The Private Costs of Patent Litigation James Bessen and Michael J. Meurer
Benefits Policy: benefits & costs Social (welfare, R&D) Private (value of patents) Patentee costs Patent prosecution costs Post-issue costs reflected in value Post-issue Costs to other parties Clearance Opinion letters Disputes
Private Costs of Disputes Act as tax With inadvertent infringement Disputes > litigation > trial Some settle before filing Some after Expected cost = risk Not just legal costs
Risk to alleged infringer Legal costs Management distraction Loss of market Delay loss of lead time / first mover advantage Financial distress / credit costs Transfer to patentee
Literature Cutler & Summers (1988) Pennzoil v Texaco Bhagat et al. (1994, 98); Lerner (1995) Patent filings Small number of observations Lunney (2004), Haslem (2005) Patent settlements
Change in stock value (WSJ) 0.0% day - 2 day - 1 announcement day day + 1 day + 2-1.0% Defendant Plaintiff -2.0% -3.0%
Event Study Assumption IF news of lawsuit filing does not reveal information about firm s prospects not related to lawsuit itself THEN stock change reveals expected change in discounted firm profits = cost
Event Study (Salinger) Normal returns (market model) r t r t m t Abnormal returns r t r t m I t t 200 day pre-event window Cumulative abnormal returns (CARs) Average CARs Multiple defendants
Data Derwent LitAlert Under-reporting Eliminate duplicates, transfers, counter-suits Identify declaratory actions v. infringement suits patentee litigant v. alleged infringer Compustat & CRSP Name-matching software Manual inspection Validity checks NBER patent data
Samples Public alleged infringers 1984 99 2,648 lawsuits 2,887 parties (multiple defendants) Both parties public, 1984 99 750 patentee litigants 747 alleged infringers Checked WSJ Suit reported Possibly confounding information 86 plaintiffs / 82 defendants
WSJ Sample CARs Event window WSJ article Suit filing Bhagat et al. T-2 to T+1 T-1 to T+24 (1998) Patentee Litigant (Plaintiff) mean -0.30% -0.10% -0.31% median 0.00% 0.90% no. of observations 86 86 Alleged Infringer (Defendant) mean median no. of observations -2.60% -1.80% -1.50% -1.40% -1.90% 82 82 Combined (matched parties) mean median no. of observations Addendum: mean combined abnormal returns Bhagat et al. (1994) Lerner (1995) -2.60% -2.50% -1.80% -0.50% 80 80-3.13% -2.00%
Standard Results Defendants lose Plaintiffs lose, but less NOT simple wealth transfer likely confounded with information revelation
Full Sample CARs Mean CAR Median CAR Observations Sample: Matched Parties Patentee Litigants Base -0.38% (0.30%) 0.00% 667 Definite infringement suits -0.63% (0.37%)* -0.45% 412 Alleged Infringers Base -0.62% (0.33%)* -0.97% 661 Definite infringement suits -0.77% (0.42%)* -0.83% 407 With possibly confounding events -0.45% (0.31%) -0.57% 743 Sample: All alleged infringers Base Single defendants Multiple defendants Single defendants, definite infringement -0.50% (0.16%)** -0.51% 2887-0.61% (0.18%)** -0.54% 2460-0.01% (0.39%) -0.39% 427-0.63% (0.27%)** -0.42% 1108
Table 4. Differences in Mean CARs by Characteristics Sample: Matched Parties Firm characteristic Alleged Infringer Patentee Litigant Employees < 500-3.20% (2.32%) -3.18% (2.45%) R&D / Sales >.15 0.22% (2.16%) -0.53% (1.22%) Total liabilities / Total Assets >.5 1.40% (0.87%) -2.35% (0.75%)** Capital / Employee > $100,000-0.02% (0.93%) -1.02% (0.74%) Current Assets / current liabilities < 1.5 0.94% (1.00%) -1.91% (0.87%)* Newly public firm -0.94% (1.78%) -1.92% (2.56%) Rival characteristic Employees < 500 1.06% (1.19%) -1.37% (1.07%) R&D / Sales >.15 0.23% (1.62%) 0.81% (0.97%) Total liabilities / Total Assets >.5-0.15% (0.86%) -0.35% (0.80%) Capital / Employee > $100,000-0.99% (0.95%) 1.02% (0.74%) Current Assets / current liabilities < 1.5 1.69% (1.11%) 1.19% (0.86%) Newly public firm 3.77% (1.51%)** 0.32% (1.05%) Other Characteristics Year > 1989-0.15% (0.82%) 0.09% (0.77)% Firms in same SIC4 primary industry 2.67% (1.16%)** -0.11% (0.78%)
Table 5. Differences in Mean CARs by Firm Characteristics Sample: All alleged infringers Employees < 500-1.70% (0.92%)* R&D / Sales >.15-1.79% (0.80%)* Total liabilities / Total Assets >.5 0.05% (0.33%) Capital / Employee > $100,000-0.26% (0.44%) Current Assets / current liabilities < 1.5 0.11% (0.34%) Year > 1989-0.56% (0.32%)* Patentee is public firm -0.12% (0.35%) Industry SIC = 28 (chemicals, inc. pharma) -0.41% (0.41%) SIC = 35,36,73 (electronics, computer,sw) 0.06% (0.38%) Other manufacturing 0.16% (0.33%)
Differences Patentee Litigants High debt lose more (pursue more marginal lawsuits) Financially distressed Reduced agency problems (Haslem) Alleged Infringers lose more: Patentee outside the industry Patentee is established firm Small (floor of legal costs) In 1990s
Interpretation Loss = cost of litigation OR Revelation of information about future profits systematic private information
1. Suit reveals competition Private info: plans to enter market Hypothesis: suit reveals patentee will enter But few plaintiffs enter defendants lose LESS when plaintiff is entrant
2. Suit reveals poor management Private info: management effort Hypothesis: suit reveals defendant managers cut corners BUT losses are GREATER for surprise suits plaintiff outside the industry suit filed same year patent issues losses do not decrease after multiple suits
3. Suit reveals tech quality Private info: quality of technology Hypothesis: suit reveals tech opportunity greater than realized MAYBE, but this would make losses smaller
Conclusion Cost to alleged infringer - loss
Cost of Litigation to Alleged Infringers Loss of wealth = CAR x common stock cap $52.4m ($4.5m median) in 1992$ Lerner biotech (joint loss): $67.9m ($20.0m median) Does not include losses in other securities Investment cost = Loss of wealth / Tobin s Q $28.7m ($2.9 median) in 1992$ Corrects for bubble
Annual risk to alleged infringers 20 15 Billions $92 10 5 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Risk measures Aggregate Annual Cost of Litigation to Alleged Infringers (billion $92) Annual Firm Infringement Risk (million $92) Aggregate Risk / R&D 1984 2.0 1.3 4.9% 1999 16.1 7.0 19.3% 1996-99 All firms 14.9 4.5 14.0% Small firms (employees <500) 0.1 0.1 1.3% Large firms (employees>=500) 14.8 9.8 14.9% SIC = 28 (chemicals, inc. pharma) SIC = 35,36,73 (electronics, computer, software) 3.4 9.7 14.1% 6.8 5.7 14.8% Other manufacturing 1.7 2.3 5.3%
Conclusion Infringement risk grew dramatically in 1990s Large compared to estimates of patent value ESR s 10-15%, (Arora et al., 17%) Not apples-to-apples Risk only of US lawsuits; ESRs worldwide Risk only public firms; ESRs (except Arora et al.) include other inventors Current litigation costs compared to future profits