Are Patents Valuable? Evidence from Patent Litigation
Lead Research Organisation:
University of Strathclyde
Department Name: Accounting and Finance
Abstract
Unarguably, innovation is a key component for economic change, growth, and prosperity. Intellectual property (IP) protection, such as patents, aim to foster innovation. Firms invest in research and development in order to develop breakthrough products and services that will differentiate them from their peers. This will also increase their probability of survival, in turn, enhancing employee welfare and shareholder value while potentially making significant socioeconomic changes. For instance, more than a third of EU GDP comes from IP intensive industries which employ approximately 77 million people (35% of total EU employment) (OECD, 2015).
Knowledge is the principal economic asset (Hanel, 2006) and one of the most important types of an intangible asset is a patent. For instance, a smartphone can be covered by as many as 3,000 patents, which are regarded as the third most important IP asset (OECD, 2015). A change in patent citation impact is positively associated with future earnings (Gu, 2005). Meanwhile, the literature highlights the value relevance of patent citations (Kogan et al., 2017).
Nevertheless, patents can be legally challenged which can potentially have significant socioeconomic and financial ramifications. For instance, Apple and Samsung Electronics engaged in a series of multibillion-dollar patent litigations during 2011 to 2013 across a number of sovereign jurisdictions. Furthermore, infringement risk and patent litigation costs significantly impact the economy. For the alleged infringers, the mean patent litigation cost was $28.7 million in 1992 dollars (Bessen and Meurer, 2008) while the average absolute loss of shareholder wealth following patent litigation is $67.9 million (Lerner, 1995). Bessen and Meurer (2008) find that patent defendants lose 0.5% in market capitalisation upon being sued for patent infringement. Meanwhile, the share price of a patent proprietor falls by 0.03% when the patent's validity is challenged (Kruppert, 2017).
There is scarce evidence on the market valuation effect of patent litigation, which is surprising, since we are shifting to a knowledge economy. Therefore, this proposed research aims to use a comprehensive sample of hand-collected data on a cross-country setting to investigate the impact of patents; how any legal challenges of patents affect firm innovation, performance, and market competition; and how this translates to country-wide economic growth and development.
The proposed study will address the following research questions:
1. What is the market valuation of different patent challenges and litigation such as infringement and revocation?
2. Does patent quality, as measured by patent citations and non-patent references, impact the magnitude of the reaction?
3. Develop a metric of an improved patent valuation proxy or index.
4. Do international differences in legal frameworks affect the market's reaction to patent litigation?
5. How do cross-country legal differences affect patent litigation, and does it encourage or inhibit corporate decision making?
6. Does patent litigation have an economic effect on firm innovation and performance, and how does this translate to country-wide economic growth and development?
Knowledge is the principal economic asset (Hanel, 2006) and one of the most important types of an intangible asset is a patent. For instance, a smartphone can be covered by as many as 3,000 patents, which are regarded as the third most important IP asset (OECD, 2015). A change in patent citation impact is positively associated with future earnings (Gu, 2005). Meanwhile, the literature highlights the value relevance of patent citations (Kogan et al., 2017).
Nevertheless, patents can be legally challenged which can potentially have significant socioeconomic and financial ramifications. For instance, Apple and Samsung Electronics engaged in a series of multibillion-dollar patent litigations during 2011 to 2013 across a number of sovereign jurisdictions. Furthermore, infringement risk and patent litigation costs significantly impact the economy. For the alleged infringers, the mean patent litigation cost was $28.7 million in 1992 dollars (Bessen and Meurer, 2008) while the average absolute loss of shareholder wealth following patent litigation is $67.9 million (Lerner, 1995). Bessen and Meurer (2008) find that patent defendants lose 0.5% in market capitalisation upon being sued for patent infringement. Meanwhile, the share price of a patent proprietor falls by 0.03% when the patent's validity is challenged (Kruppert, 2017).
There is scarce evidence on the market valuation effect of patent litigation, which is surprising, since we are shifting to a knowledge economy. Therefore, this proposed research aims to use a comprehensive sample of hand-collected data on a cross-country setting to investigate the impact of patents; how any legal challenges of patents affect firm innovation, performance, and market competition; and how this translates to country-wide economic growth and development.
The proposed study will address the following research questions:
1. What is the market valuation of different patent challenges and litigation such as infringement and revocation?
2. Does patent quality, as measured by patent citations and non-patent references, impact the magnitude of the reaction?
3. Develop a metric of an improved patent valuation proxy or index.
4. Do international differences in legal frameworks affect the market's reaction to patent litigation?
5. How do cross-country legal differences affect patent litigation, and does it encourage or inhibit corporate decision making?
6. Does patent litigation have an economic effect on firm innovation and performance, and how does this translate to country-wide economic growth and development?
Organisations
People |
ORCID iD |
| Kirsty Woomble (Primary Supervisor) | |
| Pawel Czarnowski (Student) |
Studentship Projects
| Project Reference | Relationship | Related To | Start | End | Student Name |
|---|---|---|---|---|---|
| ES/P000681/1 | 01/10/2017 | 30/09/2027 | |||
| 2104453 | Studentship | ES/P000681/1 | 01/10/2018 | 31/12/2022 | Pawel Czarnowski |
| Description | * In the first empirical chapter of my thesis, I show that the expertise of patent attorneys/lawyers, who help firms and inventors obtain patents, is important for the value and quality of patents. I differentiate between substantive expertise (specialist legal knowledge) of patent attorneys, and their procedural experience (familiarity with a particular court's procedures). I find that it is the substantive expertise of patent attorneys that matters, and not simple procedural experience. Only patent attorneys with high substantive expertise increase the economic and technological value of patents. Therefore, innovating firms should examine the substantive expertise of patent attorneys they consider hiring. * In the second empirical chapter of my thesis, I measure the shareholder value of patents and I distinguish between patents that protect environmental technologies (green patents) and ones that do not (grey patents). I find no evidence that green patents have a positive shareholder value, on average. This is in contrast to the average positive shareholder value of grey patents. I conduct additional analysis to investigate this in more detail, and I consistently find that green patents are not valuable to shareholders. The results suggest that, in terms of shareholder/firm value, an average company does not benefit from engaging in green innovation. * In the third empirical chapter of my thesis, I examine the long-run performance of firms that obtain green and grey patents. I find that firms consistently underperform after obtaining new green patents. I also find that firms do not consistently underperform after obtaining new grey patents. The findings in this chapter taken together with the findings in the previous chapter show that the money of profit-motivated firms might be better spent on projects other than environmentally friendly technologies. |
| Exploitation Route | *Future research could shed light on the factors that influence the fees charged by patent attorneys. Although the average cost of obtaining a patent from the USPTO is around $20,000, detailed data on the fees charged by patent attorneys at the level of individual inventions is not publicly available. Conducting surveys of patent attorneys or companies could help fill this gap and contribute to a better understanding of how attorney fees vary and how they relate to attorney competence. *It would also be worthwhile to investigate how patent attorney capability affects the patent outcomes of start-ups, which often rely heavily on their intellectual property assets. For example, the literature finds that obtaining a first patent can boost a start-up's sales and employment growth. Therefore, exploring whether the quality of patent attorneys hired by start-ups affects the technological value and investment potential of their patents would be a valuable research avenue. *Another promising area of research is the relationship between general law firm rankings and patent outcomes, such as their economic and technological value, and success rates in obtaining patents. Testing whether these rankings have predictive power in this context could provide insights into the factors that drive patent quality and help companies make more informed decisions when choosing legal representation. |
| Sectors | Energy,Environment,Financial Services, and Management Consultancy,Government, Democracy and Justice |
| Title | Patent Attorneys Rankings |
| Description | To collect data on law firm rankings in the Patent Prosecution category, I manually gathered information from the Legal500 website's archived snapshots using the Wayback Machine. This category has been ranked by Legal500 since 2007, and the data I collected covers the period from 2007 to 2019. Each year, Legal500 releases a list of the top patent prosecution firms, which are divided into five tiers based on their performance, with tier one being the most prestigious. Within each tier, the firms are listed in alphabetical order. On average, each tier recognizes six different law firms, resulting in a total of 30 patent attorney firms being ranked each year. |
| Type Of Material | Data analysis technique |
| Year Produced | 2022 |
| Provided To Others? | No |
| Impact | This data helps me answer the question of whether the capability of patent attorneys, which I study in my work, is reflected in patent attorney rankings. |