Using 78 patent litigation cases related to Taiwan electronics industries during the period from 1997 to 2008 as the target of the current research, the empirical results reveal that patent litigation infringement announcements would bring negative impacts on the abnormal returns as well as the trading volume of the defendant firm’s stock. In addition, this study observed that there are similar market responses on the defendant firm and its rival firms, indicating that the information-signaling effect resulting from patent infringement litigation outweighs the competitive effect. This study confirms that firms can apply patent litigation strategies to build up their competitive advantage.
This study provides policy and managerial implications as follows.
For managers:
1. In order to reduce the adverse impacts on the stock price and liquidity, defendant firms’ managers working for companies in the developing countries should take proper actions on disclosing such relevant information of the patent infringement allegation to the public to reduce the level of investment risk perceived by the investors.
2. As the patent strategy launched by transnational corporations has evolved from the defensive patent configuration strategy to the offensive patent litigation strategy, firms in the emerging economies especially should stop employing the “hit-and-run” strategy on intellectual property rights, which is opportunistic, unethical, and highly risky. Moreover, in order to prevent huge direct lawsuit costs and indirect organizational costs, firms in the knowledge-intensive industries should develop a standard operating procedure (SOP) to protect their proprietary knowledge assets against rival’s infringement and/or respond to the patent lawsuits.
3. Firms must keep surveillance on the domestic and global news of patent ligation to guard themselves against patent lawsuits. Since the contagion effect of patent litigation is harmful for the whole industry, firms may consider forming vertical or/and horizontal strategic alliances to reduce damages from malicious patent litigations.
4. In order to reduce the threat of contagion effect of patent infringement litigation, it may be a feasible strategy to develop patents with higher quality and/or patent portfolios to differentiate the focused firm from its peers.
For governments:
1. The most important task for the governments in developing countries is to change the atmosphere of patent infringement among industries. Several practices are suggested as follows. First, the local government should strictly implement the agreement or law of the intellectual property rights established by the World Trade Organization or the Paris Convention for the Protection of Industrial Property. Second, through public and social media, the authority can communicate with the potential infringers about the risks and costs of illegally using intellectual property rights. Third, eventually ethics education is the most effective way to radically eradicate the unethical business practices in the future.
2. The concept of patent bank was initially devised by some US-based firms such as RPX Corp. and Allied Security Trust, which aim to buy out all the patents that might be asserted against their members. Taiwanese government is also accelerating to set up a quasi-government agency, patent banks, to help their local firms to fight against MNCs from developed countries. Some lawyers think it may become a controversial issue and a two-edged sword for governments, arguing the line between antitrust and the protection of domestic industry against MNCs’ patent litigation is very obscure. Governments should be very careful about using patent bank as a defensive tool to deal with the cross-border patent ligation issues.