Allocation of Legal Costs and Patent Litigation: A Cooperative Game Approach

We compare the bargaining power of the patentee under American and English rules of legal costs allocation. Using the Nash Bargaining Game framework, we show that litigation can be a Pareto efficient outcome. The cooperative game framework allows us to examine how the institutional and market factors influence bargaining powers of plaintiff and defendant under different rules of legal cost allocation, free from assumptions on information and sequence of moves. The American rule renders the patentee more bargaining power when the legal system favors the defendant. An increase in damage reward raises bargaining power of the plaintiff and the settlement rate. ∗Department of Economics, State University of New York at Stony Brook; E-mail address: [email protected]. We are indebted to Robert J. Aumann, John Hillas, Murty Mandapaka, Thomas J. Prusa and Yossi Spiegel. †Department of Industrial Economics, Tamkang University, Taiwan.