Are the courts stifling innovation?

For seven straight years, Fortune has named Apple as the World’s Most Admired Company. The magazine wrote the following about why Apple is held in such high esteem:

“The iconic tech company known for the iPhone and other stylish and user-friendly products is back in the top spot on this year’s list, for the seventh year in a row. Apple, the most valuable brand on the planet according to Interbrand, brought in $171 billion in revenues in FY2014 and is flush with cash, but fan boys and girls (not to mention the market) are getting antsy to see its next big product. Bets are on a smartwatch or AppleTV, but the company is also reportedly turning its attention to cars and medical devices.”

Fame and accolades have many consequences: some good and some bad. Unfortunately for Apple, one of the downsides of its visibility is that the company has turned into a target for patent trolls. In fact, Apple—a top target of the patent trolls—has faced 92 lawsuits in three years. Patent trolls are companies whose only business is suing over patents. The goal of these businesses is to “squeeze the patents to their maximum revenue potential in licensing fees.”

In the case of Apple, the company revealed that of the 92 cases filed recently, 57 are closed cases; in 51 of those cases, Apple paid the troll. Apple’s lawyers wrote:

“Apple has rarely lost on the merits. But victory figures as small consolation, because in every one of these cases, Apple has been forced to bear its legal fees. This reality is the lifeblood of the patent assertion industry … Indeed, the opening line of many negotiations is some form of, ‘What we’re asking for is less than it will cost you to litigate this case to judgment’.’”

Other popular patent troll targets include Samsung and Google. But, at the end of the day, these companies have enough financial banking and cash in the bank to deal with these lawsuits—whether by settling or going to court. Sadly, though, patent trolls also have a big impact in the startup space.

Catherine Tucker, Associate Professor of Management Science at MIT Sloan School of Management, has conducted research that shows clearly that “excessive litigation brought by PAEs (Patent Assertion Entities) has slowed the rate of investment in innovation, especially in technology companies.”

Tucker asserts that VC investment would “likely have been $21.8 billion higher over the course of five years but for litigation brought by frequent litigators.” The findings show that VC investment “initially increases with the number of litigated patents, but that there is a ‘tipping point’ where further increases in the number of patents litigated are associated with decreased VC investment.” Tucker’s paper shares an example of a startup that had to lay off nearly 1/3 of its staff in order to pay the legal expenses of a patent lawsuit; this resulted in the startup receiving a lower value from its investors.

But, Tucker suggests a fairly straight-forward solution to part of this problem. Right now, the U.S. laws require each side in patent lawsuits to pay for their own legal costs. Perhaps a simple change in policy should have the “closing party in a patent infringement lawsuit to pay the costs incurred by the prevailing party. That would then place the onus on the plaintiff rather than courts to determine if they think the patent has merits.”

We probably can’t eradicate patent trolls, but it behooves all of us to work towards limiting their power—and that of the courts—to stifle innovation in startups and stalwarts just by threatening a lawsuit.

Catherine Tucker is an Associate Professor of Marketing at MIT Sloan School of Management and teaches in the MIT Sloan Executive Education programs: Driving Strategic Innovation: Achieving High Performance Throughout the Value Chain, Platform Strategy: Building and Thriving in a Vibrant Ecosystem, Strategic Marketing for the Technical Executive, Systematic Innovation of Products, Processes, and Services, and the Advanced Management Program (AMP).

Tucker also teaches in the Global Executive Academy, a new program that brings a diverse multinational audience together to experience MIT’s world-class education in a global multi-lingual setting. This program takes place Sept 2-11, 2014.

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