A theory of pre-filing settlement and patent assertion entities

An informed (prospective) plaintiffcan send a take-it-or-leave-it demand to an uninformed (prospective) defendant with the threat of a lawsuit that may not be credible. In this context, the well-known perfect separating equilibrium in litigation bargaining game (Reinganum and Wilde, 1986) no longer exists, and all perfect Bayesian equilibria with pre-filing settlements exhibit a cutofffeature. These equilibria offer an explanation for the distinctive behaviors of Litigation PAEs, who aggressively file lawsuits for settlements, and Portfolio PAEs, who obtain licensing revenues through pre-filing settlements. Our comparative statics results lead to testable hypotheses regarding how litigation costs and the plaintiff's reputation affect the settlement amount before and after the cases are filed, and the frequency of lawsuits from a given plaintiff. (C) 2020 Elsevier B.V. All rights reserved.