How patent trolls hurt the American economy

Patent trolls — entities that hoard patents, not to innovate but to litigate — are at it again. This time, a company called Freedom Patents has launched a fresh wave of litigation complaints targeting technology companies including T-Mobile, Samsung and Cisco.

This is the second campaign by Freedom Patents against wireless antenna technology. The grounds for its case rest on three outdated Mitsubishi patents, and the company is attempting to extract a large settlement from mobile communication companies that would rather avoid a lengthy and expensive court process.

Freedom Patents exemplifies the “patent assertion entity” model, where companies exist solely to acquire patents and file infringement lawsuits. The complexity of smartphones, which can contain around 250,000 patents, makes them a prime target for patent trolls.

These claims are filed in the Eastern District of Texas, which is infamous for being friendly to patent trolls who want to exploit the legal system for profit. At its peak, this court heard 40 percent of all patent cases in America.

It is no accident that Freedom Patents is based in Tyler, Tex., a small city which, along with Marshall, makes up the core of the Eastern District Court of Texas. In 2021, Tyler’s city manager admitted that patent litigation helped the town’s economy, boasting about the district’s “rocket docket” — a term referring to the court’s expedited handling of cases through rules that set swift procedural schedules, require defendants to provide voluminous discovery early in the case and reserve most substantive determinations for the jury.

The current slew of lawsuits targets innovative technology companies, which only increases costs for these productive firms. Research from Harvard in 2014 shows that patent trolls cost defendant firms $29 billion per year in direct out-of-pocket costs and destroy over $60 billion in firm wealth annually. In today’s dollars, that comes close to $38 billion in direct costs and $78 billion in lost wealth.

Recent congressional testimony underscores the toll these costs continue to inflict. The in-house counsel at the GPS company Garmin told a House committee that it could cost $10 million to defend against just a single case.

In addition to the Eastern District of Texas, patent trolls also exploit the International Trade Commission (ITC), a government agency that is supposed to protect real American industry against intellectual property theft. The ITC has the authority under the Tariff Act of 1930 to block the importation of goods that infringe on U.S. patents, provided the case affects a concerned domestic industry and is not contrary to the public interest.

Unfortunately, patent assertion entities have manipulated this authority to threaten innovative technology companies with draconian product bans if they don’t agree to massive settlements. For example, if just one of the patents involved in a smartphone is found to be infringing, no matter how minor it is, the entire product can be banned from American shelves. Since U.S. courts would not allow this disproportionate remedy, trolls flock to the International Trade Commission to gain this absurd and lucrative leverage.

Stopping innovative technology, particularly in the mobile communications, is detrimental to Americans who rely on smartphones daily. For some, this is a critical means of online access. One-quarter of Hispanic adults are “smartphone-only” internet users, relying solely on their devices for online access. When patent troll firms attack technology companies that produce these essential products, they restrict access and increase prices for consumers.

During our current economic competition with China for technological dominance, we must encourage the private sector to continue innovating. The billions of dollars and time spent by companies defending against trolls in court in Texas and at the ITC divert resources from better uses — such as developing faster connectivity, better security or continuing cost improvements.

If we want to accelerate innovation and reduce unneeded economic drag on producers, we need to reduce patent trolls’ ability to misuse patent litigation to extort outsized settlements from productive companies. This starts with the International Trade Commission, an agency subject to direct congressional oversight. Legislation like the Advancing America’s Interests Act offers a solution. It seeks to realign the ITC’s focus, ensuring it actually considers the public interest (the last time the Commission used this authority to decline an exclusion order was 1984), as well as ensuring the domestic industry affected is not a patent troll, but a firm that actually develops products and wants to take action.

By reforming our patent system and reining in agencies too accommodating to patent trolls, we can protect innovators, remove burdens on the economy and ensure the continued advancement of technologies that drive the American innovation future and improve our lives.

Danielle Zanzalari is an assistant professor of Economics at Seton Hall University.