Who Really Profits from Patent Infringements? Innovation Incentives and Disincentives from Patent Indemnification Rules

The size of damages awarded in courts underlines the great impact that indemnification regulations should have on innovation and imitation incentives. Surprisingly from an economic standpoint, however, various calculation methods for damages are acknowledged by the law and may be applied in parallel within one case. This paper analyses the effects of the multitude of different indemnification rules on innovative and imitative activity from an economic perspective. It discusses the economic suitability of legal definitions by comparing regulations from six different jurisdictions (US, JP, DE, UK, FR, NL). Our analysis shows that economic damages fall in between the compensations provided by the two generic legal notions of ‘lost profits’ and ‘infringer’s profits’. Modeling a Cournot competition of two capacity constrained firms we can show that policy and managerial implications from the existing regulations are complex. One of our findings is that legal systems lacking the notion of ‘infringer’s profits’ enable large corporations to behave opportunistically towards small innovators. Another finding shows that small firms can behave opportunistically towards large deliberate infringers if plaintiffs can choose infringer’s profits.     «

The size of damages awarded in courts underlines the great impact that indemnification regulations should have on innovation and imitation incentives. Surprisingly from an economic standpoint, however, various calculation methods for damages are acknowledged by the law and may be applied in parallel within one case. This paper analyses the effects of the multitude of different indemnification rules on innovative and imitative activity from an economic perspective. It discusses the economic suit...     »