State of Innovation

Patents and Innovation Economics

In Defense of Patent Trolls

The term patent trolls is usually applied to companies that enforce patents that they are not practicing.  These Non-Practicing Entities (NPEs) include companies specifically organized for this purpose such as Intellectual Ventures.  However, it also includes Universities and divisions of most large corporations such as IBM.  Many of these corporations complain about NPEs.  However, any consistent definition of a NPE (troll) would include these hypocrites.

The moral argument against NPEs is that they are not practicing their patents, so they are not entitled to enforce them.  The U.S. has consistently rejected a working requirement for patents.  The only time the U.S. had a working requirement for patents, was in early 1800s and only for English inventors. We do not argue that a landowner has to work his land in order to keep his property rights in the land.

From an economic point of Intellectual Ventures and other so-called patent trolls are the beginning of a secondary market in patents.  Most of these companies got their start in the failed companies of the bust.  These patent investing companies bought the patents of failed companies.  This reduces the cost and the risk associated with R&D.  The VC’s I knew were going to let these patents expire, resulting in zero return to the investors.  Patent investing companies like Intellectual Ventures should not be vilified, but appreciated for the valuable secondary market they are creating.  Like all new markets, the pioneers took enormous risks but also paid very little for the assets they acquired.  Their success will encourage other entrepreneurs driving up the prices for patents (excess R&D).  This will reduce the cost and risk associated with R&D, which will result in more investment in high technology start-up companies.

Vilifying patent investment companies is like vilifying investors in the physical assets of failed enterprises.  These investors recycle assets and make them part of the productive economy again.  While it is sad to see a business fail, failure is part of the innovation process.  Putting the assets of a failed enterprise back to work as soon as possible would be considered a humanitarian effort if performed by a non-profit.  However it is just as valuable or more valuable to the economy when done by a for-profit enterprise.

September 18, 2009 - Posted by dbhalling | Uncategorized | , , , , , , , | No Comments Yet

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