The Social Costs of Patent Trolls

March/​April 2012 • Policy Report

Since 2004 there has been a fivefold increase in the number of lawsuits filed by nonpracticing entities (NPEs) against U.S. firms. In the latest issue of Regulation, James Bessen, Jennifer Ford, and Michael J. Meurer of Boston University School of Law consider whether or not this trend is problematic. NPEs are businesses that acquire patents and license them to others, instead of producing goods or services. The authors find that, despite the benefits of technology markets in general, NPEs destroy incentives for real innovation. “It’s hard to believe,” they conclude, “that markets can be somehow improved by having thousands of lawsuits that incur hundreds of billions of dollars in losses.”

Timothy Sandefur, a principal attorney at the Pacific Legal Foundation and author of The Right to Earn a Living, tells the story of Michael and Chantelle Sackett, a couple ordered by the Environmental Protection Agency (EPA) to tear down the house they were building because their Idaho property had been deemed a federal wetland. The case — which has now gone to the U.S. Supreme Court — is one of the many examples of how “a bureaucracy is essentially a law unto itself.”

Economists Erwin A Blackstone, Larry F. Darby, and Joseph P. Fuhr, Jr., note that “many policymakers speak as if concentrated industries are automatically bad.” After examining duopolist sectors from aircraft manufacturing to adhesive tape, the authors maintain that “while consumers are in general made better off with more choice,” forcing more options will not necessarily increase welfare. Gerald R. Faulhaber of the University of Pennsylvania analyzes the Federal Communication Commission’s recently enacted broadband Internet rules and determines that “the economic evidence does not support prophylactic net neutrality regulation.”

Other features in this issue include brief columns on “The Flood Insurance Fix,” “Third‐​Party Litigation Funding,” “Why Greece Defaulted — and Others Will Follow,” and “Shareholder Say‐​On‐​Pay, So Far.” The Winter 2011–2012 issue includes reviews of books on energy and security in the modern world, the case for a progressive consumption tax, and the trouble with early medical diagnosis. It wraps up with editor Peter Van Doren’s survey of recent academic papers — as well as a lesson about the nature of markets from columnist A. Barton Hinkle.