FINANCING AND THE PROTECTION OF INNOVATORS

The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defense of a petent and, thus, the prospects of infrigement and the effective protection of the innovator. We compare the resort to a financier once the infrigement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropiate deductible) so as to implement the innovator's second-best outcome: a situation in which patent predaction is deterred without inducing excessive litigation.