Patent Rights, Innovation and Firm Exit
We study the causal impact of patent invalidation on subsequent innovation and exit by the patent holder. The analysis is based on patent litigation at the U.S. Court of Appeals for the Federal Circuit, and exploits the random allocation of judges to control for endogeneity of the judicial decision. Invalidation causes the patent holder to reduce subsequent patenting over a five-year window by 50 percent on average, but the effect is heterogeneous. The impact is large for small and medium-sized firms, particularly in technology fields where they face many large competitors, and for patents central to their technology portfolio. We find no significant effect for large firms. Invalidation also significantly increases the likelihood that small firms exit from patenting entirely.
Previously circulated as "Patents Rights and Innovation by Small and Large Firms." We are grateful to two anonymous referees and the Editor for very constructive suggestions that greatly improved the paper. We also thank Philippe Aghion, Iain Cockburn, Petra Moser, Florian Schuett, Carlos Serrano, Mariagrazia Squicciarini, Heidi Williams and participants in seminars at Bocconi University, Cattolica University, CEPR Conference on Applied IO, Duke, Einaudi Institute in Rome, IESE Barcelona, Tel Aviv University, UC Berkeley, University of Toronto, ZEW Mannheim, NBER and Paris School of Economics for helpful comments. We thank John Golden and David Schwartz for their help in clarifying points regarding the legal doctrine and procedure governing patent invalidation suits. Joanne Evangelista provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Alberto Galasso & Mark Schankerman, 2018. "Patent rights, innovation, and firm exit," The RAND Journal of Economics, vol 49(1), pages 64-86.