The Demise of The Market's Most Controversial Industry

What do two tech giants and a growing number of state legislatures have in common?

Well, not much… other than a collective hatred for patent trolls.

You’ve probably heard of patent trolls before. They’re the companies that sit on important intellectual property. They have no intention of actually producing anything. Instead, they wait until another company starts using similar ideas. Then, they sue.

But this “business model” is about to go down in flames.

“Famous foes Google and Apple are now letting legal bygones be bygones and joining forces,” explains Rude researcher Noah Sugarman. “They’ve dropped patent lawsuits against each other, and are now going after their shared enemy. In a joint filing submitted to federal court in D.C. just last Friday, the two companies have agreed to drop all lawsuits against each other as part of a united front for patent reform.”

When you look at the numbers, this new alliance makes sense. Apple was absolutely hammered with patent infringement lawsuits last year. Google was also heavily targeted.

US Patent Infringement Suits Filed in 2013

It shouldn’t be hard to figure out who filed these cases. The top 10 filers of new patent lawsuits are infamous “patent monetization entities”. These are the trolls, of course…

These companies don’t derive their revenues from a product or service, but rather, from vulnerabilities in the patent system. And it’s not just the cash-rich corporations that have been taking a hit.

“Patent trolls also demand licensing fees from small businesses for everyday actions like accessing Wi-Fi or using a scanner. No less than 6092 patent lawsuits were filed in 2013. And that’s a number that’s growing rapidly every year,” Noah explains. “It was easier to put up with these trolls when they were known for sticking it to cash-rich corporations. But when you go after the little guy, you tend to lose friends.”

Now a growing number of state legislatures have begun passing anti-patent troll laws in response. So far, 10 states have adopted bills banning “bad faith patent assertions” as a violation of consumer-protection laws. This is where you can find opportunity…

27 states have considered such bills, many of whom are already in the legislative process to pass them. But the real firepower lies in the federal government – and that’s where this battle is set to culminate.

Patent trolls may have bitten off more than they could chew. It doesn’t matter how profitable the industry might seem on the surface. Once legislative red tape begins unrolling, cash flows can dry up real quick.

Now, will these companies come to a screeching halt tomorrow?

“Not necessarily.” Noah says. “After all this is a large-scale war that’s only beginning to take shape. Apple and Google partnered just last week. But we’re going to be keeping a close eye on developments in this arena. A lot of other-wise intelligent investors could stand to lose a fortune if the IP litigation industry gets hit.”

Regards,

Greg Guenthner
for The Daily Reckoning

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