Probabilistic Patents, Alternative Damage Rules and Optimal Trade Policy

This paper analyzes interdependencies between optimal trade policy and 'preferred' liability doctrine to assess infringement damages, when intellectual property rights are probabilistic, in a model of import competition between a foreign patentee and a domestic infringer. It shows two reversal results. First, a regime switch from protectionism to free trade reverses stakeholders' preferences over liability doctrines. In the free trade regime both the infringer and consumers prefer the 'unjust enrichment' rule, while the patentee prefers the 'lost profit' rule, over any convex combination of these two liability doctrines. In contrast, in the regime of trade policy intervention, the importing country's government prefers the 'lost profit' rule, which best protects interests of the infringer at the expense of both consumers and the patentee. Second, the optimal trade policy changes from an import tariff under the 'lost profit' rule to import subsidization under the 'unjust enrichment' rule, unless the patent is weak.