Why do individual patent holders assign their patents to "trolls" rather than license their technologies directly to manufacturers or assert them through litigation? We explore the hypothesis that an asymmetry in financial resources between individual patent holders and manufacturers prevents individuals from making a credible threat to litigate against infringement. First, individuals may not be able to cover the upfront costs associated with litigation. Second, unsuccessful litigation can result in legal fees so large as to bankrupt the individual. Therefore, a primary reason why individual patent holders sell to PAEs is that they offer insurance and liquidity. We test this hypothesis by experimentally manipulating these financial constraints on a representative sample of inventors and entrepreneurs affiliated with Stanford University and UC Berkeley. We find that in the absence of these constraints, subjects were significantly less likely to sell their patent to a PAE in a hypothetical scenario. Furthermore, treatment effects were significant only for subjects who were hypothesized to be most sensitive to these constraints.For readers who, like me, are most curious about the experiment, here are the details: They invited 1200 inventors or entrepreneurs to fill out an email survey and ended up with 103 useful responses. (This seems like a reasonable response rate given the nature of the survey, though it is worth thinking about whether the type of people who respond are likely to influence the results.) Subjects wrote about an improvement for a product they use regularly, and then were told to imagine they had been awarded a patent for the idea that was worth $1 million, and also that a large corporation saw the idea and decided to infringe the patent without paying for it. Subjects in the control condition were given the option of selling to a patent assertion entity (PAE) for $100,000 or hiring a lawyer to assert the patent for $1,000 per hour; subjects in the treatment condition were told the lawyer worked on a contingent fee basis for one-third the total award. They also tested the subjects' risk preferences and loss aversion, and they asked subjects to self-identify as inventors or entrepreneurs.
Haber and Werfel found that the contingent fee treatment reduced the proportion of subjects who chose to sell to PAEs, and that the effect was only significant for subjects who either self-identified as inventors rather than entrepreneurs, or subjects who exhibited loss aversion. These results seem somewhat intuitive given their setup, though I think the implications for patent policy are less clear.
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