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

The recent spike in patent litigation raises concerns about the ability of the current intellectual property system to effectively promote innovation. Using a difference-in-difference design around the 2006 Supreme Court decision ?eBay vs. MercExchange,? I examine how patent enforcement can reduce the negative effects of litigation on firms? innovation. This ruling was intended to curb abusive patent lawsuits by providing more flexibility in the way courts remedy patent violations. I estimate the causal impact of the decision by comparing firms that were differentially affected by the shock, measured by exogenous firm-level exposure to patent litigation before 2006. Across a large sample of innovative firms, the decision led to an increase in the quality and quantity of patenting and, for public firms, in R&D investment. Then, I show that patent litigation reduces investment in innovation by lowering the returns from R&D and by exacerbating financing constraints. This evidence confirms that patent litigation plays an important role in hindering innovation, and therefore that adjustments in the enforcement of patent law can have sizable effects on R&D.