Undercover Economist

Taming the patent troll

Could a market for intellectual property ever work smoothly?

Trolls, as any three-year-old can tell you, lurk underneath structures they didn’t build and pop up at unexpected moments to get in the way and make unreasonable demands. And “patent trolls”? They do much the same thing, nosing around patent systems and buying up intellectual property, often of questionable quality, and using it to extort money from genuinely innovative companies by threatening protracted and expensive legal action.

I am sympathetic to the general point that many patents, and their potential for abuse, actively discourage innovation. But if we’re to solve the problem, it’s worth pinpointing where it lies – and the rise of the trolls is a symptom, not the cause.

The three pillars that enable patent trolling are: the existence of absurd patents; the forbidding cost of the legal process; and the business model of buying up patents as assets in their own right, rather than building blocks for innovation. National Public Radio’s This American Life recently discussed all three elements but focused on the last: the story is more compelling with a bad guy, after all. One contributor even compared patent trolls to a mafia collecting protection money.

But I’d look first at the patents themselves, many of which are for ideas that seem vague, broad and unoriginal. There are jokes, such as the “swinging on a swing” (US patent 6368227). But more serious are patents on, for instance, running an auction over the internet (US patent 7702540) that could surely have been dreamed up without the incentive of an intellectual property deed. The laxity of the US patent system is compounded by its sympathy for applicants: they seem to get the benefit of the doubt until a costly legal process says otherwise.

If patents were sensibly scrutinised and legal proceedings cheaper (big “ifs”, it’s true) there would be nothing wrong with buying up patents from the original inventors and then trying to collect licence fees for their use.

Could a market for intellectual property ever work smoothly? This is the dream of, among other people, Nathan Myhrvold, former chief technology officer of Microsoft. Myhrvold runs Intellectual Ventures, a company which is either the world’s worst patent troll or a leader in creating a market for inventions, depending on who you listen to. Myhrvold, with law professor Mark Lemley, has argued that when patents are licensed, the details of the deal should be a matter of public record. This would help provide the kind of transparent information to get a market operating, one which would grease the wheels of innovation rather than rusting up the gears.

But would this be enough? The economists Joshua Gans and Scott Stern argue that there are formidable obstacles in the way of setting up a well-functioning “market for ideas”. The basic problem is that patentable ideas are supposed to be unique, and ideas are typically only useful as part of an accumulation of other ideas. As a result, negotiations over patents are vulnerable to “hold-up” as various intellectual assets are acquired. As an analogy, imagine trying to buy land to build a railway line: each property owner has the incentive to hold the entire deal hostage.

So what is the solution? It might look a lot like a patent troll: a company with a large portfolio of patents it doesn’t itself use. It would put together package deals. With a reputation to uphold, the patent troll would have an incentive to make things run smoothly, rather than behaving like a cranky old man with a house on the planned railway track.

Is this just a children’s fairy tale? It is for now. But with a more sensible patent system, even the trolls may become useful members of society.

Also published at ft.com.