Patent Trolls: Evidence from Targeted Firms

Lauren Cohen,Scott Duke Kominers,Umit G Gurun

doi:10.1287/mnsc.2018.3147

Abstract

We provide the first large-sample evidence on the behavior and impact of nonpracticing entities (NPEs) in the intellectual property space. We find that, on average, NPEs appear to behave as opportunistic “patent trolls.” NPEs sue cash-rich firms and target cash in business segments unrelated to alleged infringement at essentially the same frequency as they target cash in segments related to alleged infringement. By contrast, cash is neither a key driver of intellectual property lawsuits by practicing entities (e.g., IBM and Intel) nor of any other type of litigation against firms. We find further suggestive evidence of NPE opportunism: targeting of firms that have reduced ability to defend themselves, repeated assertions of lower-quality patents, increased assertion activity nearing patent expiration, and forum shopping. We find, moreover, that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Meanwhile, we neither find any markers of significant NPE pass-through to end innovators, nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent. This paper was accepted by Tyler Shumway, finance.

Highlights

The amount of patent-related litigation has increased tenfold since 2000
: non-practicing entities (NPEs) target firms that are flush with cash and firms that have had recent, positive cash shocks
The evidence suggests that NPEs are behaving precisely as patent trolls would: They target firms that are flush with cash, that lack broad legal teams, that are likely to be busy with other cases, and that are from regions and/or industries with strong precedents for successful patent litigation

Summary

Introduction

The amount of patent-related litigation has increased tenfold since 2000. According to a recent Government Accounting Office (2013) report, three factors contributed to this pattern: (1) the number of patents (especially software-related patents) with unclear scope has increased; (2) courts have been awarding large monetary awards in infringement lawsuits, even for ideas that make only small contributions to a product; and (3) markets place a larger valuation on patents than they did before. Large-scale NPE patent litigation is a recent development; the empirical literature on NPEs is limited, but growing rapidly (see Bessen et al, 2011; Galasso et al, 2013; Bessen and Meurer, 2014; Chien, 2014; Scott Morton and Shapiro, 2014; Smeets 2014; Tucker 2014a,b). Spier (2005) provides an excellent review of the economics of litigation. Previous surveys include those of Cooter and Rubinfeld (1989), Hay and Spier (1998), and Daughety (2000). While we focus solely on intellectual property, our paper is related to the well-developed literature on the effect of litigation risk on firm activities.

Results

Discussion

Conclusion