A NYT article on Xiaomi, a fast-growing Chinese start-up that is now the number three seller of cell phones in the world, included the fascinating sentence:
"Xiaomi does not yet have much of a patent portfolio, leaving it vulnerable to lawsuits from competitors."
On its face, this sentence should have left readers baffled. Why would the lack of a patent portfolio make a company vulnerable to lawsuits? The answer of course is that patents are used as a harassing tactic. The idea is to bury your competitor with patent suits in the hope that one may actually get past summary judgement and go to trial. This can be time-consuming and expensive for a small company.
The advantage of having a large patent portfolio in this context is that you get to play tit for tat. You turn around and throw a pile of patent suits back at your competitor. The fight usually ends with both sides agreeing to drop suits, and occasionally some licensing fees being paid.
From an economic standpoint, these patent wars are a complete waste, but they nonetheless may prove profitable for a company that fights effectively. It's too bad that our "free traders" are so opposed to free trade, otherwise we could reduce this source of waste and upward redistribution (patent lawyers tend to be one percenters).