Transaction Costs and Trolls: the Behavior of Individual Inventors, Small Firms and Entrepreneurs in Patent Litigation

Abstract: The role of individual inventors, small firms and entrepreneurs in the patent courts has become controversial for two, somewhat contradictory, reasons. First, small parties may not have the financial resources to overcome the transaction costs of litigation and may therefore be at a serious disadvantage in defending their intellectual property rights in the courts. However, there is also a fear that some small inventors, particularly patent licensing firms, may operate as “trolls,” using the courts to extract economic rents from large companies. We analyze a cohort of patent cases and find that small parties suing large defendants are the most likely among all plaintiff categories to litigate a case to a judgment; they are also as likely as large firms to litigate to a trial when suing a large alleged infringer. Thus, institutional arrangement such as contingency fee lawyers may allow small parties to overcome the barriers created by high transaction costs. However, the characteristics of the litigated patents suggest that small firms may only be enforcing their most “valuable” patents and that the “average” patent may be filtered out. On the other hand, patent licensing firms do not follow the pattern of other small firms—they are less likely to seek judgments or trials. Nonetheless, they are only a very small percentage of all plaintiffs in patent cases, so while their behavior may be different from other small firms, they are not dominating the patent courts.