Patentology Cited in Academic Paper on Cost of Patent Trolls

About a month ago we published an article in response to a widely-reported study, conducted by Boston University law researchers James Bessen and Michael Meurer, which concluded that, in 2011, patent ‘trolls’ imposed a $29 billion burden on innovation in the US, and that this is further proof that the patent system is ‘broken’ (see A $29 Billion US Troll-Tax or Just Another Statistical Smokescreen?).

Our interest was piqued by the sheer unbelievability of the quoted cost, and in addition to questioning the plausibility of the conclusion we raised three main criticisms of the assumptions and methodology in the Bessen and Meurer study:

1. there is ‘selection bias’ in the sources of the data used in the study;
2. the study makes no meaningful distinction between different types of non-practicing entity (NPE), and thus fails to distinguish between deadweight costs (which are genuine burden on the economy) and transfer costs (which are not); and
3. the statistical methods and assumptions employed in the study are decidedly opaque, and fail to place any estimate of confidence on the $29 billion figure.

We were therefore very pleased to read a paper entitled Analyzing the Role of Non-Practicing Entities in the Patent System, which was placed up on SSRN in the past week, authored by David L Schwartz of the Chicago-Kent College of Law and Jay P Kesan of the University of Illinois College of Law, which concurs with our criticisms, and even cites the Patentology article (see footnote 4). 

Schwartz and Kesan of course do a more comprehensive job of analysing the assumptions and methodology of Bessen and Meurer.  However, they not only arrive at our three criticisms, they also provide a far more comprehensive critique of the claim by Bessen and Meurer that their non-random sample is representative of the much larger number of patent disputes which fall outside the limited survey results on which their study is based.  In particular, Schwartz and Kesan base their comparison on the assumption that ‘most lawsuits are not settled by an initial summary judgment but are settled before trial,’ whereas earlier work by Kesan indicates that this is a pessimistic assumption, and that most cases settle much earlier and more cheaply.

Overall, Schwartz and Kesan’s main conclusion are that:

1. Bessen and Meurer’s figures are based on a biased sample, and that the $29 billion calculation of the direct cost of NPE patent assertions should be viewed as the highest possible limit, with the true number very likely to be substantially lower;
2. there is a lack of basis in Bessen and Meurer’s work for comparison of figures, with the vast majority of the $29 billion figure consisting of settlement, licensing, and judgment amounts, which for economists are not ‘costs’, but rather ‘transfers’;
3. the definition of NPE is questionable, with Bessen and Meurer’s calculations resting upon a questionable and very broad definition of NPE; and
4. Bessen and Meurer’s paper lacks credible information on the benefits of NPEs.

Schwartz and Kesan stop short of any categorical statement that the data used by Bessen and Meurer is unreliable or lacks validity, stating only that they ‘have insufficient information to evaluate, and … believe that the burden of persuasion should fall on the researcher.’

They further conclude that:

With respect to the debate about NPEs, we believe that focusing on costs and transfers from NPEs are somewhat beside the point. The bigger picture is whether the lawsuits are being brought because the defendants are infringers of a valid patent, or whether the defendants are merely easy targets for a nuisance lawsuit. That requires looking beyond the identity of the patentee. It means we need to evaluate the patents being asserted to see if there are credible patent claims that are valid, enforceable, and infringed.

The paper is only 12 pages long, and a relatively easy read.  We commend it to anybody interested in the ongoing debate about non-practicing entities, patent aggregators, patent assertion entities, and trolls.

Tags: Economics, Innovation policy, Patents and society, Trolls