Momentum over patent reform has waxed and waned over the past several years. Throughout, there has been a constant backdrop of concern about patent assertion entities (PAEs), which the Federal Trade Commission defines as firms with a business model based primarily on purchasing patents and asserting the intellectual property against persons already using those technologies. New research demonstrates that PAEs have, in fact, increased litigation costs and deterred innovative activity. 

Intellectual property lawsuits brought by PAEs can be extremely costly for organizations, and many companies now contend that PAEs also inflict indirect economic damage by inhibiting investment. Startups in innovative sectors such as high technology, for example, are often required to list all ongoing litigation when applying for venture capital (VC) funding. A study by Analysis Group affiliate and MIT Sloan School of Management Professor Catherine Tucker recently quantified the economic impact of PAE-related activity. 

Her research, “The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity” – funded by the Computer & Communications Industry Association (CCIA) and supported by Analysis Group Managing Principal Lau Christensen and Manager Greg Rafert – found that VC investment would likely have been at least $8.1 billion higher over the course of a five-year period but for litigation brought by PAEs. These estimated losses represent a significant percentage of the nearly $131 billion actually invested in startups and innovation in these same five years.

In a CCIA press release, Professor Tucker concluded: “Some protection of intellectual property can lead to more innovation. However ... litigation by [PAEs] did not foster entrepreneurial investment at all. It is instead associated with significantly reduced venture capital investment in entrepreneurship, preventing startups from developing and suppressing job growth.” Professor Tucker’s report estimates that, in addition to losses in withheld VC investments, the direct costs of PAE litigation – including legal fees and settlements – were between $3.8 billion and $18.9 billion in 2012. These costs include only PAE litigation that reaches U.S. courts, excluding cases involving settlements that are covered by non-disclosure agreements. The report contends that the true direct and indirect costs of PAE litigation could be much larger than existing estimates.

The study also finds that although VC investment tends to increase “with the number of litigated patents,” there is also a “tipping point at which further increases in the number of patents litigated are associated with decreased VC investment.” This trend is particularly pronounced for high-technology patents and suggests that numerous startups are now vulnerable to early- to mid-stage PAE litigation, which, the report suggests, “is directly associated with decreased VC investment with no positive effects initially.”

The opinions expressed by Analysis Group affiliates do not necessarily reflect the views of the firm.