Tuesday, October 27, 2020

Proportional Restraints in Horizontal Patent Settlements

Proportional Restraints in Horizontal Patent Settlements

Erik Hovenkamp

University of Southern California School of Law

Jorge Lemus

University Of Illinois Urbana Champaign


Patent settlements between rivals restrain competition in many different ways. Antitrust requires them to be "proportional" in that their anti-competitive effects are commensurate with the firms’ expectations about (counterfactual) patent litigation. Because these expectations are private and non-verifiable, this standard is hard to apply; it has been successfully applied only within a very narrow class of agreements. We show that, even if firms’ private beliefs are ambiguous, an antitrust regulator can apply the standard universally by policing the economic structure of the firms’ (observable) settlement contract. This structure determines whether private settlement outcomes will be proportional for any private beliefs.


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