Patent reform advocates have long argued that "patent trolls"—companies that do nothing but sue over patents—are harmful to innovation, not just a plague on big companies. A new study attempted to find out if there's any real data behind that accusation or if it's just a few sad anecdotes.
Turns out there is a very real, and very negative, correlation between patent troll lawsuits and the venture capital funding that startups rely on. A just-released study [PDF] by Catherine Tucker, a professor of marketing at MIT's Sloan School of Business, finds that over the last five years, VC investment "would have likely been $21.772 billion higher... but for litigation brought by frequent litigators."
The study defines "frequent litigators" as companies that file 20 or more patent lawsuits, which limits the definition to true-blue "patent trolls," or Patent Assertion Entities (PAEs), the term used by the paper. The study covers the period from 1995 to 2012.
Tucker's paper estimates a 95 percent confidence interval for the amount of lost investment to be between $8.1 billion and $41.8 billion. Those numbers are relative to a baseline of just under $131 billion of investment that actually occurred during that five-year period of time.
Negative correlation
The study looked at the correlation between patent litigation generally and VC investment, and then looked specifically at frequent litigators.
When she looked at patent litigation generally, Tucker found that there is a positive correlation between some litigation and VC funding. More lawsuits go along with more investment—to a point.
"In the beginning, in general, patent litigation is good," said Tucker in an interview with Ars. "It suggests a well-functioning patent system and has a positive effect. However, when you get to a certain point, that's no longer the case. Then, the more patent litigation you have, the worse it is for venture capital investment."
When the study limited the question to patent assertion entities, the effect was entirely negative. There's no amount of activity by the frequent litigators that correlates with increased VC investment.
The study uses a complex mathematical technique called regression analysis to determine the correlation. Tucker and her assistants also ran the numbers with alternate scenarios, such as excluding areas known to have heavy patent litigation but limited VC investment, like the Eastern District of Texas and the District of Delaware. It didn't change the results.
Beyond anecdotes
Tucker says she was surprised by how strong the correlation was found to be.
"You hear these anecdotes, of VCs being a little nervous [because of patent lawsuits]," she said. "But I didn't think it would necessarily be strong enough to have an empirical effect."
A few mentions of those anecdotes are included in the first section of her paper. First, there's X-Plane, a South Carolina company sued over using copy protection software provided by Google, which "was forced to abandon product upgrades and new products that were in development." There's also California eyewear startup Ditto, which was sued last year by a troll called Lennon Imaging Technology. The case against Ditto was ultimately dismissed, but the company was still being valued at $3 to $4 million less than it would be otherwise, and it was forced to lay off four of its 15 employees to pay legal expenses. (Lennon Imaging also sued Condé Nast, the parent company of Ars Technica).
The study comes, not coincidentally, at a time when groups pushing for patent reform lost a big debate over a patent reform bill, which stalled in the US Senate last month. The work was funded by the Computer and Communications Industry Association, one of the tech industry groups pushing for an anti-patent-troll bill to be passed.
During the debate, critics of the proposed legislation often asserted that there was a lack of hard data on the pro-reform side. The figure reformers cited most often is the study by James Bessen and Michael Meurer, finding that trolls cost the US economy $29 billion in direct legal costs each year. That study is sometimes attacked by patent reform opponents because it's based in part on secret data provided by RPX, a defensive patent aggregator.
Tucker's study has the advantage of being based entirely on public information: the amount of patent litigation and the amount of VC funding are numbers that are known with certainty.
It remains to be seen if the study can influence the debate in Washington. For this year, reform has been killed, but lawmakers are continuing to discuss smaller measures, like kicking patent trolls out of the International Trade Commission.
"We already know startups are in danger because we didn't pass patent troll legislation," said Julie Samuels, a former EFF attorney who now lobbies for patent reform for Engine, a group representing startups. "This study is another layer, showing why the problem hurts startups more than big companies."
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