Patent trolls caused a $22B drop in VC funding, claims new study

medium_2401122079A new study claims to provide evidence that patent trolls are stifling innovation, particularly with startups. That’s because the last half-decade has seen almost $22 billion less venture funding capital raised, due to high levels of litigation.

Catherine Tucker, professor of marketing at MIT’s Sloan School of Business, insists that VC investment “would have likely been $21.772 billion higher… but for litigation brought by frequent litigators.”

In an interview with ARS Technica, Tucker argues that there’s something seriously wrong with the patent system. “In the beginning, in general, patent litigation is good,” she says. “It suggests a well-functioning patent system and has a positive effect. However, when you get to a certain point, that’s no longer the case. Then, the more patent litigation you have, the worse it is for venture capital investment.”

Tucker’s study looked at patent litigation between 1995 and 2012, and discovered that more than 20 percent of patent lawsuits were filed by so-called “frequent litigators”, often known as “patent trolls”. The study went on to correlate the activity of frequent litigators with increased VC investment, and found it always had a negative impact.

This correlation was worked out using a complex mathematical technique called ‘regression analysis’, and the team even ran the analysis with alternate scenarios to double check their findings. An example of this was to exclude with little VC investment but heavy patent litigation from the results, such as the Eastern District of Texas. When they did so, their results remained unchanged says Tucker, who admits she was surprised at how strong the correlation is.

“You hear these anecdotes, of VCs being a little nervous [due to patent lawsuits],” said Tucker. “But I didn’t think it would necessarily be strong enough to have an empirical effect.”

The study gives several examples of the impact of patent litigation. This includes X-Plane, a South Carolina-based company, which was “forced to abandon product upgrades and new products that were in development”, after being sued for using copy protection software provided by Google.

Tucker’s study comes a couple of weeks after a key patent reform bill was vetoed in the US Senate, in part due to a lack of solid data that could help the reformists’ case.

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