The Effect of Patent Litigation on Firm Performance – Evidence for Germany

While the benefits of patents for society as well as for patentees have extensively been studied in the theoretical and empirical economics of innovation literature, researchers in recent years have more and more concentrated on potential negative effects of patents. These negative effects can arise if the estimated costs of the patent system to an innovator exceed the estimated benefits (Bessen and Meurer 2008). This can for example be the case if the costs of defending a patent right exceed the profits of owning it. If there is a negative impact of patent litigation for patentees or inadvertent infringers an ex-post tax is imposed on the innovative effort which results in an ex-ante reduction of innovation incentives (Bessen Meurer 2008).

Against this background the contribution at hand considers the costs and benefits of patents by analyzing how patent litigation affects the firm value of the disputing firms. Making use of the fact that patents involved in patent infringement litigation constitute highly valuable intangible assets I expect decisions about the infringement of these highly valuable patents to be reflected in the value of the firms involved in litigation.

This paper has two main objectives. The first objective is to model, in a stylized way, the impact of patent litigation and its outcome on the firm value of the plaintiff and the defendant, taking into account the particularities of the German patent litigation system. The second objective is to empirically test the hypotheses derived from this stylized model by using changes in credit rating for German firms as a proxy for changes in firm value.

I find evidence that patent litigation is indeed reflected by changes in the firm value of plaintiffs and defendants. Defendants are negatively affected by a loss in trial or a settlement deal, while a victory leaves their firm value unchanged. I further show that small and inexperienced defendants are at a disadvantage compared to larger and more experienced firms, indicating that they are affected more severely by business disruption and financial distress. By contrast I find a positive treatment effect of litigation on the plaintiffs, independent of the outcome of the case. The results match theoretical considerations on the functioning of the bifurcated patent litigation system in Germany: The temporal separation of decisions on patent infringement claims and corresponding patent invalidity (counter) claims provides a strategic advantage to the plaintiff. The delayed decision of invalidity counterclaims (temporarily) shifts a large share of the bargaining power to the plaintiffs as they have little to lose from the infringement trial. This may lead to defendants being forced into unfavorable settlement agreements.

Schliessler, Paula (2013), The Effect of Patent Litigation on Firm Performance – Evidence for Germany, ZEW Discussion Paper No. 13-015, Mannheim.