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Patent Trolls: Evidence from Targeted Firms

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  • Lauren Cohen
  • Umit Gurun
  • Scott Duke Kominers

Abstract

We develop a theoretical model of, and provide the first large-sample evidence on, the behavior and impact of non-practicing entities (NPEs) in the intellectual property space. Our model shows that NPE litigation can reduce infringement and support small inventors. However, the model also shows that as NPEs become effective at bringing frivolous lawsuits, the resulting defense costs inefficiently crowd out some firms that, absent NPEs, would produce welfare-enhancing innovations without engaging in infringement. Our empirical analysis shows that on average, NPEs appear to behave as opportunistic patent trolls. NPEs sue cash-rich firms—a one standard deviation increase in cash holdings roughly doubles a firm's chance of being targeted by NPE litigation. We find moreover that NPEs target cash unrelated to the alleged infringement at essentially the same frequency as they target cash related to the 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, such as forum shopping and targeting of firms that may have reduced ability to defend themselves against litigation. We find 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). Moreover, 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.

Suggested Citation

  • Lauren Cohen & Umit Gurun & Scott Duke Kominers, 2014. "Patent Trolls: Evidence from Targeted Firms," NBER Working Papers 20322, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20322
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    Citations

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    Cited by:

    1. CHOI, Jay Pil & GERLACH, Heiko, 2015. "A model of patent trolls," Discussion paper series HIAS-E-9, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    2. repec:eee:irlaec:v:53:y:2018:i:c:p:38-49 is not listed on IDEAS
    3. repec:oup:oxford:v:33:y:2017:i:4:p:541-571. is not listed on IDEAS
    4. Scott Duke Kominers & Alexander Teytelboym & Vincent P Crawford, 2017. "An invitation to market design," Oxford Review of Economic Policy, Oxford University Press, vol. 33(4), pages 541-571.
    5. Bogdan Genchev & Julie Holland Mortimer, 2016. "Empirical Evidence on Conditional Pricing Practices," Boston College Working Papers in Economics 908, Boston College Department of Economics.
    6. Hong Luo & Julie Holland Mortimer, 2016. "Copyright Enforcement: Evidence from Two Field Experiments," NBER Working Papers 22082, National Bureau of Economic Research, Inc.
    7. Stefano Comino & Fabio M. Manenti & NIkolaus Thumm, 2017. "The Role of Patents in Information and Communication Technologies (ICTs). A survey of the Literature," "Marco Fanno" Working Papers 0212, Dipartimento di Scienze Economiche "Marco Fanno".
    8. Alexandrov, Alexei & Pittman, Russell & Ukhaneva, Olga, 2017. "Royalty stacking in the U.S. freight railroads: Cournot vs. Coase," MPRA Paper 78249, University Library of Munich, Germany.
    9. Farre-Mensa, Joan & Hegde, Deepak & Ljungqvist, Alexander P., 2016. "The Bright Side of Patents," CEPR Discussion Papers 11091, C.E.P.R. Discussion Papers.
    10. Lily Fang & Josh Lerner & Chaopeng Wu, 2016. "Intellectual Property Rights Protection, Ownership, and Innovation: Evidence from China," NBER Working Papers 22685, National Bureau of Economic Research, Inc.
    11. Heng GENG & Harald HAU & Sandy LAI, 2015. "Technological Progress and Ownership Structure," Swiss Finance Institute Research Paper Series 15-39, Swiss Finance Institute.
    12. Colonnello, Stefano & Herpfer, Christoph, 2018. "Do courts matter for firm value? Evidence from the U.S. court system," IWH Discussion Papers 1/2016, Halle Institute for Economic Research (IWH).
    13. Kiebzak, Stephen & Rafert, Greg & Tucker, Catherine E., 2016. "The effect of patent litigation and patent assertion entities on entrepreneurial activity," Research Policy, Elsevier, vol. 45(1), pages 218-231.

    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • K1 - Law and Economics - - Basic Areas of Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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