Patents, Litigation Strategy and Antitrust in Innovative Industries

In a patent infringement suit, the alleged infringer wins with a ruling of either invalidity or non-infringement, and may strictly prefer either outcome. Invalidity may increase current-period competition, but removes constraints to future innovation. We adapt the Segal and Whinston (Am Econ Rev 97(5):1703-1730, 2007) model, and show that a legal regime that considers infringement before validity maximizes the entrant patentee's innovation incentives. But the incumbent alleged infringer may prefer litigating validity first if the future blocking effect of validity is strong. This litigation strategy effect may reduce innovation levels. Antitrust policy should seek to attenuate this effect by reducing the advantage to incumbency.