Report is proof positive that patent trolls have negative economic impact

The report shows a decrease in venture capital availability as a result of litigation

“Patent troll” has become a ubiquitous term for the non-player entities seeking to extort cash from legitimate patent holders. While not all non-practicing entities use the patents they hold in this way, a new report indicates that those who do may be causing considerable damage to burgeoning startups. The report was published on Ars Technica on June 11.

According to the report, conducted by Catherine E. Tucker, a professor of marketing at MIT’s school of business, there is a direct correlation between what venture capitalists are willing to contribute startups and their risk for litigation.

“From 2004 through 2012, patent lawsuits in the U.S. more than doubled, from around 2,500 to over 5,000 annually; one these suits affected more than 12,600 defendants in 2012,” the report says. “We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents, but that there is a “tipping point” where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment.”

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The report claims that prolific litigation over the last five years likely contributed to a net loss of $21.7 billion potential VC investment. In order to make sure that the study covered the most virulent “patent trolls,” frequent litigators were kept to companies that filed at least 20 patent suits between 1995 and 2012.

The report puts numbers on an issue that up until now has been largely anecdotal, showing that patent trolls can in fact chill cause damages to startups as well as established businesses. According to the report, X-Plane “was forced to abandon product upgrades and new products that were in development,” due to litigation. Eyewear maker Ditto, which was suited by NPE Lenon Imaging Technology, was valuated $3 to $4 million less as a result of that suit.

The patent reform conversation is likely to rage for some time, and reports like this could offer valuable insight in the decision making process behind potential legislation.

Associate Editor

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Chris DiMarco

Chris DiMarco, Associate Editor of InsideCounsel magazine, has a background in multimedia production with previous involvement in projects in which he developed and created content...

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