Could the fear of being sued for patent infringement really discourage some companies from innovating?

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In 1999 Peter Detkin, a lawyer at Intel Corporation, was frustrated. Companies that had never produced a single semiconductor chip were suing his firm for a total of $15 billion for patent infringement. Detkin referred to his antagonists as "patent extortionists." Threatened with a libel suit, he toned it down to "patent trolls." Detkin was referring to fairy-tale trolls, like the ones in "Three Billy Goats Gruff," who live under the bridges and threaten those who try to cross them. His name for the companies stuck.

Like the ones in the story, trolls in the world of patents and inventions have an ugly image. The term refers to companies that produce no products and conduct little research to create new ideas. Instead, they buy patents from others and use them to make money from companies that have built a successful market for a product. Patent trolls use the threat of lawsuits or actual litigation to enforce their demands. A more polite and neutral name for them is nonpracticing entities (NPEs).

NPEs usually amass large portfolios of patents, which they purchase from companies that are going out of business, or from firms that have developed technology that they don't intend to pursue. They also buy patents from inventors who can't afford to develop their ideas. The trolls then look for successful products that use the technology covered by their patents and demand a licensing fee. Because patent suits are expensive to defend, the target company is often willing to settle out of court.

But a lack of litigation hasn't helped patent trolls avoid controversy -- especially in recent years. Critics say patent trolls soak up money that could be used on research and development and pass on precious little of it to inventors. Their heavy-handed enforcement tactics appear to be a drag on the very companies that are putting new technology to work. Many believe the fear of being sued for infringing on obscure, often vague patents discourages companies from innovating. The only entities who benefit from patent trolls, detractors say, are the trolls themselves, their financial backers and the lawyers who handle the suits [source: Raustiala].

Supporters of NPEs, on the other hand, argue that the companies actually encourage innovation by helping inventors profit from their ideas. What evidence is there of these claims? And how does the U.S. patent system create an environment where patent trolls can thrive? Read on to find out.