The Toll of Patent Trolls: Implications for Innovation

Abstract

Groundbreaking innovations are protected by patent systems, but innovations are not always transformed into products. Creators sometimes become victims of legal conflicts and money games. These problems particularly originate from the activities of patent trolls, who generate profits by enforcing patent rights against innovative firms. Despite the urgency and severity of the NPE-related issues in a business context, business scholars have been largely reticent in examining such opportunistic misconduct. The current research endeavors to illuminate the nature and causes of patent trolling by grounding Akerlof’s framework, in which information asymmetry results in market failure. This study also provides policy implications that preserve the health of our innovation landscape. Key findings suggest that low patent quality and high litigation costs encourage trolls to engage in ill-intentioned behaviors and discourage inventors from innovations. Increasing the minimum standards and improving patent value itself not only hinder exploitation by trolls but also induce the transfer of wealth to inventors. Discouraging trolls, however, is contingent on two preconditions: the quality of patents should be ensured, and the current damage compensation scheme should be rationalized. Our analytical derivations reveal that actions designed to deter opportunistic intent do not always encourage innovators to commercialize their inventions, but sometimes hinder commercialization of innovations. Our frameworks provide insights into addressing these issues in a synchronous manner, thereby upholding the forward-looking vision of innovation.