Does Patent Trolling Kill Innovations?

The last fifteen years have seen a surge in patent litigation, driven predominantly by non-practicing entities (NPEs), firms that amass patents just to pursue license fees and/or litigation, rather than for the sake of producing commercial products. The impact of NPEs on innovation is a question of some controversy:

  • Proponents argue that NPEs are efficient financial intermediaries that police against well-funded firms that would otherwise infringe upon small inventors' intellectual property.
  • Opponents argue that NPEs simply raise the costs of innovation by wielding the threat and uncertainty of the legal process against otherwise innovative firms.

In "Patent Trolls: Evidence from Targeted Firms," Lauren Cohen , Umit G. Gurun  and Scott Duke Kominers provide the first large-sample evidence on precisely which corporations NPEs target in litigation, when NPE litigation occurs, and how NPE litigation impacts innovative activity at targeted firms. Working with two independent sources of data on NPEs, the paper examines all NPE lawsuits against publicly traded firms from 2005 to 2015.

The evidence suggests that NPEs on average behave opportunistically: they target firms that are flush with cash, as well as firms that have had recent, positive cash shocks—even if that cash is in business segments unrelated to the alleged infringement. This cash-targeting behavior is driven by large “patent aggregator” firms, rather than small inventors. Moreover, cash is neither a significant driver of patent lawsuits by firms that actually produce products, nor of other types of litigation.

NPEs frequently “forum shop,” trying the preponderance of their cases in a single district in Texas perceived as being plaintiff-friendly (although a recent Supreme Court decision may be changing that). And NPEs assert patents that are broader and closer to expiration.

NPE litigation has a real negative impact on innovation at targeted firms. Indeed, targeted firms substantially reduce research and development investment after settling with NPEs (or losing to them in court). At the same time, there is little evidence that NPEs have driven increases in patenting by small inventors. Thus, while it is difficult to quantify the welfare effect of NPEs precisely, the overall impact of NPE litigation appears to be negative.

Given the sum of this evidence, policymakers should seek to check the power of NPEs, or—even better—introduce screening or fee-shifting measures that reduce the incentive to bring low quality lawsuits.

Read the full article at https://doi.org/10.1287/mnsc.2018.3147.

REFERENCE

Cohen L, Gurun UG, and Kominers SD (2019). Patent Trolls: Evidence from Targeted Firms. Management Science Forthcoming 65(12).

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