Early this week, James Bessen and Michael Meurer, both of Boston University, released their research paper on the direct costs from NPE disputes. NPEs, the acronym for non-practicing entities, are individuals and firms that own patents but do not directly use their patented technology to produce goods or services. Often referred to as "patent trolls," NPEs assert their patent rights through licensing and litigation against those that do use the patented technology.
“The Direct Costs from NPE Disputes” provides striking findings:
NPE litigation is growing rapidly, affecting 5,842 defendants in 2011.
The direct costs of NPE patent assertions total about $29 billion accrued cost in 2011. This includes the costs of non-litigated assertions.
Of note: this figure excludes indirect costs to the defendants’ businesses such as diversion of resources, delays in new products, and loss of market share.
Much of this burden falls on small and medium-sized companies. 82% of the defendants had less than $100 million in revenue and these accounted for 50% of the defenses.
The report finds little evidence that NPEs promote invention overall. Publicly-traded NPEs cost small and medium-sized firms more money than these NPEs could possibly transfer to inventors.
Much of the litigation appears to consist of nuisance suits that settle for a few hundred thousand dollars.
Mr. Bessen and Professor Meurer’s study has garnered the attention of several technology and business journals. Below are a few select quotes from this week:
“Patent trolls cost tech companies $29 billion last year”
Infoworld, June 27, 2012
Patent litigation caused by "non-practicing entities" (NPEs), better known as "patent trolls," cost U.S. software and hardware companies $29 billion in 2011, according to a study from the Boston University School of Law.
The researchers said this implies that NPE patent assertions effectively impose a significant tax on investment in innovation, stressing that the money spent on the lawsuits is a social loss and not a mere transfer of funds. About a quarter of the litigation cost consisted of legal fees and of the total cost, no more than a quarter could possibly represent a flow to fund innovative activity, they wrote.
“Business Costs Quadruple on Patent-Owner Claims: BGOV Barometer”
Bloomberg, June 25, 2012
Business costs have risen more than fourfold since 2005 over royalty demands filed by patent owners seeking quick profits, a study by Boston University School of Law researchers shows.
Companies with $1 billion or less in annual revenue were named in 59 percent of the claims filed last year. While large companies end up paying more in settlement and legal costs, the smaller companies’ expenses eat up a larger share of their revenue, according to the study by James Bessen, a lecturer of law at BU, and Michael Meurer, an economist and law professor at the university.
“I was surprised at the magnitude and how much of it is really hitting small companies,” said Bessen. “It’s having a bigger effect on innovation than we had thought.”
Bessen and Meurer said the study illustrates systemic problems in the U.S. patent system. They said recent court rulings and legislation that scaled back some patent rights only go so far in curbing what they consider a costly nuisance for businesses.
“Study Calculates Cost of Patent Troll Lawsuits”
CNN Money, June 26, 2012
Patent trolls last year cost defendants $29 billion in "direct costs", according to a study by James Bessen and Michael Meurer of Boston University's School of Law. But that's only the beginning -- accounting just for legal fees and licensing.
"This figure does not include indirect costs to the defendants' businesses, such as diversion of resources, delays in new products, and loss of market share," the study asserts. Even so, the direct costs alone "effectively impose a significant tax on investment in innovation" the authors say.
The study determined that 1,150 companies defended themselves against 5,842 lawsuits last year. About half of those companies earned less than $100 million during the year, showing that "NPEs are not just a problem for large firms," according to the authors.
James Bessen is currently Lecturer in Law at Boston University School of Law where he does research on the economics of technological innovation, including patents and Free/Open Source Software. His research on software patents with Eric Maskin (Nobel Laureate in Economics) and Robert Hunt has been influential in European policy deliberations. He is the author (along with Michael Meurer) of “Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk.”
Professor Michael Meurer, Boston University School of Law, teaches courses in patents, intellectual property and public policy toward the high-tech industry. He has served as an expert witness for the Federal Trade Commission on issues related to patent licensing; and he has consulted with government officials from developing countries about antitrust law.