In September, Amazon revealed its long-rumored Kindle Fire tablet to the world. Within a month—before it even released the tablet—Amazon found itself the target of a patent lawsuit. A company called Smartphone Technologies is suing Amazon because it says the Kindle Fire violates four patents it owns.

The validity of Smartphone Technologies' claim is up to the courts. But what we do know is that the firm is awfully fond of the courtroom. Its suit against Amazon follows others against tech giants such as Apple and Research In Motion, the company that produces the Blackberry. According to the patent litigation research firm Patent Freedom, Smartphone Technologies is what you might call a patent troll.

In recent years, tech companies have spent more of their time, and especially their money, defending themselves from infringement lawsuits. Sometimes it's tech company versus tech company, such as Apple's recent smartphone design fights with Samsung. But increasingly, firms are fighting off nonpracticing entities (NPEs), or "patent trolls"—firms that produce little and exist mainly to buy other people's patents and enforce licenses.

Vague wording and flaws in the U.S. patent licensing rules helped to give rise to this breed of aggressively litigious patent-holding firms, according to James Bessen, a Boston University School of Law lecturer. These organizations have pressed hundreds of lawsuits against thousands of defendants over the past 20 years, and business is booming now more than ever. Bessen wanted to know just how big the problem was, and according to a recent study he co-authored, fighting these firms cost companies an estimated $500 billion from 1990 to 2010. How did things get this way?

The Patent Arms Race

The patent wars are particularly fierce in the tech world for a few reasons. "Part of it is the nature of the technology and part of it is crafty lawyering," Bessen says. The industry's software and business-process patents are easier to exploit, he says, partly because the language in software patents, as opposed to that of drug or chemical patents, can be abstract, and partly because software is patented as opposed to copyrighted. In the past 20 years, 62 percent of patents were issued for software, and 75 percent are in computer and communications technology.

At first, he says, technology companies were caught off-guard by aggressive patent litigation, and throughout the 1990s and into this century, companies have paid hundreds of millions in awards and out-of-court settlements. Microsoft is at the center of some of the priciest disputes. It was forced to pay $120 million to Stac Electronics for infringing on its data-compression software patent in 1994, and $512 million to Eolas for infringing on its browser plug-in patent in 2003 (settled out of court for an undisclosed sum). In 2007, courts ruled the Microsoft should pay a record-breaking $1.5 billion to Alcatel. But that ruling was dismissed, and Microsoft countersued for allegedly infringing on some of its patents. (The two settled most of the disputes out of court in 2008.)

To protect themselves, companies began buying up patent stockpiles—a practice that's getting more intense. In August, Google paid $12.5 billion—63 percent above the share price—for Motorola Mobility, partly to get its 17,000 patents. A month before that, Apple and Microsoft formed an unlikely partnership at the head of a consortium of companies that outbid Google to pay $4.5 billion for a trove of 6000 patents owned by Nortel Networks, a Canadian telecom that had filed for bankruptcy in 2009.

Large stockpiles of patents can lead to a legal détente between tech giants simply because both companies own enough patents to sue the other repeatedly. But that only works if both parties make things. When trolls entered the fray, the game changed, Bessen says, because they are immune to cross-litigation. The companies that NPEs target can't cross-sue them for patent infringement because the NPEs don't make anything. And their influence is growing. NPEs brought 5 percent of all patent lawsuits from 2000 to 2002, but 16 percent in 2009.

A Half-Trillion Dollars, Evaporated

To put a number on the problem of suits by NPEs, Bessen and his team examined 1630 lawsuits involving 4114 defendants in the 20-year period—every lawsuit that a known nonpracticing entity (troll) pressed against a publicly traded company. The list of NPEs is from a database compiled by Patent Freedom; it includes Acacia Research, owner of Smartphone Technologies, among many others. The Boston University researchers tallied the payouts to these so-called patent trolls, In each of the past four years, troll litigation has cost companies an average of more than $83 billion (in 2010 dollars), the researchers found.

Those are just the legal costs. To estimate the hit to the companies' bottom line, the researchers let the market decide. They looked at the companies' stock prices during a five-day period at the time the lawsuits were announced, then adjusted for market trends and other noise. The rationale was that investors assess a company's change in wealth by anticipating probabilities. They can guess the odds of settlement, trial, time lost and so on, and "price them in," Bessen says. After all, it's a safe bet that a company will settle: Eighty-five percent do.

Add it all up and Bessen's team reached the half-trillion-dollar total of lost wealth over two decades. But, though businesses can hemorrhage money when they're sued, patent trolls themselves never touch most of that lost wealth. Looking at just 14 of the publicly traded nonpracticing entities in the Patent Freedom database, Bessen found that they were involved in 574 lawsuits from 2000 to 2010, or 14 percent of the overall total in the study. Those suits accounted for $87.6 billion in lost wealth to business, but the trolls' total revenue was just $7.6 billion, or 9 percent of the total wealth lost. Historically, NPEs have helped inventors get paid by buying their patents. Bessen's data show that less than 2 percent of the wealth lost to litigation ends up in the pockets of inventors, however.

So, Bessen says, it's not as though most of the lost $500 billion ended up in the pockets of litigious firms, or even inventors. That total represents money that simply vanished—wealth that never was, because companies spent so much time fighting over patents.

Flaws and How to Fix Them

According to Bessen, the three most important things that must be fixed to deal with this mess of lawsuits are vague wording, continuations, and low renewal fees.

To illustrate the problem of a hopelessly vague concept earning the legal protection of a patent, consider E-Data, which Bessen and colleague Michael Meurer discuss in their book Patent Failure. In 1994, the company E-Data bought a patent that was granted in 1985 for a "System for Reproducing Information in Material Objects at a Point of Sale Location." Originally that system was a kiosk that recorded music on cassette tapes for store customers. But E-Data interpreted the opaque wording to include online sales, arguing that the "point of sale" could be anywhere with an Internet connection. In 2001, a federal appeals court agreed. That ruling opened the door for E-Data to sue more than 100 businesses, including anyone who sold things online. Most of them settled.

Past studies of these suits suggest that the defendants rarely copy patented technologies—their infringement is accidental. But when patents cover such broad territory, there's no much they can do. "When you grant a property right that's open to such ambiguous interpretations, then you're creating a land mine, an opportunity for litigation," Bessen says. "Investors have to worry about those types of lawsuits, and it's a disincentive for innovation."

The second flaw in the system is patent continuation rules. Companies can file patent applications and keep them on file for years as applications, not granted patents. They can change the claims in that time, ostensibly to cover new technology in development, and then sue. They are a "legal time bomb sitting at the patent office that they can adjust," Bessen says. "That's clearly not what patent law is intended to do."

Lastly, it costs just about $1000 to renew a patent. And in Bessen's mind—in addition to granting patents for only specific inventions and cutting back on renewals drastically—the government should raise renewal rates into the tens of thousands of dollars to keep trolls from simply stockpiling patents they use for nothing but litigation.

Patent law is changing—President Obama signed a new bill into law on Sept. 16 to shake up the system. In a major change, the law turns the system around and grants the patent to the first person to file, rather than the first person to invent. (Although, when PM talked to inventors about this, many were concerned that small inventors wouldn't be able to file as soon as they invent, so they could be disadvantaged by the law.) Now, under the new first-to-file system, the U.S. Patent and Trademark Office has the power to deem things worthy of receiving a patent. Importantly, filers can now dispute the validity of a patent claim at the patent office, rather than having to lawyer up and fight it in court.

But, Bessen says, don't expect the new rules to make patent trolls go away. NPEs buy up patents, so it doesn't really matter whether the system is first-to-file or first-to-invent. The new law does raise the cost of patent renewal by 15 percent, but that only takes it from $900 to $1035 after the first four years and more thereafter. The reforms are not nearly enough, Bessen says. "They will weed out some of these bad patents, but they won't change the picture much."

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