Abstract

http://ssrn.com/abstract=2464303
 


 



Patent Trolls: Evidence from Targeted Firms


Lauren Cohen


Harvard Business School; National Bureau of Economic Research (NBER)

Umit G. Gurun


University of Texas at Dallas - Naveen Jindal School of Management

Scott Duke Kominers


Harvard University

April 24, 2016

Harvard Business School Finance Working Paper No. 15-002

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.

Number of Pages in PDF File: 72

Keywords: Patent trolls, NPEs, PAEs, Innovation, Patents

JEL Classification: D2, K1, O31


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Date posted: July 11, 2014 ; Last revised: April 26, 2016

Suggested Citation

Cohen, Lauren and Gurun, Umit G. and Kominers, Scott Duke, Patent Trolls: Evidence from Targeted Firms (April 24, 2016). Harvard Business School Finance Working Paper No. 15-002. Available at SSRN: http://ssrn.com/abstract=2464303 or http://dx.doi.org/10.2139/ssrn.2464303

Contact Information

Lauren Cohen (Contact Author)
Harvard Business School ( email )
Rock Center 321
Soldiers Field
Boston, MA 02163
United States
HOME PAGE: http://www.people.hbs.edu/lcohen
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Umit G. Gurun
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
Scott Duke Kominers
Harvard University ( email )
Rock Center, Harvard Business School
Soldiers Field
Boston, MA 02163
United States
HOME PAGE: http://www.scottkom.com/
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