Why patent trolls sue and win with weak patents.

Joshua Walker, the CEO of Lex Machina will be one of the guest speakers at The Patent Paradox, a course John Kelley and I will teach this quarter (Winter '12) at Stanford University Continuing Studies program. The 2010 NBER paper Joshua co-authored with John R. Allison (University of Texas, Austin) and Mark A. Lemley (Stanford University) analyses the quality of highly litigated patents. The authors discover a strange phenomenon:

But what we found was dramatic and unexpected: the patents and patentees that occupy the most time and attention in court and in public policy debates—the very patents that economists consider the most valuable—are astonishingly weak. Nonpracticing entities and software patentees almost never win their cases.

That is, patent trolls sue with very weak patents. Most, if not all of the patents, get invalidated in the process. Why do they do that? The authors of the paper are buffled:

Finally, our results are a bit of a puzzle for the most common law and economics models of litigation. ... they do beg the question of what is motivating the parties in these cases.

I think the answer to this puzzle can be found in Daniel Kahneman's book "Thinking Fast and Slow." In the Fourfold Pattern chapter he describes risk-related behavior with low-probability loss outcome.

The key to understanding is not the troll's, but the defendant's behavior. The defendant in a patent suit faces a very low probability of losing against a weak patent portfolio. Since the defendant, usually a large corporation, is loss averse and the probability of loss is non-zero, he is willing to settle under unfavorable conditions (lower-right corner.) On the other hand, the troll with a weak portfolio is facing a high probability of loss; therefore, he is risk seeking (upper-right corner.)
The most likely outcome of this confrontation is an out of court settlement which favors the troll.


References:
Patent Quality and Settlement Among Repeat Patent Litigants. 2010, John R. Allison, Mark A. Lemley & Joshua Walker.
Thinking Fast and Slow. 2011. David Kahneman. 

tags: patents, control, game, business, model, strategy