Suing Upstream or Downstream? A Value Chain Perspective on Defendant Selection in Patent Litigation

We analyze the plaintiff’s selection of the litigation level in patent infringement suits, i.e., the level in the value chain on which the defendant is active. We distinguish between direct litigation, where the defendant is the original implementer of the patent; and indirect litigation, where the defendant is downstream from the original implementer. Drawing on anchoring and transaction cost theory, we hypothesize which factors render indirect litigation more likely. We present empirical findings from a mixed-methods study based on 29 semi-structured interviews and data on 500 patent infringement suits filed at US district courts between 2010 and 2016. We find that 34% of the analyzed suits are indirect, with a particularly high prevalence in retail trade (65%) and transportation & public utilities (45%; e.g., communication). Indirect infringement suits are relatively rare in manufacturing industries (28%), with transportation equipment (57%) and electronics (47%) as exceptions. In qualitative analysis, we uncover the underlying motivations, and, in multivariate analysis, we find indirect patent infringement suits to be associated with complex technologies, open standards covered by standard-essential patents, product patents, and patent assertion entities as plaintiffs, as hypothesized. We contribute theoretically to research on value capture by suggesting antecedents of direct and indirect patent infringement suits. We discuss policy implications arising from the relative efficiency of the two modes and identify the need for managers to take an end-to-end perspective on IP risks in the value chain.