CEO Overconfidence and the Decision to take a Patent Litigation Case to Trial

Litigating against competitors over patent infringement is an integral part of the patent enforcement strategy of firms. An inherent challenge for plaintiff firms is to evaluate the risk/return trade-offs involved in letting a patent litigation case reach the trial stage of the litigation process compared to settling or withdrawing the case before it reaches trial. We reason that the decision to let a case go to trial is not just a matter of legal and technological considerations, but reflects the confidence of a plaintiff’s CEO about whether the heightened risk of handing the decision over to a judge or jury is justified by the additional returns of a positive outcome. We draw on mechanisms from the literature on CEO confidence and integrate them into theoretical models explaining the risk/return considerations of plaintiffs in patent litigation. We predict that the level of CEO overconfidence increases the likelihood for their firms’ decisions to let a patent litigation case go to trial. Furthermore, we isolate the overconfidence mechanism by exploring two moderations that define conditions under which risks and potential returns of patent cases are amplified at the case and the firm level. We predict that the effect of CEO overconfidence is stronger when (a) patents are involved in the litigation that are not yet granted and (b) the firm is financially constrained. We find empirical support analysing a unique dataset of 871 US public firms, 1123 different CEOs and 2634 patent infringement litigations in the US between 2003-2018