Probabilistic Patents 1

Abstract

Economists often assume that a patent gives its owner a well-defined legalright to exclude others from practicing the invention described in thepatent. In practice, however, the rights afforded to patent holders arehighly uncertain. Under patent law, a patent is no guarantee of exclusionbut more precisely a legal right to try to exclude. Since only 0.1% of allpatents are litigated to trial, and since nearly half of fully litigatedpatents are declared invalid, this distinction is critical to understandingthe economic impact of patents. The growing recognition among economistsand legal scholars that patents are probabilistic property rights hassignificant implications for our understanding of patents in four importantareas: (1) reform of the system by which patents are granted; (2) the legaltreatment of patents in litigation; (3) the incentives of patent holdersand alleged infringers to settle their disputes through licensing orcross-licensing agreements rather than litigate them to completion; and (4)the antitrust limits on agreements between rivals that settle actual orthreatened patent litigation.

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