Executive Summary — Clearly defined property rights are essential for well-functioning markets. In the case of intellectual property (IP), however, property rights are complex to define; unlike ownership of physical assets, the space of ideas is difficult to clearly delineate. A solution employed by the United States and many other countries is the patent-a property right allowing an idea's owner sole commercialization rights for a period of time. A new organizational form, the non-practicing entity (NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to prosecute infringement on their patent portfolios. In this paper the authors provide the first large-sample evidence on the litigation behavior of NPEs. They show precisely which corporations NPEs target, when NPEs litigate, and how NPE litigation impacts the innovative activity of targeted firms. NPEs behave, on average, as patent trolls. This means that NPEs target firms that are flush with cash or that have just had positive cash shocks. NPEs even target conglomerate firms that earn their cash from segments having nothing to do with their allegedly infringing patents. The stakes of how to organize intellectual property disputes are massive. If the United States becomes a less desirable place to innovate because NPEs are left unchecked, innovation and human capital, and the returns to that innovation and human capital, will likely flee overseas. But innovators will also leave if they feel they are not are protected from large, well-funded interests that might infringe on innovative capital without recourse. Key concepts include:
- The rise of non-practicing entities (NPEs) has sparked a debate regarding their value and their impact on innovation.
- This study provides evidence that NPEs do not protect innovators from large interests in the intellectual property space.
- On average, NPEs behave as patent trolls that chase cash and negatively impact future innovation.
- Policy should be to more carefully limit the power of NPEs or, in the framework of the authors' model, increase the cost of bringing suit against commercializers of innovative ideas.
We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as "patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms. Keywords: Patent trolls, NPEs, Innovation, Patents