Galasso Schankerman (2010) - Patent Thickets Courts And The Market For Innovation

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Reference

• Galasso, A. and Schankerman, M. (2010), "Patent thickets, courts, and the market for innovation", The RAND journal of economics, Vol.41, No.3, pp.472--503

@article{galasso2010patent,
  title={Patent thickets, courts, and the market for innovation},
  author={Galasso, A. and Schankerman, M.},
  journal={The RAND journal of economics},
  volume={41},
  number={3},
  pages={472--503},
  year={2010},
  abstract={We study how fragmentation of patent rights (?patent thickets?) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ?pro-patent shift? of the CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under the CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets.},
  discipline={Econ},
  research_type={Empirical},
  industry={},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Galasso Schankerman (2010) - Patent Thickets Courts And The Market For Innovation.pdf}
}

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Abstract

We study how fragmentation of patent rights (?patent thickets?) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ?pro-patent shift? of the CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under the CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets.

Model

Variables:

• [math]V\;[/math] is the revenue of the licensee if he uses all [math]n\;[/math] patents

• [math]\theta\;[/math] is a measures of complementarity:

[math]\theta = \begin{cases} 0 &\mbox{if perfect complements} \\ 1 &\mbox{if equally contributing} \\ \frac{n}{m} &\mbox{if perfect substitutes} \end{cases} \;[/math]

• [math]\frac{m}{n}\theta V\;[/math] is the revenue of the licensee if he uses [math]m \lt n\;[/math] patents

• The negotiation value when the firm already has [math]m=n-1\;[/math] of the patents is:

[math]z(n,\theta,V) = V - V\frac{n-1}{n}\theta\;[/math]

The set-up:

• Both the patentee and the infringer are risk neutral
• The infringer has private information and estimates that the patentee will prevail at trial with probability [math]p\;[/math]
• The patenteee doesn't know [math]p\;[/math] but knows [math]p \sim U[0,1]\;[/math]
• At [math]T=0\;[/math] the patentee makes a TIOLI settlement offer to the infringer. If the infringer accepts the game ends.
• If the offer is rejected, at [math]T=1\;[/math] there is a trial. The parties incur costs [math]L_p\;[/math] and [math]L_i\;[/math]. If the infringer is found liable the court awards damages of [math]z\;[/math]. The paper says that this is consistent with the Unjust Enrichment doctrine.

By backwards induction:

An infringer of type [math]p\;[/math] would accept a settlement of [math]S\;[/math] only if:

[math]S \le p z + L_i\;[/math]

[math]\therefore p \ge \frac{S-L}{z}\;[/math]

The patentee's optimization problem is to maximize his expected profit by choosing a cutoff [math]p^*\;[/math] (such that above this cut-off the infringer accepts):

[math]\max_p \pi = \int_p^1 (pz + L_i) dy + \int_0^p yz - L_p dy\;[/math]

Letting [math]L = L_i + L_p\;[/math]:

[math]p^* = 1 - \frac{L}{z}\;[/math]

The expected length of a dispute is then [math]\mathbb{E}(t^*} = p^*\;[/math].