Association for Public Policy Analysis & Management

Although the debate on patent strength is not settled, policy changes continue altering the patent system. Informed decision-making needs to take into account that most changes benefit some entities while they hurt others, given the variety of ways to use patents.

This paper aims at testing how a policy weakening intellectual property rights (IPR) impacts firms’ strategic use of patents in light of the arguments made during the policymaking process. This work contributes to the literature on how the strength of IPR affects innovation and social welfare. The study reconciles different approaches taken by legal, economics, and management scholars. Using patent and firm data as well as court documents, I evaluate the validity of arguments made by policymakers and patent users.

This study focuses on a policy change created by the 2006 Supreme Court eBay v. MercExchange decision (henceforth called “the eBay case”). The Supreme Court shifted away from over a century of practice regarding the rulings for injunctions. The Court rendered its decision based on social welfare considerations. By making patent-related permanent injunctions harder to obtain, the Supreme Court significantly weakened patents.

Studies evaluating the impact of IP policies on firm strategies have traditionally struggled with two methodological issues. First, measuring of patenting propensity – what an entity choses to patent out of what is patentable proves challenging. The second issue is to control for rival hypotheses such as a technical revolution, regulatory capture, and industry or country level changes to isolate the effect of the policy. I propose a cleaner test compared to previous literature using a measure closer to the concept of patenting propensity and a novel research design controlling for these rival hypotheses and removing endogeneity related to potential influence on policymaking. In addition, the study aims at providing strong empirical evidence by relying on a mixed-method approach combining exhaustive quantitative data with qualitative data. I use a unique dataset on the entire population of French firms over 1995-2010 matched with their patents and court documents of the case that include the Supreme Court’s opinion, the parties’ and the amicus briefs.

Using this empirical setting, I find evidence that the weakening of patent strength has a negative effect on the propensity to patent overall; however, two different changes in firm strategy explain this negative effect. Large firms with activities related to electrical engineering show a decrease due to the reduced necessity of accumulating patents for defensive reasons. On the other hand, this decrease is due to a lower incentive to use patents as a protection for potential future products. Small firms of all industries as well as firms of all sized with activities related to pharmaceuticals, chemicals and biotechnology experience this effect. In addition, I also provide evidence that the objectives stated by the Supreme Court in making this policy decision are only partially fulfilled and several externalities emerge.