Joff Wild

Last week a shocking report was produced by an organisation called TechNet. Based in the US, it describes itself as “the preeminent bipartisan political network of CEOs and senior executives that promotes the growth of technology-led innovation”. Where the Jobs Are: The App Economy claims that more than 450,000 app-related jobs have been created in the US during the last five years and that the app economy could now be generating annual revenues of up to $20 billion. What’s more, there seems to be no sign of a let-up in the good news. “In the year ending December 2011, the average number of tech want ads containing the word ‘app’ was still 45% higher than the previous year. That’s rapid expansion by anyone’s standards,” the report states.

As I say, it’s shocking stuff. For those of us who remember the multiple news stories and blog pieces during 2011 that focused on NPEs such as Lodsys taking action against app developers in the US, the idea that the sector is actually booming and creating jobs at breakneck speed is hard to comprehend. Weren’t the “trolls” supposed to be destroying a nascent industry and driving jobs and dollars away from the US? How can it possibly be that the reverse seems to be happening? Indeed, how can a serious report on the American app sector not mention NPEs or trolls at all?

Surely, it must be an amazing oversight. Or perhaps not. Maybe all the outrage and doom-mongering last year was overhyped hysteria. Maybe the reality is that NPEs, or “trolls”, or whatever you want to call them, are really not a decisive issue in the app economy at all. And maybe that applies to NPEs and trolls generally: in the great scheme of things, they are not a big deal.

In a piece published by Forbes last week, Ken Lustig, head of strategic acquisitions at Intellectual Ventures, points out that the number of patent suits initiated in the US has remained relatively flat for the last 10 years and that only around 100 actually go to trial. What’s more, there is much less patent litigation now than there was in the 19th century, supposedly a golden age of American innovation. Indeed, says Lustig, revered names such as Thomas Edison used the NPE model to diffuse their inventions and grow rich. What is being reported today in such dramatic and negative terms is what has always happened in the US when new technologies appear:

Every major technological and industrial breakthrough in U.S. history—from the Industrial Revolution to the birth of the automobile and aircraft industries and on up to today’s Internet and mobile communications revolutions—has been accompanied by exactly the same surge in patenting, patent trading, and patent litigation that we see today in the smartphone business. This is how the rights to new breakthrough technologies have always been distributed to those best positioned to commercialize them—to the benefit of the whole nation in terms of new jobs, new medical advances, and new products and services.

I suppose that what were not around in the 19th century were the internet and the 24 hour news cycle. Both are great, but they do tend to diminish perspective. And that is what is needed when discussing NPEs and trolls. I don’t think anyone would deny that some NPEs/trolls can engage in destructive behaviour and that, at the margins, they might create some difficulties; but a myth around them that bears very little relationship to reality is in danger of being created. To see what I mean, take a bit of time to read research that has been put together by Michael Risch of the Villanova University School of Law. He looks at the claims made by both NPE detractors and defenders, and finds both to be wanting. In contrast to what NPE’s opponents say:

• First, NPEs are not particularly new.

• Second, their patents look like other litigated patents. They are not dominated by business methods, though there are plenty of software patents and no biotech/pharmaceutical/chemical patents.

• Third, while measuring patent quality is extremely difficult, the available information implies that NPE patent quality is not drastically lower than other litigated patents. The same cannot be said for litigation quality; trolls almost never win infringement judgments.

• Fourth, only a small minority of patents were originally obtained by non-productive companies whose only purpose was to obtain and monetize patents.

• Fifth, very few of the companies supplying patents to NPEs are out of business; instead most came from productive companies (and most of those continue to operate).

• Finally, while the timing of lawsuits is not consistently trollish, the moniker may be somewhat accurate. The average patent sat on the shelf for more than seven years before being litigated, though several were asserted almost immediately. Of course, NPEs cannot win this argument – they would be condemned whether they rush to court or wait for an industry to develop.

As for defenders of NPEs:

• First, the evidence does not support a theory that NPEs incentivize investment by providing a market for patents. A small percentage of the companies that obtained NPE patents received venture capital investment, as did a random group of companies that held patents. While there is a difference between the two, that difference is not clearly attributable to NPE activity. That said, any startup holding a patent is much more likely to receive funding than a company without patents, and the increased probability is at least possible that NPEs contribute to that difference.

• Second, it is unlikely that NPEs are vindicating the rights of small companies forced out of business by infringers. Very few of the initial owners of NPE patents failed, and the patents were held for a long time before they were asserted.

• Finally, the evidence does support one defense of NPEs: they provide a better way for individual inventors to enforce their patents than bringing lawsuits themselves.

In short, both sides are pushing their cases on tenuous evidence. And that really matters. Should it eventually be decided that the problem is so bad “something has to be done” it is hard to see how anything can be put in place that would affect only the very few rotten apples. If you start playing with patentability, for instance, then it has an impact on all patent owners; as does getting rid of jury trials or insisting that the losing plaintiff in a case cover the costs of the defendant. In short, a problem that inconveniences a tiny minority could lead to changes that cause problems for a much greater number. In the real world, decisions should only be taken based on hard, empirical evidence; changes should only be made if they will make things better. At the moment, the whole debate is being conducted on the back of dodgy statistics, unsubstantiated assertions, wishful thinking and gut feeling. That is not good enough.