Patent Trolls & the Intellectual Property System

When functioning well, the intellectual property (IP) system can spur innovation. One particular trend in the IP system over the past decade is the emergence of Patent Assertion Entities (PAEs), colloquially referred to as patent trolls. 

PAEs are controversial actors, because unlike typical R&D firms, their business model is to buy and enforce patents, without any attempts to commercialize. Since they do not directly innovate (i.e. bring products to market), the question is what are PAEs doing and whether their actions encourage innovation.

PAEs have been difficult to study, because much of their activity is unobserved (e.g. sending out demand letters, agreeing to undisclosed licensing deals). Our approach is to understand the nature of the patents that they are buying, which will then provide an answer to the question above.

We look to uncover the nature of PAE-purchased patents by exploiting variation in patent examiner behavior. For example, some examiners ask for more edits to claims language than others.

We start by collecting patent-level data on examination (the examiner, examiner actions, changes to claims language during examination) and subsequent outcomes (litigation, PAE purchase, maintenance fee payments).

We then identify technology groups ("art units") at the USPTO that appear to quasi-randomly assign patent applications to examiners, in order to obtain variation in the nature of patents that is unrelated to the underlying technology.

• PAEs buy a disproportionate number of patents from "lenient examiners," who ask for fewer words to be added to patent claims before granting them (see graph).

• In other words, these patents lack specificity or can be described as vague or abstract. In ongoing work, I confirm this finding using variation created by the recent Supreme Court ruling Alice v. CLS Bank.

• Traditional R&D firms do not value these vague patents more than other patents.

• These patents are also more likely to be litigated by non-PAEs and be legally invalid. 

• PAE-purchased patents also appear to cover more incremental technology.

• PAEs make money by enforcing vague or abstract patents

• It is unlikely that their activities encourage innovation. Their actions incentivize firms to obtain vague patents, rather than creating the best technology. At best, PAEs are funding innovation in an indirect and inefficient manner. 

• The Importance of Patent Examination:  we also find that more generally, the patent examiner matters a lot for the usage and value of patents. This suggests that policies at the US Patent Office can have significant impacts on the IP system, in contrast to the "Rational Ignorance" view of the patent office.