A victory for the trolls

Posted Apr 26, 2011 8:58 UTC (Tue) by wahern (subscriber, #37304)
In reply to: A victory for the trolls by ajb
Parent article: A victory for the trolls

You have to discount the costs by the chance of enforcement. Discounting by risk is then the prospective cost, excluding transactional costs. If your potential liability is $5m for breaking the patent, but the chance of enforcement is only 1 in 10,000, then the prospective economic cost is $500. If executing a patent search costs more than $500, then just don't do the search. You might say that individuals don't think this way, but we do at least behave this way; and venture capitalists, with dozens or hundreds of investments do think in terms of probabilities and risk.

How many times have you turned around on a side street by poking the front-end of your car into someone's driveway? This is trespass, and the owner could sue you. But a court would probably only ever award a one-time offender $1 in damages. If a chance of suit is 1 in 1,000,000, then your cost is infinitesimal, and taking the risk is absolutely worth it. That explains why you never think about it. If the potential repercussion was death, you'd be doing a heck of a lot more curb-side three point turns.

The fact that you could be sued, and that it would be absurd in the grand scheme of things to actually be sued, doesn't mean we should modify the property regime to take this into account. There's no need to write in an exception for using driveways to turn around. The fact that enforcement is not absolute, and the limit of damages proportional to some real economic value, solves the problem for us. The homeowner will only sue when his potential return is worth the effort; and the fact that he's oblivious to most driveway incursions is significant as well--it's manifestly evident that he's only going to pursue a conspicuous offender deriving significant benefit from infringing his right.

So, when you speak with a policy maker about the "costs" of patents, you can't simply point to the costs of fastidiously avoiding infringement; how the garage inventor is oppressed by the specter of a corporation suing him in Federal Court. That's because the whole regime is predicated on the notion that enforcement is lax, and on the whole only people for who it's economically worthwhile to seek a license will do so, and conversely patent holders will only seek enforcement on a small subset of infringers capable of paying. The risk of that garage inventor being sued is miniscule, and he knows it; the same way nobody in this thread realistically believes he's going to be personally sued by Bedrock for using Linux.

Patent holders rarely sue small start-ups because it makes sense to wait for them to be gobbled up by a bigger fish, and *then* sue the bigger fish. We tend to think this is an absurdity and evidence of how illogical the system is, but in fact this is exactly how things are expected to work. If the small fish understand this, then it means there's not as much reduction in innovation as we might think. The small fish will infringe, and the bigger fish will expect to be taxed if and when they eat the small fish.

Now, that's the general model. Once you crunch the numbers, of course, most of us would agree that on the whole it's not worth it. Also transactional and collateral social costs (e.g. people overestimating their risk of suit and reducing economic activity more than what is warranted) can overwhelm the social benefit of the system, but it's not as easy to show as one might think.

This entire analysis applies equally to the real property regime. Once you start to break real property interests into all the different kinds of estates, like life and leaseholds, and interests, like tenancies and contingents, then the complexity explodes from the trivial model you're implying. And, again, it works because perfection (solving the halting problem, if you will) is not the goal. If it's difficult to determine or enforce a property right, then it will indeed be enforced much more rarely and lightly, and the value and potential costs of that right will be diminished accordingly. Consider that if you sell a house with a warranty deed you can charge a higher price than if you sell a house with a quit claim deed (where you don't warrant clean title). The value of the right to both seller and buyer is diminished by the risk of enforceability of the right.

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A victory for the trolls

Posted Apr 26, 2011 17:29 UTC (Tue) by ajb (subscriber, #9694) [Link]

Low probability of enforcement is evidence that the system is not working correctly, for a couple of reasons:

You can't simply factor out the probability of enforcement, because uncertainty also has a cost. And it's a cost to the system as a whole, not just a transfer between parties, because uncertainty causes friction. (It may seem peculiar to say that uncertainty is a problem for entrepreneurs - aren't they supposed to be all about taking risks? But we want them to spend their risk-taking capacity on innovation, not working round legal uncertainty).

This degree of uncertainty over property ownership is not seen in other areas of property. Yes, discounting by risk occurs in real property, but the vast majority of real properties - at least in the developed west - have much more certain ownership; with discounting only used to get rid of residual risk. We have seen from the recent mortgage debacle that it causes huge stress if too much uncertainty is allowed into the system. In developing countries, uncertainty over property ownership is a huge drag on the economy. Even in patents, in other industries, such as pharmaceuticals, small companies rely much less on assuming that enforcement will not occur, and actually do licence. That is why the issue in pharma is whether there is a 'patent anticommons'.

You make the same argument that Paul Graham makes (http://www.paulgraham.com/softwarepatents.html), that trolls are content to wait for the bigger fish to buy up the smaller ones. We can assume that he knows what he is talking about. But we can't assume that it will continue that way. Not all smaller companies are bought by bigger ones; in fact, small companies make up a large proportion of the economy. Trolls will want to monetise them if they can, and we can expect them to become more efficient at doing so over time (eg, via exchanges such as http://www.ipxi.com, which is implementing the ideas in Lemley and Myhrvold's "How to make a Patent Market (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012726)). Also, it is not necessarily the case that infringing a patent simply incurs some percentage 'tax' on profits. In a perfectly efficent world, each troll would negotiate separately with each infringer, but that can't happen, so we see fixed prices which prevent certain uses, such as in the MPEG pool. So the liability created by patents can make some businesses uneconomic, and this will become a larger effect once smaller companies are drawn into the system.

Secondly, the uncertainty is not just due to the low probability of enforcement, but due to the inaccuracy of determining whether you are infringing a patent. This inaccuracy dilutes the incentive effect that is supposed to be the reason for patents.
You are right that we can't obtain perfect accuracy, but the interesting question is how much does it const to obtain enough certainty for the system to actually work. That's why I suggest measuring how much information you can get for a given cost.

Also, from a political point of view, it's worth challenging the simple narrative that proponents of software patents push - in which software patents are a 'no-brainer' benefit to the economy. Exposing the real situation is well worth doing.

A victory for the trolls

Posted Apr 26, 2011 18:07 UTC (Tue) by copsewood (subscriber, #199) [Link]

Bankruptcy administrators are obliged to monetise the bankrupt's assets including patents. This might most conveniently occur through sale of the patent to a third party, but if no-one wants to buy it the administrator is obliged to enforce the patent against potential licensees. If the startup offered a license can afford neither to license it nor to litigate it, the administrator is likely, if it takes the matter to court, to obtain the startup business and it's assets as it stands. In this situation the only strategy available to the startup owner to avoid losing the business is to threaten to spend all assets attempting to defend the suit until the business is worthless, in which event the administrator will see a negative asset value due to unrecoverable legal costs. But this is a dangerous bluff if considered as such and called. I've heard of once such case where a US small software business owner took this line and lost everything in the process.

A victory for the trolls

Posted Apr 28, 2011 8:30 UTC (Thu) by ekj (guest, #1524) [Link]

This makes sense up to a certain point, but there's huge problems with handing nuclear weapons out on the *assumption* that those getting them will generally tend to not use them against small fish often.

The *law* is supposed to decide who is punished and who isn't. (offcourse modified by the fact that the chance of getting caught ain't 100%)

But increasingly, we have laws where "Everyone is a criminal, few are prosecuted, but the penalties for those few who are -- are enormous."

This hands a lot of power to the people deciding who to prosecute. Power they're not supposed to have. A big company with many patents, say IBM, can at any time decide to destroy any small software-company they dislike by claiming patent-violation. They can do this for any reason whatsoever, though you're presumably right that most of the time economical considerations will be the most common reasoning.

It's not a good thing for competition to have an environment where any of the big can, at any time, take out any of the small. Offcourse being big they might be able to do that in any number of ways, but that's no argument in favor of giving them even -more- ammunition than they've already got.