Do Economic Downturns Dampen Patent Litigation?

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Date	01 September 2015
Author	Ted Sichelman,Shawn Miller,,Alan Marco
Published date	01 September 2015
DOI	http://doi.org/10.1111/jels.12079

Do Economic Downturns Dampen

Patent Litigation?

Alan Marco, Shawn Miller, and Ted Sichelman*

Recent studies estimate that the economic impact of U.S. patent litigation may be as large

as $80 billion per year and that the overall rate of U.S. patent litigation has been growing

rapidly over the past 20 years. And yet, the relationship of the macroeconomy to patent

litigation rates has never been studied in any rigorous fashion. This lacuna is notable given

that there are two opposing theories among lawyers regarding the effect of economic

downturns on patent litigation. One camp argues for a substitution theory, holding that

patent litigation should increase in a downturn because potential plaintiffs have a greater

incentive to exploit patent assets relative to other investments. The other camp posits a

capital constraint theory that holds that the decrease in cash flow and available capital

disincentivizes litigation. Analyzing quarterly patent infringement suit filing data from

1971--2009 using a time-series vector autoregression (VAR) model, we show that economic

downturns have significantly affected patent litigation rates. (To aid other researchers in

testing and extending our analyses, we have made our entire data set available online.)

Importantly, we find that these effects have changed over time. In particular, patent

litigation has become more dependent on credit availability in a downturn. We hypothesize

that such changes resulted from an increase in use of contingent-fee attorneys by patent

plaintiffs and the rise of nonpracticing entities (NPEs), which, unlike most operating

companies, generally fund their lawsuits directly from outside capital sources. Over roughly

the last 20 years, we find that macroeconomic conditions have affected patent litigation in

contrasting ways. Decreases in GDP (particularly economy-wide investment) are correlated

with significant increases in patent litigation and countercyclical economic trends. On the

other hand, increases in T-bill and real interest rates as well as increases in economy-wide

financial risk are generally correlated with significant decreases in patent suits, leading to

*Address correspondence to Ted Sichelman, Professor, University of San Diego School of Law, 5998 Alcala Park,

San Diego, CA 92110; email: tsichelman@sandiego.edu. Marco is Chief Economist at the U.S. Patent and Trade-

mark Office; Miller is Teaching Fellow for the Program in Law, Science & Technology at Stanford Law School.

We thank Martin E. Brown for his assistance in the preparation and analysis of the data presented herein. We

also thank David Seto for his helpful research assistance. We thank Stuart Graham for providing access to some

of the data used in this article, as well as helpful comments from him. We thank Margo Bagley, Colleen Chien,

Peter DiCola, Chris Cotropia, John Duffy, Michael Frakes, Bronwyn Hall, Eric Helland, Jay Kesan, Ed Kitch, Lynn

Mather, Lee Petherbridge, David Schwartz, Polk Wagner, two anonymous reviewers, and participants at the Work-

shop on Empirical Patent Law at the University of Illinois, Empirical Studies in Patent Law Conference at the

University of San Diego, Empirical Studies in Patent Litigation Workshop at Northwestern Law School, Confer-

ence on Empirical Studies at Yale Law School, IP Counsel Forum, IP Scholars Roundtable at Drake Law School,

American Law and Economics Annual Meeting at the University of Chicago, and faculty workshops at the Univer-

sity of Illinois School of Law and the University of Virginia School of Law. The Ewing Marion Kauffman Founda-

tion supported the collecting of litigation data used in this project through the Kauffman Small Grants program

administered by the Lester Center for Entrepreneurship at the Haas School of Business, University of California,

Berkeley. The views presented herein are solely those of the authors.

481

Journal of Empirical Legal Studies

Volume 12, Issue 3, 481–536, September 2015

procyclical trends. Thus, the specific nature of a downturn predicts whether patent

litigation rates will tend to rise or fall.

I. INTRODUCTION

In the arena of patent litigation, there are two competing theories that explain the

inﬂuence of the macroeconomic environment on ﬁrms’ motives to ﬁle suit. On one

account, the decline in ﬁrm revenues associated with falling aggregate demand encour-

ages ﬁrms to reduce litigation in intellectual property suits as a method of reducing

costs and maintaining proﬁtability.

For example, during the most recent downturn, an

American Bar Association email to intellectual property lawyers advertising a seminar on

how to reduce expenses declared: “The economy is still in the doldrums, and electronic

documents have exponentially increased the costs and burdens of discovery. What can

you do?”

Relatedly, shortages in available capital may reduce the supply of contingent-

fee law ﬁrms available to represent plaintiffs, especially independent inventors and small

ﬁrms, who have increasingly used contingent-fee arrangements in patent infringement

actions.

On another account, a decline in proﬁts spurs ﬁrms to extract greater revenue

from dormant assets by litigating more aggressively against perceived infringers.

Because the relative internal rate of return on investing in patent litigation rises during

downturns, it becomes a more attractive business strategy relative to other investment

opportunities. A front-page article from the New Jersey Law Journal printed during the

downturn of the early 2000s demonstrates this tack, “However Hard the Market Falls,

Soft Landing Seen for IP Lawyers,”

as does an IP Law 360 headline from the most

recent downturn: “Drive for IP Proﬁts Accelerates Q2 Patent Suits.”

The IP Law 360

article noted that several patent litigators attributed a short-term uptick in patent

See Section II; see also Bachmeier et al. (2003:192) (“Litigation is a costly endeavor, and individual plaintiffs

and their attorneys, who may be financing the expenses of a lawsuit and are paid through contingency arrange-

ments, would presumably be influenced by economic conditions.”).

Bureau of National Affairs & American Bar Association (2009); see also Tu (2009) (making a series of recom-

mendations to reduce patent-related costs during the most recent downturn). Additionally, the value of winning

a patent infringement suit may decrease in an economic downturn, though one would expect this effect to be

marginal, since winning patentees can recover damages going back six years and garner either an injunction or

damages on a going-forward basis. See 35 U.S.C. § 286; eBay, Inc. v. MercExchange, 547 U.S. 388 (2006).

See Thomas (1998:328); Cahr and Kalina (2006); Fabricant & Dickstein Shapiro (2009, 2010); Schwartz (2012).

See also Bachmeier et al. (2003:193) (“[D]oes a weak economy force firms to seek opportunities within the legal

system to replace diminished opportunities in the marketplace?”).

See Bachmeier et al. (2003:192, citing Gottlieb 2001:1--16).

See Cherney (2010).

482 Marco et al.

litigation to efforts to generate revenue in a weak economy.

Additionally, economic

downturns may make the ﬁnancial beneﬁts of infringement greater relative to potential

costs, thus increasing overall infringing activity and potentially spurring more suits.

Both accounts of how economic downturns affect the rates of patent litigation are

theoretically plausible and, indeed, could simultaneously drive the expansion and con-

traction of patent litigation.

Given the downturn in suits ﬁled during the most recent

economic recession—with its concomitant effects on attorney hiring, law ﬁrm and judi-

cial planning, and corporate budgeting—determining which tendencies are more salient

is certainly of great interest to law ﬁrms, the corporate sector, and the judiciary.

More-

over, other than scattered anecdotal accounts and simple graphical analysis (e.g., super-

imposing graphs of GDP over patent litigation counts),

there has been no systematic

study of how macroeconomic conditions affect the rates of patent litigation. Thus, rigor-

ous study of these macroeconomic effects is also of signiﬁcant interest to economists

and empirical legal scholars.

To answer these questions, we assembled data covering patent litigation suits ﬁled

in U.S. district courts from 1971–2009, as well as more than 15 macroeconomic variables

of interest during the same time period. Consistent with previous studies examining

macroeconomic effects on litigation rates,

we use a time-series vector autoregression

(VAR) approach—a sophisticated econometric method developed by Christopher Sims,

who won the Nobel Prize for his work.

Controlling for a host of potential explanatory

factors, we ﬁnd that the macroeconomy has had signiﬁcant effects on patent litigation

rates during the time period in question. However, we ﬁnd these effects started to

change substantially sometime in the mid-1980s to mid-1990s. Of course, the rise of non-

practicing entities (NPEs) and operating companies seeking to generate substantial

licensing revenue has changed the nature of patent litigation dramatically.

Starting in

Id.; see also Chopra and Negi (2010) (“Whatever the reason, patent activity (litigation, innovation etc) only

surges in response to a recession.”).

See, e.g., Bachmeier et al. (2003:193) (“For example, will intellectual property lawsuits more likely occur in an

up or down economy?”).

Although we do not expect law firms to engage in forecasting on the basis of our results, simply knowing that

patent litigation may increase or decrease in volume given the general characteristics of a current downturn may

be helpful in general planning, especially for very large law firms and corporations that engage in or defend

numerous suits per year. For instance, based on a search in Docket Navigator, Google is currently involved in

over 100 patent cases in the district courts, and the most active law firms routinely handle more than 100 cases at

any given time.

See, e.g., Riel and Meiklejohn (2010).

See Bachmeier et al. (2003).

See Sims et al. (1990).

See Risch (2012) (reporting that large-scale NPEs began at least the mid-1980s and were active by the 1990s),

Rivette and Kline (2000) (discussing strategies for operating companies to boost their patent licensing revenue),