Riddle Me This: Do Patent Trolls Create Wealth or Destroy It?

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"... And I said it once before
but it bears repeating."
-- "Fell in Love With a Girl," by The White Stripes

I've been banging the drum about a broken patent system for years. But the problem keeps getting worse, not better.

So when researchers take my side in the patent-trolling debate, it's hard not to feel a little vindicated. A fresh study from Boston University notes that patent trolling has cost publicly traded defendants as much as $500 billion in lost market value since 1990 -- and the rate of evaporating money just keeps accelerating. The current run-rate is about $83 billion a year.

And the suits aren't simply shoveling cash into the pockets of hyperactive plaintiffs. According to the study, 14 publicly traded NPE plaintiffs reduced the market value of their targets by $88 billion over a two-decade period -- but collected only $7.6 billion in total revenue. More than 90% of the destroyed wealth converted into something positive for someone else. The rest is just collateral damage to investors in companies that actually make stuff -- like you and me.

The 10 most-targeted companies in these value-destroying lawsuits include proven innovators Apple (NAS: AAPL) , Hewlett-Packard (NYS: HPQ) , and Motorola Mobility (NYS: MMI) / Motorola Solutions (NYS: MSI) . Note that we're not talking about Apple suing Motorola, or HP suing Apple. Those staggering market-value losses all came from lawsuits by non-practicing entities, also known as patent trolls.

The defining characteristic of a troll, as the less inflammatory NPE term implies, is that the company doesn't actually make or sell anything other than intellectual property and therefore can't be fought with a patent-based counterstrike.

The largest and scariest NPE by far is Intellectual Ventures, founded by former Microsoft CTO Nathan Myhrvold and presiding over more than 10,000 patents. Longtime and fairly successful Stock Advisor recommendation InterDigital (NAS: IDCC) is the third-largest such entity, with about 2,500 patents at its disposal, and memory-tech specialist Rambus (NAS: RMBS) lands in third with 780 issued patents to its name, according to sources cited in the Boston U study.

It should come as no surprise that 62% of the wealth-destroying lawsuits are brought on software patents, while only 2% involve chemicals or drugs. It seems obvious to me that the standard of quality on software patents is much lower than in the strictly regulated drug and chemical fields. Wouldn't it be a good idea to impose an equally high bar on software patents, so that true innovation can be rewarded and all the junk thrown out with the trash? I think that investors in everything from Microsoft to Apple or HP should demand it, lest frivolous suits continue to hold back their innovation and eat away at shareholder returns.

Some NPEs see lawsuits as a last resort, not as a quick and easy cash grab. Some would put InterDigital in that category; some even think that Rambus belongs there (though I must continue to disagree). Watch this free special report to find another patent pusher with cleaner motives and real value to both investors and inventors.

At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies discussed. The Motley Fool owns shares of Apple, Research In Motion, and Google.Motley Fool newsletter serviceshave recommended buying shares of Apple, Google, and Dell and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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