Patent litigation caused by "non-practicing entities" (NPEs), better known as "patent trolls," cost US software and hardware companies $29 billion (£18.6 billion) in 2011, according to a study from the Boston University School of Law.
NPEs are individuals and firms that own patents but do not directly use their patented technology to produce goods or services and instead assert their patent rights against companies that do. Patent litigation costs to technology companies from NPE lawsuits have risen quickly, from $6.7 billion in 2005 to $12.6 billion in 2008 and more than $29.2 billion in 2011, according to the study.
"This figure does not include indirect costs to the defendant's business such as diversion of resources, delays in new products, and loss of market share," the researchers said in their paper, which was released Monday. Direct costs are high relative to total business spending on R&D, which totaled $247 billion in 2009.
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.
The data in the study was provided by 82 software and hardware companies.
The study also looked at the impact of NPE litigation on small/medium-sized and large companies. Much of the burden fell on small and medium-sized companies, the study said. Besides that smaller companies pay relatively more to the NPEs from assertions that do not go to court, according to the research.
"The burden of all of these costs appears to rebut the assertions that NPEs play an important role in improving the profits of innovative start-ups," the researchers said.
Much of the litigation brought by NPEs consisted of so-called nuisance suits that are settled for a few hundred thousand dollars, they wrote. Only a few were "big game hunters" that seek and get settlements worth tens or hundreds of millions of dollars, they added.
"The rapid growth and high cost of NPE litigation documented here should set off an alarm warning [to] policy makers that the patent system still needs significant reform to make it a truly effective system for promoting innovation," they wrote.
To change things, it is crucial to provide greater transparency in the patent system and courts should rigorously supervise patent damages awards to make sure that damages are proportional to the value of the patented technology, the study said. Besides that, the researchers called for policy reforms to constrain the generic problem of frivolous lawsuits.