The U.S. Patent System, the Coase Theorem, and the Era of Efficient Infringement

“According to Coase, obstacles to bargaining and/or poorly defined property rights lead to an inefficient marketplace. You need look no further than the current state of the U.S. patent system for living proof of this theorem.”

Efficient infringementThere is little doubt that the way patent rights are viewed and protected has transformed over the last 15 to 17 years. The patent system our government has enabled over that timeframe incentivizes stealing patent rights rather than engaging in an arm’s length negotiation. This is antithetical to basic, fundamental principles embedded throughout American law, and has caused dispute resolution, licensing and enforcement to emphatically derail.

The laws in the United States are supposed to be certain, stable and understandable. By minimizing externalities and keeping transaction costs low, bargaining of rights will ensue, which will lead to an efficient outcome. That was then, this is now, and given the erosion of patent rights, those who find their rights infringed have little choice but to sue and run the gauntlet. Arm’s length negotiations leading to licensing are virtually dead—at least if the infringer is a giant corporation more interested in waging a war of attrition.

U.S. Patents Plummet, Proving a Prominent Economic Theorem

The theorem that the law should maximize certainty and minimize transaction costs to facilitate an efficient, arm’s-length negotiation of rights is called the Coase theorem. The Coase theorem is attributed to Nobel Laureate, Ronald Coase. Wholesale changes to the law as the result of statutory changes, changes to legal precedent of the Supreme Court and Federal Circuit, and sentiment pervasive within the high-tech community, have created sweeping changes to the law and to public attitudes.

According to Coase, obstacles to bargaining and/or poorly defined property rights lead to an inefficient marketplace. You need look no further than the current state of the U.S. patent system for living proof of the theorem. Given that all branches of government – the Legislature, the Executive and the Judiciary – have embarked on a near generation-long, top-to-bottom restructuring of the U.S. patent system, it is no great mystery that it is inefficient and the type of private, arm’s-length bargaining between innovators and implementers that would define a balanced system at equilibrium is virtually non-existent. Patents are weaker, less capable of being enforced, and much more likely to be successfully challenged.

Efficient Infringement

The term “efficient infringement” is used to describe a cold-hearted calculus. Efficient infringement occurs when a large entity ignores the patent rights of another. Efficient infringement occurs because it can. The efficient infringer makes a business calculation that it will be cheaper to take and use patented technology without permission than to license and pay a fair royalty to the innovator. It is cheaper to take from anyone rather than to design or invent around, to disrupt, to compete on the merits. It is also cheaper to simply use patented technology than to pay for it because when faced by the infringement of a giant corporate entity it is virtually impossible for the patent owner to outlast the deeper pocketed infringer.

The efficient infringement model works exceptionally well for a variety of reasons. The efficient infringer takes from someone unable to stand up to the bully tactics of those who will simply take whatever they want. These black hat entities realize there are a certain number of patent owners that are simply not going to assert their patents for one reason or another, typically because they don’t have the money to do so. Then there is another group of those that will assert their patents but will not win. The calculation progresses to realize that there is only a very small group of those who are likely to assert their patent(s) and prevail, thanks in no small part due to all the hurdles put in place by legal process (i.e., the Patent Trial and Appeal Board, for example) and the law (i.e., the massive uncertainty surrounding patent eligibility). The calculation further recognizes that even if a patent owner prevails a permanent injunction is virtually impossible to obtain in the United States as the result of the Supreme Court’s decision in eBay v. MercExchange, which means, from the infringer’s perspective, they at worst gain a compulsory license. Still further, even a victorious patent owner cannot expect to ever receive the entire damages awarded by a jury because damages are likely, if not virtually certain, to be reduced on appeal to the Federal Circuit.

While the well-known business judgment rule insulates executives and officers from liability for the reasonable business judgments they make, one could make a compelling case that any executives or officers from publicly traded companies that actually license patents or pay to settle a patent infringement case are grossly abusing their discretion and should be liable to shareholders. Why pay for patents when you know that you won’t be stopped with an injunction? Why pay for patents when there are numerous challenges that can be brought to cripple any portfolio, no matter how big or how strong?

Efficient infringement, enabled by increased procedural challenges and changes to substantive patent law, have allowed giant corporations to use their might and rely on a huge financial advantage. These companies bring to bear all the legal resources necessary to ignore licensing inquiries and to shift the legal burden onto the patent owner by challenging the validity of any and every commercially valuable patent.

What PTAB Stats Imply for the Average Patent

The post grant challenges ushered into being by the America Invents Act (AIA) were supposed to rid the system of “bad patents”. The term “bad patents” has always been ill-defined, largely describing any patent that is asserted against “me”, but seems to have been intended to cover those patents that should not have been issued by the U.S. Patent and Trademark Office (USPTO) for one reason or another. The problem is that, despite a selection bias that leans heavily toward patents that are infringed and commercially valuable, PTAB procedures are aggressively used to defeat these assets. What must this say about the vast majority of non-infringed and not particularly valuable patents? If the commercially valuable patents issued by the USPTO are regularly found to contain errors, it would be foolish to believe that ordinary, run-of-the-mill inventions are of any higher quality, or any more deserving of a patent.

Who’s to Blame, and What’s to Come

The infringers who are engaging in this efficient infringement are the ones to blame for the fact that time and money is spent in courtrooms fighting over their infringement. Patent owners have little choice but to sue. Had these efficient infringers taken a license to the technology, rather than ignored the patent grant in the first place, there would have been no wasted time and money on lawyers and legal process. Patent owners would have been paid a reasonable royalty for what was used, and those who come next would be incentivized by the realization that investments in R&D can lead to monetizable assets.

So, why bother to obtain a U.S. patent? That is a good question, and one that innovators really should be asking themselves, and perhaps keeping in mind as they formulate their comments on the USPTO’s Advance Notice of Proposed Rulemaking on PTAB practices. A single patent, or even a small patent portfolio, is likely to be ineffective against efficient infringers—at least until the laws change. If you cannot afford to build or obtain a solid portfolio with dozens of infringed assets of high quality it probably makes better sense to rely on trade secrets, or perhaps take your company overseas to a jurisdiction where patents still convey exclusive rights.



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Join the Discussion

16 comments so far.

  • [Avatar for Yul]
    May 20, 2023 10:27 am

    Excellent article. Thanks. Indeed, we are in patent Zombie Apocalypse. Zombie corporations eat the small hungry inventors.. all of them. And when there are no worthy small, impoverished small inventors, these Zombie corporations turn on each other….. with the express instructions from stockholders to “kill them all”. This is gonna lead to USA destruction. No healthy ecosystem can survive with just Zombie corporations ruling the land. True innovators will escape the massacre, for sure. And we will see the continued rise of China. Sad but America needs to see collapse first, before its leaders will realize the gravity of the situation.

  • [Avatar for small inventor]
    small inventor
    May 12, 2023 02:19 pm

    If Edison,Tesla and Wright brothers are patent trolls then USA does not need patent system anymore. Good luck with that…

  • [Avatar for LeBron James]
    LeBron James
    May 12, 2023 11:54 am

    the majority of patent cases are trolls shaking down real companies for money. Most of those settle for peanuts.

  • [Avatar for James Greene]
    James Greene
    May 11, 2023 10:14 pm

    An excellant article on why America is losing on the world stage! I have an excellent example for you this company has been fighting the fight against the corruption of patent theft for 12 years , has been abused by PTABs and IPR’s and won court cases without enforcement. This is a classic example of what your discussing. The company is NetList its CEO Chuck Hong is the embodiment the American Entrepreneur fighting the good fight against foreign and domestic companies which rather steal Americas ingenuity than pay for it. Our government is failing the American people!!!

  • [Avatar for small inventor]
    small inventor
    May 11, 2023 02:14 pm

    True innovation in “software” (or anything else for that matter) is hard, very hard

    RSA patent is one example – and it really boils down to just two short formulas so it kind of looks easy to anyone without a clue

    BTW there is no difference between software and hardware -those algorithms are implemented in both hardware and software nowadays

    US patent system was the first victim in the upcoming collapse, cause nobody cared, but it is being followed by all other foundational US institutions as we see it unfolding now…

    forget patents – patents are for civilized world

  • [Avatar for Suits Me]
    Suits Me
    May 11, 2023 08:09 am

    Bunk. I’m an outsider but patents must be non-obvious and yet so many of the patent trolling ideas are just that: obvious to anyone remotely familiar with the industry.

    It seems epidemic in tech.

    Your supposition is built on the mistaken belief that innovation in software is incredibly hard. When I see patents for a programming solution that any first year computer science student or newly minted developer would have come up with, it undermines your argument.

    Patents of truly unique and non-obvious merit deserve higher protection, that’s easy to agree to, but the USPTO has never seemed to develop the expertise needed to differentiate.

  • [Avatar for small inventor]
    small inventor
    May 10, 2023 11:36 pm


    I tried it already more than 15 years ago, then again and again
    Result – zero, zilch, no interest at all from large tech companies
    Had to sue one of them eventually so they at least talked to me
    It’s a big guys club and they used to sue each other all the time on their mostly low quality patent portfolios, but they would never ever buy a really strong patent from a little guy
    Must be their “code of ethics” – be at each other throat but God forbid little guy makes a buck on his patent
    Being arms dealer is so much more rewarding
    Trust me on this

  • [Avatar for Anon]
    May 10, 2023 03:55 pm

    Or not.

    To the extent that such may occur — it most likely already does, and the fact that Efficient Infringement is as rampant as it is shows the value of your supposition is, well, amounting to zero.

  • [Avatar for Ron Hilton]
    Ron Hilton
    May 10, 2023 01:02 pm

    Yes, but if one large entity can take the small inventor’s patent with impunity, then so can another, and another, putting the two or more Goliaths in competition with each other. So there is potential value to one of those Goliaths to obtain exclusivity from the small inventor.

  • [Avatar for Anon]
    May 10, 2023 12:12 pm

    Mr. Hilton,


    Have you been under a rock? Why would the Efficient Infringers bother buying what they can easily merely take?

  • [Avatar for Ron Hilton]
    Ron Hilton
    May 10, 2023 11:43 am

    Is the patent system still working to some extent for curbing infringement by one large entity against another, where the patent holder does have the resources to challange the infringer? If so, would a possible strategy for a small inventor be to sell their portfolio to a large company who might want it as protection against their other large competitors? In other words, the small inventor becomes an “arms dealer” of sorts.

  • [Avatar for F22strike]
    May 10, 2023 10:32 am

    The US patent system is clearly broken. Big-tech bought off Congress to get the AIA passed in the first place and then to ensure that there will be no fix. The voting public couldn’t care less about the health of the US patent system. CEOs and general counsels of US companies will pare back their US patent application filings substantially. It will take longer for foreign companies to get the message that they are, in most cases, wasting their money pursuing and maintaining US patent protection. The USPTO will eventually raise fees to compensate for the lower rate of filing of US patent applications and the significant decline in the rate of maintenance of issued US patents.

  • [Avatar for Anon]
    May 10, 2023 07:07 am

    One aspect hinted at, but would be well to emphasize, is the level of propaganda against patents and the patent system that took over the main narrative and reduced President Lincoln’s comment to an archaic and ignored historical artifact.

    We all should be well aware that such propaganda and narrative shaping effects have been actively sought and utilized.

    This was no accident or mere reflection of historical trends on their own.

    If we want to change the effects, we cannot ignore the fact that people are active in bringing about those effects.

    This is (exactly) why any Congressional attempts that aim to include ALL “stakeholders,” will fail because a not-small segment of those “stakeholders” are actively aiming to NOT have strong patents.

  • [Avatar for Simone]
    May 10, 2023 06:30 am

    Thank you for the article. I do not really understand your very last suggestion to take the company to another country. The problems you have highlighted relate to the USA as a market of interest. These problems are not solved by moving the company. Even if you do it, you will still have the infringement in the US. On the other hand, wherever your company is located you can take advantage of the more pro-patentee jurisdictions by filing patent applications and enforce the patents there.

    Best regards,

  • [Avatar for Pro Say]
    Pro Say
    May 9, 2023 09:36 pm

    Dear America,

    Thank you from the bottom of my heart.

    From your AIA (America Invalidates Act) to the Congressional 2019 eligibility-restoration hearings that led to nothing (whew — that was a close one!) . . . from your Death Squad PTAB . . . from eBay to KSR to Mayo to Alice . . . from your eligibility-off-the-rails CAFC to your Constitutional-authority-usurping Supreme Court . . . and even now to your patent-waffling new Patent Director (thank goodness Iancu is gone!) . . . your innovation self-flagellation has truly been a sight to behold.

    All while we have continuously improved and strengthened our own patent system until – surprise! – ours is what your formally World-leading system once was (we know a good thing when we see it).

    Indeed, by 2025, ours will be the most innovative, patent-protecting country on Earth.

    We couldn’t have done it without you.

    Keep up the great work and don’t change a thing!

    Yours appreciatively,

    Xi Jinping
    Chairman and Head Ethnic Cleanser
    Communist China

    p.s. Unlike you, we welcome with open arms all innovations in all fields. Bring your inventions here for the patent protection they justly deserve. (We will, of course, steal all the good stuff for ourselves.)

  • [Avatar for Pro Se]
    Pro Se
    May 9, 2023 09:36 pm

    “Arm’s length negotiations leading to licensing are virtually dead—at least if the infringer is a giant corporation more interested in waging a war of attrition.”

    Thank You for writing this article.

    And in my experience, I’m watching companies stocks take devastating market dips because they’re holding on to their sense of entitlement that they can take no matter the costs (literally).

    Again, thank you for writing this piece.