Measuring Patent Thickets

Measuring the effect of patenting on industry R&D is an age old pursuit in innovation economics. It's hard. The latest interesting attempt comes from Greg Day (Georgia Business) and Michael Schuster (OK State, but soon to be Georgia Business). They look at more than one million patents to determine that large portfolios tend to crowd out startups. I'm totally with them on that. As I wrote extensively during troll hysteria, patent portfolios and assertion by active companies can be harmful to innovation.

The question is how much, and what to do about it. Day and Schuster argue in their paper that the issue is patent thickets, as their abstract shows. The draft article Patent Inequality, is on SSRN:

Using an original dataset of over 1,000,000 patents and empirical methods, we find that the patent system perpetuates inequalities between powerful and upstart firms. When faced with growing numbers of patents in a field, upstart inventors reduce research and development expenditures, while those already holding many patents increase their innovation efforts. This phenomenon affords entrenched firms disproportionate opportunities to innovate as well as utilize the resulting patents to create barriers to entry (e.g., licensing costs or potential litigation).

A hallmark of this type of behavior is securing large patent holdings to create competitive advantages associated with the size of the portfolio, regardless of the value of the underlying patents. Indeed, this strategy relies on quantity, not quality. Using a variety of models, we first find evidence that this strategy is commonplace in innovative markets. Our analysis then determines that innovation suffers when firms amass many low-value patents to exclude upstart inventors. From these results, we not only provide answers to a contentious debate about the effects of strategic patenting, but also suggest remedial policies to foster competition and innovation.

The article uses portfolio sizes and maintenance renewals to find correlations with investment. They find, unsurprisingly, that the more patents there are in portfolios in an industry, the lower the R&D investment. However, the causal takeaways from this seem to me to be ambiguous. It could be the patent thickets that cause that limitation, or it could simply be that industries dominated by large players are less competitive and drive out startups. There are plenty of (non-patent) theorists that would predict such outcomes.

They also find that firms with large portfolios are more likely to renew their patents, holding other indicia of patent quality (and firm assets) equal. Even if we assume that their indicia of patent quality are complete (they use forward cites, number of inventors, and number of claims), the effect they find is really, really small. For the one reported industry - biology, the effect is something like a -0.00000982 percent likelihood of lapse for each additional patent. This is statistically significant, I assume, because of the very large sample size and a relatively small variation. But it seems barely economically significant. If you multiply it out, it means that each patent is 1% more likely to lapse for every 1,000 patents in the portfolio (that is, from 50% chance of lapse, to 49% chance of lapse. For IBM - the largest patentee of the time with about 25,000 patents during the relative time period, it's still only a 25% change. Most patentees, even with portfolios, would be nowhere near that. I'm just not sure what we can read into those numbers - certainly not the broad policy prescriptions suggested in the paper, in my view.

That said, this paper provides a lot of useful information about what drives portfolio patenting, as well as a comprehensive look at what drives maintenance rates. I would have liked to see litigation data mixed in, as that will certainly affect renewals one way or the other, but even as is, this paper is an interesting read.

The Value of Patent Applications in Valuing Firms

It's an age-old question that we've blogged about here before - what role do patents have on firm value? And is any effect due to signaling or exclusivity? Does the disclosure in the patent have any value? Does anybody read patents?

These are all good questions that are difficult to measure, and so scholars try to use natural experiments or other empirical methods to divine the answer. In a recent draft, Deepak Hegde, Baruch Lev, and Chenqi Zhu (all NYU Stern Business) use the AIPA to provide some useful answers. For those unaware, the AIPA mandated that patent applications be published after 18 months by default, rather than held secretly until patent grant. The AIPA is the law that keeps on giving; there have been several studies that use the "shock" of the AIPA to measure what effect patent publications had on a variety of dependent variables.

So, too, in Patent Disclosure and Price Discovery. A draft is available on SSRN, and the abstract is here:

We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.

This is a short abstract, so I'll fill in a few details. The authors measure the effect on  intra-period timeliness, a standard measure used to proxy for "price discovery," or how quickly information enters the market and settle the price of a stock. There are a lot of articles on this, but here's one for those interested (paywall, sorry).

In short, the authors look at how quickly price discovery occurred before and after the AIPA, correcting for firm fixed effects and other variables. One of the nice features of their model is that patent applications occurred over a period of years, and so the "shock" of patent publication was not distributed only in one year (which could have been affected by something other than the AIPA that happened in that same year).

They find that price discovery is faster after the AIPA. Interestingly, they also find that the effect is more pronounced in high-tech and fast moving fields -- that is, industries where new R&D information is critically important.

Finally, their results say something about the nature of the patent disclosure itself - the effects come from disclosure of the information, and not necessarily the patent grant. Thus, the signaling effect may really relate to information, and (some) people may well read patents after all.

How did TC Heartland Affect Firm Value?

In Recalibrating Patent Venue, Colleen Chien and I did a nationwide study of forum shopping in patent cases (shocker - everybody did it, and not just in Texas), and predicted that many patent cases would shift from the Eastern District to the District of Delaware. And, lo, it has come to pass. Delaware is super busy. This has been good for us at Villanova (only 30 miles away from the court), as our students are getting some great patent experience in externships and internships.

But how much did firms value not being sued in Texas? The TC Heartland case is a clear shock event, so an event study can measure this. In Will Delaware Be Different? An Empirical Study of TC Heartland and the Shift to Defendant Choice of Venue, Ofer Eldar (Duke Law) and Neel Sukhatme (Georgetown Law) examine this question. The article is forthcoming in Cornell Law Review and a draft is on SSRN. Here is the abstract:

Why do some venues evolve into litigation havens while others do not? Venues might compete for litigation for various reasons, such as enhancing their judges’ prestige and increasing revenues for the local bar. This competition is framed by the party that chooses the venue. Whether plaintiffs or defendants primarily choose venue is crucial because, we argue, the two scenarios are not symmetrical.

The Supreme Court’s recent decision in TC Heartland v. Kraft Foods illustrates this dynamic. There, the Court effectively shifted venue choice in many patent infringement cases from plaintiffs to corporate defendants. We use TC Heartland to empirically measure the impact of this shift using an event study, which measures how the stock market reacted to the decision. We find that likely targets of “patent trolls”— entities that own and assert patented inventions but do not otherwise use them—saw their company valuations increase the most due to TC Heartland. This effect is particularly pronounced for Delaware-incorporated firms. Our results match litigation trends since TC Heartland, as new cases have dramatically shifted to the District of Delaware from the Eastern District of Texas, previously the most popular venue for infringement actions.

Why do investors believe Delaware will do better than Texas in curbing patent troll litigation? Unlike Texas, Delaware’s economy depends on attracting large businesses that pay high incorporation fees; it is thus less likely to encourage disruptive litigation and jeopardize its privileged position in corporate law. More broadly, we explain why giving defendants more control over venue can counterbalance judges’ incentives to increase their influence by encouraging excessive litigation. Drawing on Delaware’s approach to corporate litigation and bankruptcy proceedings, we argue that Delaware will compete for patent litigation through an expert judiciary and well- developed case law that balances both patentee and defendant interests.

As I discuss below, I have a like/dislike reaction to this paper.

Examining the Role of Patents in Firm Financing

Just this morning, an interesting new literature review came to my mailbox via SSRN. In Is There a Role for Patents in the Financing of New Innovative Firms?, Bronwyn Hall (Berkeley economics) provides an extremely thorough, extremely helpful literature review on the subject. It's on SSRN, and the abstract is here:

It is argued by many that one of the benefits of the patent system is that it creates a property right to invention that enables firms to obtain financing for the development of that invention. In this paper, I review the reasons why ownership of knowledge assets might be useful in attracting finance and then survey the empirical evidence on patent ownership and its impact on the ability of firms to obtain further financing at different stages of their development, both starting up and after becoming established. Studies that attempt to separately identify the role of patent rights and the underlying quality of the associated innovation(s) will be emphasized, although these are rather rare.

This paper caught my eye for a few reasons.

Patents and Vertical Integration: A Revised Theory of the Firm

I'm a big fan of Peter Lee's work, and I'm a big fan of theory of the firm work. Imagine my joy upon seeing Prof. Lee's new article, forthcoming in Stanford Law Review, called: Innovation and the Firm: A New Synthesis. This article is a really thoughtful, really thorough re-examination of patents and the firm. The abstract is here:

Recent scholarship highlights the prevalence of vertical disintegration in high-technology industries, wherein specialized entities along a value chain transfer knowledge-intensive assets between them. Patents play a critical role in this process by lowering the cost of technology transactions between upstream and downstream parties, thus promoting vertical disintegration. This Article, however, challenges this prevailing narrative by arguing that vertical integration pervades patent-intensive fields. In biopharmaceuticals, agricultural biotechnology, information technology, and even university-industry technology transfer, firms are increasingly absorbing upstream and downstream technology providers rather than simply licensing their patents.

 This Article explains this counterintuitive development by retheorizing the relationship between innovation and the firm. Synthesizing previously disconnected lines of theory, it first argues that the challenge of aggregating tacit technical knowledge — which patents do not disclose — leads high-tech companies to vertically integrate rather than simply rely on licenses to transfer technology. Relatedly, the desire to obtain not just discrete technological assets but also innovative capacity, in the form of talented engineers and scientists, also motivates vertical integration. Due to the socially embedded nature of tacit knowledge and innovative capacity, firms frequently absorb entire pre-existing organizations and grant them significant autonomy, an underappreciated phenomenon this Article describes as “semi-integration.” Finally, strategic imperatives to achieve rapid scale and scope also lead firms to integrate with other entities rather than simply license their patents. The result, contrary to theory, is a resurgence of vertical integration in patent-intensive fields. The Article concludes by evaluating the costs and benefits of vertically integrated innovative industries, suggesting private and public mechanisms for improving integration and tempering its excesses.

The abstract does a pretty complete job of explaining the thesis and arguments here, so I'll make a few comments after the jump.

Planning a patent citation study? Read this first.

Michael's post this morning about how patent citation data has changed over time reminded me of a nice review of the patent citation literature I saw recently by economists Adam Jaffe and Gaétan de Rassenfosse: Patent Citation Data in Social Science Research: Overview and Best Practices. (Unfortunately, you need to be in an academic or government network or otherwise have access to NBER papers to read for free.) For those who are new to the field, this is a great place to start. In particular, it warns you about some common pitfalls, such as different citation practices across patent offices, changes across time and across technologies, examiner heterogeneity, and strategic effects. I think it understates the importance of recent work by Abrams et al. on why some high-value patents seem to receive few citations, but overall, it seems like a nice overview of the area.

Rethinking Patent Citations

Patent citations are one of the coins of the economic analysis realm. Many studies have used which patents cite which others to determine value, technological relatedness, or other opaque information about a batch of patents. There are some drawbacks, of course, including recent work that questions the role of citations in calculating value or in predicting patent validity.

But what if citing itself has changed over the years? What if easier access to search engines, strategic behavior, or other factors have changed citing patterns? This would mean that citation analysis from the past might yield different answers than citation analysis today.

This is the question tackled by Jeffrey Kuhn and Kenneth Younge in Patent Citations: An Examination of the Data Generating Process, now on SSRN. Their abstract:

Existing measures of innovation often rely on patent citations to indicate intellectual lineage and impact. We show that the data generating process for patent citations has changed substantially since citation-based measures were validated a decade ago. Today, far more citations are created per patent, and the mean technological similarity between citing and cited patents has fallen significantly. These changes suggest that the use of patent citations for scholarship needs to be re-validated. We develop a novel vector space model to examine the information content of patent citations, and show that methods for sub-setting and/or weighting informative citations can substantially improve the predictive power of patent citation measures.

I haven't read the methods for improving predictive power carefully enough yet to comment on them, so I'll limit my comments to the factual predicate: that citation patterns are changing.

As I read the paper, they find that there is a subset of patents that cite significantly more patents than others, and that those citations are attenuated from the technology listed in those patents -- they are filler.

On the one hand, this makes perfect intuitive sense to me, for a variety of reasons. Indeed, in my own study of patents in litigation, I found that more citations were associated with invalidity findings. The conventional wisdom is the contrary, that more backward citations means the patent is strong, because the patent surmounted all that prior art. But if the prior art is filler, then there is no reason to expect a validity finding.

On the other hand, I wonder about the word matching methodology used here. While it's clever, might it represent patentee wordsmithing? People often think that patent lawyers use complex words to say simple ideas (mechanical interface device = plug). Theoretically this shouldn't matter if patentees wordsmith at the same rate over time, but if newer patents add filler words in addition to more cited patents, then perhaps lack of matching words also reflect changes in data over time.

These are just a few thoughts - the data in the paper is both fascinating and illuminating, and there are plenty of nice charts that illustrate it will, along with ideas for better analyzing citations that I think will deserve some close attention.

Do Patents Help Startups?

Do patents help startups? I've debated this question many times over the years, and no one seems to have a definitive answer. My own research, along with others, shows that patents are associated with higher levels of venture funding. In my own data (which comes from the Kauffmann Firm Survey), startups with patents were 10 times as likely to have venture funding than startups without patents.

But even this is not definitive. First, a small fraction of firms--even of those with patents--get venture funding, so it is unclear what role patents play. Second, causality is notoriously hard to show, especially where unobserved factors may lead to both patenting and success. Third, timing is also difficult; many have answered my simple data with the argument that it is the funding that causes patenting, and not vice-versa. Fourth (and contrary to the third in a way), signaling theory suggests that the patent (and even the patent application) signals value to investors, regardless of the value of the underlying invention.

Following my last post, I'll discuss here a paper that uses granular application data to get at some causality questions. The paper is The Bright Side of Patents by Joan-Farre Mensa (Harvard Bus. School), Deepak Hegde (NYU Stern School of Business), and Alexander Ljungqvist (NYU Finance Dept.). Here is the abstract:

Motivated by concerns that the patent system is hindering innovation, particularly for small inventors, this study investigates the bright side of patents. We examine whether patents help startups grow and succeed using detailed micro data on all patent applications filed by startups at the U.S. Patent and Trademark Office (USPTO) since 2001 and approved or rejected before 2014. We leverage the fact that patent applications are assigned quasi-randomly to USPTO examiners and instrument for the probability that an application is approved with individual examiners’ historical approval rates. We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors. Exogenous delays in the patent examination process significantly reduce firm growth, job creation, and innovation, even when a firm’s patent application is eventually approved. Our results suggest that patents act as a catalyst that sets startups on a growth path by facilitating their access to capital. Proposals for patent reform should consider these benefits of patents alongside their alleged costs.

The sample size is large: more than 45,000 companies, which the authors believe constitute all the startups filing for patents during their sample years. For those not steeped in econometric lingo, the PTO examiner "instrument" is a tool that allows the authors to make causal inferences from the data. More on this after the jump.

Do Venture Capitalists Value Patents?

This is a simple, but important question. Do venture capitalists value patents? You would think the answer is an easy yes based on survey data, as well as my own findings from the Kauffman Firm Survey that firms with patents are about ten times as likely to have venture capital funding.

But I get pushback on this. See this TechDirt post, for example, called: No, You Don't Need Patents to Raise Money:

While some of them are filing for their own patents, a key point was that their investors definitely didn't require it or push them in that direction.

None said their investors had pushed them to file for patents.

When I speak with people who espouse this view, and tell them of my 10x finding, the response is almost always: "Well, that's just people getting patents after they have money, or IP firms telling them to do it."

So, here we have an apparent conflict between stated preferences and revealed preferences. On my to do list for two or three years now has been a study of all startups, with an examination of who got patents and when. But now I don't have to, because Celia Lerman (a Fulbright Scholar at Stanford, among other things) has done the study, called Patent Strategies of Technology Startups: An Empirical Study:

How does a patent strategy affect a tech startup company’s growth? This is a fundamental question for technology entrepreneurs, investors, lawyers and the innovation system as a whole. In this study, I shed light on this issue by conducting an empirical analysis of the patenting strategies of technology startups, examining the relationship between a company’s patent applications and different events over the company’s life: rounds of investment received, company acquisition and closure. I provide the first comprehensive cross-industry analysis of this question, by analyzing the patent portfolios of United States startups listed in CrunchBase, a crowd-sourced registry of tech companies used by the startup industry. By looking into these companies’ public patent applications from the United States Patent and Trademark Office (USPTO) database between 2008 and 2012, I examine the patenting patterns of startups as they progress through funding rounds.

Through a quantitative analysis, I find that companies based in California tend to patent more than in other states, and that companies that are venture-backed patent more than those who are not. I also unveil that most start-ups that patent file their first application before even receiving any reported funding. Moreover, I find that there is a significant positive relationship between patent protection, and receiving investment and being acquired. I further find that the number of patents (and not merely the fact that a company has patents or not) contributes to higher total funding. I finally observe that patenting early is also associated to higher funding, and that early may be more important for start-ups than what some views in venture capital may predict. I also conclude that while more patents are associated with higher funding, patents account for a relevant but small portion of a company’s success.

The study provides novel insights on startup patenting strategies. It lays empirical groundwork on key circumstances under which patents can contribute to a startup’s growth, to provide important guidance to the legal and entrepreneurial communities.

The study finds that startups patent before their first funding round, from a low of 50% in software, to 64% in IT/Hardware and 67% in medical. It also finds that firms with patents are funded more often and for more money. More discussion on this after the jump.

Why are many IP contracts contingent?

At the recent American Law and Economics Association (ALEA) meeting at Columbia, I provided some comments on Intellectual Property Contracts: Theory and Evidence from Screenplay Sales by Milton Harris, Abraham Ravid, Ronald Sverdlove, and Suman Basuroy. The paper works with a fascinating dataset: 1269 contracts for screenplay sales between 1997 and 2003, which are either for a fixed price (averaging $958,000) or contingent on production—but not success—of the script (with average initial payments of $458,000 and average total compensation of $914,000).

Why are many of these contracts contingent when the buyers are typically better at bearing risk? And why are contingent contracts more likely for less experienced sellers? One typical explanation is moral hazard, but apparently that is not an issue in screenplay sales: studios use other writers to edit scripts prior to production, so no further effort from the seller is required once the script is sold. Instead, this paper develops a model in which the seller's competence is not directly observable by either party, and the seller is more optimistic about her competence than the buyer. And as sellers become more experienced, more information is available, which narrows the difference of opinion between the buyer and seller.

I had two general sets of questions about the paper:

Are Patent Fees Effective at Weeding out Low-quality Patents?

Gaétan de Rassenfosse & Adam B. Jaffe have posted Are Patent Fees Effective at Weeding out Low-quality Patents? (sorry, behind NBER paywall, though many universities have subscriptions). The abstract is here:

The paper investigates whether patent fees are an effective mechanism to deter the filing of low-quality patent applications. The study analyzes the effect of the Patent Law Amendment Act of 1982, which resulted in a substantial increase in patenting fees at the U.S. Patent and Trademark Office, on patent quality. Results from a series of difference-in-differences regressions suggest that the increase in fees led to a weeding out of low-quality patents. About 16–17 per cent of patents in the lowest quality decile were filtered out. The figure reaches 24–30 per cent for patents in the lowest quality quintile. However, the fee elasticity of quality decreased with the size of the patent portfolio held by applicants. The study is relevant to concerns about declines in patent quality and the financial vulnerability of patent offices.

Others have suggested that patent fees be used to weed out patents, for example to weed out low value or to deter patent trolls (who tend to assert later). This paper seems to support that notion, but I'm not sure it gets us all the way there, as I discuss after the jump.

More on Valuing the Public Domain

Michael Risch previously posted on the study by Paul Heald, Kris Erickson, and Martin Kretschmer on the value of public domain photographs on Wikipedia. Those authors, along with Fabian Homberg and Dinusha Mendis, have posted a new paper, Copyright and the Value of the Public Domain: An Empirical Assessment, an independent report commissioned by the UK Intellectual Property Office. Their 90-page report has the ambitious goals of defining the public domain, mapping its size and frequency of use, identifying business models that benefit from the public domain, and evaluating existing theories of creativity based on these results. This report builds on work by scholars such as Yochai Benkler, Larry Lessig, and James Boyle, who have sought to define "the public domain" not just as the absence of copyright, but as an independent and valuable thing that is worth defending.

In this new UK IPO report, Erickson et al. define the public domain as including (1) works for which copyright has expired, (2) works that were never protected by copyright (from antiquity and folklore), (3) underlying ideas not being substantial expression, and (4) works offered to the public domain by their creator under a free and open license (including for commercial use). (While I think their definition makes sense, it might be worth trying to disentangle value from works with expired copyrights, which conceivably might not exist without copyright, and other works.) They do not attempt to quantify the overall value of the public domain (a perhaps impossible task). Rather, they describe results from three empirical studies as an initial step toward a larger assessment. In addition to the Wikipedia photo study that Michael described, they present results from interviews with 22 UK firms that used public domain materials and from a study of public-domain materials on Kickstarter.

What is the Value of the Public Domain?

Paul Heald (Illinois), Martin Kretschmer, and Kris Erickson (both Univ. of Glasgow) have posted The Valuation of Unprotected Works: A Case Study of Public Domain Photographs on Wikipedia. The article is an attempt to value a small slice of the public domain. Here is the abstract:

What is the value of works in the public domain? We study the biographical Wikipedia pages of a large data set of authors, composers, and lyricists to determine whether the public domain status of available images leads to a higher rate of inclusion of illustrated supplementary material and whether such inclusion increases visitorship to individual pages. We attempt to objectively place a value on the body of public domain photographs and illustrations which are used in this global resource. We find that the most historically remote subjects are more likely to have images on their web pages because their biographical life-spans pre-date the existence of in-copyright imagery. We find that the large majority of photos and illustrations used on subject pages were obtained from the public domain, and we estimate their value in terms of costs saved to Wikipedia page builders and in terms of increased traffic corresponding to the inclusion of an image. Then, extrapolating from the characteristics of a random sample of a further 300 Wikipedia pages, we estimate a total value of public domain photographs on Wikipedia of between $246 to $270 million dollars per year.

I think this is a fantastic study. My thoughts follow the jump.

Abrams et al. on Patent Value and Citations

Next up in my CELS IP recap: David Abrams (Penn) presented Patent Value and Citations: Creative Destruction or Strategic Disruption? (with Ufuk Akcigit & Jillian Popadak), for which Browyn Hall served as the discussant. This paper addresses one of the key quandaries of innovation policy: how do you measure innovation?

Mann & Underweiser: New Look at Patent Quality

"What can justify another paper about patent quality?" ask Ronald Mann (Columbia Law) and Marian Underweiser (IBM) at the beginning of A New Look at Patent Quality: Relating Patent Prosecution to Validity (a working paper posted to SSRN last fall). Answer: an empirical analysis of a new dataset of Federal Circuit patent validity decisions from 2003 until 2009. Mann and Underweiser have written my favorite kind of article: one that brings new and rigorous empirical evidence into the debate. Even if you disagree with their specific policy conclusions, the empirical results are presented independently and remain a useful contribution.

Colleen Chien on the Patent Ecosystem

The "patent ecosystem" is defined by the complex interactions between two seemingly disparate paradigms—the defensive amassing of patents in the "patent arms race," and the purchase of patents (often by "patent-assertion entities") in the "patent marketplace"—argues Colleen Chien (Santa Clara Law) in From Arms Race to Marketplace: The Complex Patent Ecosystem and Its Implications for the Patent System. How do these two paradigms interact, and what can they teach us about the patent system?

Michael Risch on Patent Trolls and Utility

Michael Risch (Villanova Law) has posted two new articles on SSRN that are related to recent Written Description posts. The first is Patent Troll Myths (forthcoming in the Seton Hall Law Review), which compares results with Patent Quality and Settlement Among Repeat Patent Litigants by John Allison, Mark Lemley, and Joshua Walker. Risch begins with a provocative claim: "It turns out that just about everything we thought about patent trolls—good or bad—is wrong." Risch started with the ten "most litigious" non-practicing entities (NPEs)—including Acacia Technologies, General Patent Corp., and Ronald A. Katz—and searched for all cases involving these NPEs from 1986 and 2009, resulting in a dataset involving 1011 cases and 400 patents.

Allison, Lemley & Walker: Repeat Patent Litigants

Do repeat patent plaintiffs have stronger patents? Are they more likely to settle to prevent these patents from being invalidated? John Allison (UT Austin Business), Mark Lemley (Stanford Law), and Joshua Walker (Lex Machina, Inc.) empirically address these questions in Patent Quality and Settlement Among Repeat Patent Litigants, which was just published in the March issue of the Georgetown Law Journal.

The study was based on the Stanford IP Litigation Clearinghouse, which links all patent suits since 2000 with their corresponding patents (and is "free to academicians, public interest researchers, judges, policymakers, and the media" and run by Lex Machina). The authors compare the 106 patents that were litigated 8 or more times with 343 patents that were litigated only once. Among their findings:

Buccafusco & Sprigman: Valuing IP

Are there problems with the way IP is priced? Professors Christopher Buccafusco (Chicago-Kent) and Christopher Sprigman (Virginia) provide a novel experimental insight on this question in Valuing Intellectual Property: An Experiment, which was published in the November 2010 issue of the Cornell Law Review. I have been thinking recently about the prices that are set for intellectual property because of Amy Kapczynski's project on theorizing the costs of these prices, which she presented at Yale Law School today (and which I'll blog about in more detail once a draft of her paper is posted). But while Kapczynski provides the first thorough critique of price itself (challenging the premise that IP should be priced whenever transaction costs are low), Valuing Intellectual Property contributes to the second-order critiques that emphasize the particularly high transaction costs in the IP context.

Buccafusco and Sprigman conducted a clever experiment to study how people set prices for creative works by creating a market for 10 poems in a $50 poetry contest. They found that the "authors" who wrote the poems and the "owners" who were told they owned one of the poems were only willing to sell their poem (and the corresponding chance of winning the contest) for over $20, while "bidders" would only pay around $10 to buy a poem. This effect was the same whether the participants could see all 10 poems or not. And even when the "contest" became a random lottery (so that each poem had a 1 in 10 chance of winning), authors and owners would only sell for over $15, while bidders would only pay around $5 (the actual expected value).

This experiment is the first demonstration of the endowment effect (where people value something they own more than an equivalent thing they don't) for non-rival, created goods. Even though the authors were reminded that they would get to keep their poems (which would be emailed to them), they still priced the poems' values as contest entries more highly than the bidders. The implication for IP is that the deadweight loss caused by copyrights and patents may be even larger than previously expected. Although the endowment effect is well established in behavioral law and economics, these inefficiencies are particularly troubling in IP, where the marginal cost of information is zero. Buccafusco and Sprigman argue that their results suggest market failures in licensing IP, which supports the use of liability rules over property rules and a more expansive fair use doctrine. More broadly, their results demonstrate another problem with using price as a signal of value for information goods.