Patent Trolls: Evidence from Targeted Firms

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We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as "patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms.

Patent suits, Non-practicing entities, Economics, Target firms, Patent trolls, Innovation, Patents
US National Science Foundation grant nos. SES-0847395 and CCF-1216095
©2014 The Authors, "Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author."