Patent Trolls on Markets for Technology - An Empirical Analysis of Trolls' Patent Acquisitions

Abstract

Patent trolls appropriate profits from innovation solely by enforcing patents against infringers. They are often characterized as relying on low-quality patents, an assessment that, if correct, would imply that eradicating such patents would effectively terminate the troll business. In this paper, we shed light on this issue by empirically analyzing trolls patent acquisitions. We draw on a unique dataset of 392 U.S. patents acquired by known patent trolls between 1997 and 2006, which we compare to three control groups of 784 U.S. patents each acquired by practicing firms. Our findings regarding patent characteristics support recent theoretical propositions about the troll business model. The probability that a traded patent is acquired by a troll rather than a practicing entity increases in the scope of the patent and in the patent density of its technology field. Remarkably, and contrary to common belief, we find that this probability also increases in the patent’s technological quality. On a descriptive level, we find that troll-acquired patents are of significantly higher quality than those in the control groups. This result implies that elevating minimum patent quality will not put an end to the patent troll business, and suggests that this business is sustainable in the long run. Furthermore, we discuss the fact that trolls are peculiar players on markets for technology insofar as they are solely interested in the exclusion right, not in the underlying knowledge. We posit that transactions involving patent trolls may only be the tip of the iceberg of “patent-only” transactions, a conjecture with strong implications for the efficiency of markets for technologies. Managerial and policy implications are discussed.