Legal Shields, Hidden Costs: The Dual Effects of Patent Troll Laws on Information Technology Firm Innovation

The information technology (IT) industry is especially vulnerable to patent trolls because digital products combine modular, interdependent, and software-intensive components, making patent claims difficult to isolate and easy to assert broadly. Many U.S. states responded by adopting patent troll laws aimed at abusive demand letters. These laws can affect firms through two channels; they may reduce litigation risk by discouraging coercive threats, but they may also increase compliance costs by requiring greater disclosure when asserting patents. We leverage staggered adoption across U.S. states and track 900 IT firms from 2012 to 2019. We find that these laws are associated with higher overall patenting, but the increase is concentrated in areas where firms already have experience; patenting in new areas does not increase on average. Consistent with the two-channel mechanism, firms with greater prior exposure to troll litigation show larger increases in patenting in familiar areas, whereas firms facing higher expected compliance burdens show lower patenting in new areas. These differences are more pronounced in laws with more stringent disclosure and enforcement provisions, highlighting the tension between deterrence and compliance costs. For policymakers, the findings show how to design these laws: deter abusive assertions without imposing compliance burdens that dampen longer-term technological search.