Post Ebay ruling decimated NPE’s

Previous discussion presents the shock as a reduction in the bargaining power of plaintiffs in litigation. In this section, I provide evidence consistent with this hypothesis by examining the stock returns of a set of public PAEs. In particular, I find that the ruling led to a drop of about 10% in the stock price of these companies.

Following the literature (Cohen et al., 2019; Feng and Jaravel, 2015; Kiebzak et al., 2016; Tucker, 2014), I identify PAEs looking at nonpracticing entities (NPEs), which are companies that generate most of their revenue through licensing and settlement fees rather than from manufacturing.17 This setting is a useful laboratory for several reasons. First, previous research has confirmed NPEs extensively used injunction threats when negotiating licensing agreements or settlements (Chien and Lemley, 2012). Therefore, the ruling should have somehow harm their business model. Second, unlike for other companies, automatic injunction does not constitute a major risk for these firms because they generally do not directly use intellectual property to develop products or sell services.

Therefore, if the ruling had a big impact on patent enforcement, I expect NPEs to be negatively affected by the decision. In particular, I test this hypothesis by looking at the stock market returns of public NPEs around the time of the ruling. The main challenge in this type of analysis is that most NPEs are private. For instance, “Intellectual Ventures” – allegedly the largest NPE today – is a private firm. I start by combining two lists of NPEs, provided respectively by PatentFreedom, one of the most important firms in assessing NPE risk and now owned by RPX, and by EnvisionIP, a law firm involved in strategic IP consulting.18 Then, I identify the firms in these lists for which returns information is available in CRSP around the date of the event. This analysis yields a final list of ten companies.19

Studying the returns of these companies around the decision, I identify four important stylized facts.20 First, on the day of the decision these firms experienced a drop in stock price of 3.3% – 3.8%, depending on whether I look at raw returns or abnormal returns. These effects are highly significant, with the Sharpe ratios ranging between 4.08 and 4.75. Second, firms suffered negative returns also in the couple of days before the decision (Figure 2). While the largest one-day drop occurred the day of the Supreme Court ruling, these stocks also lost value in the three days before it. Examining the abnormal returns with respect to the S&P500, the firms lost 6.3% ( t = −4.53 ) on average the week before the ruling. One explanation for this result is that investors, anticipating the arrival of news regarding the case, started to require a premium to hold these stocks until the day of the decision. Third, I find that the drop is not capturing a negative trend in the data. When I consider a month or two months before the ruling – excluding the five trading days before it – I find no out-performance of this group of firms with respect the benchmarks (Table A.6).