Property Rules vs. Liability Rules for Patent Infringement

33 Pages Posted: 5 May 2016

See all articles by Carl Shapiro

Carl Shapiro

University of California, Berkeley - Haas School of Business

Date Written: May 4, 2016

Abstract

When a patent has been infringed, the court can impose a forward-looking remedy based on a property rule or based on a liability rule. Under the property rule, the court issues an injunction ordering the infringing party to stop infringing. Under the liability rule, the court allows the infringing party to continue to infringe the patent in question so long as it pays specified ongoing royalties to the patent holder. Since the Supreme Court’s landmark 2006 decision in the eBay case, the United States has employed a hybrid system: the lower courts have discretion, on a case-by-case basis, to issue an injunction or to establish ongoing royalties. This article develops a simple model, including the possibility of patent holdup, in which the court has an imperfect ability to measure the harm to the patent holder caused by ongoing infringement. In the model, the patent holder and the infringing firm can negotiate efficiently over a patent license following the court’s imposition of a remedy, subject to some antitrust limits. Remedy regimes are evaluated based on how close they come, in expected value, to compensating the patent holder for any ongoing infringement. The model identifies a fundamental tradeoff: ongoing royalties perform better, the greater are the switching costs the infringing firm would bear to redesign its product to avoid infringing, but an injunction performs better, the greater is the court’s uncertainty about the harm that ongoing infringement will cause to the patent holder. Based on this analysis, recommendations regarding prospective patent remedies are offered to the courts.

Suggested Citation

Shapiro, Carl, Property Rules vs. Liability Rules for Patent Infringement (May 4, 2016). Available at SSRN: https://ssrn.com/abstract=2775307 or http://dx.doi.org/10.2139/ssrn.2775307

Carl Shapiro (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-5905 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu

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