DP4944 Financing and the Protection of Innovators

Author(s): Gerard Llobet, Javier Suarez
Publication Date: March 2005
Keyword(s): financial strategy, intellectual property, litigation, predation
JEL(s): G32, O34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4944

The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defence of a patent and, thus, the prospects of infringement and the effective protection of the innovator. We compare the resort to a financier once the infringement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropriate deductible) so as to implement the innovator?s second-best outcome: a situation in which patent predation is deterred without inducing excessive litigation.