The Design of Post-Grant Patent Challenges

This paper investigates the optimal design of a patent challenge mechanism through the re-allocation of patent rights, in which a successful challenger is rewarded with partial patent rights previously granted to the patentee. Two incentive problems shape the optimal mechanism: how to provide a potential challenger with adequate incentives to look for the defeating prior art, and whether and how to prevent collusion once the prior art has been found. Transferring patent rights to a successful challenger encourages search and deters collusion; it also reduces costly opportunistic patenting and therefore improves patent quality. However, from an ex post point of view, over-search ensues when collusion is severe or when the challenger is the only user of the technology. The optimal policy, then, calls for a careful balance between these costs and benefits. The paper also shows that when multiple players engage in sequential searches, the optimal policy may be to deter collusion in the later stage but accommodate collusion between the patent-holder and the fact-finder after the early stage of search. Partial collusion-deterrence preserves the subsequent searcher's incentives and reduces the cost to fight collusion