Presumption of patent validity and litigation incentives

Abstract

We analyze the effects of the presumption of patent validity on litigation incentives. We consider a game with three players—a non-practicing patent holder, a potential infringing firm, and a court that resolves the dispute if there is a trial. We model the court’s decision-making as a learning process based on evidence, and the presumption as a factor influencing the court’s prior belief of patent validity. The presumption increases out-of-court settlement but its effect on trial frequency can go in either direction. Further, when there is high uncertainty about the patent’s merit, the presumption has countervailing efficiency effects.

Keywords: patents, litigation, presumption, learning, persuasion, error of judgment

JEL Classification: C72, D74, D83, K41