Antitrust Limits on Patent Settlements: A New Approach*

Abstract

Patent settlements between rivals restrain competition in many different ways. Antitrust requires that their anticompetitive effects are reasonably commensurate with the firms' expectations about (counterfactual) patent litigation. Because these expectations are private and non-verifiable, this standard is hard to administer; to date, it has been successfully applied only within a very narrow class of agreements. We show that it can be applied universally by policing the economic structure of the firms' contract. This approach determines whether settlement outcomes will be antitrust-compliant for any private beliefs the firms might have, thus avoiding the need to speculate about such beliefs. I. INTRODUCTIONALMOST ALL TRANSACTIONS OF PATENT RIGHTS, including ordinary licensing deals, are settlements in the sense that they are negotiated in the shadow of litigation: there is some probability that the patent would be deemed invalid (or noninfringed) by a court, in which case the patentee would have no right to exclude or restrain the other party's use of the invention. 1 Patent settlements between rivals ('horizontal settlements') have contributed to 'perpetual confusion and controversy since the inception of the [antitrust laws]' more than a century ago (Kaplow [1984]). In these deals, a patent monopolist and *We thank two anonymous referees, the Editor and discussants and participants at Northwestern's Searle Center,