Limiting Patentees’ Market Power Without Reducing Innovation Incentives: The Perverse Benefits of Uncertainty and Non-Injunctive Remedies

Uncertainty and delay in patent litigation may have unforeseen virtues. The combination of these oft-criticized characteristics might induce a limited amount of infringement that enhances social welfare without reducing (or without substantially reducing) the profitability of the patentee. Patent infringement is generally viewed as socially inefficient because infringement reduces the patentee’s ex ante incentive to innovate. Limited amounts of infringement combined with increased patent duration, however, can substantially reduce the distortionary ex post effects of supracompetitive pricing without reducing the patentee’s ex ante incentives to innovate. Indeed, this Article derives a legal regime that preserves the incentive to innovate by giving the patentee the same expected profits, but that substantially increases efficiency in comparison with an “idealized” patent regime (in which a patentee can instantaneously win an injunction to stop infringement). Legal scholars have failed to appreciate that unconstrained monopoly pricing is not a cost-justified means of rewarding patentees. The last bit of monopoly pricing produces large amounts of deadweight loss for a relatively small amount of patentee profit. If society wants to use patent profits to induce innovation, it should choose the method of producing a particular level of profit that produces the least cost to society. But allowing patentees to raise price all the way to the monopoly level is a little like giving them a license to steal car radios – it produces a social cost (to car owners) far greater than the private benefit. The dual thesis of this Article is that (1) efficient patent policy should strive to give patentees constrained market power, and (2) an enforcement regime with uncertainty and delay (in conjunction with the appropriate patent duration) may be one way of achieving this policy goal. Even if readers ultimately are unwilling to accept uncertainty and delay as tools to constrain patentees’ market power, the insight that the last bit of monopoly pricing provides disproportionately small profits in comparison to its social cost should be of continuing independent concern to policymakers seeking an optimal enforcement regime.