Financing Patent Litigation through Market Entrance

We propose a model of patent litigation where a potential competitor - the Entrant - can challenge a patent with and without entering the market before a final court decision. We study the settings (the Financing Space) where market entrance is used to finance patent litigation, i.e. where the Entrant would not have challenged the patent's validity, had she not been able to enter the market. This space increases in the Entrant's litigation costs, but decreases in the Patent Holder's litigation costs and as the court becomes better at calculating the size of damages to the Patent Holder. When the value of future access to the market increases, the size of the Financing Space decreases. And, with some constraints, the Financing Space increases with the likelihood of the patent being valid. Finally, market entrance may also finance the Patent Holder's litigation costs, such that he litigates in settings where he would not have, if the Entrant had not entered. As such, entrance can be a double edged sword.Our insights have implications for how attorneys should advise their clients on strategy and how policy makers should amend the patent litigation system to fulfill their goals