Growth of Firms under Injunction Risk
By Fred Bereskin, Po-Hsuan Hsu, and Huijun Wang
The use of an injunction during a patent dispute is one of the most valuable remedies available to plaintiffs, as alleged infringers are prohibited to make, use, or sell the item that infringes the covered patent. Injunctions were frequently awarded from the 1990s until 2006, alongside increased patent litigation. Industry practitioners and researchers have criticized such a high rate of requested injunctions being granted to harm new product development and economic growth.
To examine this criticism, we analyze how the landmark 2006 Supreme Court ruling of eBay v. MercExchange (Mezzanotti and Simcoe 2019; Mezzanotti 2021) reshape firms’ product market strategies — firms face the greatest injunction risk when they attempt to expand their product lines. In this eBay ruling, the Supreme Court made an unexpected decision in ruling that a 98-year-old presumption of “automatic injunctions” is contrary to the equitable principles of the Patent Act. Overall, this ruling is regarded as strengthening the position of defendants—especially producers in the information and communications technology industries.
We exploit the USPTO trademark database and measure a firm’s new product development using new trademarks it filed. Our analysis suggests affected defendant firms have launched significantly more new product lines after the eBay ruling. Additional tests suggest a financing channel underlying such an effect: affected defendant firms’ new products increase more after the eBay ruling when they have less internal and external financing sources (and would have been most vulnerable to the pernicious effects of injunctions before the eBay ruling). We also show that affected defendant firms’ profitability increases after the eBay ruling, supporting our proposition that reduced injunction risk enhances the growth of affected firms. This effect is particularly prominent among firms with less diverse product lines, high litigation-risk industries, and firms with high product competition.
Our empirical evidence suggests that the eBay ruling encourages all firms to develop new products and earn more profits, which have implications for economic growth. Our focus on new product development—an important yet underexplored dimension of innovation in the literature—offers new insights to the impact of injunction risk. Our study adds to the literature on how an environment with intensive patent litigation affects subsequent aggregate innovation and economic growth (Bessen and Meurer 2013).