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A Model of Patent Trolls

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  • Jay Pil Choi
  • Heiko Gerlach

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.

Suggested Citation

  • Jay Pil Choi & Heiko Gerlach, 2015. "A Model of Patent Trolls," CESifo Working Paper Series 5536, CESifo.
    • Handle: RePEc:ces:ceswps:_5536
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    References listed on IDEAS

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    1. Lauren Cohen & Umit G. Gurun & Scott Duke Kominers, 2019. "Patent Trolls: Evidence from Targeted Firms," Management Science, INFORMS, vol. 65(12), pages 5461-5486, December.
    2. Silvana Krasteva & Huseyin Yildirim, 2012. "Payoff uncertainty, bargaining power, and the strategic sequencing of bilateral negotiations," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 514-536, September.
    3. Che, Yeon-Koo & Yi, Jong Goo, 1993. "The Role of Precedents in Repeated Litigation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 399-424, October.
    4. Jay Pil Choi & Heiko Gerlach, 2017. "A Theory of Patent Portfolios," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 315-351, February.
    5. James Bessen & Jennifer L. Ford & Michael J. Meurer, 2011. "The Private and Social Costs of Patent Trolls," Working Papers 1103, Research on Innovation.
    6. Carl Shapiro, 2010. "Injunctions, Hold-Up, and Patent Royalties-super-1," American Law and Economics Review, Oxford University Press, vol. 12(2), pages 509-557.
    7. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.
    8. Lemley, Mark A & Shapiro, Carl, 2007. "Patent Hold-Up and Royalty Stacking," Competition Policy Center, Working Paper Series qt8638s257, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    9. Choi, Jay Pil, 2009. "Alternative damage rules and probabilistic intellectual property rights: Unjust enrichment, lost profits, and reasonable royalty remedies," Information Economics and Policy, Elsevier, vol. 21(2), pages 145-157, June.
    10. Vincenzo Denicolò & Damien Geradin & Anne Layne-Farrar & A. Jorge Padilla, 2008. "REVISITING INJUNCTIVE RELIEF: INTERPRETING eBAY IN HIGH-TECH INDUSTRIES WITH NON-PRACTICING PATENT HOLDERS," Journal of Competition Law and Economics, Oxford University Press, vol. 4(3), pages 571-608.
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    Cited by:

    1. Gerard Llobet & Jorge Padilla, 2023. "A theory of socially inefficient patent holdout," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(2), pages 424-449, April.
    2. Gerard Llobet & Jorge Padilla, 2016. "The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents," Working Papers wp2016_1608, CEMFI.
    3. Nicoletta Berardi & Paul Seabright, 2020. "Joint Ownership of Production Projects as a Commitment Device against Interest Groups," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(3), pages 572-594.
    4. Denicolò, Vincenzo & Zanchettin, Piercarlo, 2022. "Patent protection for complex technologies," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    5. He, Leshui, 2020. "A theory of pre-filing settlement and patent assertion entities," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    6. Turner, John L., 2018. "Input complementarity, patent trolls and unproductive entrepreneurship," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 168-203.
    7. Brander, James A. & Spencer, Barbara J., 2021. "Patent assertion entities and the courts: Injunctive or fee-based relief?," International Review of Law and Economics, Elsevier, vol. 65(C).
    8. Wang, Ling & Zhang, Yujia & Yan, Yushan, 2023. "Offensive patent litigation strategic choice: An organizational routine perspective," Technovation, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    patent portfolios; patent litigation; non-practicing entities; patent troll;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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