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Learning by Suing: Structural Estimates of Court Errors in Patent Litigation

This paper presents structural estimates of the probability of validity, and the probability of Type I and Type II errors by courts in patent litigation. Patents are modeled as uncertain property rights, and implications of the model are tested using stock market reactions to patent litigation decisions. The estimation quantifies beliefs about patent validity and court errors in a Bayesian context. I estimate that the underlying beliefs about validity range from 0.6 to 0.7 for litigated patents. Market beliefs about courts show that Type I errors (finding a valid patent invalid) occur very frequently–an estimated probability of 0.45. However, Type II errors (finding an invalid patent valid) occur with near zero probability. Additional implications of the model address patent value. My results are the first structural estimates of court errors. Additionally, this study is the first to perform event studies on patent litigation.

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File URL: http://irving.vassar.edu/VCEWP/VCEWP68.pdf
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Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 68.

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Date of creation: Mar 2005
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Handle: RePEc:vas:papers:68
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Web page: http://irving.vassar.edu/VCEWP/VCEWP.htm

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  1. Adam B. Jaffe & Manuel Trajtenberg & Rebecca Henderson, 1992. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," NBER Working Papers 3993, National Bureau of Economic Research, Inc.
  2. Jean O. Lanjouw & Mark Schankerman, 1997. "Stylized Facts of Patent Litigation: Value, Scope and Ownership," NBER Working Papers 6297, National Bureau of Economic Research, Inc.
  3. Stanley, Linda R & Coursey, Don L, 1990. "Empirical Evidence on the Selection Hypothesis and the Decision to Litigate or Settle," The Journal of Legal Studies, University of Chicago Press, vol. 19(1), pages 145-72, January.
  4. Matthew D. Henry & John L. Turner, 2006. "The Court of Appeals for the Federal Circuit’s Impact on Patent Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 35(1), pages 85-117, 01.
  5. Jean O. Lanjouw & Josh Lerner, 1997. "The Enforcement of Intellectual Property Rights: A Survey of the Empirical Literature," NBER Working Papers 6296, National Bureau of Economic Research, Inc.
  6. Joel Waldfogel, 1993. "The Selection Hypothesis and the Relationship between Trial and Plaintiff Victory," NBER Working Papers 4508, National Bureau of Economic Research, Inc.
  7. Hall, Bronwyn H. & Jaffe, Adam & Trajtenberg, Manuel, 2001. "Market Value and Patent Citations: A First Look," Department of Economics, Working Paper Series qt8vh1c20f, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Landes, William M & Posner, Richard A, 2001. "Harmless Error," The Journal of Legal Studies, University of Chicago Press, vol. 30(1), pages 161-92, January.
  9. Rasmusen, Eric, 1995. "Predictable and unpredictable error in tort awards: The effect of plaintiff self-selection and signaling," International Review of Law and Economics, Elsevier, vol. 15(3), pages 323-345, September.
  10. Sherry, Edward F. & Teece, David J., 2004. "Royalties, evolving patent rights, and the value of innovation," Research Policy, Elsevier, vol. 33(2), pages 179-191, March.
  11. Hall, Bronwyn H & Jaffe, Adam B & Trajtenberg, Manuel, 2001. "The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools," CEPR Discussion Papers 3094, C.E.P.R. Discussion Papers.
  12. Mark A. Lemley & Carl Shapiro, 2005. "Probabilistic Patents," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 75-98, Spring.
  13. Kortum, Samuel & Lerner, Josh, 1999. "What is behind the recent surge in patenting?1," Research Policy, Elsevier, vol. 28(1), pages 1-22, January.
  14. Jean Olson Lanjouw, 1994. "Economic Consequences of a Changing Litigation Environment: The Case of Patents," NBER Working Papers 4835, National Bureau of Economic Research, Inc.
  15. Lanjouw, Jean O & Schankerman, Mark, 2001. "Characteristics of Patent Litigation: A Window on Competition," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 129-51, Spring.
  16. Austin, David H, 1993. "An Event-Study Approach to Measuring Innovative Output: The Case of Biotechnology," American Economic Review, American Economic Association, vol. 83(2), pages 253-58, May.
  17. Theodore Eisenberg & Henry S. Farber, 1996. "The Litigious Plaintiff Hypothesis: Case Selection and Resolution," NBER Working Papers 5649, National Bureau of Economic Research, Inc.
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