Do Patent Trolls Exist? Examining the Economic Impact of Non-Practicing Entities and Patent Infringement Litigation on Innovation

Abstract

Non-practicing entities (NPEs) – firms that do not produce goods or services but license to and sue other companies with portfolios of patents – have drastically increased patent infringement litigation since 2006. Over the same period, the USPTO has granted an increasing amount of patents, indicating that American innovation has strengthened by one measure. This paper finds fault with equating patents granted to innovation and develops a new metric of innovation – the ratio of a firm’s intangible to total assets. Through empirical analysis this study concludes that lawsuits initiated by NPEs between 2006 and 2011 do not affect the rate of American innovation. However, this study also finds that NPEs inflict at least a $567 million innovation cost to the top twenty-five most litigated against firms in the United States. This cost represents money that could be allocated towards research and development or investment, but it is not a dead-weight loss – it is the cost associated with firms’ growth measured in inflation-adjusted total assets. Ultimately, this study highlights the need for continued research into the impact of NPEs on the American economy but provides empirical evidence that the patent troll classification is unwarranted.