Proportional Restraints in Horizontal Patent Settlements

Abstract

When rivals settle a patent dispute, they prefer to preserve monopoly profits, even if the patent is very likely invalid or noninfringed. Antitrust has come to embrace a policy that requires horizontal settlements to restrain competition by no more than the expected result of counterfactual patent litigation. But this creates serious difficulties in practice, and has only been effectively applied to one type of settlement. However, we show that a settlement's design necessarily determines how "proportional" private bargaining outcomes will be: how closely their competitive effects will compare to the expected result of litigation. Using our approach, one can identify settlement designs that will always induce bargaining outcomes generating the same profits --- and greater consumer welfare --- than litigation would provide in expected value. More generally, our approach enables one to discern any settlement's proportionality (or lack thereof) without having to estimate the expected outcome of counterfactual patent litigation.

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

Keywords: Patents, Antitrust, Patent Settlements, Innovation, Licensing, Horizontal Restraints, Validity, Patent Quality, Reverse Payment, Pay for Delay, Actavis

JEL Classification: L40, L41, L10, K00, K21, O30, O31, O32, O34, O38