Patent privateering, litigation, and R&D incentives

Abstract

We model “patent privateering”—whereby producing firms sell patents to Patent Assertion Entities (PAEs), which then license them under the threat of litigation—in a bargaining game. PAEs can negotiate higher licensing fees than producing firms because they cannot be countersued for infringement. Privateering produces two countervailing effects: it increases the offensive value of patents, whereas it decreases their defensive value and lowers the aggregate surplus of producing firms. Embedding the bargaining game into a Research and Development (R&D) contest for multiple complementary technologies, we find that privateering may increase R&D investments, even as it induces more litigation threats and reduces industry profits.

Patent Licensing, Non‐Practising Entities, and Investment in R&D*

“…They examine how the level of upstream innovation is related to the degree of competition in the (downstream) market. Lemus and Temnyalov [2017] consider a model where two operating firms compete in R&D investment (to assemble a set of component patents), but have the option of selling patents to a patent assertion entity. This creates two opposing effects.…”

The influence of patent assertion entities on inventor behavior

“…As such, PAEs can compel targets to settle through licensing agreements more effectively than can inventors 3 . PAEs are particularly immune to threats of counter‐litigation, as they do not manufacture products, allowing them to generate greater licensing fees (Lemus & Temnyalov, 2017). The expected revenues from these licensing agreements provide a basis for the compensation that PAEs can offer inventors when originally acquiring their patents; due to the efficiencies garnered by PAEs, such compensation is likely higher than the profits that many inventors could generate by licensing and enforcing patents on their own.…”

A Model of Patent Trolls

“…In contrast, we do not assume any asymmetric information about firms' types, and our main results are driven by information externalities across litigation suits. Lemus and Temnyalov () analyze the role of PAEs on litigation and innovation incentives. To address this issue, they consider a model in which a PAE is allowed to acquire patents from PEs and compare the equilibrium in such a setup to a situation in the absence of the PAE.…”