The Private Value of Software Patents

We investigate the value creation or destruction associated with the introduction of software patents in the United States in two ways. The first looks at the cumulative abnormal returns to Information and Communication Technology (ICT) firms around the time of important court decisions that impacted software patents, and the second analyzes the relationship between firms’ stock market value, the sector in which they operate, and their holdings of software patents. We find that the extension of patentability to software was initially negative for software firms, especially for those producing application software or services. However, we also find that the ownership of software patents is positively and significantly associated with Tobin’s Q, and that the market’s valuation of software patents increased following changes in the USPTO’s treatment of software patents in 1995. 1 Hall: 549 Evans Hall, Berkeley, CA 94720, [email protected]. MacGarvie: 595 Commonwealth Ave., Boston, MA 02215, [email protected]. This is a revision of a paper written in April 2005. We thank Anne Layne-Farrar and LECG for the use of the Corptech data, and we thank Jim Bessen for helpful suggestions and for supplying us with the list of software patents used in Bessen and Hunt (2003). We are also grateful to Stu Graham, Bala Iyer, Lucia Silva, numerous participants in the Empirical Patent Research Conference, St. Helena, California, February 2005, the IIOC, Atlanta, April 2005, the ZEW Conference on Patents and Innovation in Mannheim, September 2005, the Seventh CEPR Conference on Applied Industrial Organization, Madeira, May 2006, the NBER Summer Institute 2006, the First Annual EPIP Conference, Munich, September 2006, and seminars at UCSD, University of Kansas, University of Michigan, University of Maastricht, and LMU-Muenchen for extremely helpful comments. Hall and MacGarvie September 2006 2 The Private Value of Software Patents Bronwyn H. Hall and Megan MacGarvie