Patent Litigation and the Role of Enforcement Insurance

Abstract

Abstract We study the effects of patent enforcement insurance when used by an incumbent patent holder in order to increase its incentives to oppose alleged infringers (entrants). By covering some of the legal costs ex-ante, the incumbent can increase its commitment to litigate and, as a result, deter some potential entrants and, in case of entry, induce a more profitable settlement deal. We identify the circumstances in which it is optimal for the incumbent to undertake patent enforcement insurance, typically with a deductible that either prevents litigation from occurring in equilibrium or trades off the ex-post costs of excessive litigation with the aforementioned strategic gains. We assess the impact of patent enforcement insurance on equilibrium outcomes across different legal-cost allocation rules and parameterizations of the model.

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