Tort Reform and IP Litigation in the State of Texas

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1 From PI to IP : Yet Another Unexpected Effect of Tort Reform Ronen Avraham * John M. Golden * July 2014 [DRAFT: PLEASE DO NOT CITE OR QUOTE WITHOUT PERMISSION] * Professor in Law, The University of Texas at Austin. For helpful comments and input, the authors thank David Abrams, Alma Cohen, Allan Ferrel, Michael Frakes, Mark Lemley, Jonathan Masur, Michael Meurer, Michael Risch, Pam Samuelson, David Schwartz, Ted Sichelman, Charles Silver, Matthew Spitzer, Melissa Wasserman, Heidi Williams, prior anonymous reviewers, and participants in the 2012 Empirical Patent Law Conference sponsored by Cornell Law School and the University of Illinois College of Law, the 2012 Intellectual Property Scholars Conference, the University of Texas School of Law s Drawing Board workshop. The authors thank Melissa Bernstein, Ross MacDonald, Grace Matthews, and Jane O Connell for research assistance. The first part of the title is in quotation marks because it was also the first part of the title for a 2005 news story in the journal IP Law & Business (Cohen 2005). 1

2 Abstract Is there a connection between state-law tort reform and the explosive growth of U.S. intellectual property (IP) litigation? The tort reform literature has established that the number of tort claims in states with tort reform has gone down. How do personal injury (PI) plaintiff lawyers deal with the decrease in the demand for their services? How do district court judges respond to the lightening of their dockets due to the reduction in tort suits? There is anecdotal evidence that some proportion of PI lawyers have switched substantially to IP and that some judges find ways to attract IP litigation in the wake of a decrease in PI litigation. Using data gathered from multiple sources, including Lex Machina, DocketX, the National Practitioners Databank and the Database of State Tort Law Reforms, we find evidence that tort reform has a statistically significant impact on intellectual property litigation. Specifically, we are the first to find that state tort reform is associated with statistically significant and substantial increases in copyright and patent filings in U.S. district courts in the states where tort reform has occurred. In contrast, our study does not indicate a similarly significant increase in trademark and trade secret filings. In this paper, we explore multiple potential explanations for the increase in patent and copyright filings after tort reform and the lack of such increase for trademark and trade secrets filings. We consider two competing hypotheses for this phenomenon. The retooling hypothesis suggests that tort reform causes PI attorneys or would-be PI attorneys to migrate to other areas of practice such as IP. Alternatively, the explanation might be court-centered in accordance with what we call a vacuum hypothesis. Under the vacuum hypothesis, a post-reform decrease in docket congestion creates a vacuum that could make a state s U.S. district courts significantly more attractive for IP filings, either directly by making litigation in those courts likely to be speedier or indirectly by leading to court actions, such as adoption of local rules for IP litigation, that increase the courts attractiveness to IP plaintiffs. We call the direct-effect and indirect effect variants of the vacuum hypothesis the passive-court variant of the vacuum hypothesis and the active-court variant of the vacuum hypothesis, respectively. Explanation of a comparative lack of tort-reform impact on trademark and trade secret litigation in U.S. district courts is possible under the retooling hypothesis and both variants of the vacuum hypotheses. The paper analyzes the plausibility of these hypotheses in light of the paper s newly developed empirical evidence as well as other available data. 2

3 The first two thirds of my career were PI, and now it s IP. 2 [I]f I wanted some interesting cases to work on, I might consider adopting these patent rules. 3 I. Introduction Something interesting happened in Texas in the first decade of the twenty-first century. The United States District Court for the Eastern District of Texas saw a jump in its patent filings. With some ups and downs, this jump has been sustained to the present day. In 2002 and the years before then the Eastern District had about 30 patent filings per year. In 2003 the number of patent filings in the Eastern District jumped to 52, in 2004 to 103, and in 2007 to 358. Annual patent filings in the Eastern District fell a bit as did national filings during the Great Recession but remained consistently above 200. Annual patent filings in the Eastern District then rose to unprecedented heights after the recession and 2011 changes to the Patent Act. During that same decade, the other three districts in Texas did not see much or as much of a change in their patent filings. Instead, the other three districts mostly saw a jump in their copyright filings, although this jump lasted only a few years before copyright filing numbers returned to their early 2000s level. What can explain these jumps? On February 22, 2005 the Eastern District of Texas adopted local rules for the practice and management of patent cases that regulate the timing of disclosures of party contentions, document production, and discovery and filings relating to patent claim construction. (E.D. Tex. Local Patent Rules 2014; Leychkis 2007, p.209) As these rules arguably made the district a more favorable forum for plaintiffs looking to file patent-infringement suits, their adoption could have explained the jump in patent filings but for the 2 Carl Roth, one of the best known personal injury (PI) plaintiff s lawyers in Marshall, Texas, has become, after Texas 2003 reform, a go-to local lawyer for intellectual property (IP) cases (Carter 2006). 3 Judge T. John Ward as paraphrased by Judge Leonard Davis (Nguyen et al. 2011). 3

4 fact that the jump really started in 2003 and was very pronounced already in The local patent rules adopted by the Eastern District court likewise appear unable to explain an essentially simultaneous jump in copyright cases. One naturally wonders what else might have happened in Texas in the early 2000s that could be related to the jumps in patent and copyright filings. One event that has attracted our attention is the 2003 approval by Texas voters of a referendum that amended the state's constitution to allow legislative caps on non-economic damages in medical malpractice suits. Could there be a connection between Texas tort reform and the explosive growth of intellectual property (IP) litigation in Texas? If yes, in what ways exactly? Is this effect unique to Texas or is it something that other states also experienced? This paper provides answers to all these questions. We find that tort reform is associated with substantial and statistically significant increases in copyright and patent filings but has no such association with changes in trademark and trade secret filings. We find that the relationship between tort reform and increased copyright and patent filings is true not only for Texas, but also for other states that have enacted tort reform. Further, a number of factors suggest that this relationship is causal, with tort reform effectively leading to increased in-state copyright and patent filings. As a robustness check on our analysis we use payment data from the National Practitioners Data Bank which has been widely used by scholars to proxy liability pressure for potential targets of tort litigation and that might similarly proxy the intensity of opportunities for gain through tort litigation for attorneys. Consistent with our other findings, we find that a reduction in this proxy for liability pressure is associated with an increase of IP filings. As to what explains that increase, we explore various hypotheses and conclude that our current data is well explained by a retooling hypothesis, under which we expect PI attorneys to move to other fields, including IP litigation, in the wake of state tort reform and to bring a disproportionate share of their court business to U.S. district courts located within the state of reform. The notion that state tort reform generates significant and substantial impacts on the filing of federal IP cases in U.S. district courts can seem counterintuitive. Thus, we start by explaining the theoretical plausibility for the connection between tort reform and IP filings. 4

5 Tort reform has been a major concern in the United States for decades, with the reining in of medical malpractice suits being a common focus. Reforms of medical malpractice law have held a central place on many state legislative agendas. Dozens of different reforms have been enacted, struck down, or reenacted in recent decades (Avraham 2014). Even at the national level, tort reform has made an appearance. Indeed, no fewer than 16 bills to federalize the various aspects of medical malpractice law (currently governed by state common law) have been debated in the U.S. Congress over the last decade. Republicans made tort reform a major component of the 2010 midterm elections. In 2011 the U.S House Judiciary Committee approved a reform bill seeking to cap damages in medical malpractice suits. The various impacts of tort reform have been widely explored (Eisenberg 2014). Previous scholarship has indicated that tort reform decreases payouts (Avraham 2007). One of the most established findings, and one which makes total sense, is that tort reform reduces the number of medical malpractice claims (Paik, Black, Hyman, Sage & Silver 2009; Avraham 2007). Because tort reform reduces plaintiffs recoveries and/or the probability of recovering, and because plaintiffs lawyers commonly work on a contingency fee basis, tort reform likely makes it harder for many plaintiffs to find a lawyer who will take their case (Daniels and Martin (2011) pp , Van Hoy (1999) p.364). Indeed, this effective restriction of access to legal services, as well as the associated displacement of attorneys to other work, is presumably an intended result of much tort reform. Stephen Daniels and Joanne Martin have described the logic of an apparently typical pro-reform argument as follows: If medical malpractice cases become less profitable, then plaintiffs lawyers (presumed to be rational, self-interested actors) will be less interested in handling such cases and move on to other, more profitable markets. (Daniels and Martin 2011, p.636). The result can be real change in the civil justice system as lawyers move to new practice areas and away from older ones. (Daniels and Martin 2002, p.1824). When state tort reform discourages plaintiffs lawyers from taking on personal injury cases or other cases affected by the reform, what do lawyers do? There is some evidence that some of them go to states without tort reform, but there is also evidence that many of them retool in order to switch specialties (Carter 2006; Daniels & Martin 2002; Daniels & Martin 2006). Further, there is anecdotal evidence that one of the areas toward which personal injury ( PI ) lawyers or at least PI lawyers based in Texas gravitate is 5

6 intellectual property ( IP ) (Carter 2006; Taylor 2010, p.2). Such gravitation might reflect rational economic behavior as tort lawyers (or otherwise tort-lawyers-to-be) look for a next-best specialty area that offers viable work opportunities with the prospect of a relatively high rate of remuneration. Of course, if plaintiffs PI lawyers have less work, so will defendants attorneys, and thus the latter might also need to find other cases on which to work. We call this the retooling hypothesis. But lawyers are not the only part of the legal system impacted by tort reform. The court system is also influenced by a drop in the number of PI cases. This can trigger many things, but two that are related are worth mentioning here. First, fewer tort cases to occupy courts time might mean that courts will be able to resolve other cases more quickly, thus making the courts more attractive to plaintiffs lawyers filing non-tort lawsuits. Just as, loosely speaking, [n]ature abhors a vacuum (Holton and Brush 1985 p.299) judges or litigants might tend to work to fill a depopulated docket. We call this the passive-court variant of the vacuum hypothesis. Under the passive-court variant of the vacuum hypothesis, decreases in tort filings open room for IP cases to fill courts dockets, without regard for whether those IP cases are brought by retooling in-state tort attorneys or by in-state or out-of-state attorneys who experience little to no direct impact from state tort reform. In essence, the passive-court variant of the vacuum hypothesis is one under which litigants flow to district courts not because of any specific court initiatives or even substantially because of in-state attorney retooling, but more simply because those courts dockets have been relatively depopulated by tort reform and thus more attractive to litigants seeking courts with relatively low caseloads. Second, judges who see a decrease in the number of cases before them might have their own incentives to seek other work. Because Article III of the U.S. Constitution protects the salary and tenure of federal district court judges, they might, unlike some state court judges, be expected to lack relatively direct financial incentives to maintain their workload. But judges might have other relevant motivations, such a basic yearning for interesting cases or a desire for the prestige or feeling of importance that can come from deciding cases somehow perceived as important. Statements by judges from the Eastern District of Texas suggest that this judge-centered dynamic might have been at work in that district and thus might provide at least a partial explanation for post-tort-reform growth of patent filings in that district (Davis 2011, pp ; Taylor 2007, p.572). In short, even without the transitioning of significant numbers 6

7 of PI lawyers to IP, there could be court-centered mechanisms by which state tort reform leads to increased IP filings. We call this the active-court variant of the vacuum hypothesis. The retooling hypothesis and the two variants of the vacuum hypothesis are not mutually exclusive theories. At least in principle, they could all have contributed to the post-tort-reform increases in tort filings that we observe. Nonetheless, we try to disentangle the paths of causation suggested by these different hypotheses. We most specifically explore the potential role of judges in filling the vacuum via changes to local rules for patent cases (consistent with the active-court variant of the vacuum hypothesis), analyzing this as a possibility that operates separately from the parallel possibility that plaintiffs attorneys retool to IP once PI avenues have been blocked, thus helping fill any docket vacuum created by tort reform without need for a rule change (consistent with the retooling hypothesis). We do not directly test for the passive-court variant of the vacuum hypothesis as opposed to the retooling hypothesis, but we do look to see whether case-specific litigation data can shed light on whether one or the other of the passive-court vacuum hypothesis or the retooling hypothesis was at work. More particularly, in this paper we explore the potential impact of tort reform and local patent rules on court filings by exploiting five main datasets. First, to track state tort reform, we use the Database of State Tort Law Reform ( DSTLR 5th ), a dataset that documents dozens of reforms in all 50 states and Washington, D.C., since the 1980s. Second, as an alternative measure for a reduction in liability pressure, we use data about payments made in medical malpractice cases in all 50 states and Washington D.C., using the National Practitioners Data Bank (NPDB). Third, we use a new dataset, the Lex Machina database originally known as the Stanford Intellectual Property Litigation Clearinghouse). Lex Machina purports to provide comprehensive electronic data on patent lawsuits and substantial but less comprehensive coverage of copyright, trademark and trade secret lawsuits filed in U.S. district courts since 2000 more than 25,000 suits in all. (Lex Machina 2011). Fourth, we use a dataset on patent litigation provided by DocketX, a provider of data on patent litigation that, unlike Lex Machina, focused on patent litigation only. In addition to data on numbers of court filings that we were able separately to obtain through Lex Machina, DocketX provided spreadsheet data on details of patent cases such as the number of law firms involved, number of out-of-state law firms, etc. Our hope was that, with this additional litigation data, we might identify 7

8 case-specific characteristics whose behavior over time would effectively distinguish between the retooling hypothesis and the two variants of the vacuum hypothesis, but as we explain, so far we have not identified such distinguishing characteristics. Finally, to explore the viability of the active-court variant of the retooling hypothesis, we examine potential impacts of local patent rules on the numbers for patent case filings. For this purpose, we use hand-collected data on local patent rules adopted by U.S. district courts. Included in the rules dataset are rules that we view as regulating the management of patent cases substantially enough to generate a reasonably plausible possibility that the relevant districts might be viewed as more desirable fora for the efficient and effective resolution of patent cases. (Excluded were more trivial versions of rules, such as rules simply requiring that copies of any asserted patents be attached to a plaintiff s complaint.) We find that tort reform is associated with substantial and statistically significant increases in copyright and patent filings but has no such association with increases in trademark and trade secret filings. The association with increased patent and copyright filings is statistically significant at the 1% level and robust to various ways of capturing tort reform. Similarly, using data from the NPDB we find that reductions in winning judgments for the plaintiff is associated with an increase in patent and copyright filings. One potential explanation for the lack of a similar effect on trademark and trade secret filings is that, to the extent tort reform produced an increase in trademark or trade secret filings, that increase could have been concentrated in state courts (which Lex Machina does not cover), rather than federal district courts, which have exclusive original jurisdiction over patent and copyright cases but do not have exclusive jurisdiction over trademark and trade secret cases. Our efforts to determine which of the retooling and vacuum hypotheses best explain our data have generated a number of additional findings. First, we find no evidence to support the active-court variant of the vacuum hypothesis. Specifically, despite prior accounts describing local patent rules as significant attractors of litigation (Liang 2010, p.43; Nguyen et al. 2011, pp ), we find no evidence that local patent rules adopted by district courts had any significant impact on patent filings. Also interestingly, we find no significant association between state tort reform or liability pressure and case-specific characteristics for patent litigation such as the per-case numbers of plaintiffs or defendants law firms located in state or out of state. The lack of such an association would conflict 8

9 with an additional in-state-attorney hypothesis that, under the retooling hypothesis, a tort-reform-related increase in local IP litigation would likely involve in-state lawyers disproportionately. But as discussed below, there are independent reasons to doubt this in-stateattorney hypothesis and its failure s capacity to distinguish between the retooling and vacuum hypotheses with respect to their likely validity. In contrast, various other pieces of evidence, including finer statistical differences between the associations of copyright and patent filings with tort reform, appear to support the retooling hypothesis in particular. Thus, we believe that our study provides statistical evidence for the retooling hypothesis, which resonates with anecdotal attorney lore but for which we have not seen prior statistical evidence. 4 Regardless of whether the retooling hypothesis or the passive-court variant of the vacuum hypothesis ultimately proves better as an explanation of IP filings growth, our existing study points to yet another unanticipated impact of tort reform, potential spillover effects of tort reform on other areas of litigation. II. Forming Hypotheses Perhaps unsurprisingly, the clearest result of tort reform appears to have been its negative impact on the value and frequency of targeted forms of tort litigation. Avraham (2007) has explored more than 100,000 medical malpractice payments in all 50 states over a period of 4 A more direct way to support the retooling hypothesis would be to count the number of lawyers practicing torts and IP in each state and year. We sought to collect such data through a number of approaches, for example, by successfully obtaining state-by-state membership numbers for the American Intellectual Property Law Association. But the AIPLA data failed to look suitable for our purpose, and attempts to obtain sufficiently reliable systematic data on individual attorneys practice areas did not succeed. 9

10 8 years and concluded tort reforms reduced the number of annual payments by 10% 13%. Paik, Black, Hyman, Sage & Silver (2010) have documented a reduction in frequency of malpractice claims of 64% for adults and 40% for babies in Texas after the 2003 tort reform. Similar results have been reported by many others. (Danzon 1986; Mello & Kachalia 2010; Spurr & Simmons 1996; Morlock & Malits 1993; Durrance 2010; Kachalia & Mello 2011). Tort reform has also been found to have an impact on employers health insurance premiums (Avraham et al. 2012) and on health insurance coverage (Avraham & Schanzenbach 2010). This paper is the first to indicate that tort reform has a statistically significant spillover effect on patent and copyright filings. The next subsections discuss potential explanations for such a spillover effect. a. The retooling hypothesis One of the less discussed impacts of the reduction in medical malpractice lawsuits is plaintiffs lawyers loss of cases. Personal injury (PI) lawyers are specialists. For many of them up to 85% to 95% of their cases are personal injury cases (Daniels & Martin ). One personal injury Texas lawyer described the consequent impact of Texas tort reform as follows: My income has dropped to probably 10 percent of what I made in 2003 (Carter 2006). What did personal injury lawyers in states that enacted tort reform do? Some solo practitioners closed their practice. Others reduced the size of their firm, especially by cutting support stuff. Others increased advertising and started to cherry-pick cases with welloff clients who could show economic damages (Daniels & Martin ). Others have mov[ed] out of the market altogether and look[ed] into other areas of contingency fee work, like business litigation. (Daniels & Martin 2011). Indeed, there is anecdotal evidence that a number of medical-malpractice plaintiffs lawyers began showing up at intellectual property seminars (Carter 2006). Indeed, as another personal injury Texas lawyer has explained: You just have to replace practice areas the law takes away from you. We ve added a business section doing contingency fee cases, including intellectual property. (Carter 2006). Another trial lawyer from East Texas was quoted as saying: [B]efore tort reform, a lot of us used to try tort cases, but not anymore. And likely the time will come when 10

11 patent reform happens and maybe we will not try patent cases anymore. (Carrol 2011, p.243). News stories in Texas have painted Marshall, a city in East Texas that is the seat of a U.S. District Court, as destination sort of plaintiffs lawyers heaven, an oasis for Texas lawyers hurt by tort reform who were eager to get in on intellectual property litigation (Cohen 2005; Carter 2006; Creswell 2006). 5 Although some might wonder about the competence of tort attorneys moving into IP litigation, high-end plaintiffs attorneys, such as many medical-malpractice attorneys, are commonly accustomed to complex litigation on technical matters that require significant evidentiary development and use of outside experts (Daniels & Martin 2011, p.657 & pp ). A move into IP by such attorneys is far from implausible in light of the substantial shift into patent litigation, arguably the most technical area of IP litigation, that many general-practice law firms have made over the past few decades, in part by effectively hiring experts in the form of established IP lawyers who previously worked at patent-focused boutique firms (Plager 2001). If all else is equal, we might expect that PI lawyers switching to IP would be more likely to bring IP cases in states where they had formerly been filing PI cases: whether because of convenience or familiarity, there would seem reason to believe that those states host courts in which the relevant plaintiff lawyers would commonly choose or be chosen by clients to bring claims. Of course, this last statement assumes that plaintiffs have a choice. Does the legal infrastructure provide freedom to choose the forum? The answer is that, from at least about 1990 until at least about 2009, plaintiffs lawyers, in combination with their clients, have had relatively wide freedom to choose where to bring IP claims such as patent and copyright claims when those claims implicate nationally marketed and used goods or services. 6 5 Compare Transcript of Oral Argument at 10, ebay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (No ) (statement of attorney for petitioners) ( We re in a world where if a patent holder files a lawsuit in Marshall, Texas, no patent has ever been declared invalid in that jurisdiction, and no patent has ever been found not to [be] infringe[d]. ), with id. at (statements by Justice Scalia) (suggesting that that s a problem with Marshall, Texas, but that patent law perhaps should not be reshaped simply because we have some renegade jurisdictions ). 6 In 1988, Congress amended a general statute regulating venue that made it easier to shop for a convenient forum in IP cases by providing that a defendant corporation would be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time [an] action is commenced. (28 U.S.C. 1391(c), Liang 2010). The amendment was significant for patent litigation, for which statutory law provides for venue in districts where the defendant resides. (28 U.S.C. 1400(b)) Courts had already recognized venue extending as far as personal jurisdiction over copyright litigation based on separate statutory provision for venue in districts in which the defendant or his agent resides or may be found. (28 U.S.C. 1400(a); Kogan v. Longstreet (1974)) Because there is a good 11

12 In late December 2008, the U.S. Court of Appeals for the Federal Circuit acted to limit the effectiveness of a plaintiff s initial choice of venue in patent cases by granting a writ of mandamus for transfer of a case out of the Eastern District of Texas. (In re TS Tech USA Corp 2008; Liang 2010, pp.51-53)) But broad statutory provisions for venue in patent and copyright cases have remained in place, 7 and, although the Federal Circuit s 2008 decision attracted substantial attention, it is not clear that it was associated with a very substantial percentage change in courts transfer practices (Janicke 2009). b. The vacuum hypothesis i. The passive-court variant A different explanation of why IP filings increase with tort reform that is not based on PI lawyers retooling is more court-centered. To the extent state tort reform decreases the number of state tort filings in U.S. district courts located in that state, such reform could generate space in those courts dockets that attracts IP cases. Conventional wisdom holds that plaintiffs are frequently interested in speed in litigation (Lemley 2010 pp.413; Nguyen et al. 2011). Thus, rocket dockets are frequently thought to attract IP filings (Liang 2010, p.44; Lemley 2010, p.415), and the emptying of a court s docket of state tort suits could be associated with a greater likelihood that an IP suit filed there will be resolved quickly. Tort reform in Texas apparently reduced the number of personal injury, products liability, and medical malpractice cases brought in the Eastern District of Texas (Klerman & Reilly 2015 pp.25-26), and because tens chance personal jurisdiction over a defendant will exist in fora where allegedly infringing products or processes occur, extension of venue to encompass all districts in which there is personal jurisdiction over a defendant has helped support a broad capacity for IP forum shopping (Liang 2010 pp 39, Wanat 2008 pp589, Woodhouse 2010 pp 233). 7 In 2011, Congress enacted a major patent reform bill from which venue reform was excluded, although it did include a change to joinder rules that, by restricting the parties who could be joined in a single case, appears to have contributed to a subsequent increase in patent filings. (Cotropia et al. (2014)) 12

13 of thousands of personal-injury tort actions were filed in U.S. district courts on the basis of diversity jurisdiction during each year of our study period, state tort reform might well have impacted the dockets of federal trial courts outside the Eastern District of Texas. 8 As a result, one can hypothesize a passive-court variant of the vacuum hypothesis under which, without courts taking active steps to attract cases, tort reform makes it more likely that plaintiffs will file cases in district courts within a state where reform has occurred. ii. The active-court variant Courts might play a more active role in attracting IP cases than the passive-court variant of the vacuum hypothesis supposes. Whether due to interest in empire building, desire to allay boredom, or simply greater opportunity to do something they would otherwise want to do (Levinson 2005, pp ), judges with time freed from resolving tort suits might facilitate the filing of IP suits in their districts by adopting local rules or other measures that promise to expedite litigation or to streamline it in other ways that are desirable to plaintiffs. A number of scholars have recently embraced this explanation for the growth of various U.S. district courts patent dockets (Anderson 2015; Klerman & Reilly 2015; Sag 2015). Under the resulting active-court variant of the vacuum hypothesis, tort reform plays a less direct role in causing an increase in IP filings within a state. Under the active-court variant of the vacuum hypothesis, tort reform at least partially empties district court dockets, then district judges react by taking steps such as the adoption of local patent rules to attract IP cases, and more IP cases come to relevant districts in response to the steps taken by the judges. c. Distinguishing between the hypotheses 8 Filing numbers were obtained from Table C-2 of the Administrative Office of the U.S. Courts Federal Judicial Caseload Statistics for 2001 to 2014 (Federal Judicial Caseload ). According to such statistics, the numbers of medical-malpractice suits filed in U.S. district courts were much lower than the total number of personal-injury suits, with official statistics indicating that an average of 1485 were annually filed in U.S. district courts from April 1, 1999, through March 31, 2004, and that an average of were annually filed in U.S. district courts from April 1, 2009, through March 31,

14 As noted above, our different hypotheses for how tort reform can lead to increased IP filings are not mutually exclusive. All three mechanisms attorney retooling, passive-court vacuum, and active-court vacuum could be operating at once. But in part because the different hypotheses could have different policy implications, we look to see whether we can rule out one or another hypothesis as a potential explanation for increased IP filings. To test the explanatory power of the active-court variant of the vacuum hypothesis, we look at the association between tort reform and courts local rules (our independent variables) on the number of IP filings within a given district. If courts adoption of substantial local patent rules plays a significant role in attracting IP cases, we would expect that to be reflected in a statistically significant association between IP filings and in-state courts adoption of local patent rules. If a statistically significant association is not seen, that result is a blow to the active-court variant of the vacuum hypothesis because local patent rules have been suggested to be a particularly potent means by which district courts can act to attract patent cases (Liang 2010, p.43; Nguyen et al. 2011, pp ). The passive-court variant of the vacuum hypothesis is harder to distinguish from the retooling hypothesis because neither requires that initiative be taken by courts, institutions that have the advantage from an empirical researcher s perspective of generally being required to act in publicly visible and, commonly, publicly recorded ways. Nonetheless, we have tried to disentangle the passive-court variant of the vacuum hypothesis and the retooling hypothesis by gathering systematic data from DocketX on case-specific characterizes such as the identities, numbers, and listed locations of plaintiffs law firms and defendants law firms in individual patent cases. We conjectured that, if tort reform is associated with a significant change in such case-specific variables, such an associated change would support the retooling hypothesis. Why? All else being equal, the shifting of lawyers traditionally working in field A to field B might be expected to shift, at least to some degree, the way litigation is pursued in field B as immigrant lawyers bring their own special needs, traditions, skills, and knowledge to bear on field B. With respect to needs, lawyers shifting from PI to IP might be expected to partner more often with lawyers from firms more experienced in patent law and litigation, thereby resulting in a higher average number of lawyers or law firms listed as involved in IP cases. With respect to traditions, skills, and knowledge, lawyers moving from PI to IP might bring with them different 14

15 experiences and beliefs with respect to the structuring and financing of litigation. These different experiences and beliefs could lead to different characteristic numbers of lawyers, law firms, plaintiffs, or defendants tending to be involved in patent litigation when these former PI lawyers are playing a more dominant role. In contrast, all else being equal, the two variants of the vacuum hypothesis do not by themselves provide any particular reason to think that increases in IP filings might be accompanied by changes in case-by-case litigation characteristics relating to how litigation is structured. This contrasting expectation results because, at least to a first approximation, we might expect a court vacuum to draw indiscriminately from an essentially established pool of IP litigation, with the result that we might be less expectant of a change in figures relating to the structuring of litigation under variants of the vacuum hypothesis than under the retooling hypothesis. Hence, if we see correlated shifts in figures relating to the structuring of litigation, we could interpret that as at least indirect support for the retooling hypothesis as a separate mechanism operating independently of either variant of the vacuum hypothesis. On the other hand, a failure to see such shifts could simply reflect the failure of the conjecture that retooling brings with it changes in the observed characteristics of the cases. In-state attorneys might predominantly move to IP by partnering substantially with out-of-state lawyers along already familiar lines. Consequently, a failure to see significant shifts in how IP litigation is structured would not necessarily give cause to doubt the retooling hypothesis. III. Identification Strategy a. Data In the first instance, we count the number of patent, copyright, trademark and trade secret filings between 2000 and 2012 using the Lex Machina database formerly known as the Stanford Intellectual Property Litigation Clearinghouse ( IPLC ). Lex Machina purports to provide comprehensive electronic data on every patent lawsuit filed in every district court in all 50 states (plus Washington, 15

16 D.C) since 2000 more than 25,000 suits in all. Over the past three years, a number of scholars have used Lex Machina or its predecessor, IPLC, in their research. 9 As a check on the results from Lex Machina and as a way of investigating the impact of tort reform with respect to additional variables, we also use the DocketX database, a database of U.S. patent cases available through the Academic Expert Group, LLC, that, like Lex Machina, is intended to be comprehensive during the time of our study. With data from the DocketX database, we were able to construct figures for the number of plaintiffs; the number of defendants, the number of listed plaintiff and defendant lawyers; the number of plaintiff and defendant law firms; the number of non-foreign plaintiff and defendant law firms, where in this context nonforeign means that the plaintiff and defendant law firms listed an address in the same state as that of the U.S. district court where the litigation occurred; and the number of foreign plaintiff and defendant law firms.. Our tort reform dataset comes from the fifth edition of the Database of State Tort Law Reforms ( DSTLR 5th ). This dataset, which is discussed at length in Avraham (2014), was assembled by reviewing the laws and court cases of the 50 states (and the District of Columbia) from 1980 to 2012 and comparing them to existing tort law compilations. The process revealed that commonly used dating schemes suffer from missing reforms, missing or erroneously coded effective dates of reforms, and missing or erroneously coded state supreme court decisions striking down or upholding reforms. The DSTLR 5th edition is the most comprehensive and accurate dataset on tort reform legislation to date. Table A of the Appendix lists the states that enacted and repealed reforms during our study period. As Table A reveals, state legislatures enacted or struck down nine types of tort reform during the period under study. However, because we use a difference-indifferences approach, we have sufficient variation during the study period (2000 to 2012) to analyze only three in detail: caps on noneconomic damages, periodic payment reform, and limits on joint and several liability. In addition to our single-reform specifications we also estimate models using a count of these three major reforms as well as a count of all nine reforms enacted during our study years. 9 See, for example, Fromer (2010); Narachania (2010); Durie and Lemley (2010); Sichelman (2010); Offen-Brown (2010); Allison and Lemley (2009); and Chien (2009). 16

17 If tort reform has an impact on IP filings it must be through a reduction in tort-related activity. To directly measure the impact of tort-related activity on IP filings and as a robustness check for the impact of tort reform on IP filings we measure the impact of liability pressure in a given state on IP filings. We constructed this measure using data from the National Practitioner Data Bank (NPDB) where all malpractice payments made on behalf of a licensed health care provider must be reported. We restricted our sample to the fifty states and Washington, D.C, and excluded payments made for U.S. territories. Our final sample consists of 132,745 payments for malpractice occurring between 2000 and Amounts recorded in the NPDB measure the amount of actual payments, not jury awards: if a defendant has malpractice liability coverage for only a smaller amount than the judgment award then the NPDB will record the smaller amount actually paid by the insurer, if plaintiffs settle for a lower amount (to avoid appeals by the defendant), or if the jury award is reduced to comply with state damages caps, the NPDB will record the lower number. Despite limitations (such as the corporate shield loophole and potential underreporting), researchers report that the NPDB is the most representative national database on medical malpractice payments (Baicker and Chandra 2007) and that the size of these potential biases is limited. 10 Through use of this database, we examined positive payments that resulted from either a court judgment or a settlement made outside of the courts. In other words, we could look only at cases where the plaintiff prevailed. b. Reforms 10 The NPDB has been the subject of criticism from the U.S. Government Accountability Office (GAO). One of the major points of criticism is the corporate shield. This loophole renders payments made on behalf of a hospital exempt from inclusion in the NPDB, as long as any individual practitioner is dropped as part of a settlement agreement. The magnitude of underreporting has been assessed to be consistent and approximately 20 percent (Baciker and Chandraw 2007). 17

18 Caps on Noneconomic Damages. Noneconomic damages encompass pain and suffering, loss of enjoyment of life, and loss of consortium. Such damages can comprise a significant fraction of total damage awards and have often been the focus of tort reform advocates (Avraham 2006). Caps vary across many dimensions. Some reforms impose a cap of a fixed dollar amount, while others use a multiplier of the economic damages. Some are indexed to inflation, some are not. In addition, the levels of the caps vary from state to state. By 2012, twenty-six states had capped noneconomic damages. Between 2000 and 2012, twelve states enacted or struck down caps on noneconomic damages. Periodic Payment. Periodic payment reform allows or requires courts to award future damages that are above some threshold, usually $200,000, in periodic installments. This reform eases the burden on the defendant, who can purchase an annuity for that purpose, and potentially increases the burden on the plaintiff, who has to wait longer for complete payment. The reform can help the defendant in another way by potentially relieving the defendant of a portion of his or her due damages if the plaintiff dies before the damages are fully awarded. By 2012, thirty-three states have enacted laws requiring periodic payment of large future damage awards. Between 2000 and 2012, five states enacted this reform. Joint and Several Liability. Under the common law rule of joint and several liability, the plaintiff can collect the entire damages award from any of the defendants found liable in the lawsuit, regardless of a specific defendant s percentage of liability. This allows plaintiffs to pursue defendants with deep pockets and collect the full recovery from them. In medical malpractice cases, the deep pockets are likely hospitals and practice groups. States have limited plaintiffs access to deep pockets by modifying the joint and several liability rule in various ways, primarily by limiting each defendant s liability to its proportional share of responsibility. Because, by common tort law standards, doctors lack deep pockets and recoveries from them are often limited to their insurance coverage policy limits that can be lower than their actual legal liability (see Hyman et. al (2007) for a discussion), joint and several liability reform can in effect limit the amount of recovery a plaintiff can receive, not unlike a cap. Between 2000 and 2012, five states enacted reforms of the joint and several liability rule. 18

19 b. Specifications Our primary specification regresses the number of cases filed in a state on various measures of tort reforms, which vary at the state-year level. We primarily rely on Poisson regressions, but our results do not change qualitatively when we use negative binomial or ordinary least square regressions except that their statistical significance is lower. We report standard errors clustered by state to allow for correlation in the error terms across districts within the same state. The baseline specification is as follows: (1) NumOfFilings it Tort Reform it Year State demographi cs t i it it The subscript i refers to the state and t to the year. TortReformit is an indicator variable that generally takes a value of 1 in the year of the implementation of the reform in question, but that goes from 1 to 0 with a strike-down of a tort reform provision. We present estimates under which the variable TortReformit is sensitive to a single one of the three reforms described above as well as an estimate in which the variable TortReformit is sensitive to the occurrence or nonoccurrence of all three types of reform together. In addition, we report specifications using the sum of these three major reforms. In these specifications, the variable TortReformit can take a value ranging from 0 to 3. This index allows us to test the average impact of introducing an additional liability limitation. Additional aspects of Equation 1 or relevant variants of it deserve mention. Equation 1 includes state and year fixed effects via the variables Yeart and Statei. Equation 1 also includes a time-varying state-specific measure: demographics. Our demographics vector includes population, number of lawyers, number of patents and state Gross Domestic Product (GDP). In addition, although not reflected in Equation 1 itself, we estimate all models both with and without state-specific time trends. Such time trends account for different patterns of development in volumes of litigation across states and help account for the risk of legislative endogeneity, i.e., the risk that pre-existing trends in IP filings are correlated with the passage of tort reform. 19

20 When we explore the impact of district courts adoption of local rules, we run our regressions at the district level. (We also run our tort-reform regressions at the district level as a robustness check and the results remain qualitatively similar to those for regressions run at the state level.) IV. Results We start by showing numbers for IP filings in Texas, which is the state from which we drew most of the anecdotal evidence described in Part I of this paper. Figure 1 shows that trademark filings did not change much after 2003 the year Texas enacted tort reform whereas patent and copyright filings significantly increased after the 2003 reform, although the copyright figures in particular should be taken with more than a grain of salt before comparison with figures for other states because the copyright figures rise and subsequent fall follow a more general national pattern that appears to have coincided with the dialing up and down of a recording industry campaign against copyright infringement through file sharing (Kravets 2010). 20

21 Year # Patent filings # Copyright filings # Trademark filings Figure 1- Number of IP filings in Texas If one assumes that lawyers whose practices are substantially affected by Texas tort reform are lawyers who, in pursuing work in other practice areas, are disproportionately likely to file cases in courts located in Texas, Figure 1 is consistent with the anecdotal evidence we cited above. IP filings grew substantially and significantly after tort reform was enacted in We are interested, however, in exploring to what extent this phenomenon generalizes to other states and also to what extent this phenomenon is robustly distinguishable from national trends a particularly important question, as noted above, in light of the fact that the recording industry s 21

22 mid-2000s litigation campaign, rather than Texas-centered developments, might be hypothesized to account for the spike in copyright filings shown in Figure 1. Tables 1 and 2 present results only for patent and copyright filings, for which federal district courts have exclusive jurisdiction under 28 U.S.C. 1338(a) and which Figure 1 suggests are likely to be of greatest interest. Tables 1 and Table 2 do not report regression results for trademark and trade secret filings. In unreported regressions, we found no significant association between tort reform and trademark or trade secret filings. As explained in Part V below, the differential behavior of trademark and trade secret filings as opposed to copyright and patent filings is explicable under the retooling hypothesis and both variants of the vacuum hypothesis and thus need not detain us here. Table 1 presents the results from Lex Machina data for Poisson regressions estimating the association between tort reform and patent filings. Estimated coefficients transformed to incidence-rate ratios are reported; that is, we report values for exp(b), rather than b. Column 3 in Table 1 shows that periodic payment reform is associated with the largest and most significant change in the number of patent filings. Specifically, enactment of tort reform is associated with the increasing of filings by a factor of 1.43 (p<.05). When state-specific time trends are accounted for, the factor decreases a bit to 1.27, yet still remains highly significant (see column 9). When other reforms are controlled for, the factor associated with periodic payment reform becomes 1.40 (p<.01) in the basic specification, and 1.26 (p<.10) with a state-specific time trend (columns 6 and 12, respectively). Results for the other two types of reform are more muted. Joint and several liability reform is associated with the increasing of patent filings by a factor of 1.24 (p<.01) but only when state-specific time trends are accounted for (see column 8). The impact of joint and several liability disappears when we control for the other two reforms (see columns 6 and 12). The results for regression on reform of caps on noneconomic damages suggest that this reform is not associated with any significant increase of patent filings. We also estimated two types of sum of reforms variables. The sum of the three major reforms was found to increase patent filings by a factor of (p<.01, see columns 4 and 10), depending on the specification. This means that, on average, adding one of the three major reforms increases filings by that factor. Our sum of all 9 reforms variable suggests that enactment of any one of the nine 22