Chilling effects of patent trolls

Abstract

We find that, when a firm is sued by non-practicing entities (NPEs), the likelihood of its technology peers being sued increases in the subsequent year. Defendants’ technology peers experience significant market value losses around the lawsuit filing date. Moreover, defendants’ technology peers respond to NPE litigation risk by increasing R&D investments to develop workaround technologies. However, the increase in R&D incrementally generates fewer patent citations or patents with lower values. Thus, our results highlight broader wealth effects and corresponding real effects of NPE-initiated litigation on defendants’ technology peers. These results provide sharp contrasts to the insignificant wealth and real impacts on defendants’ technology peers if litigations are initiated by practicing entities (PEs). The new evidence informs the current regulatory and policy debates pertaining to NPEs. Valuation Insight: Firm value is negatively affected when a technology peer firm is sued by a non-practicing entity (NPE) trolling for patent violations. The firm generally responds by increasing R&D investment to develop alternative technologies. However, this appears to be ineffective. In contrast, litigation by a practicing entity (PE) has little impact on technology peer firm value and investment decisions.