Transaction Costs and Trolls: Strategic Behavior by Individual Inventors, Small Firms and Entrepreneurs in Patent Litigation

The role of individual inventors, small firms and entrepreneurs in the patent courts has become controversial for two, somewhat contradictory reasons. First, there is the view that small parties may be at a serious disadvantage in the courts since they do not have the financial resources to overcome the transactions costs of litigation. However, there is also a fear that some small inventors and licensing firms may be operating as trolls, using the courts as a mechanism to extract economic rents from large companies. Using original court documents to accurately identify the parties, outcomes and disputed patents in cases filed in 2000 and 2002, we explore how the resolution of patent cases relates to the nature of the parties. In particular, we examine whether individual inventors and entrepreneurs are ability to defend their patent rights and whether patent trolls are a significant problem. We find that small parties are quite active in our cohort of cases, constituting nearly half of all plaintiffs. However, most small plaintiffs are suing other small parties. Nonetheless, we also find that about 20% of small plaintiffs are suing defendants with annual sales greater than $500 million. These results indicate that small parties are active in the patent courts and are suing large alleged infringers, but that large infringers are not the primary focus of their activity. However, when small plaintiffs sue large defendants, the vast majority are able to overcome transaction costs and seek judgments against large firms or litigate to a trial. In fact, small firms are the most likely among all plaintiff categories to seek a judgment and are as likely as large firms suing other large firms to litigate to a trial. Thus, the possibility of high damages combined with institutional arrangements, such as contingency fee lawyers, may allow inventors and entrepreneurs to overcome the barriers to enforcement of patent rights. But, this conclusion must be accompanied by an important caveat. In cases with small plaintiffs, various indicators of patent quality, such as the number of claims and the number of backwards citations, increase with the size of the defendant. The same trend is not evident for large or medium sized plaintiffs. Thus, there is some evidence that when suing a large alleged infringer, small parties are only enforcing their most valuable patents, and that the average case may be filtered out. Finally, we explore the role of licensing firms, the most common candidate for the troll moniker. We find that the licensing firms in our cohort of cases - all of which would have classified as small firms as of 2002 - are a very small percentage of all plaintiffs. However, when licensing firms sue large firms, they do not have the same propensity to seek a judgment or go to trial as witnessed for other small firms suing large firms. Thus, our results suggest that patent litigation is not dominated by trolls, but the best candidates for the troll moniker do seem to behave differently in comparison with firms of similar size. However, these results should be evaluated with caution; it may also be that the small numbers of such firms makes it difficult to analyze their behavior.