Presumption of Patent Validity and Litigation Incentives

We analyze the effects of the presumption of patent validity on litigation incentives and outcomes. We develop a litigation game between a patent holder and an alleged infringing firm. A court resolves the dispute if there is a trial. We model the court's decision‐making as a learning process based on evidence and consider the presumption as a factor influencing the court's prior belief of patent validity. The presumption affects the trial outcome in two ways—directly by biasing the prior, and indirectly by affecting the incentives to invest in evidence‐seeking activities. We show that its effect on the likelihood of trial is ambiguous. Moreover, when patent validity is uncertain, the presumption generates a trade‐off: it reduces resource dissipation, but increases the probability of judicial errors. With pre‐trial settlement, even low‐merit patents are profitably asserted, and a stronger presumption raises the settlement payments extracted through credible enforcement threats. Taken together, our results suggest a cautious or limited application of the presumption, especially in environments where patent validity is highly uncertain.