Antitrust Limits on Patent Settlements: A New Approach

Abstract

Patent settlements between rivals restrain competition in many different ways. Antitrust requires that their anticompetitive effects are reasonably commensurate with the firms’ expectations about (counterfactual) patent litigation. Because these expectations are private and non-verifiable, this standard is hard to administer; to date, it has been successfully applied only within a very narrow class of agreements. We show that it can be applied universally by policing the economic structure of the firms’ contract. This approach determines whether settlement outcomes will be antitrust-compliant for any private beliefs the firms might have, thus avoiding the need to speculate about such beliefs.

The online appendix is available at https://ssrn.com/abstract=3259259.

Keywords: antitrust, patent settlement, horizontal restraints, collusion, litigation, licensing, pay for delay, reverse payment, robust design, patent system

JEL Classification: L40, L41, L24, O34, K21, K41, K42