Patent remedies and technology licensing: Evidence from a supreme court decision

Abstract

Research Summary: Remedies for infringement are important determinants of the strength of patent protection. However, there has been little emphasis on the role of patent remedies in profiting from innovation via licensing. To address this gap, we examined the impact of patent remedies on technology licensing. Our study exploited a US Supreme Court decision that reduced the probability of issuing injunctions as a remedy to compare US firms' licensing propensity with that of a matched control group of European firms. We found that the decision reduced, on average, US firms' propensity to license. This effect is driven mainly by small firms and especially those in discrete technology industries. This research contributes to the literature on profiting from innovation and presents several implications for firms' licensing strategies. Managerial Summary: This study demonstrates how patent remedies (i.e., injunctions vs. ongoing royalties) differentially influence firms' incentives to engage in technology licensing. We suggest that injunctions cast a credible threat to potential licensees' product market activities, enhance the bargaining power of licensors in negotiations, and increase the likelihood of making a deal. Our research shows that when the probability of obtaining an injunction declines, firms are less likely to capture value by out-licensing their technological innovations. Especially for small firms, profiting from innovation via licensing becomes challenging. This effect exacerbates when small firms operate in discrete technology industries. These findings imply that in such conditions, firms may benefit from other value capture mechanisms, such as entering the product market or forming partnerships with industry incumbents.