Friday, May 01, 2015

Is Patent Trolling a Problem -- And Why Is It Newsworthy?

by Neil H. Buchanan

[Note: My new Verdict column, published today, continues the discussion (which I initiated in another Verdict column last Thursday) of the Republicans' political strategy to set the IRS up for failure, then to blame it for failing.  As I noted in my complementary Dorf on Law post last Thursday, a new report from the Republican staff of the House Ways & Means Committee has added several new wrinkles to the all-out attack on the IRS.  I plan to publish a third Verdict column about this topic next week, at which point I'll write another companion post on this blog.  In the meantime, today's post below is on an entirely different topic.]

In my Dorf on Law post earlier this week, I observed that "lobbying" has become the content-free deus ex machina that we now use to explain all bad political outcomes.  I currently have nothing to add to my comments on that subject, but I do want to return to one of the examples that I used in that post.  I noted that the main story on John Oliver's most recent edition of his "Last Week Tonight" show was about "patent trolling."  Oliver blamed the failure of an anti-patent trolling bill to pass the Senate on lobbying, as if that were enough of an explanation.

As I was initially watching the segment, I was thinking about the merits of the case that Oliver was making.  Did I agree that patent trolling is a bad thing?  Did I agree with the way that the lobbied-to-death bill would have tried to fix the problem?  Because I am not an expert on patent law, and I have only heard occasional complaints about the supposed problem, my mind was open.  I was certainly put off by Oliver's resorting to rank lawyer-bashing, but I could have forgiven that (or at least discounted it), if the overall case were compelling.  (By comparison, even though I am very pro-union, I would have a hard time complaining about a news article that criticized prison guards' unions for standing in the way of important criminal justice reforms.)

Here, I want to think through some of the basics of patent trolling.  I will do this in part as an economist, and in part as a law professor.  My bottom line is that I am not convinced that patent trolling is a problem.  If it is a problem, however, it is not a matter of trolls creating "inefficiency," or anything like that.  Instead, the patent trolling issue highlights the open-ended nature of analyzing legally created sources of wealth -- which is to say, all sources of wealth.

In this blog post, I have now used the term "patent trolling" six times in three paragraphs (and once in the title), yet I have not even defined what patent trolling is.  An article in the Business section of Wednesday's New York Times provides a very helpful analysis, but the problem is that the implicit definition of trolling is inevitably too broad.  The supposedly nefarious trollers are companies that have been set up for the explicit purpose of litigating patent violations.  That is, the so-called troll is a company that buys patents from the people or companies who were originally granted the patents (or from other intermediate owners), with the express purpose of "protecting" the patent by taking violators to court.  Such trolls usually buy large numbers of patents, so that they can spread their risks over a portfolio of ongoing risky litigation.

The economist in me says: So what?  Creators of property frequently sell their property, which they created in order to generate profits, and the buyers determine the price that they will pay by reference to the profits that the property will generate.  A buys land from B, after B has developed the land and built condos.  C buys shares of common stock in an initial public offering from D, which will pay dividends to C or to any subsequent owner to whom C sells the shares.  E buys the right to collect mortgage payments from F, which issued the mortgages in the first place.  If we think that patents, copyrights, and so on should truly be thought of as intellectual property, why should we have any problem with people buying and selling such property, and then protecting their property rights?

The objection, apparently, is that the trolls do too much litigating of the patents.  That is, the originator of the patent might not be inclined (or able) to go after patent violations, such that many possible patent violations are likely to go unpunished.  The business model of the troll is entirely based on not allowing any possible lawsuit to be undeveloped.  But again, so what?  Other than some vague notion of America being "overly litigious" (whatever that might mean), why are more lawsuits per se bad?  Why would we not view trolls as overcoming transactions costs that heretofore prevented the potential profits made possible by intellectual property from being fully mined?

I am certainly not the only person who has noticed this fundamental issue.  Near the end of that Times article, the reporter notes that "some conservative academics ... refer to trolls as 'patent monetization entities' who are engaged in price negotiations for intellectual property owners whom they represent.  Legislation, they say, is mainly an effort to change the game to favor politically influential technology companies, increasing their profits further."  I am hardly a conservative, but I understand the argument.  Their wonky relabeling of trolls is a bit silly, but there is nothing inherently wrong if the owner of a property right -- in this case, the right to prevent others from using one's inventions without paying for such use -- chooses to sell that right to a third party, even (or especially) when that third party is better at litigating than the original owner was.

By comparison, consider banks.  Introductory economics courses explain that banks are simply financial intermediaries.  There is some basis for saying that banks create nothing, because they merely connect people who have money to lend with people who want to borrow that money.  Yet that word "merely" is glossing over the entire point of intermediation: Without a bank (or equivalent), borrowing and lending would be much more difficult, costly, and infrequent.  Similarly, patent trolls act in ways that guarantee that a patent does what patents are supposed to do: reward the inventor, and charge the user.

In the abstract, a troll simply fronts the money to the inventor, taking on the risk that there will be no violations -- or, more interestingly, that violators will be wrongly allowed to take a free ride.  True, the trolls created nothing -- but then, in my examples above, none of the buyers of property (A, C, or E) created the properties, either.  They are merely hoping that their future profits from owning someone else's creation will be greater than the up-front cost.  And when B, D, and F created their properties, they were certainly aware of the possibility of selling to non-creators in the future.

The comparison to banks, however, brings us to the reason that I part company from the most direct implications of what I have laid out above.  Just as banking activity in the real world can be destructive -- predatory lending, over-leveraging to the point of becoming too big to fail, and so on -- it is certainly possible that the theoretically innocent act of becoming a patent intermediary could lead to seriously bad outcomes.

What are those bad outcomes?  The Times article describes how the targets of lawsuits have recently become retailers, hotels, and restaurants, and it quotes James Bessen of Boston University Law School: “The litigation problem [has gotten] worse, and it spread into mainstream America."  But, one more time, why is that bad?  If a retailer violates a patent, why is suing them somehow worse than suing a tech company that violates a patent?

Here, we come back to the core issues, which are not unique to patent law at all.  First, the concern is that the underlying law is somehow defective, such that the "wrong" side wins too many cases.  That is, somehow the litigation of patents makes it possible for a non-violator to be forced to pay, either because the patent itself is written too broadly, or because the courts interpret patents in ways not intended by the Patent and Trademark Office.  Second, the proposed legislation aims at nuisance suits, by which trolls supposedly collect money from targets who are too scared to go to court (or who, equivalently, view the cost of early settlement as an acceptable alternative).  The usual remedies are again being rolled out: loser-pays provisions, enhanced frivolousness rules, and so on.

I do not have a strong opinion about whether those particular proposals are wise or foolish in this situation, but color me skeptical about the claims of a crisis from the anti-trollers.  Patents are, after all, a government-sponsored monopoly.  Even the most sophisticated economic modeling leads to ambiguous results regarding the optimum patent terms, and so on.  (I am setting aside my skepticism regarding mainstream economic modeling here, because my point is simply that even people who buy into much of what I reject are still unable to reach definitive conclusions on this question.)  There is no obvious reason to think that there is currently too much protection for these government-granted monopolies, or too little.  And there is certainly nothing about patent trolling that seems meaningfully analogous to the problems that financial intermediaries have inflicted on the economy.  (Skeptical?  Try to imagine patent trolls causing a global economic crisis.)

As I noted above, however, nothing here is actually unique to patents.  A government in a capitalist economy sets up the rules that allow commerce to proceed.  Even when it does not specifically create a property right like a patent, the government is ultimately behind all property rights, all contractual rights, all tort responsibilities, and so on.  Nothing in the public discussion about patent trolls presents us with anything other than the familiar questions about how to draw proper balances between interests, when there are no non-law baselines against which to measure goodness or badness (or efficiency or inefficiency, which are just goodness and badness in pseudo-objective garb).

The title of this post asks two questions: (1) Is patent trolling a problem? and (2) Why is patent trolling newsworthy -- and, I would now add, legislation-worthy and lobbying-worthy?  My answer to the first question is, "If it is, I haven't seen a convincing case for it."  Telling me that there has been an increase in lawsuits tells us nothing, since we do not know whether there were previously too few lawsuits, too many lawsuits, or the Goldilocks quantity of lawsuits.  But the answer to the second question is easy: The people who are being sued having the ability to make their complaints heard.  "There are more lawsuits than there used to be, and the companies being sued aren't used to it," is not actually an argument, but it motivates the affected parties enough to get the political process moving.

Which means that I was sort of lying when I said above that I have nothing further to add to my discussion of lobbying.  After all, what is the process by which the affected parties get the political process moving?  That's right: lobbying.  But the point is that there is only something to lobby against when lobbying on the other side has created the proposed legislation in the first place.  Saying that lobbying killed a bill is like saying that a football team won a championship because they "wanted it more."  Both sides want to win, and focusing only on one side's efforts is meaningless.