Enforcing weak patents: the role of litigation costs, and damage rules in patent disputes

This paper compares the e¤ects of two rules used by courts of law in assessing awards for damages to patentees (Lost Pro\u85t vs Unjust Enrichment). Our model captures situations in which two innovative \u85rms compete on a market for a homogenous good, but only one (the Patentee) is successful in innovating \u85rst and \u85ling a patent. The other \u85rm (the Infringer) strategically infringes the patent in order to secure a licensing agreement. In this set up, we show that the Unjust Enrichment rule yields fewer trials conditional on patent enforcement than the Lost Pro\u85t rule. However, regarding three main objectives of intellectual property laws (protection of innovators pro\u85ts, incentives to invest in R&D, and social welfare), we nd that neither rule is better than the other, generally speaking. Our model also illustrates how the combination of litigation costs, the size of negotiation gains, and the strength of IPRs shapes the incentives to enforce and infringe IPRs, but in a way which is damages speci\u85c. Interestingly enough, we \u85nd that the Lost Pro\u85t rule preserves the incentives to enforce wea