Takeaways
- So-called patent trolls sometimes squat on patented ideas rather than produce a product to extract payments from licensing agreements or litigation.
- Terry researcher John Turner finds that when this happens, innovation suffers because of the “unproductive entrepreneurship effect.”
- Fewer new products and designs on the market also could limit choices for consumers who are willing to pay for them.
It’s a decision faced by inventors — and their attorneys: Is it better for them to sit on their patent or produce the product?
Research by Terry College of Business economics professor John Turner shows that these so-called patent trolls thwart innovation if they decide squatting on their patents could produce a bigger payoff when a company uses their patented idea.
“You wait around and see if somebody will use it, and then when they do, you attempt to enforce your right to exclude them from doing that. But the real goal is to extract some payment,” he said.
The payment could come in the form of a licensing agreement with royalties or damages resulting from litigation. About two-thirds of the patent lawsuits are filed by patent trolls, which is the term used for “non-practicing entities.”
The result is the “unproductive entrepreneurship effect,” which results in a lower rate of innovation, according to Turner’s research, which appeared in the January 2018 International Journal of Industrial Organization.
The problem has intensified in the last 20 years because of the proliferation of information technology, Turner said.
Think about making a smartphone: It’s difficult for an individual firm to determine which patents might cover what they do because there are hundreds of components in the design. Samsung and Apple, for example, continue to battle in court over design patents. Even free Wi-Fi at a coffee shop was a patented idea — and yes, the patent holder sued coffee shop owners in the 1990s.
When a person or firm is producing a product they developed, they may use — without realizing it — a patented idea of a complementary piece of technology to create their innovation. In addition, patents are sometimes written in an esoteric language and are meant to be vague, he said.
“Sometimes they’re never going to be completely sure if they’re infringing on someone else’s patent,” he said.
That’s why Turner questions in his paper if it’s a good idea to have firms discover and develop innovations to a point of receiving a patent but not make any products.
“Are they actually adding value, or are they more trouble than they’re worth because they’re making innovation costly for others?” he said.
Discovering and patenting a technology, distributing it to the public domain, and licensing it at low rates could cut down the cost of innovation by another company. Inventors could save money because they can use the idea without reinventing the wheel. For patent trolls to survive, his paper finds, there needs to be a critical mass of other productive people that might use the ideas.
“If by discovering innovations themselves and making those available to others who would pay to adapt them, then they can be a cost-effective substitute for other innovators,” he said. “On the other hand, in order to get them to do that, you have to pay them royalties, and when the royalty rate gets higher, there’s going to be a reduction in innovation.”
Firms incorporate the royalties into their innovation costs, and this makes some firms less inclined to invent, develop and sell products.
“If royalties are really high, you’re going to get would-be innovators saying, ‘I’m better off squatting on this technology and waiting for a chance to sue,” he said.
When that happens, innovators become patent trolls, and the economy generates fewer new products and designs for consumers.
“That’s a force that we don’t want because consumer willingness-to-pay for these lost products exceeds the total costs of producing the products,” he said. “Unproductive entrepreneurship wipes that value out.”