The Market Effects of Patent Litigation

Matthew D. Henry

Department of Economics, Cleveland State University, Cleveland, USA.

DOI: 10.4236/ti.2013.41007                

Abstract

This study measures the value of patents to firms and identifies factors that contribute to that value by observing the abnormal change in firms’ stock market values following court decisions. Firms lose 0.85% (about $19 million) of their value following a decision that one of their patents is “Invalid”, but only gain about 0.7% following a “Valid & Infringed” decision. The factors that that affect the expectations of investors as to the enforceability of patent rights are at least as important in determining the contribution of the patent to the firm’s market value as are characteristics of the patent. Most prominently, this confirms the substantial impact that the creation of the Court of Appeals for the Federal Circuit (CAFC) had on the value of patents. After the creation of the CAFC, “Invalid” decisions resulted in a 0.7% (about $15.5 million) greater loss of firm value. Clearly, patents are more valuable because of this change in the legal landscape.

Keywords

Patents; Litigation; Valuation

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	D. A. Burge, “Patent and Trademark Tactics and Practice,” 3rd Edition, John Wiley & Sons, Inc., Hoboken, 1999. doi:10.1002/9780470172285
[2]	M. D. Henry and J. L. Turner, “The Court of Appeals for the Federal Circuits Impact on Litigation,” Journal of Legal Studies, Vol. 35, No. 1, 2006, pp. 85-118. doi:10.1086/498834
[3]	J. R. Allison, M. A. Lemley, K. A. Moore and R. D. Trunkey, “Valuable Patents,” Georgetown Law Journal, Vol. 92, No. 3, 2004, pp. 435-479.
[4]	J. O. Lanjouw and M. Schankerman, “Characteristics of Patent Litigation: A Window on Competition,” RAND Journal of Economics, Vol. 32, No. 1, 2001, pp. 129-151. doi:10.2307/2696401
[5]	K. A. Moore, “Worthless Patents,” Berkeley Technology Law Journal, Vol. 20, No. 4, 2005, pp. 1521-1552.
[6]	B. H. Hall, A. Jaffe and M. Trajtenberg, “Market Value and Patent Citations,” RAND Journal of Economics, Vol. 36, No. 1, 2005, pp. 16-38.
[7]	K. Engelmann and B. Cornell, “Measuring the Cost of Corporate Litigation: Five Case Studies,” Journal of Legal Studies, Vol. 17, No. 2, 1988, pp. 377-399. doi:10.1086/468134
[8]	S. Bhagat, J. A. Brickley and J. L. Coles, “The Wealth Effects of Interfirm Lawsuits,” Journal of Financial Economics, Vol. 35, No. 2, 1994, pp. 221-247. doi:10.1016/0304-405X(94)90005-1
[9]	S. Bhagat, J. Bizjak and J. L. Coles, “The Shareholder Wealth Implications of Corporate Lawsuits,” Financial Management, Vol. 27, No. 4, 1998, pp. 5-27. doi:10.2307/3666410
[10]	J. Bessen and M. J. Meurer, “The Private Costs of Patent Litigation,” Boston University School of Law Working Paper 07-08, 2007.
[11]	S. Bhagat and R. Romano, “Event Studies and the Law: Part I: Technique and Corporate Litigation,” American Law and Economics Review, Vol. 4, No. 1, 2002, pp. 141-168. doi:10.1093/aler/4.1.141
[12]	S. Bhagat and R. Romano, “Event Studies and the Law: Part II: Empirical Studies of Corporate Law,” American Law and Economics Review, Vol. 4, No. 2, 2002, pp. 380423.
[13]	J. M. Bizjak and J. L. Coles, “The Effect of Private Antitrust Litigation on the Stock-Market Valuation of the Firm,” American Economic Review, Vol. 85, No. 3, 1995, pp. 436-461.
[14]	D. H. Austin, “An Event-Study Approach to Measuring Innovative Output: The Case of Biotechnology,” American Economic Review, Vol. 83, No. 2, 1993, pp. 253-258.
[15]	A. C. Marco, “The Value of Certainty in Intellectual Property Rights: Stock Market Reactions to Patent Litigation,” Working Paper, 2005.
[16]	A. C. Marco, “Learning by Suing: Structural Estimates of Court Errors in Patent Litigation,” Vasser College Economics Working Paper 68, 2005.
[17]	S. Kortum and J. Lerner, “Stronger Protection or Technological Revolution: What Is behind the Recent Surge in Patenting?” Carnegie-Rochester Series on Public Policy, Vol. 48, 1998, pp. 247-304. doi:10.1016/S0167-2231(98)00023-2
[18]	B. H. Hall, “Exploring the Patent Explosion,” Journal of Technology Transfer, Vol. 30, No. 1-2, 2005, pp. 35-48. doi:10.1007/s10961-004-4356-9
[19]	J. Lerner, “Patenting in the Shadow of Competitors,” Journal of Law and Economics, Vol. 38, No. 2, 1995, pp. 463-495. doi:10.1086/467339
[20]	C. MacKinlay, “Event Studies in Economics and Finance,” Journal of Economic Literature, Vol. 35, No. 1, 1997, pp. 13-39.
[21]	B. H. Hall, A. Jaffe and M. Trajtenberg, “The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools,” NBER Working Paper 8498, 2001.