FIRM STRATEGIES AND TRENDS IN PATENT LITIGATION IN THE UNITED STATES

• Pages: 103-147
• DOI: https://doi.org/10.1016/S1048-4736(04)01504-8
• Published date: 27 April 2004
• Date: 27 April 2004
• Author: Deepak Somaya

FIRM STRATEGIES AND TRENDS IN

PATENT LITIGATION IN THE

UNITED STATES夽

Deepak Somaya

ABSTRACT

Patent litigation has been rising rapidly in the United States since the

mid-1980s, and particularly so in high-technology industries. The strategies

pursued by firms with their patents have a significant influence on their

decisions to file suit, and on the outcomes within litigation. The influence of

strategic motivations on settlement outcomes is studied in two illustratively

different industries – computers and research medicines. Evidence is found

for two types of influences – the use of patents (as isolating mechanisms)

to protect valuable strategic stakes, and their “defensive” role in obtaining

access to external technologies (through mutual hold-up).

So here’s my fantasy: We take all our patents and trademarks out in back, and we have a

weenie roast. I watch the smoke twirl up in the sky, and I say, “Adios!” Then I go back in and

write checks to pay all my legal bills. And when someone wants to play legal patty-ake [sic],

we just say “peace” and go figure out how to get along. In my dreams.1

夽This is an extended version of a paper published earlier in the StrategicManagement Journal, 2003,

24(1): 17–38, under the title “Strategic Determinants of Decisions not to Settle Patent Litigation.”

Intellectual Property and Entrepreneurship

Advances in the Study of Entrepreneurship, Innovation and Economic Growth,

Volume15, 103–147

Copyright © 2004 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1048-4736/doi:10.1016/S1048-4736(04)01504-8

103

104 DEEPAK SOMAYA

1. INTRODUCTION

Patent strategy is increasingly becoming an important part of corporate strategy in

the knowledge economy, especially for technology firms that rely on intellectual

property rights for their competitive advantage (Rivette & Kline, 2000). While

firms may outsource many legal services for their patents, the strategic importance

of patents means that their managers (like the CEO quoted above) must understand

and exercise their legal options diligently. Understanding how managers make

such tradeoffs about their patents is of central interest in this paper, specifically

in the context of patent litigation. Recent years have seen a growing scholarly

interest in patent litigation to unpack the role patents play in firm strategy and the

economy. Prior research has studied firm valuation (Bhagat, Brickley & Coles,

1994;Lerner, 1995), predatory behavior (Lanjouw & Lerner,2001; Lerner, 1995),

and suit filing decisions (Lanjouw & Lerner, 1998; Lanjouw & Schankerman,

1997, 1998) in the context of patent litigation.

Patent enforcement entails substantial direct and indirect costs. Direct legal

costs alone can run in the range of $1.0–3.0 Million (in 1997 dollars) for each

side through trial (AIPLA, 1997). In addition, patent litigation also involves

considerable organizational dislocation, absorbing the time and energy of key

managers, lawyers, engineers, and scientists in the company. Not surprisingly,

prior research has found that the filing of patent suits led to a 2–3.1% average de-

crease in the market value of the firms involved(Bhagat, Brickley & Coles, 1994;

Lerner, 1995). This paper investigates systematic reasons for non-settlement,

which can explain why firms are willing to continue fighting patent suits despite

these costs.

In unstructured exploratory interviews, patent lawyers sometimes suggested

that (arguably) irrational behavior plays a large part in litigation outcomes – egos

get involved, poor legal advice is followed, or the parties lose perspective in the

“brutality” of the lawsuit. However, in many instances, more systematic explana-

tions were cited as important factors – namely, a patentee’s desire to “take out a

competitor” in a key market, to build a tough reputation, to protect its “crown jew-

els,” or to extract royalties at a higher rate than was otherwise “affordable” by the

non-patentee. Moreover, other factors were suggested as driversof suit settlement

– patentees may be forced to compromise in order to obtain access to complemen-

tary patents, or settlement may be induced by on-going business relations between

the parties.

This paper investigates the strategic dimension of patent enforcement suggested

by these systematic explanations, and suggests two main drivers of non-settlement

in patent suits. First, patent suits are less likely to be settled if patentees, or their

opponents, have strong strategic stakes in the litigated patent. This explanation

Firm Strategies and Trends in Patent Litigation in the United States 105

rests on an understanding of patents as isolating mechanisms, i.e. mechanisms

that prevent rivalsfrom easily replicating valuable firm-specific assets deployed in

the pursuit of competitive advantage (Lippman & Rumelt, 1982; Rumelt, 1984).

Second, in systems-products industries, which combine multiple inventions in

end-products, mutually blocking patent rights can encourage settlement in patent

litigation due to the threat of counter-suits by rivals using their own patents. A

key contribution of this paper is the linking of these strategies with formal law

and economics theories of suit settlement.

Firm strategy in the patent area is still not well understood, and survey research

suggests that patent strategies vary across different industries (Cohen, Nelson &

Walsh,2000;Levin, Klevorick, Nelson & Winter, 1987). This paper presents some

broad distinctions between the features of patent litigation in different industries,

and investigates the differences in depth in Computers and Research Medicines

(Pharmaceuticals plus Medical Biotechnology). Prior research suggests that

strategic stakes are likely to be more important in research medicines, and mutual

hold-up and counter-suing strategies in computers.

The rest of this paper is organized as follows. Section 2 describes broad trends

in patent litigation, and examines differences between industries. Section 3

develops a set of hypotheses relating strategic stakes and mutual hold-up to

settlement decisions in patent litigation. Section 4 describes the two-industry

sub-sample, and discusses observed litigation differences in computers and

research medicines. Section 5 discusses empirical methods, variables, and sample

statistics. Section 6 presents and discusses the main empirical findings of the

paper. Section 7 concludes.

2. TRENDS AND INTER-INDUSTRY DIFFERENCES

IN PATENT LITIGATION

When patent disputes occur, they are taken in the first instance to a federal district

court that has jurisdiction over the dispute. Similarly, copyrights and trademarks,

which are also protected by federal law, fall under the purview of the federal

court system. Appeals against decisions made by the district courts in trademark

and copyright disputes are heard by the Appeals Courts of the respective circuits

into which federal districts are grouped. However, since October 1982, appeals in

patent cases have been consolidated into the newly created Court of Appeals of the

Federal Circuit. In addition, this court was given jurisdiction over some trademark

appeals that arise out of decisions made by the Patent and Trademark Office, but

not over other trademark disputes. Throughout this paper, the focus is on suits at

the district court level.