Contributory Infringement Rule and Patents

The contributory infringement rule assesses liability to a third party that contributes to the infringement of a patent. Not only are firms that directly infringe liable, but those that indirectly contribute are also liable. We investigate how this rule affects the creation of a network of members (e.g., an e-commerce network). We find that the enforcement of indirect liability does not induce more trials in equilibrium. Firms settle out-of-court, but because of the threat of trial, the network size decreases and the social welfare is reduced. Surprisingly, we find that if the compensation paid by the indirect infringers is high, the rule does not benefit the patentholder and may not even give enough R&D incentives ex ante. It is possible to find a direct compensation for the patentholder that is socially preferable.