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August 10 2015

It's Time For Legal Reform

Carrie L. Lukas

When people consider what’s good about the American economy—what works and what we ought to be proud of—our record of entrepreneurship and inventiveness must near the top of the list. For all of our problems, America’s economic system continues to be an engine of new ideas and innovation. Sadly, this traditional strength is threatened by what must surely be one of our economy’s most profound weaknesses: our litigation system and the explosion of frivolous lawsuits.

I’ve written before how the fear of litigation makes American society lives less free and fun. Living in Europe, where there is far less worry about frivolous lawsuits, restaurants often have big playgrounds on the premises. As a result, parents relax and enjoy dinner and drinks, while the kids happily play. Everyone is better off. I suspect that such arrangements are far less likely in the United States because businesses cannot afford the risk that a child would scrap their knee or break an arm during the normal course of play and sue creating potentially ruinous legal cost.

 

Appreciating the full costs of America’s unhealthy legal system can be hard because one has to note not just examples of wasteful lawsuits, but also what’s missing as a result: the playgrounds, businesses, and civic institutions that might exist if our legal system didn’t exact such a toll and discourage people from taking action.

A similar challenge exists in understanding the harm that is done to businesses and economic growth by the wasteful legal practices that drain money from productive entities and discourage the research and investment that’s necessary to create innovation.

Consider the situation with patent trolls. That’s the term for those who abuse our patent system to force businesses, big and small, to pay them off or undergo a protracted, costly legal battle. Patents and other intellectual property protections were supposed to be a safeguard to encourage inventors and innovators to invest in developing new creations, by enabling them to recoup their investment and be rewarded for their work. Our Constitution specifically charges Congress with administering a system to give “for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Yet now, that system is sadly often used not to protect creators, but to enrich those unrelated to the innovation process.

Patent trolls exist to buy up obscure patents and then file lawsuits alleging that others are violating their patent rights. Often the goal isn’t even to win a lawsuit, but simply to extract a payment from that business. They send letters threatening to drag a business to court unless they pay a licensing fee. Many businesses, particularly the small businesses that are often targeted, can’t afford to pay the legal fees that would be necessary to fight a court battle. Instead they cut their losses by just paying up.

This practice doesn’t just impact cutting-edge technology companies, but common industries, such as grocery stores, restaurant franchises, retailers and hotels. Together this litigation drains billions from employers and would-be investors and innovators. Harvard Business Review recently highlighted three studies that confirm that “patent litigation is reducing venture capital investment in startups and is reducing R&D spending, especially in small firms.” In other words, abusive practices are discouraging the behaviors that are so important to innovation and improving our quality of life.

The good news is Congress is considering this issue and legislation to discourage abusive patent litigation. It would require that those sending letters asserting patent rights must be truthful and include key information about the patent and the nature of the alleged violation. It would reform the litigation process to make it more likely that frivolous or abusive lawsuits are dismissed. It would also require that a losing party that brought a lawsuit recognized as frivolous pay the other side’s attorney fees. This loser pays system could deter people from getting in the business of abusing the legal system.

Such legal reforms would be a step in the right direction in returning our patent system to its intend purpose: protecting those that develop useful innovations and creations. Similar legal reforms are needed in other areas to discourage the frivolous lawsuits that drain resources from productive entities, prevent more research and development from taking place, and leave our society less rich and inclusive than it would otherwise be. Until there is such reform, we won’t know all that we are missing.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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