A Trojan Horse Inside the Gates? Knowledge Spillovers During Patent Litigation

While patent litigation is an important appropriability mechanism for protecting firms' proprietary knowledge, through the litigation process, valuable knowledge may unintentionally spill over from firms defending their patents to those they accuse of patent infringement. We examine whether such spillover subsequently enhances the innovation of accused firms by analyzing over 3,000 patent litigation cases from 1998 through 2015 in the U.S. pharmaceutical industry. We find that firms accused of infringement have higher levels of innovation following litigation relative to other similar firms. Furthermore, litigation of patents that build on recent and heterogeneous knowledge and are characterized by greater scope more strongly enhance the accused firms' subsequent innovation. These findings support the argument that patent litigation can facilitate knowledge spillovers.