Patent Litigation Cost US Business About A Trillion Dollars In A Quarter Century, Outweighing Benefits

from the trolls-strike-again dept

Techdirt recently wrote about the ever-growing flood of patents being granted by the USPTO. As we've emphasized, more patents do not mean more innovation; nor do they necessarily lead to greater overall benefits for business. That's clear in an important new paper from a team including James Bessen, whose work has been mentioned here several times before. It builds on the approach described in the 2008 book "Patent Failure" by James Bessen and Michael Meurer, and seeks to estimate both the private costs and private benefits accruing from patents in the US during the years 1984 to 2009. Here's how the costs are obtained: We obtain lower bound estimates of the private costs of patent litigation by performing stock market event studies around the dates of lawsuit filings. This approach provides estimates of total cost that are greater than direct legal costs and include the costs of lost business, the costs of management diversion, and anything else that reduces the wealth of a firm as the result of defending a patent lawsuit. As for the benefits, these include: upper bound estimates for patent rents, the stream of additional profits that firms gain from patenting, including gains from strategic uses of patents. As the paper explains, this produced the following results: We have direct aggregate litigation cost and aggregate rent estimates for 1984-2002. During this period, we estimate about $240 billion in private costs and about $195 billion in private benefits. Hence, private costs exceed private benefits by about 24%. Assuming average growth in private benefits during 2002-09, we estimate about $385 billion for 1984-2009. Private costs exceed private benefits by about 29% over this longer period. One estimate by the researchers puts the total costs at about $538 billion, while another obtains an even more eye-watering $1.49 trillion. The latter figure is consistent with previous work from Bessen, done with Michael Meurer and Jennifer Ford, which suggested that patent trolls -- or "Non-Practicing Entities (NPE)" -- are alone responsible for $500 billion of costs to US companies.

The new study notes how the patent landscape has changed in recent years: we also identify rapid growth in NPE lawsuits, in lawsuits that include a patent in the Computers/Communications technological area, and in lawsuits brought against alleged infringers in the non-manufacturing, software and telecommunications industries.



While patent stocks have increased at about 6% per year, the values of patents and the associated rents per patent have not changed significantly. The result is a widening gap between the private costs of patents and the private benefits received by publicly listed firms. ... the upward trend in private costs is far lower if we restrict attention just to cases where a practicing entity (PE) files suit. Indeed, without NPE cases, aggregate private benefits would likely exceed aggregate private costs in the years since 2002. From this we see that one of the key problems that needs fixing in the US patent system is the parasitical behavior of NPEs. Pity that, once more, it looks like this isn't going to happen.

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community. Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis. While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: cost, economics, patents