Damage rules and the patent hold-up problem: Lost Profit versus Unjust Enrichment

Abstract

This paper provides an analysis of two damage rules (Lost Profit versus Unjust Enrichment) introduced in the French Code de la Propriété Intellectuelle in 2007 (Loi du 27 Octobre 2007, Art. L. 615-7). We use a simple sequential game where both the decisions to infringe and to enforce the patent, as well as the decisions to accommodate, settle or litigate the case, and the outputs decisions (Cournot competition) are endogenous. We characterize the equilibria associated with each rule, and compare their properties. We show that: 1/ the Unjust Enrichment rule provides Patentees with higher damages compensation than the Lost Profit one; however, 2/ Lost Profit induces more deterrence of infringement, and is associated with less trials than Unjust Enrichment; 3/ Unjust Enrichment may deter the Patentee to enforce his right; 4/ when there is a positive probability that the case settles, Patentee's expected utility is higher under Lost Profit than under Unjust Enrichment.