Clogged courts doom innovation-specifically in biotech.

The licensing and sale of patents - the ‘market for innovation’ - are an important source of R&D incentives. Recent research has shown that transactions in patent rights contribute to the diffusion of technology, and strongly affect the incentives for firms to undertake innovation in the first place (Arora, Fosfuri and Gambardella, 2001). Firms increasingly recognize and exploit the commercial potential of their patent portfolios through licensing. To cite one high profile example, IBM reports earning 958 million from its portfolio.1 But the market for innovation is not just important for large firms. For small firms patents are often their most important asset, and the ability to license or sell them effectively is critical to preserving their innovation incentives and access to venture capital finance (Baum and Silverman, 2004). Moreover, transactions in patent rights are important to the development of efficient market structures in high technology sectors. In biotechnology and other high technology areas, transactions in patent rights strongly shape the division of labor, and nature of competition, between small firms who specialize in radical innovation and larger firms whose comparative advantage is in the development, production and marketing of these innovations (Gans, Hsu and Stern, 2002). One of the difficulties in studying transactions in patent rights is the lack of large scale data sets. As a result, existing studies are typically based on survey information. The only exception of which we are aware is Serrano (2009), who exploits patent office information on changes in the registered ownership to study the sale of patents. In this paper we study the market for innovation through a new lens — the settlement of patent infringement disputes. It is common for patents to be licensed as part of settlement agreements that arise from patent disputes (Anand and Khanna, 2000). An effective market for innovation requires that such disputes are settled as quickly as possible. Delay and uncertainty in the settlement and licensing process mean slower diffusion of patented technology. Moreover, longer delays would typically be associated with higher transaction costs for the negotiating parties.2 We use comprehensive data on the timing of settlements in patent disputes filed in U.S. courts to study this issue. As a window on the market for innovation, studying the duration of patent disputes has both advantages and limitations. First, the speed with which disputes are resolved is itself important for innovation, and an indication of how well the market for innovation works. The second advantage is that we have much more extensive data on patent settlements than on licensing. In particular, this paper exploits information on essentially all patent cases filed in U.S. courts over the period 1978-2000. The main limitation of our empirical strategy is that we do not observe the terms of patent settlements, and thus do not know whether licensing actually occurred as part of the agreement (or court order).