Wednesday, 5 October 2011

Litigation risk, tax rates and gains from patent enforcement: a new paper

"Trading and Enforcing Patent Rights" is the title of a paper by an Anglo-Canadian trilogy of professors: the Alberto Galasso (Toronto), Mark Schankerman (London School of Economics) and Carlos J. Serrano (Toronto). Issued in August of this year, it's the National Bureau of Economic Research's NBER Working Paper No. 17367 and you can purchase it online in pdf format from for electronic delivery at the very reasonable price of US$5.

So what is this paper all about?  According to the abstract:
"We study how the market for innovation affects enforcement of patent rights. Conventional wisdom associates the gains from trade with comparative advantage in manufacturing or marketing. We show that these gains imply that patent transactions should increase litigation risk [on a lawyer's non-economic view, one might hazard a guess that any transaction that places a patent in the hands of an assignee who wants it more than assignor did is likely to to increase litigation risk, while patent pooling transactions leading to and including FRAND licensing schemes should have the opposite effect]. We identify a new source of gains from trade, comparative advantage in patent enforcement, and show that transactions driven by this motive should reduce litigation. Using data on trade and litigation of individually-owned patents in the U.S., we exploit variation in capital gains tax rates as an instrument to identify the causal effect of trade on litigation [Any chance of replicating this work using EU data? That would be good]. We find that taxes strongly effect patent transactions, and that reallocation of patent rights reduces litigation risk, on average. The impact of trade on litigation is heterogeneous, however. Patents with larger potential gains from trade are more likely to change ownership, suggesting that the market for innovation is efficient. We also show that the impact of trade on litigation depends on characteristics of the transactions".

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