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Yes, Patent Trolls Are Hurting Your Business They're just as bad as everyone says they are. Here's why.

By Laura Entis

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Defending the patent troll is an unpopular position. Known officially as Patent Assertion Entities, patent trolls don't create new products, but instead accumulate patents in order to make money by collecting licensing fees from accused infringers – often small to medium-sized companies that can't pay the legal fees to fight back.

President Obama thinks they are "trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them," and has called for legislation to limit patent trolling so that businesses can "stay focused on innovation, not costly and needless litigation." (Unfortunately, despite support from the president, patent reform bills are hitting a Congressional wall).

But is this animosity warranted? A recent op-ed in The Wall Street Journal by Stephen Harber and Ross Levine makes the unconventional argument that Patent Assertion Entities aren't the bad guys – instead, anti-patent troll sentiment originates from "Big Money," i.e. deep-pocketed tech companies such as Apple who have a vested interest in reforming patent laws so they don't have to pay for patented technology. Despite their unpopularity, Harber and Levine contend, the evidence that patent trolls hurt innovation or entrepreneurship "does not exist."

Related: Tesla's New Patent Strategy Makes Sense

So do we have our collective panties in a knot over nothing? Economist James Bessen, writing for the Harvard Business Review, did some poking around. Here's what he found:

Patent trolls cost defendant firms a lot of money: An estimated $29 billion in direct-out-of-pocket costs and $60 billion in aggregate firm wealth each year, to be specific.

Innovative firms are disproportionally targeted for patent infringement: As a firm's research and development grows, so does the likelihood that it will be sued.

Patent trolls don't just go after "Big Money." Small and medium sized startups are targets, too: In fact, the majority of patent trolls target businesses making less than $100 million in annual revenue. One survey of software companies found that 41 percent reported "significant operational impacts" from infringement suits.

Patent trolls hurt venture capital: A study by MIT professor Catherine Tucker found that VC investment over the last five years "would have likely been $21.772 billion higher... but for litigation brought by frequent litigators."

Small firms targeted by an extensive patent infringement lawsuit spend less on research and development: A study by Roger Smeets, an assistant professor at Rutgers Business School, found that after a lawsuit, firms reduced their spending on research development by 3 percent to 5 percent of operating expenditures, which translates into a reduction in spending of 19 percent.

…As do large firms: Research from Harvard University and the University of Texas found that when a lawsuit brought against a public company by a patent troll was not dismissed, the firm, on average, cut research and development spending by $211 million, a 48 percent reduction.

Related: Entrepreneurs Want Patent Trolls Gone, But Current Legislation Is Sloppy

While Bessen acknowledges that the studies he cites could be subject to minor revisions, he nonetheless concludes:

"Across a significant number of studies using different methodologies and performed by different researchers, a consistent picture is emerging about the effects of patent litigation: it costs innovators money; many innovators and venture capitalists report that it significantly impacts their businesses; innovators respond by investing less in R&D and venture capitalists respond by investing less in startups."

In other words, don't waste any time pitying the patent troll.

Related: Angry Business Owner Wages War on 'Troll'

Laura Entis is a reporter for Fortune.com's Venture section.

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