This paper focuses on the class of legal rules that governs intellectual property rights: the antitrust limits imposed on patent settlements. The paper discusses the benefits and costs of settlements and explains why antitrust limits on settlements are needed to prevent abuse of the settlement process. It develops a general rule for evaluating proposed settlements. This paper explores a simple antitrust rule governing settlements of intellectual property disputes: a settlement cannot lead to lower expected consumer surplus than would have arisen from ongoing litigation. It argues that this rule respects intellectual property rights while encouraging efficient settlements. Under extremely general conditions, there exists a settlement that leaves consumers better off and raises the joint profits of the two firms engaged in the dispute. This general test is then applied to several types of settlements: mergers; agreements specifying the timing of entry; and patent pools.
