The Criterion Journal on Innovation: The Real Option Value of Patent Infringement by Andrew P. Vassallo
Would one ever put a quarter in a parking meter if the fine for illegal parking were $0.25? The most common remedy for patent infringement is a reasonable royalty, which is estimated as the outcome of a hypothetical negotiation at the time of first infringement. That is, the most common remedy for infringement is the price the infringer would have paid absent the infringement. Such a remedy minimizes the incentive for a potential licensee to seek a license before infringement. In addition, the remedy grants to the infringer a valuable real option to infringe a patent and pay a royalty in the future roughly equal to the royalty that would be paid today. That royalty is paid only if (1) the infringement is discovered, (2) the potential royalty is significant enough to cover the transaction costs of licensing, and (3) the patent holder is successful in enforcing its patent rights.