The innovation consequences of judicial efficiency

We examine how judicial efficiency, defined as a court’s ability to resolve patent cases quickly and in a manner that is mutually agreeable to both parties in the lawsuit, impacts corporate innovation. To do so, we exploit the Patent Pilot Program (PPP) introduced by the U.S. Congress in 2011, which allowed judges with expertise and resources (as opposed to randomly selected judges) to preside over more patent cases to facilitate efficient ruling. We find firms headquartered in counties subject to the PPP increase patent-based innovation by 6.9%, relative to firms in counties not under the program. The increase is driven both by greater investments in R&D as well as firms strategically transitioning their trade secrets to patents. Moreover, patents filed after the PPP exhibit higher patent disclosure quality, consistent with the PPP providing a reliable enforcement mechanism that curbs competitors from illegally exploiting patent information. Our results are concentrated among firms with high legal costs and uncertainty: firms that engage in innovation with “fuzzy boundaries”, that have high litigation risk, and that are small and private. Probing further, we find that small private firms are significantly better at safeguarding their intellectual property (IP) using the judicial system, which in turn, helps them attract more venture capital investments after the PPP. Taken together, our findings underscore the important role of judicial efficiency in facilitating innovation and IP protection.