Do Economic Downturns Dampen Patent Litigation?

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 20 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 data set 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 nonpracticing entities (NPEs), which, unlike most operating companies, generally fund their lawsuits directly from outside capital sources. Over roughly the last 20 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.