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Real Options And Patent Damages: The Legal Treatment Of Non‐Infringing Alternatives, And Incentives To Innovate

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  • Jerry Hausman
  • Gregory K. Leonard

Abstract

Patent litigation has become an increasingly important consideration in business strategy. Damage awards in patent litigation are supposed to compensate the patent owner for economic harm created by infringement and are therefore important for protecting returns to innovation. We analyze the effects that a recent court decision in the United States, called Grain Processing, has had on the incentives of potential infringers to infringe and innovators to innovate. We find that Grain Processing has decreased the expected value of damages awards in patent cases by conferring a ‘free option’ on infringers. Grain Processing also concluded that the patent owner in the case did not suffer lost profits due to the infringement because the infringer would have adopted an (inferior) non‐infringing technology had it not infringed. We demonstrate that this conclusion is inconsistent with standard economic models.

Suggested Citation

  • Jerry Hausman & Gregory K. Leonard, 2006. "Real Options And Patent Damages: The Legal Treatment Of Non‐Infringing Alternatives, And Incentives To Innovate," Journal of Economic Surveys, Wiley Blackwell, vol. 20(4), pages 493-512, September.
    • Handle: RePEc:bla:jecsur:v:20:y:2006:i:4:p:493-512
    DOI: 10.1111/j.1467-6419.2006.00258.x
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    References listed on IDEAS

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    1. Jerry A. Hausman & Jeffrey K. MacKie-Mason, 1988. "Price Discrimination and Patent Policy," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 253-265, Summer.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Jerry A. Hausman & J. Gregory Sidak, 2005. "Did Mandatory Unbundling Achieve Its Purpose? Empirical Evidence from Five Countries," Journal of Competition Law and Economics, Oxford University Press, vol. 1(1), pages 173-245.
    4. Jerry A. Hausman & Gregory K. Leonard, 2005. "Competitive analysis using a flexible demand specification," Journal of Competition Law and Economics, Oxford University Press, vol. 1(2), pages 279-301.
    5. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
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    Cited by:

    1. Michael McAleer & Les Oxley, 2006. "Intellectual Property And Economic Incentives," Journal of Economic Surveys, Wiley Blackwell, vol. 20(4), pages 483-491, September.
    2. Lichtenthaler, Ulrich, 2010. "Determinants of proactive and reactive technology licensing: A contingency perspective," Research Policy, Elsevier, vol. 39(1), pages 55-66, February.
    3. Mohd Shadab Danish & Pritam Ranjan & Ruchi Sharma, 2022. "Assessing the Impact of Patent Attributes on the Value of Discrete and Complex Innovations," Papers 2208.07222, arXiv.org.
    4. Suhejla Hoti & Michael McAleer & Daniel Slottje, 2006. "Intellectual Property Litigation Activity In The Usa," Journal of Economic Surveys, Wiley Blackwell, vol. 20(4), pages 715-729, September.
    5. Hagedoorn, John & Ridder, Ann-Kristin, 2012. "Open innovation, contracts, and intellectual property rights: an exploratory empirical study," MERIT Working Papers 2012-025, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    6. Dong Geun Choi & Heesang Lee & Tae-kyung Sung, 2011. "Research profiling for ‘standardization and innovation’," Scientometrics, Springer;Akadémiai Kiadó, vol. 88(1), pages 259-278, July.
    7. Mohd Shadab Danish & Pritam Ranjan & Ruchi Sharma, 2021. "Identification of “Valuable” Technologies via Patent Statistics in India: An Analysis Based on Renewal Information," BASE University Working Papers 13/2021, BASE University, Bengaluru, India.

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