Wednesday, 18 September 2013

Patent litigation and stock market reactions: evidence from a recent study

© Rob Tannenbaum/Nasdaq
'Certain patents' is the title of an interesting article, published in the Yale Journal of Law & Technology and now available on SSRN, in which Alan C. Marco and Saurabh Vishnubhakat estimated and compared the market reactions to patent litigation decisions and to patent grants, analysing litigation data for the period 1977-1997. According to the abstract:
These estimates reveal that the resolution of legal uncertainty over patent validity and patent infringement is, on average, worth as much to a firm as is the initial grant of the patent right. Each is worth about 1.0-1.5% excess returns on investment. There are significant differences between such market reactions before and after the establishment in 1982 of the United States Court of Appeals for the Federal Circuit. There are also significant differences among the reactions of patent holders to resolved uncertainty depending on their litigation posture as plaintiffs or defendants. Interestingly, there is no similar effect for appellate decisions relative to trial decisions. The normative implications of these findings proceed, not from the magnitude of the quantitative results — which are statistically meaningful but modest — but rather from our illustration that uncertainty in the value of patent rights is quantifiable and so can be correlated with patentee and litigant behavior in developing patent policy.
The article provides one of the first comprehensive reviews of the effects of patent litigation on stock market valuations in the US. The data collected by the researchers corroborate the idea that the evaluation of plausible market reactions may play a significant role in determining the strategic choices made by firms involved in patent litigation. In this perspective, the authors noted that '[i]f valuable patents are subject to uncertainty about validity and infringement, then resolving that uncertainty is important to patent holders, and leaving such uncertainty unresolved reduces patent value as well as rewards to innovation'. These findings appear to lend weight to the hypothesis that agreements which seek to avoid or delay the resolution of legal uncertainty normally concern weak or less valuable patents. Although this correlation should be tested on a case by case basis, as taught by the US Supreme Court in the recent case of Federal Trade Commission v Actavis Inc. et Al., estimated stock market reactions could provide another useful factor to understand the objective, and assess the lawfulness, of such agreements.

The study still leaves many questions unanswered, in particular concerning the market reactions to settlements and non-final decisions, and the proportionality between market reactions and actual gains or losses determined by the outcome of litigation. Further, although other researches analysed some of these issues, there appears to be no comprehensive study of how market reactions evolved in the past few years. Recent evidence suggests that the sensitivity of the stock market to patent litigation may have significantly increased; correspondingly, the effects of market reactions on the firms' strategic choices may be higher than in the past. A recent example of this phenomenon is the market reaction to the presidential disapproval, on 3 August 2013, of the exclusion order issued by the ITC against several products manufactured by Apple, for infringement of a patent held by Samsung (see here and here): according to The Wall Street Journal, '[m]ore than $1 billion was wiped off Samsung's market value on Monday after the surprise veto' (approximately 0.6% of its current market cap). Similarly extreme market reactions may indeed play an increasingly important role in shaping the firms' behavior in patent litigation.

More on this topic? See the following studies:

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