Riddle Me This: Do Patent Trolls Create Wealth or Destroy It?

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"... And I said it once before
but it bears repeating."
-- "Fell in Love With a Girl," by The White Stripes

I've been banging the drum about a broken patent system for years. But the problem keeps getting worse, not better.

So when researchers take my side in the patent-trolling debate, it's hard not to feel a little vindicated. A fresh study from Boston University notes that patent trolling has cost publicly traded defendants as much as $500 billion in lost market value since 1990 -- and the rate of evaporating money just keeps accelerating. The current run-rate is about $83 billion a year.

And the suits aren't simply shoveling cash into the pockets of hyperactive plaintiffs. According to the study, 14 publicly traded NPE plaintiffs reduced the market value of their targets by $88 billion over a two-decade period -- but collected only $7.6 billion in total revenue. More than 90% of the destroyed wealth converted into something positive for someone else. The rest is just collateral damage to investors in companies that actually make stuff -- like you and me.

The 10 most-targeted companies in these value-destroying lawsuits include proven innovators Apple (Nasdaq: AAPL  ) , Hewlett-Packard (NYSE: HPQ  ) , and Motorola Mobility (NYSE: MMI  ) / Motorola Solutions (NYSE: MSI  ) . Note that we're not talking about Apple suing Motorola, or HP suing Apple. Those staggering market-value losses all came from lawsuits by non-practicing entities, also known as patent trolls.

The defining characteristic of a troll, as the less inflammatory NPE term implies, is that the company doesn't actually make or sell anything other than intellectual property and therefore can't be fought with a patent-based counterstrike.

The largest and scariest NPE by far is Intellectual Ventures, founded by former Microsoft CTO Nathan Myhrvold and presiding over more than 10,000 patents. Longtime and fairly successful Stock Advisor recommendation InterDigital (Nasdaq: IDCC  ) is the third-largest such entity, with about 2,500 patents at its disposal, and memory-tech specialist Rambus (Nasdaq: RMBS  ) lands in third with 780 issued patents to its name, according to sources cited in the Boston U study.

It should come as no surprise that 62% of the wealth-destroying lawsuits are brought on software patents, while only 2% involve chemicals or drugs. It seems obvious to me that the standard of quality on software patents is much lower than in the strictly regulated drug and chemical fields. Wouldn't it be a good idea to impose an equally high bar on software patents, so that true innovation can be rewarded and all the junk thrown out with the trash? I think that investors in everything from Microsoft to Apple or HP should demand it, lest frivolous suits continue to hold back their innovation and eat away at shareholder returns.

Some NPEs see lawsuits as a last resort, not as a quick and easy cash grab. Some would put InterDigital in that category; some even think that Rambus belongs there (though I must continue to disagree). Watch this free special report to find another patent pusher with cleaner motives and real value to both investors and inventors.

Fool contributor Anders Bylundholds no position in any of the companies discussed. The Motley Fool owns shares of Apple, Research In Motion, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Dell and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2011, at 10:38 PM, johnnyg135 wrote:

    Anders, you are making a "fool" out of yourself when you classify Interdigital as a patent troll.

    Interdigital "invents the technology" they license. Are you even aware of the number of PHD's and Master engineers that work on developing new technology at Interdigital ? You might want to do more due diligence before you include them in the same category with Intellectual Ventures.

    A patent troll license that which they have purchased from the inventor.

    When you try and classify a company such as Interdigital in this manner you destroy any credibility you might have had.

  • Report this Comment On September 22, 2011, at 2:28 AM, 1984macman wrote:

    A patent, by definition, is only legitimate if it covers a concept that's not obvious at the time of invention to one skilled in the art. It's highly unlikely that more than a handful aren't legitimately issued. Once issued, the patent becomes public knowledge. In return for thus informing the world of the nature of the invention, a monopoly is granted to the patent holder for a very short length of time (compared to, say, a copyright).

    How can this can be construed in any way, shape or form as being a bad thing? The only possible situation I can picture in which a patent might be bad is when it is used to charge usurous rates, which it is my understanding is illegal.

    Seems to me the anti-patent crowd are basically a bunch of whiners who want something for nothing, and don't stop to think about the damage to innovation that would result if they got their way, or maybe even care so long as they got theirs first.

  • Report this Comment On September 22, 2011, at 12:05 PM, nostockpro wrote:

    I see Anders is back up on his soapbox. Maybe he doesn't realize that study he has latched onto is a questionable source. Or maybe he doesn't care and will just use anything that supports his point, valid or not.

    Communism failed. This is the reason: People need to be paid for their hard work and innovation, or they won't do it anymore. It's called incentive.

    The only reason there are patent trolls is because, in our current legal system, when individuals and small companies invent useful things, they cannot afford to fight for themselves against the giant corporations cherry picking and bullying them. So unfortunately they must sell to someone who can. Now you want to take that away from the inventors too?

    Maybe I should copy this article and print it all over the web with my name on it. Same thing, except of course this article is garbage so why would anybody do that.

  • Report this Comment On September 22, 2011, at 1:56 PM, Andersafool wrote:

    anders, please explain to me how you have a job. Have you even stopped to think that if these large corporations would pay for the technology that they are blatantly stealing, there would be no where near as much lost value for these publicly traded companies? Do you think Samsung, Hynix, Micron, and these other large corporations always play fair? Are you okay with people stealing ideas that aren't theirs? Unfortunately, the broken court system with corrupt, paid for judges like robinson and payne is the only recourse for people/companies to get paid for ideas that are being blatantly stolen. The sad part is, that 500 billion is probably lower than what it should be because it doesn't include the bribe money these big corporations pay out to influence politicians and judges so they can continue to steal with impunity.

    Do you also steal candy and toys from children and blame them for telling their parents that you stole? You might as well, you fool.

  • Report this Comment On September 23, 2011, at 3:18 PM, flashfinancials wrote:

    Apparently a lot of RMBS speculators read this board and are attacking the messenger. Not much substance to their attacks. Re macman "It's highly unlikely that more than a handful aren't legimately issued"...that's a pretty bold statement, especially considering congress just passed a patent bill that is in response to the US patent office being overwhelmed and undermanned. Didn't they grant Amazon a patent a few years back on the concept of "one click purchase", and Amazon went around suing or threatening to sue people claiming "one-click" for years? Very original and non-obvious idea there, clearly the patent office thoroughly screens all applications.

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