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) 1 ( ) 1 (
, ., t mkt
t
t
t i
t
t
R R CAR + + =
=
=
=
=
Where
Ri ,t = daily return for event firm i on day t
A common t window is 3-day window around the event day. i.e., (-1, 0, +1), where day 0 is the
event day
Rmkt ,t = daily return for the specific market index on day t
CRSP has multiple market indices as market benchmarks. For this study, we used equally-
weighted and value-weighted indices. As these tables show below, the CARs of three different
time windows were collected: 3-day window, 5-day window, and 7-day window.
- The Equal-Weighted Index is an Equal-Weighted Portfolio built each calendar period
from all issues listed on the selected exchanges with valid prices on the current and
previous periods.
- The Value-Weighted Index is a Value-Weighted Portfolio built each calendar period
using all issues listed on the selected exchanges with available shares outstanding and
valid prices in the current and previous periods.
(2)
(1)
The Market Effects of Smartphone Patent War Tian Zou
20
We expected the market to react positively to favorable events such that:
H0: CAR > 0
H1: CAR < = 0
We expected the market to react negatively to unfavorable events such that:
H0: CAR < 0
H1: CAR > = 0
Cross sectional CAAR t-Test was conducted to test the statistical significance of CARs and
provide insights on the entire population under study. One-tail t-test was performed for the
reason that we formed the null hypotheses in particular ways based on our expectations of
potential market reactions:
Where
N = sample size
d = degree of freedom
CAR = Cumulative Abnormal Return
CAAR = Cumulative Average Abnormal Return
T1 = event window lower bound
T2 = event window upper bound
(
,
)
=
1
( )
(
=
(
)
The Market Effects of Smartphone Patent War Tian Zou
21
Table 3. CAR for category plaintiff filings
Plaintiff
P File Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.70% 0.55% 0.57% 0.78% 0.63% 0.58%
Cross t-test 1.298 1.160 1.556* 1.377 1.249 1.529*
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 1.17% 0.80% 0.01% 1.51% 1.16% 0.29%
Cross t-test 2.117** 1.664* 0.028 2.531*** 2.258** 0.704
* denotes statistical significance at 0.10 using one-tail test
** denotes statistical significance at 0.05 using one-tail test
** denotes statistical significance at 0.01 using one-tail test
The category plaintiff filings is comprised of the following events:
- Initial filings and amendments of complaints
- Counterclaim by the plaintiff
- Appeals to and transmission of appeals by the plaintiff to the Federal Circuit Court
- Filings for preliminary injunctions and permanent injunctions
- Motion to reopen administratively closed cases by the plaintiff
We can see that whenever the plaintiff proactively files for a legal action against the defendant, it
will increase the stock price by 0.57% to 0.58% at 90% significance level within the 3-day event
window, which is expected since the firm is taking legal actions to protect its intellectual
properties, and they can generate additional revenues for the firm.
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Strangely, there is a positive return for the defendant of 1.17% to 1.51% return at 99%
significance level, which is not expected by the author. Going through the cases we collected, it
appears that there are a few cases with Apple being the defendant had relatively high positive
CARs responding to plaintiffs filings.
This could be due to companys individual characteristics. One possible explanation is that given
Apples strong market position and good patent portfolio, observers are expecting counteractions
brought by Apple, which could then generate additional revenue for Apple.
Another possible explanation is that for these particular incidents with Apple being the defendant
and having relatively high positive CARs in response to plaintiffs filings, the defendant Apple is
already involved in ongoing lawsuits with a number of plaintiffs, and in these cases, Apple is
actually the party who brought the legal action to the court against the other party. So these legal
cases are viewed as counteractions from the other party, and they are only a fraction of the big
picture of a series of patent lawsuits.
Another possible reason is that companies events are not accounted. So release of new products,
earning statements, dividends, courts decisions in other lawsuits have currently not been taken
into consideration for our dataset, but they might have material influences on the defendants
stock performances in additional to influences from the events of filings by the plaintiffs.
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Table 4. CAR for category defendant counteractions
Plaintiff
D counter Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.17% -1.14% -0.77% -1.33% -1.26% -0.84%
Cross t-test -1.425* -1.59* -1.139 -1.663* -1.745** -1.236
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.62% 0.24% 0.01% 1.02% 0.69% 0.24%
Cross t-test 1.113 0.444 0.033 1.539** 1.047 0.471
The category defendant counteractions is comprised of the following events:
- Counterclaims and amendments of counterclaims
- Appeals to and transmission of appeals by the plaintiff to the Federal Circuit Court
In the CAR table, we can see that on average, counteractions will cause negative return from -
1.14% to -1.33% to the plaintiff. As for the defendant, market will react to its counteractions
positively; stock is estimated to go up by 1.02% at 95% significance level. Its understandable
that the market actually reacts stronger for the plaintiff rather than for the defendant, since the
plaintiff loses its competitive edges on the lawsuit when the defendant rebuts the plaintiffs claim
with evidences.
Table 5. CAR for category favorable court decisions for the plaintiff
Plaintiff
P+ all Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 2.17% 2.16% 1.51% 2.09% 2.08% 1.90%
Cross t-test 1.265 1.34 0.733 1.287 1.347 0.919
Defendant
Value-weighted Equal-weighted
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7-day 5-day 3-day 7-day 5-day 3-day
CAAR -0.05% 1.14% 1.62% -0.17% 0.52% 1.26%
Cross t-test -0.04 1.145 0.937 -0.133 0.673 0.843
The category favorable court decisions for the plaintiff is comprised of the following events:
- Court orders granting preliminary injunctions
- Court orders granting sanctions
- Court filings and decisions granting damage awards
- Court rulings that plaintiff won on patent infringement
o Patent infringed
o Patent found not invalid
o Patent found not unenforceable
- Settlements: defendant to pay one-time fees and/or ongoing loyalties
It appears that in general, favorable court decisions for the plaintiff do not have material
influences on neither the plaintiffs nor the defendants market returns. Its possible that because
some courts determinations are implied or can be inferred from previous courts activities.
Therefore, we will break these decisions down to a few major categories and analyze them
independently.
Table 6. CAR for category settlements: defendant to pay
Plaintiff
Settle D
pay
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 5.13% 4.36% 5.12% 5.78% 5.22% 6.72%
Cross t-test 0.977 0.812 0.791 1.262 1.086 1.110
The Market Effects of Smartphone Patent War Tian Zou
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Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.34% 1.85% 2.33% 0.18% 1.17% 1.90%
Cross t-test 0.219 1.885 1.047 0.103 1.936* 0.996
The category settlements: defendant to pay is comprised of the following events:
- Settlements: defendant to pay one-time fees and/or ongoing loyalties
Even though it appears that there is a positive influence of settlements of which the defendant
has to pay on the plaintiffs market performance that the CAAR is from 4.36% to 6.72%, the
return, however, is not statistically significant. Therefore, we cannot generalize that settlements
with defendants payments have material influence on the plaintiffs stock performance.
Looking at the defendants side, even though the defendant has to pay one-time fee and/or
ongoing royalties, the market is actually reacting positively with 1.17% abnormal return for a 5-
day window to the event, and it is significant at 90% level. It makes sense if we interpret the
settlement as now that there is less uncertainty on the defendants position, and the defendant can
focus on innovations with better access to competitors patent portfolio rather than expensive
litigations.
Table 7. CAR for category damage awards
Plaintiff
Damage Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 1.62% 1.81% 0.19% 1.26% 1.76% 0.17%
Cross t-test 17.770** 1.401 0.171 14.951** 1.415 0.161
Defendant
Value-weighted Equal-weighted
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7-day 5-day 3-day 7-day 5-day 3-day
CAAR N/A
Cross t-test N/A
The category damage awards is comprised of the following events:
- Court filings and decisions granting damage awards
From the table, we can see that being granted damage awards has a positive return of 1.26% to
1.62% on a 7-day window, and it is statistically significant at 95% confidence level.
There is not enough data to study the influence of damage awards on the defendant since the
prices of foreign stocks were not collected.
Table 8. CAR for category sanctions
Plaintiff
Sanction Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.85% -0.53% -3.38% -2.07% -0.92% -3.74%
Cross t-test -0.887 -0.458 -2.108* -0.996 -0.818 -2.271*
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR N/A
Cross t-test N/A
The category sanctions is comprised of the following events:
- Court orders granting sanctions
Surprisingly, sanctions actually have a negative influence on the plaintiffs stock performance
that it causes -3.74% to -3.38% abnormal return on a 3-day window. This is possibly because of
the nature of the cases we studied. For the sanction cases, the plaintiff actually both received
The Market Effects of Smartphone Patent War Tian Zou
27
from and had to pay for sanctions to the other party, so this complicated the situation and market
might reacted differently from what we expected.
There is not enough data to study the influence of sanctions on the defendant since the prices of
foreign stocks were not collected.
Table 9. CAR for category injunctions granted
Plaintiff
Inj granted Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 2.53% 2.37% 1.28% 2.10% 1.96% 1.33%
Cross t-test 1.596* 1.643* 0.921 1.22 1.2 0.971
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR N/A
Cross t-test N/A
The category injunctions granted is comprised of the following events:
- Court orders granting preliminary injunctions
The market reacted positively towards injunctions granted to the plaintiff. Abnormal return for a
7-day window is 2.53% and for a 5-day window is 2.37%; both are significant at 90% level.
There is not enough data to study the influence of injunctions on the defendant since the prices of
foreign stocks were not collected.
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Table 10. CAR for category unfavorable court decisions for the plaintiff
Plaintiff
P- all Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.65% 0.57% -0.25% 0.68% 0.55% -0.39%
Cross t-test 0.705 0.748 -0.353 0.776 0.772 -0.565
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.62% 0.71% 0.04% 0.96% 1.38% 1.08%
Cross t-test 0.547 0.65 0.067 0.773 1.081 1.058
The category unfavorable court decisions for the plaintiff is comprised of the following events:
- Court orders denying or dissolving preliminary injunctions or permanent injunctions
- Court filings and decisions reducing damage awards
- Court rulings that defendant won on patent infringement
o Patent non-infringement
o Patent invalidity
o Patent unenforceability
- Settlements: plaintiff to pay one-time fees and/or ongoing loyalties
- Settlements: cross-licensing
- Dismissals: voluntarily dismissed by plaintiff with no agreements reached, or dismissed
by court
Similar to our previous study of favorable court decisions, unfavorable court decisions for the
plaintiff do not have material influences on neither the plaintiffs nor the defendants market
returns. Again, it could be due to the fact that some courts determinations are implied or can be
inferred from previous courts activities.
The Market Effects of Smartphone Patent War Tian Zou
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Therefore, we will again break these unfavorable court decisions to the plaintiff down to a few
major categories and analyze them independently.
Table 11. CAR for category dismissals
Plaintiff
Dismiss Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -0.70% 0.12% 0.36% -1.08% -0.37% -0.07%
Cross t-test -2.333* 0.556 1.796 -2.061* -1.268 -0.534
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.01% -0.81% 0.41% -1.08% -1.07% 0.20%
Cross t-test -0.416 -0.416 0.265 -0.425 -0.556 0.135
The category dismissals is comprised of the following events:
- Dismissals: voluntary dismissals by plaintiff with no agreements reached, with or without
prejudice
- Dismissals: dismissals by court, with or without prejudice
Dismissals have negative impact on the plaintiffs market performance; abnormal return for a 7-
day window is between -0.7% to -1.08%, and its significant at 90% significance level. A
negative impact is expected since the plaintiff has put substantial amount of time and energy to
pursue the lawsuit but has not succeeded in asserting against the defendant.
Table 12. CAR for category injunctions denied
Plaintiff
Inj denied Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.00% -0.74% -0.55% -0.64% -0.55% -0.75%
The Market Effects of Smartphone Patent War Tian Zou
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Cross t-test -0.822 -1.777 -0.391 -0.676 -0.951 -0.56
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.01% -0.81% 0.41% -1.08% -1.07% 0.20%
Cross t-test -0.416 -0.416 0.265 -0.425 -0.556 0.135
The category injunctions denied is comprised of the following events:
- Court orders denying or dissolving preliminary injunctions or permanent injunctions
The market is neutral when either motions to injunctions got denied or previously granted
injunctions got dissolved. It could be that the public understands the nature of the game that
injunction is rarely granted and less likely to sustain.
Table 13. CAR for category settlements: plaintiff to pay
Plaintiff
Settle P
pay
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR -1.31% -1.40% -3.23% -0.38% -1.32% -3.39%
Cross t-test -0.342 -0.398 -1.184 -0.101 -0.405 -1.298
Defendant
Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.81% 0.41% 0.57% 3.17% 4.02% 5.59%
Cross t-test 1.747 20.25*** 8.41*** 13.035*** 2.143* 2.166*
The category settlements: plaintiff to pay is comprised of the following events:
- Settlements: plaintiff to pay one-time fees and/or ongoing loyalties
- Settlements: cross-licensing
From the table, we can see that there is actually a strong positive market reaction to settlement
situations when plaintiff is the party to pay for fees and/or royalties. Since in general the market
The Market Effects of Smartphone Patent War Tian Zou
31
would assume defendant is the party who is more likely to pay for damages caused due to
unauthorized uses of patented technologies, having plaintiff to be the party ending up paying for
settlements is expected by the author to induce positive reaction for the defendant.
Conclusion
The battle over smartphone patents has been going on for the past seven years, and its very
likely to continue in the future as long as there is a great demand in the market. We do agree that
it is necessary for players to take legal actions to defend themselves, but what would be the costs
for them to do so?
We used event study method to identify and understand the impact of legal actions taken by the
plaintiff and the defendant as well as courts rulings on involved parties performances in the
public market. After taking into considerations of the capability of generalization over the
number of cases we studied as well as adjusting to their nature, we find that the following events
do have statistically significant influences on the plaintiffs stock performances:
Positive abnormal returns:
- category plaintiff filings
- category damage awards
- category injunctions granted
Negative abnormal returns:
- category defendant counteractions
The Market Effects of Smartphone Patent War Tian Zou
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- category dismissals
And these events have statistically significant influences on the defendants stock performances:
Positive abnormal returns:
- category defendant counteractions
- category settlements: defendant to pay
- category settlements: plaintiff to pay
These results show that the plaintiff is actually more likely to be negatively affected by legal
actions. The study results confirmed that smartphone patent war does have significant effects on
involved parties market performances. Our findings are important even outside of the litigation
context. Firms need to be more careful in order to manage their brand recognition and recognize
that their litigations have material impacts on investors expectations.
We found that litigations have unavoidable and significant influences as well as business costs to
companies, but at the same time, they do offer firms opportunities to generate additional revenue
through damage awards and ongoing loyalties. And the goal for many smartphone participants is
experiencing better sales and dominating the market by slowing down competitors in a series of
lawsuits. Intuitively, however, these litigations would reduce smartphone players incentives to
innovate. The smartphone industry is extremely dynamics and is subject to rapid changes. As far
as we are concerned, there is no clear winners or losers in the patent war, but we are glad to see
that companies are becoming more willing to settle cases. We hope that with time, firms will
focus more on research and development rather than litigations.
The Market Effects of Smartphone Patent War Tian Zou
33
Reference
Gartner:
http://www.gartner.com/newsroom/id/2665715
CRSP:
http://www.crsp.chicagobooth.edu/products/documentation/stock-file-indexes-0
Online articles:
http://www.metrocorpcounsel.com/articles/21011/smartphone-patent-wars-us-perspective
http://www.eventstudytools.com/significance-tests
Papers:
http://lipas.uwasa.fi/~sjp/articles/sp_acta_wasaensia_143_327-354.pdf
http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1554&context=facpubs
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340899
http://www.scirp.org/journal/PaperDownload.aspx?paperID=28079
http://object.cato.org/sites/cato.org/files/serials/files/regulation/2012/5/v34n4-1.pdf
http://www.hbs.edu/faculty/Publication%20Files/14-015_8483575c-1f96-4a34-bcbf-
c83d99da8959.pdf
http://www.simon.rochester.edu/fac/warner/jerry%20papers/jfe-september%2080.pdf
Research:
The Market Effects of Smartphone Patent War Tian Zou
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http://www.pwc.com/en_us/us/forensic-services/publications/assets/2013-patent-litigation-
study.pdf
http://www.whitehouse.gov/sites/default/files/docs/patent_report.pdf
http://www.gao.gov/assets/660/657103.pdf
http://www.ambercite.com/downloads/The%20Smartphone%20Patent%20Wars%20whitepaper_
March%202011.pdf
http://www.rpxcorp.com/wp-
content/uploads/2014/01/2A01E1CD29DA06AB8C95399AE5D04919.pdf
USPTO:
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/naics/stc_naics_wgall/all_stc_naics_wg.htm
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/telecomm.htm#PartB
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/h_at.htm