Patent Litigation Cost US Business About A Trillion Dollars In A Quarter Century, Outweighing Benefits

from the trolls-strike-again dept

Techdirt recently wrote about the ever-growing flood of patents being granted by the USPTO. As we've emphasized, more patents do not mean more innovation; nor do they necessarily lead to greater overall benefits for business. That's clear in an important new paper from a team including James Bessen, whose work has been mentioned here several times before. It builds on the approach described in the 2008 book "Patent Failure" by James Bessen and Michael Meurer, and seeks to estimate both the private costs and private benefits accruing from patents in the US during the years 1984 to 2009. Here's how the costs are obtained:

We obtain lower bound estimates of the private costs of patent litigation by performing stock market event studies around the dates of lawsuit filings. This approach provides estimates of total cost that are greater than direct legal costs and include the costs of lost business, the costs of management diversion, and anything else that reduces the wealth of a firm as the result of defending a patent lawsuit.
As for the benefits, these include:
upper bound estimates for patent rents, the stream of additional profits that firms gain from patenting, including gains from strategic uses of patents.
As the paper explains, this produced the following results:
We have direct aggregate litigation cost and aggregate rent estimates for 1984-2002. During this period, we estimate about $240 billion in private costs and about $195 billion in private benefits. Hence, private costs exceed private benefits by about 24%. Assuming average growth in private benefits during 2002-09, we estimate about $385 billion for 1984-2009. Private costs exceed private benefits by about 29% over this longer period.
One estimate by the researchers puts the total costs at about $538 billion, while another obtains an even more eye-watering $1.49 trillion. The latter figure is consistent with previous work from Bessen, done with Michael Meurer and Jennifer Ford, which suggested that patent trolls -- or "Non-Practicing Entities (NPE)" -- are alone responsible for $500 billion of costs to US companies.

The new study notes how the patent landscape has changed in recent years:

we also identify rapid growth in NPE lawsuits, in lawsuits that include a patent in the Computers/Communications technological area, and in lawsuits brought against alleged infringers in the non-manufacturing, software and telecommunications industries.

While patent stocks have increased at about 6% per year, the values of patents and the associated rents per patent have not changed significantly. The result is a widening gap between the private costs of patents and the private benefits received by publicly listed firms. ... the upward trend in private costs is far lower if we restrict attention just to cases where a practicing entity (PE) files suit. Indeed, without NPE cases, aggregate private benefits would likely exceed aggregate private costs in the years since 2002.
From this we see that one of the key problems that needs fixing in the US patent system is the parasitical behavior of NPEs. Pity that, once more, it looks like this isn't going to happen.

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Filed Under: cost, economics, patents


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  1. identicon
    David, 29 Apr 2014 @ 1:04am

    What's that supposed to prove?

    During this period, we estimate about $240 billion in private costs and about $195 billion in private benefits. Hence, private costs exceed private benefits by about 24%.

    Well, big surprise: laws to redistribute money according to some metric (in this case patents) don't achieve more than redistributing money according to some metric, minus administrative efforts.

    That's just how the system works, and how it is supposed to work. That's not even a sensible question.

    The premise is that the recipients of those moneys do more for the ultimate public good with that money than those who have to pay it would do, even when taking the administrative costs into account.

    Which is basically the underlying metric for any sustainable business: both sides are better off as a result because what they receive is ultimately more to them than what they give. It does not mean that magically everybody gets more than what he puts in, but rather that everybody gets something that's worth more to him than what he puts in.

    Which is why financial markets are such a crock: people are not actually exchanging money for money (there would be no net gain possible) but probabilities. It's sort of a "pick your personal lottery" market where the big players (for whom a billion dollars is pretty much a thousand times as useful as a million dollars) leech on the small players for whom small and large sums of winnings and losses are not merely proportionally useful to their amounts since they can start and/or end existences.

    Anyway: naturally the patent system itself consumes a net amount of money. That's not the question. The question is whether the redistribution of money that is its principal operation (minus churn) is in the public interest. You need to look at other numbers for that, and figuring out their relation to "what-if-we-had-no-patents" involves a lot of speculation and leaps of faith since there are rather few "comparable" economies "only" differing in patent laws.

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