A Model of Patent Trolls

49 Pages Posted: 28 Oct 2015

See all articles by Jay Pil Choi

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Heiko A. Gerlach

University of Queensland - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2015

Abstract

This paper develops a model of patent trolls to understand various litigation strategies employed by nonpracticing entities (NPE). We show that when a NPE faces multiple potential infringers who use related technologies, it can gain a credible threat to litigate even when it has no such credibility vis-à-vis any single potential infringer in isolation. This is due to an information externality generated by an early litigation outcome for subsequent litigation. Successful litigation creates an option value against future potential infringers through Bayesian updating. This renders a credible litigation threat against the initial defendant and allows the NPE to extract more rents. We discuss policy implications including the adoption of the British system of “loser-pays” fee shifting and the use of injunctive relief.

Keywords: patent portfolios, patent litigation, non-practicing entities, patent troll

JEL Classification: D430, L130, O300

Suggested Citation

Choi, Jay Pil and Gerlach, Heiko A., A Model of Patent Trolls (September 30, 2015). CESifo Working Paper Series No. 5536. Available at SSRN: https://ssrn.com/abstract=2681051

Jay Pil Choi (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-353-7281 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Heiko A. Gerlach

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

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