Working Paper: CEPR ID: DP4944
Authors: Gerard Llobet; Javier Suarez
Abstract: The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defence of a patent and, thus, the prospects of infringement and the effective protection of the innovator. We compare the resort to a financier once the infringement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropriate deductible) so as to implement the innovator?s second-best outcome: a situation in which patent predation is deterred without inducing excessive litigation.
Keywords: financial strategy; intellectual property; litigation; predation
JEL Codes: G32; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financing of legal costs (K41) | Incentives of innovators to litigate against patent infringement (O31) |
| External financing (G39) | Likelihood of litigation by incumbents against rivals (L49) |
| Better financing conditions (G32) | Willingness to litigate (K41) |
| External financing (G39) | Deterrence of potential infringers (D45) |
| Patent litigation insurance (PLI) (K13) | Optimal deductible that prevents wasteful litigation while maintaining deterrence (K41) |
| Terms of financing (G32) | Effectiveness of arrangements in preventing patent predation (D45) |
| Financing scenarios (internal vs. external) (G19) | Incumbents' litigation decisions (K41) |