Contributory Infringement Rule and Patents

The contributory infringement rule assesses liability to a third party that contributes to the infringement of a patent. Not only are firms that directly infringe liable, those who indirectly contribute are also liable. In the e-commerce world, this rule takes on an important dimension because of the network structure of the Internet. We investigate how the contributory infringement rule affects the creation of a network of members (membership program) and whether this rule is harmful to consumers and firms. We find that the enforcement of the contributory infringement rule does not induce more trials in equilibrium. However, because of the threat of trial, it decreases the network size, and then reduces the social welfare. Surprisingly we find that if the compensation paid by the indirect infringers is high, the contributory infringement rule does not benefit the patentholder and does not give enough R&D incentives ex ante. It is even possible to find a direct compensation for the patentholder that is socially preferable (as it increases the network size).