The term “patent trolls” is a colloquialism that denotes what the trolls themselves prefer to call “patent-assertion entities.” A patent troll buys patents (sometimes thousands) with the aim not of making the patented product or process or licensing it to others to make but of finding companies or individual inventors that the troll can claim with more or less plausibility are infringing one or more of his inventory of patents. The troll demands a license fee from every such allegedly infringing company or inventor. If the target of the demand refuses, the troll may drop the matter or may sue the refuser for patent infringement, hoping that if the threat is plausible this will induce a favorable settlement. If the target refuses to settle, the troll, to maintain the credibility of its threats, may litigate the suit to judgment. The troll does not practice the patent; but, in its own terminology, “asserts” it.
Two recent articles in the New York Times (July 14, Sunday Business section, p. 1; July 17, Business Day section, p. B1) report the crescendo of criticism that the trolls are attracting, as the magnitude and consequences and visibility of their activities grow. Last year 61 percent of the patent suits filed were filed by trolls. Trolldom is becoming increasingly profitable—one of the articles is about a troll who earns $25 million a year from trolling—and is therefore growing. There is little if anything that will stop their growth except saturation of the market (which will put a ceiling on troll activity, but at a very high level) or action by Congress.
It is extremely difficult to discern any possible social benefit from trolls, and extremely easy to discern substantial social costs. The purpose of patent protection is to encourage innovation by giving the creative inventor temporary insulation from competition, to enable him to recover his upfront costs. In the the case of phamaceutical drugs, the testing on animal and human subjects for safety and efficacy, testing required for approval of a pharmaceutical drug for sale, may cost hundreds of millions of dollars incurred a decade or more before the drug is approved, goes on sale, and thus begins to earn money for the manufacturer. Yet the cost of making the drug once it is approved may be modest. As a result, the inventor could not hope to recover its upfront costs if competitors were allowed to duplicate and sell the drug as soon as it appeared on the market; and to forbid them it needs a patent. Actually few markets have the characteristics of the pharmaceutical drug market. It seems to be the lone poster child for the patent system. There is a widespread belief among economists, scientists, and business people that the patent system is vastly overextended—patents granted too casually, patent terms too long, patent litigation too expensive and unreliable.
The patent system has serious problems; the troll problem is among the serious problems and happens to be the one easiest to solve (were it for the usual political obstacles—like class action lawyers, patent trolls have deep pockets that they can draw from to influence Congress). All that would be required is a rule that barred enforcement of a patent that was not reduced to practice within a specified time after the patent was granted, with extensions allowed for inventions that required an unusual amount of post-patent development to reduce to practice. There is no reason to allow the enforcement of a patent that was obtained by its current owner for the sole purpose of shaking down alleged infringers. Remember that the purpose of patent protection is to encourage invention by enabling the inventor to recover his upfront costs of invention, which he might not be able to do if anyone could copy the invention and, not having incurred any upfront costs, undersell the patentee. There are no upfront costs if the patented invention is never produced, but serves merely as an excuse for a threat to sue.
It’s not just that patent trolls don’t do anything that encourages innovation; they impair innovation. Trolldom requires inventors to invest more resources in searching the files of the patent office before
applying for a patent (and for safety’s sake again after they begin making the patented product or process), to avoid being hit by a license demand from a troll. This makes trade secrecy a more attractive alternative to patent protection than it would otherwise be. And trade secrecy not only is often a costly or even infeasible alternative to a patent; it also conceals information that a patent is required to disclose. The patent must disclose enough information to enable a person with the relevant technical skills to duplicate the patented invention. Not that he is permitted to duplicate it without the patentee’s permission. But the disclosure fosters innovation by adding to the stock of technical information. It enables “inventing around,” the lawful practice of using information in a patent to create a substitute for the patented invention that is different enough not to be deemed infringing.
The problem of patent trolls is a function in part of the promiscuity with which the patent office has issued patents in recent years, and the encouragement that such issuance has received from the U.S. Court of Appeals for the Federal Circuit, the federal appellate court that has exclusive appellate jurisdiction over patent cases. The court has long played a promotional role in the patent system, having been created at a time (the early 1980s) when there were fears that the United States was being overtaken on the technological front by Japan. Those fears of course proved groundless. But the idea that American inventors needed more encouragement and therefore that the standard of patentability should be relaxed persisted. The result today is a vast number of patents in force—some 2 million—providing a rich source of inputs for the patent troll industry.
President Obama criticized patent trolls last month and promised action to curb them. Such action is overdue.