The Private and Social Costs of Patent Trolls

Abstract

The emergence of nonpracticing entities (NPEs) — firms that purchase and hold patent rights but neither innovate themselves nor use the patents in the production of goods — is supposed to incentivize innovation by providing a ready market for innovators. We test this idea empirically and find that NPEs produce little returns for innovators or for their own shareholders, but they place significant costs on productive firms that violate patents inadvertently. Indeed, it appears that NPEs — often disparagingly called “patent trolls” — discourage productive firms from innovating for fear that they will then be subject to a patent troll suit. Thus, NPEs may discourage innovation, resulting in a social loss.