Proportional Restraints in Horizontal Patent Settlements

When rivals settle a patent dispute, they prefer to preserve the full monopoly profit, even if the patent is very likely invalid. The literature advocates comparing settlement outcomes to the expected result of litigation, but has not identified a comprehensive means of doing this. We show that a settlement's design - the way it restrains competition - determines how bargaining possibilities compare to the firms' litigation expectations. We identify "proportional" restraints such that the firms can only agree on outcomes generating the same profits - and greater consumer welfare - than they expect from litigation. This avoids the need to estimate the odds of counterfactual patent litigation.This is a previous draft. The updated version is available at: https://papers.ssrn.com/abstract=3670815