Injunctions are among the costliest remedies available during patent litigation, as alleged infringers are prohibited to make, use, or sell an item that infringes on a covered patent. Injunctions can result in a devastating impact on a firm when the affected product is important to its business. As patent litigation—and threatened injunctions—has increased dramatically since the 1990s, firms have become exposed to much higher direct and indirect litigation costs, and the possibility of injunctions has contributed significantly to these costs. In our recent project, we evaluate the effects of injunction-likelihood on firms’ stock prices, operating performance, and decisions with respect to technology commercialization.
As an example of the effects of injunctions, consider the Taiwanese firm HTC Corp.; it was a pioneer in the smartphones business and by 2011 had obtained 10 percent of global market share. However, in March 2010, Apple initiated patent lawsuits against HTC and successfully imposed an injunction on HTC’s new smartphones. These injunctions severely halted and delayed HTC’s imports and shipments in the U.S. In the subsequent 14 months, HTC’s stock price slumped 72 percent, while Apple’s stock price had gained 65 percent. HTC subsequently declined quickly and became an unimportant player in the smartphone industry.
There is a paucity of empirical analysis on the effects of injunction likelihood on firms’ operations, profitability, and market value. In our study, we examine an external shock to the legal environment: the 2006 Supreme Court ruling in eBay v. MercExchange (“the eBay ruling”). Prior to the ruling, courts typically granted injunctions when patents were found to be valid and infringed. These “automatic injunctions” became increasingly costly to some high-tech firms’ operations due to the increased complexity of advanced technologies. Moreover, firms were frequently and inadvertently infringing on patents relating to only minor aspects of their new products.
The Supreme Court unanimously decided that the imposition of “automatic injunctions” is contrary to the equitable principles of the Patent Act. Subsequently, other remedies – such as monetary rewards – are being used more frequently, replacing injunctions. For the most part, this ruling is viewed as strengthening the position of defendants, especially those in information and communications technology (ICT) industries, as products in these industries are based on more complex systems that likely include a large number of patented technologies. To the extent that the eBay ruling affects corporate activities, we examine whether and how it is informative of firms’ long-term growth and market value. In particular, we focus on firms’ commercialization activities, since injunctions mainly delay some firms’ product inventions.
We use data from Lex Machina to identify patent litigation cases filed against U.S. public firms since 2000, and exclude cases driven by non-practicing entities (NPEs, or “patent trolls”). We first find that after the eBay ruling there is a significant decline in the likelihood of injunctions being imposed on alleged infringing firms in ICT-related cases. We then examine how stock markets reflect this reduced likelihood of injunction imposition in price adjustment upon patent infringement litigation filing events.
We next examine the mechanism of the effect of the eBay ruling on stock prices, and study whether alleged infringers’ reduced likelihood of injunction imposition results in improved operating performance. We find that the reduced likelihood of injunction among ICT firms due to the eBay ruling also leads to improved firm profitability. Subsample analysis indicates that the eBay effect is concentrated in firms with less diversified product lines. This is consistent with the notion that product diversity helps position firms to be less affected by the likelihood of injunction.
We split our sample by litigation risk and product competition. We find that the eBay effect only exists in high litigation-risk industries, providing further confirmation that our findings are driven by reduced likelihood of injunction. Additionally, we show that the eBay effect concentrates in firms with high product competition; this finding is consistent with the intuition that the likelihood of injunction is more impactful when competitors can provide similar products.
Finally, to examine how the reduced likelihood of injunction influences the operations of alleged infringers, we implement difference-in-differences-in-differences (DIDID) specifications to examine firms’ commercialization decisions, with commercialization measured by the number of new trademarks filed in the subsequent three years, scaled by the number of patents it filed in the past, as in prior research. We find evidence that the reduced likelihood of injunction in ICT-related patents due to the eBay ruling indeed encourages alleged infringers’ technology commercialization. This evidence supports the eBay effect on firm profitability that we document earlier.
We further consider subsample analysis based on firms’ product diversity. We find that the eBay effect is concentrated among those firms with less diversified product lines. Our finding is consistent with economic intuition implying that product diversity would enhance firms’ resilience to injunctions’ impact.
Our study builds on the insights of Mezzanotti and Simcoe (2019) and Mezzanotti (2021), although in our setting, we propose a framework that focuses on the role of defendants in patent infringement lawsuits, as injunctions only happen when patent lawsuits occur.
Our paper adds to the literature in several ways. First, we provide novel evidence of the adverse effect of patent litigation and injunctions on firm value. Recent studies have documented the negative aspects associated with the current patent system, especially on how litigation intensity harms firms’ operations. Our finding – that removing automatic injunctions is associated with increased stock returns for ICT defendants – serves as a test for the argument made by prior studies. Our result also implies that a substantial part of the negative market reactions to patent litigation news can be attributed to injunction concerns and their associated costs.
Additionally, our approach enables us to make causal inference into how patent injunctions influence firms’ operations. In particular, our findings that defendants in the ICT sector become more profitable after the ruling highlights how injunction concerns can reshape industry structure. More importantly, we show that the mitigation of the likelihood of injunction encourages firm-level technology commercialization – the key mechanism underlying the eBay effect.
Our results offer new and compelling evidence to the debate regarding the optimal scope of patent protection and its role in promoting innovation. Our study suggests that the eBay ruling enhances product inventions at the aggregate level, and we thus offer new insights into this issue from the perspective of the product market.
Fred Bereskin is an Associate Professor of Finance at the University of Missouri
Po-Hsuan Hsu is a Professor of Quantitative Finance at National Tsing Hua University
Huijun Wang is an Assistant Professor of Finance at Auburn University
This post is adapted from their paper, “Injunctions, Firm Value, and Technology Commercialization” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.
