Theoretically, stronger legal protection affects strategic portfolios in two ways. As each patent becomes more effective, the gain from multiple patents would be less, reducing the demand for patents (negative inframarginal effect). With the effective price of patent protection being lower, the demand for protection and patents would increase (positive marginal effect). The net effect is more likely to be negative in complex technology industries, and magnified by patent ownership fragmentation, manufacturing assets, technological competition, and size. Exploiting variation in the shift in patent law due to the Federal Circuit Appeals Court (CAFC), we find that the average increase in patent protection due to the CAFC led businesses to reduce strategic patenting by 23.3%, and the contingent effects accorded with the hypotheses.

How should businesses adjust patent portfolios to changes in the legal protection of patents? As each patent becomes more effective, the gain from multiple patents would be less, reducing the demand for patents. With the effective price of patent protection being lower, the demand for protection and patents would increase. The net effect is more likely to be negative where the stakes (costs of holdup or gain from exclusivity) are larger. Empirical evidence from strategic patenting by U.S. manufacturing businesses between 1986 and 1992 before and after changes in patent law due to the U.S. Court of Appeals for the Federal Circuit supports our propositions.