A Theory of Pre-Litigation Settlement and Patent Assertion Entities (original) (raw)

Endogenous Litigation Costs: An Empirical Analysis of Patent Disputes

SSRN Electronic Journal, 2017

A theoretical literature explains how parties can strategically sink litigation costs to maximize their prospects. We explore this "endogenous litigation costs" hypothesis empirically. To do so, we introduce measures of case progression, establish and validate new proxies for party and court costs, and parse the rich information about litigation contained in novel administrative data from court dockets. As a case study, we use the universe of 16,661 patent cases from 2005 to 2010, containing roughly 1.5 million docket entries. We document the costs of litigants and courts throughout litigation, and find that litigation costs cluster around events that must occur in order for litigation to proceed. Finally, we present evidence that costs around stages of litigation are higher for cases that eventually reach later stages of litigation, which we argue is consistent with the endogenous litigation costs hypothesis. .

Patent Settlements as a Barrier to Entry

Journal of Economics & Management Strategy, 2012

Empirical studies have found that most patent litigations are resolved through settlements rather than trials. Moreover, license fees negotiated in settlement agreements have become very large. We formulate a model of sequential entry with an incumbent patent holder, multiple potential entrants and asymmetric information about the validity of the contested patent (patent strength) between firms that are already in the market and future potential entrants. Within this framework we show that patent settlements between the incumbent and the first entrant can be mutually beneficial even when the cost of trial is zero and the settlement agreement takes the form of a simple fixed license fee. For intermediate patent strengths, settlements are a tool for further entry deterrence. The two parties agree on a high settlement amount which sends a credible signal to 'outsiders' that the incumbent's patent is not weak and therefore further entry will not be profitable. This provides a novel explanation for the role of settlements and to the recent observation of high license fees negotiated in settlement agreements. Our analysis demonstrates than even non-reverse settlements that entail only a fixed fee can be anticompetitive because they are used to block further entry.

The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs

The Journal of Law, Economics, and Organization, 2021

We analyze the extent to which private defensive litigation insurance deters patent assertion by non-practicing entities (NPEs). We study the effect that a patent-specific defensive insurance product, offered by a leading litigation insurer, had on the litigation behavior of insured patents’ owners, all of which are NPEs. We first model the impact of defensive litigation insurance on the behavior of patent enforcers and accused infringers. We show that the availability of defensive litigation insurance can have an effect on how often patent enforcers will assert their patents. We confirm this result empirically showing that the insurance policy had a large, negative effect on the likelihood that a patent included in the policy was subsequently asserted relative to other patents held by the same NPEs and relative to patents held by other NPEs with portfolios that were entirely excluded from the insurance product. Our findings suggest that market-based mechanisms can deter so-called “...

Litigation and Settlement in Patent Infringement Cases

The RAND Journal of Economics, 2002

A patent is not a perfect protection against imitation. It only grants the patentholder the right to sue intruders once they have been identified. This implies that the patentholder must supervise the market and react in case of infringement. His reaction may be to go to court, to settle an agreement or to accept the entry. We investigate how intensive the monitoring effort should be and how it will influence the entry decision. In a simultaneous game we show that even if the penalty paid by the infringer in case of a finding of liability is high, the patentholder may prefer a settlement over a trial. Furthermore, there exist cases in which the likelihood of entry increases with the penalty. In sequential games, we show that regardless of whether the patentholder or the potential infringer plays first, entry occurs comparatively less often than in the simultaneous game.

The economics of patent litigation: an empirical analysis in the U.S. from 1996 to 2010

2015

I dedicate this dissertation to my wonderful family, Sedigheh, Amir, Hori and my lovely wife, Farnaz. Thank you for always being there for me. Without your love and support I would not be here today. I would like to thank my committee members for all of the valuable comments and suggestions. Especially, I am deeply grateful to my advisor Professor William Latham for his guidance and advice. v TABLE OF CONTENTS LIST OF TABLES .

The incentive effects of litigation fee shifting when legal standards are uncertain

International Review of Law and Economics - INT REV LAW ECONOMICS, 1995

In recent years, various commentators have argued that adopting the British rule for litigation costs, which requires the losing party to pay the winner's reasonable legal expenses, would reduce the cost of litigation in the United States. The economic literature on litigation so far has failed to support this claim. This paper considers the effects of the British rule, not on litigation costs, but on the incentives to engage in efficient primary substantive behavior. To do this, we bring together two branches of the literature that previously have been analyzed separately: the relation between litigation costs and substantive behavior, and the effect of legal uncertainty on substantive behavior, as analyzed by Calfee and Craswell. Our analysis shows that when legal standards are administered imperfectly, the efficiency of fee shifting is a problem of the second best. In some cases, the British rule corrects the distortions created by legal error and improves incentives to take...

Patent litigation insurance and R&D incentives

International Review of Law and Economics, 2008

A major policy concern regarding patenting activity is related to the actual enforceability of the patents granted by Patent Offices. The risk of facing elevated legal costs to defend patent rights can affect ex-ante incentives to invest in R&D. This paper analyses whether the availability of insurance policies that cover legal expenditures for patent litigation could increase the appropriability of the innovation. We model a situation in which an incumbent innovator is endowed with a valid patent and an entrant imitator can either directly enter the market or try to apply for a patent, hoping that an error will be made by the Patent Office. The incumbent can accommodate the entrant, file a suit to a civil court or offer a settlement agreement. We model the presence of heterogeneity in the risk that the patents will face an error by both patent examiners at Patent Offices and judges at civil court. We analyse the changes in expected profits for the innovator when given the possibility of buying an insurance policy which will cover legal costs in the event of trial. We compare the cases in which i) coverage is voluntary and the insurer can discriminate perfectly between risky patents; ii) coverage is voluntary and the insurer cannot discriminate between patents, and iii) coverage is compulsory. The model highlights a set of peculiar strategic characteristics of insurance for legal expenditures which contribute to singling out the reasons underlying the underdevelopment of this market. We suggest that the crucial reason for such a failure is not adverse selection; consequently, we challenge the benefits of making coverage compulsory.

A Model of Patent Trolls

International Economic Review, 2018

This paper develops a model of patent trolls to understand various litigation strategies employed by nonpracticing entities (NPE). We show that when a NPE faces multiple potential infringers who use related technologies, it can gain a credible threat to litigate even when it has no such credibility vis-à-vis any single potential infringer in isolation. This is due to an information externality generated by an early litigation outcome for subsequent litigation. Successful litigation creates an option value against future potential infringers through Bayesian updating. This renders a credible litigation threat against the initial defendant and allows the NPE to extract more rents. We discuss policy implications including the adoption of the British system of "loser-pays" fee shifting and the use of injunctive relief.

Innovation in the Shadow of Patent Litigation

Review of Industrial Organization, 2008

We analyze non-cooperative R&D investment by two …rms that already hold patents that they can assert against each other with probabilistic success. The market structure results from stochastic innovation and patent litigation. Depending on the level of infringement fees, we highlight positive and negative e¤ects of litigation threats on innovation. We de…ne an appropriate regulatory structure of infringement fees that will implement socially e¢ cient R&D investments in the case of symmetric and asymmetric patent portfolios.