The effect of patent litigation and patent assertion entities on entrepreneurial activity

Abstract

This paper empirically investigates the statistical relationship between levels of patent litigation and venture capital investment in the U.S. We find that VC investment, a major funding source for entrepreneurial activity, initially increases with the number of litigated patents. However, there is a “tipping point” where further increases in the number of patents litigated are associated with decreased VC investment, which suggests an inverted U-shaped relation between patent litigation and VC investment. This appears strongest for technology patents, and negligible for products such as pharmaceuticals. Strikingly, we find evidence that litigation by frequent patent litigators, a proxy for litigation by patent assertion entities, is directly associated with decreased VC investment, with no positive effects initially.