Roadblock to Innovation: The Role of Patent Litigation in Corporate R&D

I examine how patent enforcement affects corporate research and development (R&D), exploiting the legal changes induced by the Supreme Court decision eBay v. MercExchange. This ruling increased courts’ flexibility in remedying patent cases and effectively lowered the potential costs of patent litigation for defendants. For identification, I compare innovative activity across firms differentially exposed to patent litigation before the ruling. Across several measures, I find that the decision led to a general increase in innovation. This result confirms that the changes in enforcement induced by the ruling reduced some of the distortions caused by patent litigation. Exploring the channels, I show that patent litigation negatively affects investment because it lowers the returns from R&D and exacerbates its financing constraints. This paper was accepted by Gustavo Manso, finance.

[1]  Mark A. Schankerman,et al.  Patents and Cumulative Innovation: Causal Evidence from the Courts , 2013 .

[2]  Josh Lerner,et al.  The Use and Misuse of Patent Data: Issues for Corporate Finance and Beyond , 2017 .

[3]  Catherine Tucker Patent Trolls and Technology Diffusion: The Case of Medical Imaging , 2014 .

[4]  Margherita Bottero,et al.  Sovereign Debt Exposure and the Bank Lending Channel: Impact on Credit Supply and the Real Economy , 2019, Journal of International Economics.

[5]  Jeremiah S. Helm Why Pharmaceutical Firms Support Patent Trolls: The Disparate Impact of Ebay v. Mercexchange on Innovation , 2006 .

[6]  Ian Appel Governance by Litigation , 2016 .

[7]  Vetle I. Torvik,et al.  Disambiguation and co-authorship networks of the U.S. patent inventor database (1975–2010) , 2014 .

[8]  Richard A. Epstein,et al.  The Property Rights Movement and Intellectual Property , 2008 .

[9]  William R. Kerr,et al.  Breakthrough Inventions and Migrating Clusters of Innovation , 2009 .

[10]  Lubomir P. Litov,et al.  Creditor Rights and Corporate Risk-Taking , 2008 .

[11]  Mark A. Schankerman,et al.  Characteristics of patent litigation: a window on competition , 2001 .

[12]  R. Fisher On the Interpretation of χ2 from Contingency Tables, and the Calculation of P , 2018, Journal of the Royal Statistical Society Series A (Statistics in Society).

[13]  C. Shapiro Property Rules vs. Liability Rules for Patent Infringement , 2016 .

[14]  Josh Lerner,et al.  The Financing of R&D and Innovation , 2009 .

[15]  Petra Moser,et al.  How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World Fairs , 2003 .

[16]  Po-Hsuan Hsu,et al.  Financial Development and Innovation: Cross-Country Evidence , 2013 .

[17]  Timothy S. Simcoe,et al.  Patent Policy and American Innovation after eBay: An Empirical Examination , 2018, Research Policy.

[18]  Mark A. Lemley,et al.  Patent Holdup, the ITC, and the Public Interest , 2012 .

[19]  Steven M. Fazzari,et al.  Financing Constraints and Corporate Investment , 1987 .

[20]  Daniel Ferreira,et al.  Creditor Control Rights and Board Independence , 2017, The Journal of Finance.

[21]  Carlos J. Serrano,et al.  Patent Collateral, Investor Commitment, and the Market for Venture Lending , 2014, Journal of Financial Economics.

[22]  A. Shleifer,et al.  An Activity-Generating Theory of Regulation , 2009, The Journal of Law and Economics.

[23]  Matteo P. Arena,et al.  The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy , 2012 .

[24]  P. Craig Courts , 1932, EU Administrative Law.

[25]  Joshua Lerner,et al.  Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It , 2011 .

[26]  Gustavo Manso,et al.  Shareholder Litigation and Corporate Innovation , 2020, Manag. Sci..

[27]  Gabriel Chodorow-reich The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008–9 Financial Crisis , 2014 .

[28]  James Bessen,et al.  The Direct Costs from NPE Disputes , 2012 .

[29]  Umit G. Gurun,et al.  Patent Trolls: Evidence from Targeted Firms , 2018, Manag. Sci..

[30]  Xavier Jaravel,et al.  Who Feeds the Trolls? Patent Trolls and the Patent Examination Process , 2016 .

[31]  Rosemarie H. Ziedonis Don't Fence Me in: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms , 2003, Manag. Sci..

[32]  Mark A. Lemley,et al.  Journal of Economic Perspectives—Volume 19, Number 2—Spring 2005—Pages 75–98 Probabilistic Patents , 2022 .

[33]  Samuel Kortum,et al.  Assessing the Contribution of Venture Capital to Innovation , 2000 .

[34]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[35]  Rosemarie H. Ziedonis,et al.  The patent paradox revisited: an empirical study of patenting in the U , 2001 .

[36]  Michael A. Carrier Innovation for the 21st Century , 2009 .

[37]  S. Shavell,et al.  Property Rules Versus Liability Rules: An Economic Analysis , 1996 .

[38]  Ufuk Akcigit,et al.  Growth through Heterogeneous Innovations , 2010, Journal of Political Economy.

[39]  Petra Moser Patents and Innovation: Evidence from Economic History , 2012 .

[40]  James Bessen,et al.  Of Patents and Property , 2009 .

[41]  R. Fisher On the Interpretation of χ2 from Contingency Tables, and the Calculation of P , 2010 .

[42]  Josh Lerner,et al.  The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues , 2008 .

[43]  John L. Turner,et al.  Trends in Private Patent Costs and Rents for Publicly-Traded United States Firms , 2018, International Review of Law and Economics.

[44]  Andrea L. Eisfeldt,et al.  The Value and Ownership of Intangible Capital , 2014 .

[45]  S. Scotchmer,et al.  Standing on the Shoulders of Giants: Cumulative Research and the Patent Law , 1991 .

[46]  Asli Demirgüç-Kunt,et al.  Law, Finance and Firm Growth , 1998 .

[47]  Stijn Claessens,et al.  Financial Development, Property Rights and Growth , 2002 .

[48]  L. Kogan,et al.  Technological Innovation, Resource Allocation, and Growth , 2012 .

[49]  H. Broadman,et al.  Finance and Growth: Schumpeter Might Be Right , 1993 .

[50]  T. Beckett Innovation in the 21st century , 1987 .

[51]  Douglas J. Skinner,et al.  Measuring Securities Litigation Risk , 2012 .

[52]  M. Weisbach,et al.  The Cash Flow Sensitivity of Cash , 2003 .

[53]  Joan Farre-Mensa,et al.  Do Measures of Financial Constraints Measure Financial Constraints? , 2013 .

[54]  R. Smeets Does Patent Litigation Reduce Corporate R&D? An Analysis of US Public Firms , 2014 .

[55]  O. Williamson Credible Commitments: Using Hostages to Support Exchange , 1983 .

[56]  Heidi L. Williams Intellectual Property Rights and Innovation: Evidence from Health Care Markets , 2015, Innovation Policy and the Economy.

[57]  Jacopo Ponticelli Court Enforcement and Firm Productivity: Evidence from a Bankruptcy Reform in Brazil , 2013 .

[58]  W. Mann Creditor Rights and Innovation: Evidence from Patent Collateral , 2017, Journal of Financial Economics.

[59]  Bruce Haslem,et al.  Managerial Opportunism During Corporate Litigation , 2005 .

[60]  Todd A. Gormley,et al.  Common Errors: How to (and Not to) Control for Unobserved Heterogeneity , 2013 .

[61]  Josh Lerner Trolls on State Street?: The Litigation of Financial Patents, 1976-2005 , 2005 .

[62]  G. Moschini Innovation and Its Discontents: How Our Broken Patent System Is Endangering Innovation and Progress, and What to Do About It by Jaffe, Adam B. and Josh Lerner , 2009 .

[63]  V. Acharya,et al.  Bankruptcy Codes and Innovation , 2007 .

[64]  Bronwyn H Hall,et al.  Business Method Patents, Innovation, and Policy , 2003 .

[65]  Carl Shapiro,et al.  Injunctions, Hold-Up, and Patent Royalties1: September 2010 , 2010 .

[66]  A. Shleifer,et al.  Legal Determinants of External Finance , 1997 .

[67]  Yixin H. Tang The Future of Patent Enforcement after eBay V. MercExchange , 2006 .

[68]  Josh Lerner,et al.  Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity , 2005 .

[69]  Eric Maskin,et al.  Sequential Innovation, Patents, and Imitation , 2000 .

[70]  Joshua D. Angrist,et al.  Mostly Harmless Econometrics: An Empiricist's Companion , 2008 .

[71]  James E. Bessen,et al.  Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk , 2008 .

[72]  James Bessen,et al.  medium provided this notice is preserved. AN EMPIRICAL LOOK AT SOFTWARE PATENTS , 2004 .

[73]  G. Calabresi,et al.  Property Rules, Liability Rules, and Inalienability: One View of the Cathedral , 1972 .

[74]  Mark A. Lemley,et al.  Patent Holdup and Royalty Stacking , 2006 .

[75]  Anil K. Kashyap,et al.  Credit Conditions and the Cyclical Behavior of Inventories , 1994 .

[76]  Ufuk Akcigit,et al.  Patent Value and Citations: Creative Destruction or Strategic Disruption? , 2013 .

[77]  Scott Duke Kominers,et al.  The growing problem of patent trolling , 2016, Science.

[78]  A. Gambardella,et al.  The Market for Patents in Europe , 2006 .

[79]  Jay P. Kesan,et al.  Studying the Impact of eBay on Injunctive Relief in Patent Cases , 2015 .

[80]  Josh Lerner,et al.  The Enforcement of Intellectual Property Rights: A Survey of the Empirical Literature , 1997 .

[81]  Jonathan L. Rogers,et al.  Shareholder Litigation and Changes in Disclosure Behavior , 2008 .

[82]  D. Levine,et al.  The Case Against Intellectual Property , 2002 .

[83]  Catherine Tucker,et al.  The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity , 2014 .

[84]  J. aiken Patent Demands & Startup Companies : The View from the Venture Capital Community , 2015 .

[85]  R. Peters,et al.  Intangible Capital and the Investment-q Relation , 2016 .

[86]  Michael J. Schill,et al.  Ebay, Inc. (A) , 2006, SSRN Electronic Journal.

[87]  Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts , 2016 .

[88]  Josh Lerner,et al.  Patent Protection and Innovation Over 150 Years , 2002 .

[89]  Josh Lerner,et al.  Patenting in the Shadow of Competitors , 1995, The Journal of Law and Economics.

[90]  Dietmar Harhoff,et al.  Recent Research on the Economics of Patents , 2012 .

[91]  Raj Chetty,et al.  Salience and Taxation: Theory and Evidence , 2009 .

[92]  PATENT ASSERTION AND U.S. INNOVATION , 2013 .

[93]  K. Arrow Economic Welfare and the Allocation of Resources for Invention , 1962 .

[94]  Bronwyn H Hall,et al.  Market value and patent citations , 2005 .

[95]  Steven M. Fazzari,et al.  Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom , 2009 .

[96]  C. Hulten,et al.  How Do You Measure a "Technological Revolution"? , 2010 .

[97]  Shai Bernstein Does Going Public Affect Innovation? , 2012 .