Business costs have risen more than fourfold since 2005 over royalty demands filed by patent owners seeking quick profits, a study by Boston University School of Law researchers shows.
The BGOV Barometer shows companies face $29 billion in expenses from 5,842 infringement claims filed in 2011 by so- called non-practicing entities, patent owners using their rights to collect license fees instead of producing products. That's up from 1,401 claims and $6.6 billion in costs in 2005, according to the study published today.
Companies with $1 billion or less in annual revenue were named in 59 percent of the claims filed last year. While large companies end up paying more in settlement and legal costs, the smaller companies' expenses eat up a larger share of their revenue, according to the study by James Bessen, a lecturer of law at BU, and Michael Meurer, an economist and law professor at the university.
"I was surprised at the magnitude and how much of it is really hitting small companies," said Bessen. "It's having a bigger effect on innovation than we had thought."
Bessen and Meurer said the study illustrates systemic problems in the U.S. patent system. They said recent court rulings and legislation that scaled back some patent rights only go so far in curbing what they consider a costly nuisance for businesses.
The study reviewed lawsuits or royalty demands filed by non-practicing entities, sometimes referred to as "patent trolls." They include hedge funds that buy patents, some university licensing programs and individual inventors, as well as operating companies that assert patents in areas in which they don't make products.
The study is based on the results of a survey conducted by RPX Corp., (RPXC) a San Francisco-based firm that buys patents for a syndicate whose members include Google Inc. (GOOG) and Cisco Systems Inc. (CSCO) so they can't be used in litigation against the companies.
In most instances, the study said, the NPEs make demands to large numbers of companies and settle for smaller amounts rather than targeting an individual company in hopes of a big payoff. The targeted companies often aren't even aware of the patents before being notified they might be using the invention.
"These are owners that are simply licensing freedom from suit rather than licensing technology" for use in a product, Bessen said. "To handle $100 million litigation, you have to have a rare set of skills and make some big investments."
San Francisco-based RPX, which developed a lawsuit database, submitted questions to companies that it works with. That limited results to mostly technology companies, which are sued more than firms in other industries.
The survey asked companies how much they spent in legal costs and to settle the infringement claims. It didn't take into account any delays in production or diversion of resources. It costs on average $1.75 million for a small or medium-sized company to cover legal and settlement costs, and $8.79 million for companies with more than $1 billion in annual revenue, Bessen said.
The researchers were critical of some companies that say they help inventors get compensation for work that's being used by big firms. At most, about 21 percent of the money goes to the inventors, Bessen said.
Meurer said more should be done to curb software and business method patents in particular, and to let more patents lapse into the public domain if they're not being used in products, because much of the NPE litigation involves patents at the end of their 20-year lifespan.
"The cost of keeping and obtaining patents should be increased significantly," Meurer said. "We have too many patents. It's creating a pollution problem."