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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. Copyright 2006 The Authors Journal compilation © 2006 Blackwell Publishing Ltd.

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
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    Cited by:

    1. Lichtenthaler, Ulrich, 2010. "Determinants of proactive and reactive technology licensing: A contingency perspective," Research Policy, Elsevier, vol. 39(1), pages 55-66, February.
    2. Hagedoorn, John & Ridder, Ann-Kristin, 2012. "Open innovation, contracts, and intellectual property rights: an exploratory empirical study," MERIT Working Papers 025, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    3. repec:spr:scient:v:88:y:2011:i:1:d:10.1007_s11192-011-0344-7 is not listed on IDEAS

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