Patent assertion entities and the courts: Injunctive or fee-based relief?

A 2006 U.S. Supreme Court decision encouraged district courts to rely more on license fees and less on injunctions as a remedy for patent infringement. This paper provides a simple model in which a patent-owning "patent assertion entity" (PAE) and an infringing firm engage in Nash bargaining over a possible license fee after the PAE initiates an infringement lawsuit. We compare a fee-based regime in which the court imposes a "fair value" license fee if there is no settlement with a regime in which failure to reach a settlement leads to an injunction that disrupts production. The injunctive regime always involves a settlement but, in a fee-based regime, settlements occur only for patents on drastic innovations (as defined by Arrow, 1962). For small incremental innovations, PAEs prefer the injunctive regime because negotiated license fees are higher. For higher value innovations, license fees are lower in the injunctive regime and PAEs would prefer the fee-based regime, contrary to the presumption that injunctive regimes necessarily favor PAEs.