How does patent litigation by Patent Assertion Entities impact invention activity?

Patent Assertion Entities (PAEs) can enhance invention by creating a market for patents or reduce invention by making the returns to invention uncertain. We empirically examine the impact of patent enforcement by different types of entities, including Patent Assertion Entities, on invention in US patent classes. We construct a new database of litigation and invention and estimate difference-in-difference models to identify the net impact of patent litigation on invention. We find that, in the current US economy and legal system, patent litigation within specific technology classes reduces invention in the same classes. We also find that litigation by PAEs leads to a significantly larger negative impact on invention, compared to litigation by product companies, and suggest that this is because PAEs’ interest in financial rather than in-kind settlements reduces the available internal finance for invention. The negative impact of litigation has grown in recent years.