Chilling effects of patent trolls

Abstract

We find that non-practicing entities (NPEs) exhibit a unique legal strategy of sequential rounds: (1) subject to the same patent, NPE plaintiffs file approximately seven follow-on lawsuits after the initial lawsuit; and (2) when a firm is sued by NPEs, the likelihood of its technology peers being sued increases by 14 % in the subsequent year. Defendants' technology peers experience significant market value losses around the lawsuit filing date. Moreover, defendants' technology peers respond to NPE litigation risk by increasing R&D investments to develop workaround technologies. However, the increase in R&D incrementally generates fewer patent citations or patents with lower values. Thus, our results highlight broader wealth effects and corresponding real effects of NPE-initiated litigation on defendants' technology peers. These results provide sharp contrasts to the insignificant wealth and real impacts on defendants' technology peers if litigations are initiated by practicing entities (PEs). The new evidence informs the current regulatory and policy debates pertaining to NPEs.