The global impact of the COVID-19 pandemic has been both significant and far-reaching. With large swaths of the U.S. economy ground to a halt, experts forecast that the pandemic has sparked what likely will be the worst recession in generations. These are surely unprecedented times, and it is difficult-to-impossible to predict much with any degree of certainty. That said, history has a tendency to repeat itself, and a look back at past economic declines provides a glimpse of what is to come, so that companies, intellectual property practitioners and other stakeholders alike can plan and strategize accordingly.

Economic Downturns: The Basics and Recent History

Our cyclical economy naturally experiences periods of expansion and contraction. These periods of economic contraction, or recessions, have been defined, historically, as two consecutive quarters of decline in gross domestic product (GDP). They are typically characterized by decreases in a number of economic metrics, including income, employment, manufacturing, and retail sales, with the most recent periods of economic contraction being the Great Recession of 2008, the early 2000s dot-com bust, and the savings and loan crisis of the early 1990s.

The COVID-19 outbreak has triggered a new state of uncertainty, with economists now confirming we are in a recession. Unemployment in the United States rose to 16% in April, from 4.4% in March, with economists estimating the jobless rate could approach the peak of 25% reached during the Great Depression. Interest rates have been lowered to near zero, the lowest since 2008, and the stock market has experienced extraordinary volatility, with the Dow Jones Industrial Average recently recording the worst one-day point drop in its history. As companies muscle through the current economic environment, many are trying to project, to the extent possible, what is to come in the near term—including with regard to intellectual property strategy, both in terms of patent litigation and patent prosecution.

Patent Litigation: An Increase on the Horizon?

Patent practitioners have historically offered two competing theories about how periods of economic contraction affect patent litigation in the United States. The first, the "capital constraint theory," argues that economic downturns tend to reduce patent litigation due to restrictions on available capital. According to the theory, the economic downturn causes companies to hunker down and look for places to reduce spending, including legal spend on non-essential litigation matters. The alternative theory, the "substitution theory," posits that economic downturns actually increase patent litigation and licensing efforts, as companies seek new revenue streams to compensate for decreased profits on sales of products and services. Both theories are logical and have some merit. So which theory is correct, and how can we estimate the impact of the current economic downturn?

An insightful 2015 study suggests that both theories are, to some degree, correct—patent litigation may increase or decrease during and immediately following an economic downturn depending on the nature of the downturn. Marco et. al., Do Economic Downturns Dampen Patent Litigation?, 12 J. Empirical Legal Stud. 481 (2015). According to the study, there is no one-size-fits-all approach to how an economic downturn has historically impacted U.S. patent litigation filings—rather, specific macroeconomic indicators such as real aggregate GDP, outside investment, real interest rates, investment in research & development, and the TED spread (a measure of the perceived credit risk in the U.S. economy) all play a role. Id.

The study found that patent litigation tends to increase when real aggregate GDP, investment, and real interest rates all decrease, and when there is little to no constriction in available capital. Id. Alternatively, patent litigation tends to decrease in a downturn when available capital becomes limited, GDP remains fairly stable, investment increases, and the TED spread sharply increases. Id.

Using the Great Recession of 2008 as the most recent example, the number of patent litigation filings in the United States dropped in 2008 and then again 2009. That financial crisis was characterized by severe constraints on capital and financing—banks were failing, and capital and credit were unavailable. The TED spread also spiked dramatically, more than quadrupling to a peak of over 4.5% in 2008, suggesting massive perceived credit risk across the economy. During the same period, U.S. GDP remained fairly stable. These indicators were tied to the decrease in patent litigation filings in that period.

Looking to the current economic climate, these same macroeconomic indicators may offer a glimpse at what the future holds with respect to patent litigation. The GDP is surely in decline as a result of the partial global shutdown—economists predict world economic activity will decline by 1.9% this year, with U.S. GDP to fall by 3.3%. See "Global Economic Outlook—Coronavirus Crisis Update 2 April 2020," Fitch Ratings (April 2, 2020). Interest rates are near-zero. And while the TED spread rose in late March to almost 1.5% following weeks of coronavirus developments in the United States and the accompanying economic anxiety, it has since stabilized below 0.5%.

These macroeconomic factors considered together may call for an increase in patent litigation in the near term. U.S. GDP growth was already slowing and is now expected to decline. But, importantly, the banks are not in jeopardy, as they were in 2008, and as a result, and aided by massive economic stimulus, capital, credit, and risk have not been affected as they were in 2008. And while the TED spread approached 1.5%, it has since receded to below 0.5%, nowhere near the 4.5% peak in 2008 that reflected the tremendous perceived economy-wide credit risk in that period. Many economists believe the economy now is simply more fundamentally sound than it was in the lead-up to 2008.

The emergence of litigation finance, particularly in IP cases, is another factor that was not in play in 2008. Recent years have brought a rise in significant third-party investment in commercial litigation by entities seeking alternative investment vehicles. See Lundberg, G.A., Litigation finance in a down economy benefits lawyers, clients alike, Bloomberg Law (March 24, 2020). These litigation funders have increasingly become interested in patent litigation in particular—and these investments are not limited to "patent trolls," or patent holding companies, as may previously have been the case. More recently, university tech transfer offices and large operating companies have been increasingly exploring and accessing litigation finance in their IP enforcements, both to address corporate budgetary constraints and as a means for sharing risk. And in highly volatile economic climates, litigation finance can provide the ultimate hedge, untethered to markets or other economic forces.

This convergence of circumstances—both in the macroeconomic indicators, and the litigation funding environment—may suggest an increase in patent litigation is on the horizon. In these times of uncertainty and litigation risk, companies would be wise to maintain best practices around litigation, and consider infringement risk with care (including cease and desist letters and patent licensing assertions from third parties). And companies may also be wise to consider, where a patent portfolio warrants, new outbound licensing programs to drive new revenue streams.

Patent Prosecution: Staying the Course

The impact of an economic downturn on patent prosecution and portfolio development is different. Importantly, patent portfolios are viewed as long-term investments, with potential returns lasting well beyond the one to two years of a recession, and which can provide business advantages well into the future.

According to statistics provided by the U.S.P.T.O., patent application filings have consistently increased over the last two decades. See Sameni, P., Predicting COVID-19's IP Impact From Past Recessions' Stats, Law360 (April 8, 2020). From 1997 to 2018, patent application filings showed an average year-to-year growth of 4.7%. That said, periods of economic contraction do tend to impact the rates at which IP owners file patent applications. In the respective two-year periods immediately following the recessions of 2001 and 2008, the growth rate of patent applications stagnated, with 2009 seeing the first decline in U.S. patent applications filed from the preceding year in decades. Like litigation, the effects of the economy on patent prosecution will likely vary, depending on the nature of a recession.

For example, the two years following the tech bubble of 2000 and the ensuing 2001 recession were marked by a decline in year-to-year patent application filing growth. However, the decline in growth was not consistent across all technology sectors. After many dot-com companies failed, patent filings in technology centers for computer architecture and communications saw negative growth, while other technology areas continued to see increases. The 2008 financial crisis—again, characterized by failing banks, capital shortages, and high perceived credit risk—had a more widespread and consistent impact, resulting in declines in U.S. patent application filings across all technology sectors in 2009. See id.

Ultimately, while companies are looking carefully at the expense side of the balance sheet in this environment, given the differences between this recession and the most recent 2008 recession—including in particular the relative availability of capital and strength in the banks and economy now as compared with 2008—the broader trends in U.S. patent application filings will likely remain unaffected. Companies will continue to find other new efficiencies in patent portfolio management, for example, by utilizing artificial intelligence and software tools for prosecution and workflows. Companies likely also will continue to exercise discretion, as evidenced by the recent increase in abandoned applications and non-payment of maintenance fees, to manage costs for less important inventions. Given the long-term importance of IP to businesses, sophisticated companies will recognize that they will be best positioned for success coming out of the recession by continuing to file patent applications on their most important innovations.

As the recession develops and the nature of this economic downturn becomes clearer, companies should continue to adjust their IP strategies and budgets accordingly and continue to maintain best patent practices, manage risk, and capture new innovation, all with a focus on efficiency and cost control. And while patent disputes may pose risk to companies as potential targets of IP enforcements, those same companies may benefit by seeking out opportunities for outbound licensing that may drive new revenue streams.

Rob Maier is an intellectual property partner in the New York office of Baker Botts, and the head of its intellectual property group in New York. Ohireime Eromosele, an intellectual property law clerk at Baker Botts, assisted in the preparation of this article.