Hooray for the Patent Troll!

In late November, Microsoft lost a round in a South Korean legal dispute with a local inventor and a company that had bought the rights to his patent for a process that translates Korean into English. Such a dispute would have been too small to merit notice internationally if not for the plaintiff’s business model. This suit was brought against Microsoft not by the inventor alone, but rather by both the inventor and the firm—called P and IB—that had bought the rights to his patent, apparently without any intention of turning those rights into any kind of product.

The firm in this case took on the role of a so-called patent troll. I say ”so-called” because the phrase is a pejorative label of indeterminate meaning, and I find it somewhat loathsome. In fact, patent owners who are often accused of being patent trolls are acting within the law. There is nothing wrong either with them or the law. Far from stifling innovation, trolls foster it.

It’s worth noting that no one has clearly defined what a patent troll is. Indeed, the situation has reached the point where any patent owner cast in a negative light ends up being called a troll. The label has been applied to think tanks that employ inventors to sit around thinking up gadgets and devices, then file patent applications on those developments and prosecute any infringements. Others say that corporations that buy patents with no intention of commercializing products relating to those patents are trolls.

I know of one company, which I will not name, that had patented its own technologies—for television set-top boxes—conducted its own research, and developed its own products. Nevertheless, that company was labeled a troll when it sought to enforce a patent it had purchased, even though that patent had to do with set-top boxes, its core business.

What trolls have in common is that they do not commercialize products relating to the patents they own. Yet patent law is silent on whether a patent must be commercialized in order to be enforceable; a patent simply affords an inventor the right to exclude others from exploiting the invention defined in the patent’s claims. Additionally, the patent statutes make clear that patents, like any other personal property, can be bought and sold, licensed, and so forth. If a company is going to be labeled a patent troll simply because it seeks to enforce a patent outside of its core competency—whatever that competency may be—this kind of criticism could deter companies from developing ideas outside their core areas.

The reason for this restraint is that the pejorative label itself does harm. Legal decisions, and more notably settlements, in patent cases are affected by the media’s portrayal of the parties. If a company is slapped with a disparaging label by the media and that labeling affects business, sales, cooperative arrangements, and the company’s stock, there is an incentive to settle or withdraw from a litigation that may be the impetus for the label. Limiting or restricting patent protection only to that which is ”commercialized” thus inhibits the progress of science. Such inhibition contradicts the principles of the patent system established by the U.S. Constitution.

What’s more, companies that purchase patent property without performing research or even commercializing any product are nonetheless providing a valuable service. Most inventors barely have enough money to file for a patent application. Even if the inventor can afford to get the patent to issue, patent litigation is exorbitantly costly, frequently requiring millions of dollars. Individual inventors, and even small or medium-size companies, cannot afford such fees. Without another company to finance the litigation or at least to license or buy the patent—as P and IB did for the Korean inventor—the inventor may never realize any benefit from his toils.

Even more important, companies that buy patents provide a service to inventors who otherwise would find it hard to finance their efforts. These include individuals, small companies, companies that need to liquidate their assets, and companies that have patent assets outside their core businesses. Patent-holding companies thus constitute a secondary market, much like the one that exists for real-estate mortgage lenders. No one questions the propriety of the transactions that occur when bank A contracts a mortgage and sells it to bank B, which then pools it with other such mortgages and finally sells shares in the pool to third-party investors. Without this system, it would be far harder for people to buy homes.

So, too, patent-holding companies provide another way, and sometimes the only way, for an inventor to monetize his patent. They foster innovation by making it possible for small companies and individual inventors to spend their time in research and development, knowing that if a patent does issue, they will not necessarily have to commercialize or litigate it. They can spend time doing what they are good at—inventing.

Do not fear the patent troll. When considered according to the principles and purposes of the patent system, the beast vanishes, revealing a prince—a company that fosters innovation by providing patent marketplace liquidity.