This piece originally appeared in ProMarket.
America’s essential system of patent protections, a key driver of economic dynamism, is under siege. Patents provide individuals and firms with an incentive to innovate by granting them a finite monopoly over their invention. Patent litigants, however, are abusing this system by targeting innovative companies that use proprietary technologies as product inputs to extract settlement payments, grinding research and development and product sales to a halt until the case is settled or otherwise decided.
Patent litigants, also known as “patent trolls,” operate by engaging with hedge-funded patent assertion entities (PAEs) or non-practicing entities that don’t innovate or manufacture themselves but acquire patents to build shakedown portfolios. These patent litigants use data mining to detect where these patents are deployed—frequently and unwittingly by third-party suppliers in a complex supply chain comprising the thousands of inputs that make up a typical electronic device—and then sue the final manufacturer for infringement. Patent trolls then exploit Section 337 (unfair import) investigations at the United States International Trade Commission (ITC) to coerce target firms to pay settlement fees in the millions of dollars. The ITC was chartered in 1916 to stop the import of counterfeit goods and was never intended to become the de facto domain of patent litigation, even if global supply chains mean that many of these patented technologies are imported.
The direct costs of litigation brought by non-practicing entities (NPEs), was estimated to cost defendant firms $29 billion per year in direct out-of-pocket costs in 2012, with aggregate costs destroying some $60 billion in firm value annually. The number and share of NPE lawsuits has only grown since then. They now number 400 cases annually, quadrupling from just a decade ago. NPEs accounted for 63% of all patent litigation cases in 2022.
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