Thursday, October 1, 2015

How Does the Economy Affect Patent Litigation?

When I was in practice, the conventional wisdom was that litigation (of all kinds) grew during recessions, because people were less optimistic and willing to let slights go, and instead fought over every dollar. Alan Marco (Chief Economist, PTO), Shawn Miller (Stanford Law Fellow), and Ted Sichelman (San Diego) have attempted to tackle this question with respect to patent litigation. They examine litigation rates from 1970-2009 in conjunction with a variety of macroeconomic factors.

Their paper is coming out in the Journal of Empirical Legal Studies, but a draft is on SSRN. The abstract follows:

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 twenty 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 dataset 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 non-practicing entities (NPEs), which unlike most operating companies, generally fund their lawsuits directly from outside capital sources. Over roughly the last twenty 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 procyclical trends. Thus, the specific nature of a downturn predicts whether patent litigation rates will tend to rise or fall.
The authors also have a guest post at Patently-O discussing their findings.

I don't have too much to add to their analysis; the notion that a credit crunch will reduce litigation makes a lot of sense.

My two primary additional comments are as follows:

1. There is a lot more to the findings and the authors' analysis than presented in the Patently-O post. For example, there was a shift as litigation changed from competitor to licensor-based claims. The full paper is worth a read.

2. I am not fully convinced what this tells us about the period from 2010-2014. The authors hint that economic growth during that time correlates with a drop in litigation, but the drop in litigation was only in latter 2014 (and reversed itself in early 2015, as they note). This is further complicated by the change in how we count litigation after the America Invents Act requirement that each defendant be joined in a separate case. I think a lot more work (and creative thought) needs to be done to meld the pre- and post-AIA data into a coherent data set.

[UPDATE: I've been corrected - patent litigation by defendant count apparently decreased more than I let on (see, e.g. here) if you exclude false marking claims. This tempers some of my skepticism, though I would still like to see the post AIA data combined with pre-AIA data]

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