Escaping the patent trolls: The impact of non‐practicing entity litigation on firm innovation strategies

Research Summary Non‐practicing entities (NPEs) are firms that accumulate and acquire patents but do not further develop or implement the patented inventions (known as patent trolling). NPEs seek to receive royalties or profits through out‐of‐court settlements in patent infringement cases. We examine how firms targeted by NPEs in NPE‐initiated litigations (i.e., target firms) shift their innovation strategies and trajectories in response to heightened litigation risks. We theorize and show that after the initial lawsuit, target firms draw more upon their in‐house technologies to reduce the legal ground for further lawsuits. Furthermore, nontarget firms in related technology areas shift their innovation activities away from those of target firms under high NPE litigation risks. These effects are more pronounced with higher innovation costs and under more competitive product markets. Managerial Summary Non‐practicing entities (NPEs) are known as patent trolls that accumulate and acquire patents but do not further develop or implement these patented inventions. These patent trolls aim to obtain royalties or profits through out‐of‐court settlements in patent infringement cases. We investigate how firms targeted by patent trolls in litigations (i.e., target firms) change their innovation strategies and trajectories to deal with increased NPE litigation risks. After the initial lawsuit, we find that these target firms use their in‐house technologies more to reduce the legal ground for future lawsuits. Moreover, nontarget firms in related technology areas move their innovation activities away from those of target firms under high litigation risks. These effects are stronger when innovation costs are higher and under more competitive product markets.