Patent Trolls: Evidence from Targeted Firms

We develop a theoretical model of, and provide the first large-sample evidence on, the behavior and impact of non-practicing entities (NPEs) in the intellectual property space. Our model shows that NPE litigation can reduce infringement and support small inventors. However, the model also shows that as NPEs become effective at bringing frivolous lawsuits, the resulting defense costs inefficiently crowd out some firms that, absent NPEs, would produce welfare-enhancing innovations without engaging in infringement. Our empirical analysis shows that on average, NPEs appear to behave as opportunistic patent trolls... We find that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Moreover, we neither find any markers of significant NPE pass-through to end innovators, nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent.