Patent Policy and American Innovation after eBay: An Empirical Examination

Timothy Simcoe and Filippo Mezzanotti

In 2006, the U.S. Supreme Court issued a decision that went against nearly 100 years of precedent when it ruled that a court should not automatically issue an injunction against a patent infringer.  Before this decision, patent owners had had considerable leverage when negotiating settlements in patent infringement lawsuits, because they could halt sales of an entire product, even if the patent only covered a minor component.  While some commentators hailed the Supreme Court’s decision as a way to stop so-called “patent trolls,” others feared that without the power of an automatic injunction, inventors would lose some incentive for innovation. Timothy Simcoe and Filippo Mezzanotti looked at the numbers over the past decade to see what actually happened and found no negative effects on innovation after the Supreme Court’s decision in eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).  

Prior to eBay, courts would almost always issue injunctions prohibiting infringers from continuing to use a patent when the patent was found to be both valid and infringed.  As the scope of patentable subject matter expanded to include software and business methods, and with the advent of “patent trolls,” companies that owned patents but made money from licensing and litigating them rather than selling products or services, commentators feared a “crisis” within the patent system.  Even an accidental infringer would be at the mercy of the patent holder’s demands, which could be worth much more than the patent by itself, using the threat of an injunction to “hold up” the infringer.

The hold-up problem famously manifested itself when MercExchange sued eBay.  MercExchange, an alleged patent troll, claimed eBay was infringing some of its patents, including one that covered eBay’s “Buy It Now” feature.  In 2003, a federal district court awarded MercExchange $30 million in damages, but denied its request for a permanent injunction. The case made its way to the U.S. Supreme Court, which ruled that courts should apply traditional equitable principles in determining whether to issue injunctions in infringement cases, and no longer issue them automatically.  

With this sudden and radical shift in patent policy, many feared that it would stifle innovation because inventors would no longer have an automatic injunction to protect them.  Simcoe, Professor of Strategy & Innovation at Questrom School of Business, Boston University, and senior fellow of the Technology & Policy Research Initiative at Boston University School of Law, and Mezzanotti, Assistant Professor of Finance at Northwestern University’s Kellogg School of Management and fellow at TPRI, set out to quantify any impact eBay had on innovation by examining patents, R&D spending, and productivity growth.  

None of the data showed any negative effects that pointed to eBay as the cause; some evidence suggested that innovative activity may have actually increased.  The number of patent applications filed and patents granted, in both the U.S. and E.U., grew throughout the period 1990-2016, with a slight dip because of the recession in 2008-2009.  The growth in the U.S. was actually greater than in the E.U., which suggests that eBay had no effect on the number of patent applications filed.  

They also found no effect on R&D spending.  R&D spending reflects only the inputs to innovation, i.e., money spent to support innovative efforts, but a slowdown or decline in R&D spending growth after eBay could indicate a reduction in those efforts.  Simcoe and Mezzanotti found no decrease in spending immediately after eBay, and, indeed, after the expected drop during the Great Recession, R&D spending took off, which suggests that the overall economic climate has a much stronger influence on R&D spending than patent policy.  They also examined venture-capital spending as a proxy for innovation in startups, to see if they experienced any effects from eBay, and found that, if anything, startup funding, and in the computing industry in particular, increased dramatically after eBay.  While there is no way to know if the increase would have been even more dramatic absent eBay, their findings are “consistent with the idea that intellectual property is less important for driving investments in innovation” than other factors, like demand.  

Simcoe and Mezzanotti also examined productivity, “which measures the total economic value created for a given level of resources used in production.”  Productivity growth in the U.S. has slowed compared to the late 1990s, and there is “robust ongoing debate” about its causes. Although eBay is not likely to be a cause of the slowdown because it often takes decades for significant inventions to have an impact on productivity, Simcoe and Mezzanotti nevertheless analyzed productivity for seventeen manufacturing industries in the period 2000-2011.  They found that the computing industry had the fastest productivity growth both before and after eBay, which is expected, given the rapid improvements associated with Moore’s law.  Further analysis showed that productivity actually increased for patent-intensive industries (such as computing) after eBay, and there was no change in productivity growth rate across all industries for that same period.  

Although innovation can be difficult to measure, and any changes in policy may take years if not decades to manifest in the data, there is as yet no indication that eBay harmed innovation.  

SSRN Working Paper