Proportional Restraints and the Patent System

To be mutually-preferred to litigation, patent agreements between rivals often must restrain competition to some degree. Any such agreement forestalls a ruling on the patent’s validity (and hence its enforceability), which depends largely on the “innovativeness” of the invention. Ideally, there would be proportionality between (1) the quality of the patent (the probability it is valid) and (2) the extent to which competition is restrained. We show that antitrust can accomplish this by simply policing the manner in which competition is restrained, and by prohibiting certain side-deals that always subvert proportionality. Different restraints vary considerably — and predictably — in the extent to which bargaining possibilities deviate from the firms’ litigation expectations (which depend on patent quality). We can thus infer the degree of proportionality from the nature of the agreement, making it unnecessary to estimate competitive effects or patent quality.