Galasso (2007) - Broad Cross License Agreements And Persuasive Patent Litigation

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Reference

• Galasso, Alberto (2007), "Broad cross-license agreements and persuasive patent litigation: theory and evidence from the semiconductor industry", LSE STICERD Research Paper No. EI45

@article{galasso2007broad,
  title={Broad cross-license agreements and persuasive patent litigation: theory and evidence from the semiconductor industry},
  author={Galasso, Alberto},
  journal={LSE STICERD Research Paper No. EI45},
  year={2007},
  abstract={In many industries broad cross-license agreements are considered a useful method to obtain freedom to operate and to avoid patent litigation. In this paper I study the previously neglected dynamic trade-off between litigating and cross-licensing that firms face to protect their intellectual property. I present a model of bargaining with learning in which firms’ decisions to litigate or crosslicense depend on their investments in technology specific assets. In particular the model predicts that where firms’ sunk costs are higher, their incentive to litigate and delay a cross-license agreement is lower. In addition, the bargaining game shows how firms with intermediate values of asset specificity tend to engage in inefficient "persuasive litigation". Using a novel dataset on the US semiconductor industry I obtain empirical results consistent with those suggested by the model. Combining model intuition with some empirical figures, I evaluate possible effects of the currently debated patent litigation reform.},
  discipline={Econ},
  research_type={Theory, Empirical},
  industry={Semiconductors},
  thicket_stance={Assumed Pro},
  thicket_stance_extract={In particular, Shapiro (2001) has argued that a "patent thicket" has appeared that renders it difficult to commercialize a new technology. In some industries the number of intellectual property rights a firm requires to produce a new product is so large, and their ownership is so dispersed, that it is quite easy to unintentionally infringe on a patent. In this environment there is, therefore, a hold-up problem: when the manufacturer starts selling its product a patentee might show up threatening to shut production down unless it is paid high royalties... The existence of a patent thicket that raises firms cost of innovation has led various economists to question the patent system as the best incentive scheme (a review of this literature is offered in Gallini and Scotchmer (2002))... Because of these features of the technological setting, a semiconductor firm requires to cut through a patent thicket in order to legally manufacture and sell its products. In fact, as previous studies have already noticed (Grindley and Teece (1997), Hall and Ziedonis (2001) and Ziedonis (2003)), the patent thicket looks extremely severe in this industry making cross-license agreements quite a common practice.},
  thicket_def={#A-S, References Shapiro, Complementary Inputs, Diversely-Held, Cummulative Invention},
  thicket_def_extract={Shapiro (2001) has argued that a "patent thicket" has appeared that renders it difficult to commercialize a new technology. In some industries the number of intellectual property rights a firm requires to produce a new product is so large, and their ownership is so dispersed, that it is quite easy to unintentionally infringe on a patent.},  
  tags={Cross-Licensing, Willfull Infringement, Mexican Standoff, Litigation},
  filename={Galasso (2007) - Broad Cross License Agreements And Persuasive Patent Litigation.pdf}
}

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Abstract

In many industries broad cross-license agreements are considered a useful method to obtain freedom to operate and to avoid patent litigation. In this paper I study the previously neglected dynamic trade-off between litigating and cross-licensing that firms face to protect their intellectual property. I present a model of bargaining with learning in which firms’ decisions to litigate or crosslicense depend on their investments in technology specific assets. In particular the model predicts that where firms’ sunk costs are higher, their incentive to litigate and delay a cross-license agreement is lower. In addition, the bargaining game shows how firms with intermediate values of asset specificity tend to engage in inefficient "persuasive litigation". Using a novel dataset on the US semiconductor industry I obtain empirical results consistent with those suggested by the model. Combining model intuition with some empirical figures, I evaluate possible effects of the currently debated patent litigation reform.