Broad Cross-License Agreements andPersuasive Patent Litigation: Theory andEvidence from the Semiconductor Industry

Abstract

In many industries broad cross-license agreements are considered a useful method toobtain freedom to operate and to avoid patent litigation. In this paper I study thepreviously neglected dynamic trade-off between litigating and cross-licensing that firmsface to protect their intellectual property. I present a model of bargaining with learning inwhich firms' decisions to litigate or crosslicense depend on their investments intechnology specific assets. In particular the model predicts that where firms' sunk costsare higher, their incentive to litigate and delay a cross-license agreement is lower. Inaddition, the bargaining game shows how firms with intermediate values of assetspecificity tend to engage in inefficient "persuasive litigation". Using a novel dataset onthe US semiconductor industry I obtain empirical results consistent with those suggestedby the model. Combining model intuition with some empirical figures, I evaluate possibleeffects of the currently debated patent litigation reform.

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