Patent Litigation Settlement in Germany - Why Parties Settle during Trial

With about 600 cases per year Germany is the most active country in Europe when it comes to patent litigation trials. These trials, usually initiated by a patentee suspecting the infringement of his patent by another firm, are aimed at delivering a judgment about whether the infringement took place. If the court rules that there is an infringement it bans future infringement and decides about appropriate damage awards to be paid to the patentee. The most striking fact about these patent litigation trials is that - even though initiated to obtain a ruling on the dispute - about 60 percent of the cases never reach a final judgment. They are either withdrawn bilaterally or unilaterally or dropped because the counterparties have reached a private settlement agreement. From a theoretical point of view this is astonishing as a settlement agreement is also possible prior to trial, without incurring any (sometimes very costly) lawyer and litigation expenses.

The purpose of this study is therefore to investigate why and under which conditions the plaintiff and defendant decide to not go for a judgment, but to deal out some private settlement arrangement after having reached out to the courts.

The study is conducted using a unique, hand-collected database compiled at the ZEW that contains detailed information about roughly 80 percent of all patent litigation cases in Germany between 2000 and 2008.

Theoretical models from the law and economics literature suggest that asymmetries in information and stakes drive parties to choose trial rather than a settlement deal. Applying this reasoning to the decision to settle or not after having filed a court case we argue that parties will deviate from their decision to obtain a judgment only if the asymmetries change during trial in a way that makes a settlement deal more attractive. Our results show that, indeed, changes in information and stakes arising after the filing of the court case can increase the likelihood of settlement. If an expert is called upon by the judges to deliver an expertise about the technical details of the infringement the informational asymmetries between plaintiff and defendant reduce, aligning their estimates about their prospect at trial and making a settlement agreement more attractive for both. If the stakes for one or both of the parties suddenly increase during trial through the setting of a very high value of the dispute by the judges or through the filing of a nullity suit by the defendant that severely threatens the monopoly right of the patentee, the parties also recalculate their expected payoff from trial. Our results show that under these new conditions they are more likely to conclude that settlement is the better option.

In addition to these changes invoked during trial proceedings we find the general willingness to settle rather than wait for a judgment to depend on overall firm specific-­‐stakes, strategies and the firm’s confidence in the case. Firms with overall higher stakes in the case, more confidence in winning and the strategy to obtain a stable judgment at a highly accepted court are generally less likely to change their mind and deal out a settlement agreement.

Cremers, Katrin and Paula Schliessler (2012), Patent Litigation Settlement in Germany - Why Parties Settle during Trial, ZEW Discussion Paper No. 12-084, Mannheim, published in: European Journal of Law and Economics.