Patent litigation and firm performance: the role of the enforcement system

Abstract

This paper analyzes the impact of the German patent litigation system on the firms involved in patent litigation suits. The German system of separation of infringement and invalidity decisions provides patent holders with a window of opportunity to enforce patents that may later be invalidated. This shifts a major share of the risk to the defendant, allocating bargaining power to the plaintiff. This study empirically provides support for this incongruity by analyzing how patent litigation outcome in Germany affects the financial performance of the disputing firms. I show that plaintiffs on average profit from litigation while defendants agreeing upon a settlement deal lose as much as defendants losing in trial. I further show that small and unexperienced firms, particularly defendants, are at a disadvantage when dealing with litigation. The results stress that, as long as patent validity cannot entirely be established prior to the infringement proceedings, defendants, and particularly small defendants, will be disadvantaged by a separation of infringement and nullity proceedings.