Patent Litigation Insurance

Anne Duchene

No 2015-621, Working Papers from Department of Research, Ipag Business School

Abstract: Empirical studies have found that high litigation costs often discourage small firms from investing in R&D, as they fear their patent will be infringed and they will not be able to afford litigation. As a solution, firms have been encouraged to purchase insurance policies which, by covering legal costs in the event of a trial, serve as a commitment to litigate so that settlement terms are more favorable to the insured, and potential infringement is less likely to occur. However, very few firms are purchasing insurance and the market remains poorly developed throughout the world. I show that firms might be discouraged from buying insurance because of information asymmetries, not only with insurance companies but also with their competitors. I study the situation of a patent holder, who perfectly knows the validity and enforceability (“strength”) of her patent, that has been infringed by a competitor with less information on the patent. The patent holder can purchase insurance to have a credible threat to litigate and increase the infringer’s settlement offer. But the decision to buy an insurance conveys information about the patent strength to the infringer. As a result the patent holder may prefer not to be insured rather than transmitting this information. This signaling effect can yield different equilibriums, in particular a pooling equilibrium “no insurance” where no patent holder purchases an insurance. I study if this situation might be improved by imposing a mandatory insurance or by giving the insurer a share of litigation proceeds.

Keywords: litigation; settlement; patent litigation; insurance. (search for similar items in EconPapers)
JEL-codes: D82 G22 K41 O34 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2015-01-01
New Economics Papers: this item is included in nep-ias, nep-ind, nep-ipr, nep-pr~ and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Patent Litigation Insurance (2017)
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