Patent Litigation as an Information Transmission Mechanism

The literature on patent protection assumes a so called "fencepost" system, in which there would be no need to refer to the courts over questions of interpretation. In reality, we observe a myriad of patent infringement suit through which questions of utility, novelty, and nonobviousness are independently ruled on by a court. Therefore, patent litigation accompanying initial imitations can reveal important information about the validity of the contested patents for other potential entrants. This paper explores the implications of such information revelation through patent litigation. It is shown that the payoffs for the patentee and the initial imitator are highly discontinuous in the degree of patent protection. Furthermore, strengthening intellectual property rights is not necessarily desirable for the patentee. The analysis also has implications for interpreting empirical data on imitations lags.