Research shows that activity by non-practising entities is bad news in the US. The UK should beware.

The term ‘trolls’ is a clue to public opinion.

But are businesses that buy up patents solely with a view to winning damages really evil, or do they, as a letter in The Economist this week claims, serve a purpose by providing a means of enabling the assertion of intellectual property by inventors who would not otherwise be able to do so?

While I’m attracted to the free-market argument, an impeccably evidenced study* published by Harvard Business School this summer seems to show that ‘non-practising entities’ are indeed a malign influence. 

Non-practising entities (NPEs) are businesses which collect portfolios of patents not for the sake of turning them into products but to claim licence fees and to litigate with a view to winning damages or out-of-court settlements for infringements. They have emerged as a major source of patent litigation in the US, which has increased 10-fold since 2000.

However, thanks mainly to the unfriendly costs regime, they have yet to emerge in England and Wales. (The possibility of this happening was one objection to the creation of Europe’s Unified Patent Court.) 

Are businesses that buy up patents solely with a view to winning damages really evil?

Supporters of NPEs say they act as useful intermediaries, policing infringements by powerful corporations. Opponents portray them as little more than opportunistic blackmailers, exploiting the flaws of a legal system in the hope of being paid to go away. 

The Harvard Business School team set out to discover which businesses are targeted by NPEs, when litigation takes place and how it affects the targeted firms’ innovative activity. 

Unsurprisingly, the study found that targets are overwhelmingly companies with assets in the bank, particularly those that have had ‘recent, positive cash-shocks’. They are vulnerable even if this cash had nothing to do with the patent in question. By contrast, lawsuits from practising entities - usually rival businesses - are much less driven by cash.

Meanwhile, NPEs are attracted to targets that are already tied up with non-patent litigation and - good news for in-house teams - deterred by the existence of large legal departments. Another distinct feature of NPE litigation is the tendency to forum shop, ‘trying the plurality of their cases in a single district of East Texas’. 

As to the overall impact, of NPE litigation, the study finds that firms that lose such actions cut their R&D spending by an average of 20% compared with those that are not targeted. And only a small fraction of payouts won by NPEs finds its way back to the original innovators. 

The inescapable conclusion is that ‘NPEs appear to behave as opportunistic patent trolls’ which, far from oiling the wheels of innovation, deter it. 

In the US, the patent trolling phenomenon has already prompted an investigation by the federal Fair Trade Commission. Should we be worried here?

 *Patent Trolls: evidence from targeted firms. Lauren Cohen, Umit G Gurun and Scott Duke Kominers, Harvard Business School 2015. 

Michael Cross is Gazette news editor