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Economics of Industry Paper
Broad Cross-License Agreements and Persuasive Patent Litigation: Theory and Evidence from the Semiconductor Industry
Alberto Galasso July 2007
Paper No' EI 45:
Full Paper (pdf)

JEL Classification: 031; 032; C78; L63

Tags: cross-license; patent litigation; bargaining; semiconductors.

In many industries broad cross-license agreements are considered a useful method to obtain freedom to operate and to avoid patent litigation. In this paper I study the previously neglected dynamic trade-off between litigating and cross-licensing that firms face to protect their intellectual property. I present a model of bargaining with learning in which firms’ decisions to litigate or crosslicense depend on their investments in technology specific assets. In particular the model predicts that where firms’ sunk costs are higher, their incentive to litigate and delay a cross-license agreement is lower. In addition, the bargaining game shows how firms with intermediate values of asset specificity tend to engage in inefficient 'persuasive litigation'. Using a novel dataset on the US semiconductor industry I obtain empirical results consistent with those suggested by the model. Combining model intuition with some empirical figures, I evaluate possible effects of the currently debated patent litigation reform.