Legal Shields, Hidden Costs: The Dual Effects of Patent Troll Laws on Information Technology Firm Innovation

Patent troll activity creates persistent uncertainty for information technology (IT) firm innovation by exploiting patent assertion practices. The IT industry is especially vulnerable to patent trolls for structural reasons as its modular, interdependent, and software-intensive technologies expose firms to broad and overlapping claims. U.S. states responded by enacting patent troll laws that regulate demand letters. These laws can both reduce litigation risk from patent trolls and increase compliance costs for firms enforcing their own patents. This combination changes the risk-return conditions under which firms make innovation decisions. We examine how state patent troll laws affect the volume and direction of IT firm innovation. Using staggered state enactments, we conduct a difference-in-differences analysis of 4,648 firm-year observations from 900 IT firms between 2012 and 2019. We find that these laws increase total patenting, but the increase is concentrated in exploitative patenting, whereas exploratory patenting does not increase on average. Heterogeneity analyses show that the laws strengthen exploitative innovation among firms with greater prior exposure to patent troll litigation, whereas firms with higher expected compliance costs engage in less exploratory innovation. These effects are concentrated in laws with stronger disclosure and enforcement provisions but not in those with penalty provisions. This study advances information systems research in two ways. First, it shows that in the context of IT innovation, patents are not only strategic assets for value appropriation but also, sources of structural uncertainty because the modular, interdependent, and software-intensive nature of IT systems makes patents more susceptible to opportunistic assertion. Second, it extends information systems research on the institutional governance of patent rights by shifting attention from patent eligibility to patent enforcement and showing how enforcement-stage governance shapes IT firm innovation volume and direction. In practice, the findings suggest that greater exploitative innovation reflects responses to legal incentives rather than inherently superior innovation strategies, highlighting the need for policies that deter opportunistic assertion while preserving conditions for exploratory innovation.

History: Indranil Bardhan, Senior Editor; Min-Seok Pang, Associate Editor.

Funding: This work was supported by an Early Career Scheme Research Grant (Hong Kong) [Grant 26600020].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2024.1262.