SETTLING THE CONTROVERSY OVER PATENT SETTLEMENTS: PAYMENTS BY THE PATENT HOLDER SHOULD BE PER SE ILLEGAL

Pages475-504
DOIhttps://doi.org/10.1016/S0193-5895(04)21010-7
Date01 July 2004
Publication Date01 July 2004
AuthorCristofer Leffler,Keith Leffler
SETTLING THE CONTROVERSY OVER
PATENT SETTLEMENTS: PAYMENTS
BY THE PATENT HOLDER SHOULD BE
PER SE ILLEGAL
Cristofer Leffler and Keith Leffler*
ABSTRACT
Under the patent system created by Congress a patent enjoys only a
rebuttable presumption of validity. The resulting probability of invalidity
has an economic value. The incentive for a challenger to capture that value
creates consumer benefit. In contrast, a payment by the patent holder to
the challenger to recognize validity changes the congressionally mandated
rebuttable presumption into a conclusive presumption. When a patent holder
enlarges the reward granted to him by Congress, by paying a potential
rival to confess validity, he reduces efficiency and consumer welfare and,
therefore, commits a per se violation of the antitrust laws.
Cristofer Leffler is an associate at Graham & Dunn PC in Seattle, Washington. Keith Leffleris an
associate professor in the Department of Economics at the University of Washington specializing in
antitrust economics. The views expressed herein are the views of the authors and do not necessarily
reflect the views of their employers.
Antitrust Law and Economics
Research in Law and Economics, Volume21, 475–504
Copyright © 2004 by Elsevier Ltd.
All rights of reproduction in any form reserved
ISSN: 0193-5895/doi:10.1016/S0193-5895(04)21010-7
475
476 CRISTOFER LEFFLER AND KEITH LEFFLER
1. INTRODUCTION
A fundamental principle of antitrust is that it is per se unlawful under the Sherman
Act for a manufacturer to agree with an actual or potential competitor not to
compete. There is some debate, however, as to whether such agreements by a
patent holder to induce an alleged infringer to refrain from competing are per se
illegal in the resolution of patent litigation. Many authors have noted that there are
public benefits from the settlement of litigation, and particularly, in the settlement
of complex patent litigation.1Hence, there appears to be a tradeoff of the benefits
of settlement vs. the potential consumer welfare loss of continued monopoly. This
tradeoff appears particularly vexing since the foundation of patents is exactly to
provide the possibility of monopoly profits.
We here provide economic analysis showing that it is almost always anticom-
petitive for a patent holder to settle a patent dispute by a lump sum payment to
the alleged infringer in return for a stipulation as to patent validity. We also show
that there are little or no offsetting competitive benefits from such settlements.
Therefore, we conclude that such agreements should be treated just like any other
naked agreement to pay a potential competitor not to compete – they should be
judged per se illegal.2
In the first section of this paper, we derive the basic economic propositions that
guide our subsequent analysis. Most importantly,we find that a lump sum payment
by a patent holder to an alleged infringer to recognize patent validity is dominated
on an efficiency basis by a settlement that licenses or otherwise allows the alleged
infringer to enter the market. Wetherefore conclude that such lump sum payments
are anticompetitive and should be per se illegal. While our focus is on the extreme
form of such settlements in which the challenger does not enter as a consequence
of the settlement, we also find that per se illegality should apply to settlements
that are a mix of cash payments and licensing.3We reach this conclusion after
showing that lump sum payments of any kind reduce economic welfare compared
to licenses except in the rarest of circumstances. Since there is no practical way to
identify the rare case in which the lump sum payment might be efficient, and since
allowing lump sum payments will likely perpetuate a monopoly,we conclude that
a general per se rule is appropriate.
In the second section, we consider possible increases in dynamic efficiency
from allowing lump sum payments which can increase the return to a patent holder
as compared to a licensing settlement. We suggest that Congress and the courts
have implicitly solved the inherent ambiguity of the static efficiency losses vs.
the dynamic efficiency gains from increased monopoly profits to patent holders
through a defined set of procedures and rules and that agreements not to compete
that include lump sum payments by a patent holder to an alleged infringer are of

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