# The legal enforcement of intellectual property rights: an empirical study on French trademarks

Etienne Pfister

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The legal enforcement of intellectual property rights:
an empirical study on French trademarks

Etienne PFISTER

2000.109
# The legal enforcement of intellectual property rights: an empirical study on French trademarks*

Etienne Pfister

November 2000

<footnote>*TEAM-CNRS-University of Paris I, cpfister@univ-paris1.fr. I wish to thank the SESSI (French Ministry of Industry) for data access and the CGP and the CNRS for financial support. Jenny Lanjouw, Reinhilde Veugelers, Emmanuel Combe, Bruno Deffains, David Encaoua, Josh Lerner, Thierry Mayer, Markus Reitzig and Philippe Saucier also provided useful suggestions. An earlier version of this paper was awarded a prize at the 2000 Young Economist Competition of the European Association for Research in Industrial Economics (EARIE).</footnote>
Abstract

A combination of survey and quantitative data is used to estimate the extent of trade-
mark infringement and to examine whether the variables prominent in the theoretical
literature are statistically useful in explaining the enforcement strategies of imitated firms.
Compared to the previous empirical studies in the field, this dataset presents several dis-
tinctive features regarding the measurement of enforcement strategies and the type of
independent variables. Most of the intuitions developed by the theoretical literature are
confirmed but I also find that a large market share reduces the probability of enforcement
while a large size confers a very significant advantage in out of court negotiations.

Keywords : trademarks, enforcement, intellectual property.

Résumé

Des données qualitatives et quantitatives sont utilisées pour appréhender l'étendue de
la contrefaçon de marque et la pertinence des propositions théoriques avancées pour expli-
quer les comportements de poursuites et d'accord à l'amiable relatifs à cette contrefaçon.
Par rapport aux autres études empiriques réalisées dans ce domaine, la base de donnée
constituée présente plusieurs spécificités quant à la mesure des stratégies de protection et
des variables indépendantes, nous permettant ainsi de proposer plusieurs résultats orig-
inaux. Ces derniers confirment d'ailleurs la plupart des intuitions mises en avant par la
littérature théorique. Il apparaît par ailleurs qu'une part de marché importante rend les
firmes imitées moins agressives à l'égard de leurs contrefacteurs tandis que les grandes
firmes parviennent plus facilement à obtenir un accord à l'amiable.

Mots-clés : marques, poursuites, propriété intellectuelle.

JEL codes : L2, K41, K42,
# 1 Introduction

Understanding the legal enforcement of intellectual property rights (IPRs) matters crucially to the design of socially optimal IPRs, be they patents, trademarks or copyrights. First, the costs and uncertainties associated with the enforcement process are likely to have a significant impact on the expected profits associated to patents or trademarks and thus on the incentive to innovate and/or introduce new products (Lanjouw, 1998, Aoki and Hu, 1999). Second, several papers have argued that firms may be unequally endowed to manage these enforcement processes. In particular, Cohen and al. (1997) as well as Combe and Pfister (2000) find strong evidence indicating that smaller firms tend to be more sensitive to the enforcement costs related to patent protection. As a result, IPRs from smaller firms may be less respected (as shown by Koen, 1991) or, conversely, smaller firms may be more severely deterred by the IPRs detained by their competitors<fnref n="1" /> (Lerner, 1995a). Finally, enforcement processes often imply socially inefficient costs and delays that may impede economic efficiency. Merger and Nelson (1994) point out to the strong inefficiencies induced by lengthy litigation in the early automobile industry. A more recent example can be found in the latent conflict that has opposed *Gencell* to *Schering-Plough* (Ducruet, 1998). In this case, *Schering-Plough* had a patent on a genetic component used by *Gencell* in its research programs. According to the representatives of *Gencell*, *Schering-Plough* launched several trial threats while simultaneously refusing to negotiate a settlement agreement. The uncertainty associated with this conflict subsequently led *Gencell* to privilege other research programs.

As the use of IPRs spreads upon new domains (such as softwares) and new countries (those emerging countries that have signed the TRIPs agreement of the World Trade Organization<fnref n="2" />) and as the advent of new replicating technologies makes imitation a lot easier, the number and the scale of these conflicts is very likely to rise. On the other hand, the stronger stance adopted towards IPRs in the early 80s has led several large manufacturers of the semi-conductor industry, such as *Texas Instruments*, to adopt more aggressive strategies towards presumed infringers (Hall and Ham, 1999) and to litigate patents they once left unenforced, thus yielding significant receipts through litigation (Rosen, 1992).

The legal enforcement of IPRs thus comprises an important set of issues. However, despite the constantly growing theoretical literature in law and economics that does address the process of dispute resolution (Deffains, 1997), empirical studies on IPR legal conflicts remain relatively scarce so that we have only scant knowledge on how these conflicts are resolved and on how to make them more efficiently solved. For instance, while there seems to be a general consensus on the higher sensitivity of smaller firms to litigation costs, there is only small evidence that these costs really deter small firms from enforcing their IPRs. Lerner (1995a) argues that legal experience matters just as much as financial strength and Duguet and Kabla (1997) find no evidence that a higher sensitivity to patent enforcement costs prevents firms from patenting their innovations. Another aspect of the empirical literature is that it is largely American-based. Yet, the United States' legal system displays several distinct features compared to the European ones. In particular, legal statistics and survey data reveal that the level of damage awards and of litigation costs is higher in the United States than in anywhere else in the world

<footnote n="1">¹Lanjouw and Lerner (1996) also find that smaller firms involved in patent conflicts are more heavily preyed upon by the preliminary injunctions of (often larger) opponents.</footnote>

<footnote n="2">²The Trade-Related Intellectual Property Rights agreement entails that all member countries of the World Trade Organization should adopt and enforce minimum standards of intellectual property rights protection.</footnote>
(Veron, 1997; Combe and Pfister, 2000). Finally, most of the evidence so far has concentrated on patents, thus neglecting other types of IPRs that are likely to be at least as important for firm appropriation strategies, especially given the administrative costs and the disclosure requirements imposed by patent law.

This paper consists in an empirical examination of the determinants of litigation and nego-
tiation strategies and gives at least a partial answer to some of the questions outlined above. To
this end, I have built a dataset that presents several distinct features. First, it is based upon
survey data regarding the enforcement strategies of corporate trademark owners faced with in-
fringers. Through the combination of data on the firms' *propensities* to litigate these infringers
and/or to settle the case<fnref n="3" /> with data on the number of filed complaints and/or agreements, I
assess each firm's *propensity* to react to an infringement, to find an out of court settlement (as
opposed to litigation) and to find a court settlement agreement (as opposed to trials). Thus,
the dataset fully accounts for the sequence of enforcement strategies that may follow an in-
fringement. In particular, unlike all the previous studies in this field, I am able to analyse the
determinants of out of court settlements, a strategy often left out because of inadequate data.
Also, I focus on firms that have declared that they have been infringed; previous papers on this
topic were not able to draw that distinction and it was sometimes delicate to distinguish those
characteristics that influence enforcement strategies from those that govern the probability of
infringement.

Another distinctive feature of my dataset is that it combines data on the type of imitation
(closeness to the original product, destination country(ies) and the damage done to the original
producer) with imitated firms’ characteristics such as size, financial capacities, market share
or advertisement expenditures. Thus, I am able to analyse which type of infringements are
more fiercely addressed by the original producer but also which original producers develop
the most aggressive enforcement strategies towards infringers. Finally, the dataset focuses on
trademark infringement, a presumably frequent sort of infringement (given the ease of imitating
a trademark and given the high propensity of firms to use such institutional tools to protect
their own image or that of their products<fnref n="4" />) but which has scarcely been considered in the
empirical literature. This combination of traits allows us to produce original yet thoroughly
needed results on how and when firms react to the infringement of their IPRs.

This is not to say that this dataset is flawless, however. First, our conclusions regarding
the trade-off between court settlement and trial should probably be considered with caution
because only 7 out of the 161 firms that are still present at this stage of the enforcement process
prefer court settlements to trials. More fundamentally, because this dataset consists (at least for
some variables) in survey data, I cannot escape the measurement problems usually associated
with this type of studies. In particular, I am unable to differentiate all the cases of infringement
faced by the original producer. Neither can I trace each conflict's costs, damages and court
decisions. It is worth pointing out that the combination of firms' propensities to litigate/settle
their cases with the number of cases actually filed or settled enabled me to eliminate incoherent
respondents. Also, the search for quantitative data to match *court* (as opposed to *survey*) data

<footnote n="3">³Respondents were asked to choose between four ordered qualitative variables (never, sometimes, often or always) to describe their propensity to litigate or settle cases of infringement.</footnote>

<footnote n="4">⁴Indeed, compared to patents, trademarks are a lot less costly and complicated to deposit than patents. Moreover, in the case of trademarks, there is no equivalent of the patent/secrecy trade-off since the product that the trademark seeks to protect does not have to be described in precise terms. In other words, the trademark does not facilitate the imitation and there is no strategic reason not to deposit a trademark.</footnote>
would have been much more hazardous. Finally, qualitative data are probably unavoidable if
one needs to consider out of court settlements.

The rest of the paper is framed as follows. Section 2 reminds the reader of the basic
theoretical predictions associated with a stylized, two-firm, IPR conflict. It also briefly considers
the previous empirical literature. Section 3 describes the sample and the dependent variables.
Section 4 uses these data to estimate the extent of imitation in French industries as well as
the firms' responses to imitation. It also presents ordered multinomial and conditional logit
regressions aimed at evaluating the determinants of the enforcement strategies. Section 5
concludes.

2 Theoretical considerations and previous empirical liter-
ature

Games of litigation and settlement are abundant in the law and economics literature<sup>5</sup>. Given the dataset at hand, it is very clear that not all the implications of this literature can be tested. In particular, the conclusions of incomplete information models cannot not be assessed as I do not have any information on the terms of agreements or even on the agreements that have failed. Besides, I do not have the court data necessary to estimate which theoretical framework (complete or incomplete information) would be the most appropriate; in particular, I do not have any data on the results of the trials to apply the much used Priest and Klein (1984) methodology<sup>6</sup>.

Therefore, I prefer to relate my results to the complete information structure exposed below<sup>7</sup>.
In a second subsection, I relate these results to the recent but scarce empirical evidence that
has been gathered in this field.

**2.1 Some theoretical considerations**

Assume a trademark owner *A* faced with an infringer denoted *B*. Figure 2.1 depicts the various responses that can be given to this infringement. The imitated firm *A* first has to decide whether it is profitable to react to the infringement. In particular, assuming complete information, its expected trial profit must exceed its expected trial costs<fnref n="8" />. If not, its trial threat is not credible and the negotiation process will not be any more profitable (since the plaintiff has no threat to impose on the unrepentant defendant). Once the credibility constraint is fulfilled, the plaintiff firm faces two distinct strategies : it can either negotiate with the infringer, in which case an

<footnote n="5"><sup>5</sup>See Cooter and Rubinfeld (1989) or Deffains (1997) for a survey of these models.</footnote>

<footnote n="6"><sup>6</sup>See Siegelman and Waldfogel (1999) for a recent application of the Priest and Klein framework.</footnote>

<footnote n="7">⁷See Lanjouw and Lerner (1996, 1997) for some theoretical discussions of the same spirit. Also note that the empirical evidence gathered Siegelman and Walfogel (1999) stresses that compared to other types of conflicts, IPR conflicts are characterized by a symmetric and well distributed information. Indeed, as they point out, most of the characteristics of the case are public, parties are often assisted by experienced lawyers and conflicts are usually decided by judges specialized in this field rather than by juries. On the other hand, some court decisions on trademark conflicts appear to be very subjective (see below). Whether this leaves room to asymmetric information is less certain as it is unlikely that any of the parties has private information about the issue given to the conflict.</footnote>

<footnote n="8">⁸Incomplete information regarding the expected trial profits or costs may allow the plaintiff to adopt a *bluffing* strategy by which it will seek a settlement agreement even when its expected trial profit is negative. See Meurer (1989).</footnote>
out of court agreement is found, or litigate him. In this latter case, it can still seek a court
settlement or it can prefer a full trial instead<fnref n="9" />.

Later on, the dataset will allow us to analyse the determinants of this three-stage decision
process : reaction vs no reaction, out of court settlement vs litigation and court settlement
vs trial. Before, I briefly consider some of the theoretical predictions associated with each of
these trade-off. I proceed in backward induction and start with that between trial and court
settlement.

<figure><img src="image_3.png" /><figcaption>Figure 2.1 : A game of litigation and settlement</figcaption></figure>

**2.1.1 The trade-off between a court agreement and a trial**

A owns a trademark that has been imitated by a firm denoted B. At this stage of the game, each firm makes a profit $\Pi_d^i$, $i = A, B$. Litigation has begun so that these firms have the choice

<footnote n="9">⁹Note that due to the complete information setting, the left branch starting at the negotiation point in figure 2.1 can be deleted as negotiations will never be engaged unless firm A is certain that they can be successful.</footnote>
between a trial and a court settlement. A court settlement will consist in firm B paying a jointly agreed fixed or royalty fee to firm A in order to avoid the trial and to continue the exploitation of A's trademark. As the fees merely pass from one firm to another, it does not affect the surplus that is obtained under this solution and which can be written as $\Pi_d^A + \Pi_d^B$ under the assumption of zero negotiation costs<fnref n="10" />.

The trial can force B to pay the damages J to plaintiff A and to leave the market. In that case, firm A enjoys the monopoly profits $\Pi_m^A$ and the damage awards J. A trial can also relax firm B from the charges made against it, in which case both firms enjoy the profits $\Pi_i^d$, $i = A, B$. Let $\alpha_i$ ($i = A, B$) denote the subjective probability that A prevails at trial. The trial costs are denoted as $T_i$, $i = A, B$, and each firm is responsible for its own litigation costs<fnref n="11" />. A's and B's threat points are thus given by the following equations:

$$\Pi_t^A = \alpha_A(\Pi_m^A + J) + (1 - \alpha_A)\Pi_d^A - T_A \quad (1)$$

$$\Pi_t^B = -\alpha_B J + (1 - \alpha_B)\Pi_d^B - T_B \quad (2)$$

Because an agreement will be concluded if and only if it is jointly preferable over a trial, the following condition must be met for an agreement to be signed:

$$T_A + T_B > \alpha_A \Pi_m^A + (\alpha_A - \alpha_B) J - \alpha_A \Pi_d^A - \alpha_B \Pi_d^B \quad (3)$$

Hence, proposition 1:

**Proposition 1** Once litigation has begun, the probability that a court settlement is found increases with the litigation costs and with the duopoly profits of both firms but decreases with the monopoly profits of firm A, with the optimism of both parties and with the stake asymmetry of the conflict.

Indeed, an increase in duopoly profits reduces the marginal profits associated to a trial both because firm A will only enjoy a small marginal increase in its profits if it wins and because the risk taken by firm B increases. On the contrary, as the monopoly profits increase, a trial becomes more profitable for A because a settlement agreement will never guarantee him with the same level of profits.

The optimism of the parties is measured by $(\alpha_A - \alpha_B)$. As $\alpha_A$ increases, so do A's expected trial profits. As $\alpha_B$ decreases, B's expected trial profit increases. Thus, when both firms are

<footnote n="10">¹⁰We also assume that agreement does not facilitate collusion strategies.</footnote>

<footnote n="11">¹¹In France, where the continental rule of cost allocation prevails, the loosing party is supposed to be responsible for the total administrative costs of the legal procedure. However, estimates tend to show that only a third of the litigation costs of the winning party tends to be recovered (Industries, 1998). Litigation costs are supposed to have no influence on the objective value of $\alpha$, an assumption consistent with exogenous litigation costs. Rubinfeld and Sappington (1987) assume endogeneous trial costs in the context of a criminal case. In their model, the investment that a party puts into trial provides a signal to the courts. A stronger signal (higher trial costs) increases the probability that the judge will favor the facts represented by the sender and this will influence its probability of winning. Hause (1989) looks at the effects of alternative allocation rules of litigation costs in the context of endogeneous litigation costs and concludes that the continental system, where the loosing party is supposed to bear all litigation costs, induces overspending at trials, as the marginal value of each additional expenditures is increased by the higher trial stakes and as the expected costs of trial investment are decreased.</footnote>
optimistic, the surplus associated with a trial increases while that associated with a settlement decreases.

To understand the role of stake asymmetry, assume that $\alpha_A = \alpha_B$ and note that even in this case, trials cannot be ruled out as $(\Pi_m^A - \Pi_m^B - \Pi_d^A + \Pi_d^B)$ - which is what we define as the stake asymmetry (firm A's stake minus firm B's stake) - may still exceed the level of combined litigation costs. In particular, it is worth pointing out that firm A “fights” to be the only firm allowed to use the infringed trademark while B “fights” only to share this right with A (and possibly with any other firm willing to enter the market). The rewards associated with a trial victory for A may exceed the monopoly profits $\Pi_m$. For instance, a trial victory may deter further infringements. If A's total reward from trial victory is set to $\lambda\Pi_m$ ($\lambda > 1$), his incentives to go to trial will be further increased. Among the forces that could drive up the stake asymmetry figure reputation concerns on the part of the plaintiff who seeks to impress future infringers with a severe enforcement strategy<fnref n="12" />.

Finally, it can also be shown that the level of optimism of the parties involved in the conflict influences whether greater damage awards *J* make settlement easier or more difficult. Indeed, when the parties are optimistic, an increase in *J* strongly increases the trial incentives of firm *A* while leaving those of firm *B* almost unchanged. In that case, stronger damage awards make a trial more likely. It is the opposite when the parties are pessimistic. The level of damage awards has no influence on the settlement/trial trade-off when the parties have an objective knowledge of $\alpha$ since any increase in *J* will be compensated in the terms of settlement<fnref n="13" />.

### 2.1.2 The trade-off between an out of court settlement and litigation

Now that the determinants of the trade-off between trials and settlement agreements have been found, I consider the choice between out of court settlement and litigation (given that a firm has reacted to the infringement). Launching the litigation process is assumed to incur a fixed cost *F*. On the other hand, out of court negotiations now cost $N_i$, $i = A, B$ to each firm. Indeed, compared to court negotiations, the parties no longer have a legal assistance designed to promote settlement and this may result in higher negotiation costs<fnref n="14" />. Two different cases need to be considered depending on whether a court settlement agreement is reached once litigation has begun.

When a settlement agreement cannot be found once litigation has begun, an agreement might still be found before litigation has begun because this would prevent firm *A* from incurring the filing cost *F*. On the other hand, this negotiation strategy also entails specific negotiation

<footnote n="12">¹²Of course, if he is a repeat imitator, firm *B* may also seek to appear as a tough bargainer, in which case its incentive to go to trial is increased. The dataset exploited by Siegelman and Walfogel (1999) reveals that repeat plaintiffs are a lot more frequent than repeat defendants especially in the case of IPR conflicts. Another point that has to be considered concerns the risk associated with an infringer victory at trial. This opens the way for further entry and, as demonstrated by Choi (1998), the IPR owner may not launch any litigation in order to maintain uncertainty regarding its trial win probability and deter further entry.</footnote>

<footnote n="13">¹³The profits of each firm under the settlement agreement can be derived from the above calculations and shown to decrease with own litigation costs and to increase with those of the opponent. Because I have no data on the terms of settlement, I prefer to leave this point out of the current presentation. Also note that in a complete information context, these profits are unlikely to influence the trial/agreement trade-off as any party is sure to get at least as much through an agreement as through a trial - provided the negotiation surplus is positive.</footnote>

<footnote n="14">¹⁴Of course, a less stringent but equivalent assumption is merely that negotiating out of court is more costly than negotiating in the courts.</footnote>
costs denoted $N_A$ and $N_B$. Again, for a (out of court) settlement to be found, the (out of court) negotiation surplus has to be positive, which entails :

$$ (T_A + T_B + F) > \alpha_A \Pi_m^A - \alpha_A \Pi_d^A - \alpha_B \Pi_d^B + (\alpha_A - \alpha_B)J + N_A + N_B \quad (4) $$

Comparing this expression with equation 3 yields that an out of court settlement will be found only if the above condition is met and if $N_A + N_B < F$.

If a settlement can be found both before and after litigation has begun (meaning that conditions 3 and 4 are met), the strategy chosen by firm A will be the one associated with the greatest profit, i.e., with the greater negotiation surplus. This implies that the choice between both negotiation strategies will hinge on their respective costs. Thus, again, the out of court negotiation strategy will be chosen if and only if $F > N_A + N_B$.

We may now derive proposition 2 from the above discussion :

**Proposition 2** The trade-off between out of court negotiations and litigation presents the same particularities as the trade-off between court negotiation and trials except for one point : an out of court negotiation strategy may only be preferred to litigation if the total negotiation costs $N_A + N_B$ are inferior to the litigation costs $F$.

### 2.1.3 The trade-off between reaction and no reaction to the infringement

For any action to be profitable, the expected trial profit of firm A must exceed the current profit $\Pi_d^A$. Otherwise, no settlement will ever be found and the trial will never be chosen as it is not profitable. On top of this, the infringer must also be detected, which may not be an easy task if the imitation is produced in a foreign country. Therefore, an action will be undertaken if and only if :

$$ \alpha_A(\Pi_m^A + J - \Pi_d^A) - T_A - F - D > 0 \quad (5) $$

where $D$ denotes the cost of detecting the infringer. Hence :

**Proposition 3** The propensity of a firm to react to an infringement increases with the imitation loss, with the level of damages granted if he prevails at trial and with the probability of winning and decreases with the trial, litigation and detection costs.

There are many points that could be added to this simple structure to make it more descriptive of the theoretical literature on this matter. Trial as well as litigation costs can be assumed to be endogeneous and some of the above conclusions can then be reversed<fnref n="15" />. As demonstrated by Meurer (1989) and others, asymmetric information and strategic negotiation strategies aimed at capturing a larger share of the surplus can also reverse - or reinforce (see Bebchuk, 1984) - the above conclusions. Again, however, it is not the aim of the above developments to encompass all the complexities of the existing literature. Given the absence of court and case data comprising the terms of settlements and the plaintiff win rate at trial, the conclusion of such models could not have been put to test. Rather, the above model should be viewed as a baseline framework.

<footnote n="15">¹⁵For instance, as the trial stakes increase, firms would spend more in the case of a trial. Thus trials would get more costly as stakes increase and settlements may be preferred (Cooter and Rubinfeld, 1989).</footnote>
## 2.2 Previous empirical literature

Though our empirical knowledge of IPR conflicts and enforcement strategies has greatly increased recently<fnref n="16" />, there are only a few empirical studies to which this work can be referred back to essentially because there are only a few studies that consider how firms choose to react to an infringement. Moreover, even in these studies, the data constraints are such that only a few of the trade-off exposed above have been put to test. Some of the studies have tried to relate several patent characteristics to the above propositions. Another class of studies considers the enforcement strategies of small firms.

### 2.2.1 Patent characteristics and litigation

Probably the most ambitious attempt at evaluating the determinants of IPR litigation is the empirical study of litigated patents by Lanjouw and Schankerman (1997). Comparing a sample of more than 5 400 litigated patents to a matched sample of random patents of the same cohort and technological classes, they find that litigated patents (i.e., those patents that have figured in legal conflicts brought to the courts) present a higher number of future citations and of claims. Pharmaceutical and biotechnology patents are also more likely to be litigated. Because all of these characteristics can plausibly be related to a higher patent value, they argue that more valuable patents are more likely to be litigated, thus supporting the above theoretical relationships exposed in proposition 2 and 3. Unfortunately, their data do not allow the authors to draw a clear distinction between the determinants of reaction and those of litigation (as opposed to settlement). A potentially more damaging observation is that a higher number of future citations and claims makes an infringement conflict more probable, all else equal. Similarly, there could be a strong correlation between patent value and the value of the innovation it seeks to protect and thus a higher probability that valuable patents get infringed more often. Therefore, more valuable patents may be more litigated because they are imitated on a more regular basis rather than because their value dictates the behavior of the patentee.

Harhoff and Reitzig (2000) use a similar empirical framework to analyse the determinants of opposition to European pharmaceutical and biotechnology patents. Arguably, the measurement problems exposed above may be less pervasive than before as an imitating firm would not expose itself to prosecution by challenging the patent it has infringed<fnref n="17" />. They reach the same conclusions regarding future citations and patent scope as Lanjouw and Schankerman, which tend to prove that the results obtained by Lanjouw and Schankerman are quite robust. Besides, they also find that patents of lower quality (as rated by the European Patent Office) are more likely to be opposed, thus confirming that a higher probability of winning entails more aggressive litigation strategies. Again, however, they can only analyze the determinants of litigation (or opposition for that matter) and cannot reflect on out of court (or our of patent office) negotiation strategies.

Besides the relationship between litigation and patent value, the Lanjouw and Schankerman study provides many other interesting results. In particular, they find that challenge suits are a lot less frequent than infringement suits. Moreover, the coefficients of the probit regression explaining the occurrence of patent challenge suits are only a third of those of the same regression explaining patent infringement suits. This is a clear evidence of asymmetric stakes between patent challenge and patent infringement suits. Foreign patents, despite being of a

<footnote n="16">¹⁶See Lanjouw and Lerner (1997) for a survey.</footnote>

<footnote n="17">¹⁷Though this clearly is their strategy when they are being attacked for infringement.</footnote>
greater value, are also less frequently litigated than domestic ones but those litigated foreign patents are litigated as frequently as domestic ones. Thus, there seems to be a fixed litigation cost that must be incurred before the infringers can be litigated and which is higher for foreign firms. Finally, Lanjouw and Schankerman find that patents owned by individuals are more litigated than those owned by corporations, a somewhat surprising results since both financial capacity and reputation concerns should have induced corporate patentees to be more aggressive than individual ones. Again, though, it is uncertain whether this means that corporations have advantages in out of court negotiation processes or that individual patents get infringed upon more frequently. Because the litigation strategies of small firms figure prominently in the agenda of this literature, I briefly summarize the results that have been obtained so far.

### 2.2.2 The enforcement strategies of small firms

The higher litigation costs endured by small firms may prevent them from adequately enforcing their IPRs. Though intuitive, this relationship has yet barely been put to test. The most convincing attempt to date is probably that of Lerner (1995a), who shows that small biotechnology firms fear to tread into technological subfields where firms with greater financial strength and legal experience have already been granted some patents. Incidentally, his results also point out to the negative impact of litigation costs on the research incentives.

Most of the other attempts have focused on analyzing whether smaller firms make a lesser use of patents and other institutional tools of protection. Lerner (1995b) does find that smaller firms are significantly more involved in conflicts related to trade secrecy than in those related to patents. On the basis of a sample of large innovative firms, Arundel and Kabla (1998) similarly conclude that size and patent propensity are positively related. This relationship is fragile in many ways, however. First, nothing indicates that smaller firms patent less because of higher enforcement costs. Indeed, Duguet and Kabla (1997) even find that whether the firm is sensitive to patent enforcement costs does not impact on a firm's patent propensity (though sensitivity to patent disclosure does)<fnref n="18" />. Their results also reject the positive relationship between sales and patent propensity. Finally, as shown by Brouwer and Kleinknecht (1999), smaller firms that have patented at least one innovation tend to use patents more frequently, presumably because they have no other appropriation strategies at hand.

Despite the many issues at stake, it turns out that the empirical studies of IPR conflicts have so far failed to bring any clear-cut information on how firms decide their enforcement strategies. One may first feel disappointed at the lack of consideration for firm-level characteristics (beside litigation costs). In particular, there is no distinction between the enforcement strategies of dominant vs fringe competitors. More importantly, the determinants of the trade-off between litigation and out of court settlements are barely studied and when they are, they cannot be distinguished from those of the reaction/no reaction trade-off or, worse still, from the imitation/no imitation trade-off. With the exception of Lanjouw and Lerner (1996), who consider the use of preliminary injunctions in infringement suits, there is scarcely any relevant information on how firms arbitrate between the various options at hand when they are confronted with an infringer. This is particularly regrettable since most of the policies aimed either at encouraging smaller firms to enforce their IPRs or at facilitating out of court and court settlements have theoretically ambiguous impacts<fnref n="19" />.

<footnote n="18">¹⁸The sensitivity to patent deposit and enforcement costs is measured through survey data.</footnote>

<footnote n="19">¹⁹For instance, the French Ministry of Industry has recently proposed the idea of increasing damage awards for</footnote>
# 3 Sample and variables

## 3.1 The dataset

In 1993, the statistical department of the French ministry of industry (SESSI) conducted a survey called “Contrefaçon” which resulted in a sample of 2046 firms²⁰. Quantitative data on their turnover and industry were obtained from the EAE datasets (also from SESSI) for 1983 of these firms. Out of the 2046 firms sample, 521 firms declared that they had fallen prey to counterfeiters and 447 firms gave accurate and coherent answers about their propensity to settle the case or to proceed to trial (always, often, sometimes and never), along with the number of cases that have been settled or litigated. For all but 15 firms, this information allowed me to calculate the propensity of each firm to react to an infringement (either by litigation or by out of court settlements), to file a complaint, to find an out of court settlement agreement, to go to trial or, finally, to settle the case before trial²¹. As a last step to build to a coherent and useable dataset, I combined the qualitative information obtained for these firms with quantitative information on size, advertisement expenditures, financial strength and domestic market share²², a process which resulted in a sample of 397 firms (mean 1993 sales of FF 500 millions).

## 3.2 Elements of trademark law

The “Contrefaçon” dataset considers the infringement of trademarks. In particular, the questions related to the type of imitation (see below) clearly refer to elements of trademark law as opposed to patent or copyright law. This does not mean however that the trademark infringement was necessarily devoided of an imitation of patented innovations. Before describing the sample in more details, I give a short brief on French trademark law.

In France, the infringement of trademarks is defined as any violation of the rights associated with owning a trademark, including reproducing and/or using a trademark identical or close to an original one for products that may be identical, similar or even different from the original one.

The criteria for court decisions are of three types. They first consider whether the imitation is used in the same industry as that designed by the original trademark. If this is not the case, then the imitation is more likely to be ruled valid as a trademark is protected only in those few industries defined when the trademark is deposited. In a second stage, they consider whether the imitation can induce confusion in the minds of the consumers. The more similar an imitation, the likelier the confusion and the more severe the tribunal will be. Last, imitations of “notorious” trademarks will be often be considered with a special attention. In particular, imitations of notorious trademarks can be condemned even if they are used in another industry

smaller litigants and of reducing their litigation costs through an insurance scheme (Lombard, 1998). However, whether firms react more to damage awards than to the halt brought to imitation remains uncertain. Moreover, reducing the litigation costs and increasing the damage awards may encourage firms to pursue aggressive litigation strategies rather than cost-efficient settlement strategies.

²⁰Mean 1993 sales of FF 250 000. French firms are used to answering to SESSI surveys (the SESSI conducts many surveys each year). The persons in charge of answering the survey are clearly identified.

²¹This was done by comparing the firms’ propensity to litigate or settle the case with the number of cases actually filed or settled. When neither of the propensities contained an extreme answer (always or never), I could not infer the propensities to settle out of courts, to go to trial or to settle after litigation.

²²These data are taken from the EAE (SESSI).
and the danger of confusion will often be rated higher when the imitation concerns a notorious
trademark. On the other hand, however, deciding when a trademark becomes notorious enough
to enjoy this special treatment is highly hazardous, however (see Chavanne and Burst, 1998,
for details). There also a few examples of trademarks (such as *Frigidaire* in France or *Escalator*
in the United States) that have become so notorious that they entered the public domain and
were no longer enforceable.

In fact – and this is pointed out by many commentators – the court decisions often appear
as arbitrary or at least extremely subjective (see De Chanterac, 1989; Chavanne and Burst,
1998) : for instance, *Le Lutin* was ruled to be an imitation of *Lutece* while *Sirop Ramay* was
not considered to be an imitation of *Sirop Ramy*. Such an arbitrariness surely stems for the
lack of a compulsory methodology to be followed when evaluating the danger of confusion. In
this case, the attitude of the parties as well as that of the judge can tilt the balance in favor of
one party or of the other. Therefore, the decisions taken by the tribunals are hardly predictable
except in the most evident cases such as those of perfectly identical trademarks in identical or
closely related markets.

3.3 The dependent variables

My dataset consists in a sample of 397 firms that have been imitated at least once and that describe their responses to this infringement of their trademarks. More precisely, I have an evaluation of their propensities to :

1) react to the infringement (either by settlement or by litigation),

2) litigate an infringer,

3) find a settlement agreement without litigating the infringer,

4) go to trial,

5) reach a settlement agreement after litigation has begun.

As described above, the propensity to adopt a given behaviour is described by four possible
modalities, depending on whether the behavior has systematically/often/sometimes or never
been chosen. It thus consists in an ordered qualitative variable which should be treated
through an ordered logit estimation.

This treatment would be far from being totally satisfactory however as the above trade-
off are decided sequentially as in the decision tree 2.1. First, a firm decides to react to the
infringement or not. In a second stage, it decides whether this reaction should take the form
of litigation or that of negotiation. Finally, it decides whether a trial is better than a court
settlement. At each stage, several firms disappear from the process and the predicted influence
of some of the variables is altered.

To reflect this sequential decision taking, I transform the variables “propensity to litigate” and “propensity to find an out of court settlement agreement” into “propensity to litigate given reaction” and “propensity to find a settlement agreement given reaction”. Thus, for instance, a firm that sometimes react to infringement and that sometimes litigate but never reaches an out of court agreement is transformed into a firm that sometimes react but *always* chooses litigation upon reaction. The same transformation is applied to the variables “propensity to go to trial” and “propensity to find a court settlement agreement”, so that they now account for the fact that litigation has already been engaged.

A conditional logit structure is then applied upon these data so that the trade-off between
out of court settlement and litigation or between court settlement and trial account for the
<table><caption>Table 1: The dependent variables</caption><thead><tr><td>Variable</td><td>Treatment</td><td>Number of observations</td></tr></thead><tbody><tr><td>Propensity to react to infringement</td><td>Ordered multinomial logit</td><td>397</td></tr><tr><td>Propensity to litigate given reaction</td><td>Conditional logit</td><td>216</td></tr><tr><td>Propensity to go to trial given litigation</td><td>Conditional logit</td><td>161 (154 trials)</td></tr></tbody></table>

choices that are taken at the preceding stage (table 1). Before coming to the estimation results, I describe the independent variables as well as the theoretical predictions they can be associated with.

## 3.4 The independent variables

The independent variables can be grouped in two classes, depending on whether they concern the imitated firm or the imitation itself.

### 3.4.1 Imitation characteristics

- *The imitation loss.*

A firm will react to an infringement only if the imitation loss is important compared to its litigation costs. Moreover, as the imitation loss increases, the probability that an agreement can be found decreases if a significant share of this loss can only be recaptured through the eviction of the infringer from the market. As pointed out above, the stakes may be asymmetric in the sense that the plaintiff has more to gain than the defendant has to lose and this reduces the negotiation surplus.

Although the relationship between the damage created by the imitation and the litigation strategies of both parties is clear enough, there is only scant empirical evidence that this relation does have an empirical relevance. To my knowledge, only two papers in the IPR literature have put this relationship to test. Lanjouw and Schankerman (1997) conclude to a positive relationship between patent value (approximated through several instruments such as future citations and scope) and likelihood of litigation. However, they cannot distinguish between the impact of patent value on the incentives to litigate and its impact on the trade-off between litigation and settlement agreements. More fundamentally, they cannot separate imitated patents from those that are not and it is not clear in their results whether the impact of patent value is on litigation strategies (given imitation) or on the probability that the patent gets imitated (and thus litigated). Despite these limitations, the Lanjouw and Schankerman results are probably very robust as Harhoff and Reitzig (2000) confirm their results through data on patent challenge conflicts : more valuable patents are more likely to be opposed by third parties.

The imitation loss is measured either in monetary terms or in a turnover percentage<fnref n="23" />.

<footnote n="23">²³Firms could either give a precise estimation of the imitation loss in turnover percentage terms answer or tick one of the seven intervals proposed by the questionnaire. The imitation loss in monetary terms is derived</footnote>
Statistical results will reveal that larger firms have significantly higher imitation losses when measured in nominal terms, but smaller firms endure a higher loss in percentage terms. Because in France, damages granted at trial are based on the lost profit expressed in nominal terms, it is very likely that smaller firms may be less reactive to imitation though they rank among the most affected in percentage terms.

Of course, the quality of the estimation made by the firm is quite uncertain. Obviously, one may fear that firms grossly overstated their losses in order to capture the government's attention towards the extent of counterfeiting. While this fear cannot be totally alleviated, it is somewhat reassuring that French firms are used to the SESSI surveys and do not expect any direct or indirect, financial or political, compensation for the losses they may state. Firms may also genuinely miscalculate the imitation loss because this requires an adequate sector and firm analysis which may not have been systematically performed at the time of the survey. Therefore, the estimation may not perfectly reflect the real loss endured by the firm.

### *— The type of imitation*

The “Contrefaçon” survey asks the respondent to give a brief description of the imitations he has fallen prey to. These can be crude, i.e., easily detected as imitations by the consumer – type I –, intelligent, i.e., not easily detected by the consumer – type II – or differentiated from the original product – type III. Sample statistics show that 26 % of the firms in the sample reported a “crude imitation” while 53 % reported an “intelligent” imitation and 45 % a differentiated imitation<fnref n="24" />. For each type of imitation, I define a dummy variable that takes the value of 0 if imitations do not belong to that type and of 1 if they do.

The type of imitation will affect the litigation process in various predictable ways that I discuss shortly here. First, “crude” or “intelligent” imitations can be expected to be treated more severely by the courts because there cannot be any doubt regarding the purpose and the bad faith of the infringer: the trademark or good was imitated voluntarily and with the objective of increasing one’s profit at the expense of the producer and (in the case of “intelligent” imitation) of the consumer. Clearly, the plaintiff should prevail at trial and – which is at least as important – *both parties know this*. The conclusion of a settlement agreement should thus be facilitated. On the contrary, “differentiated” imitations are imitations that are not perfectly similar to the original trademark or that consist in using the trademark for a good that is not originally produced by the potential plaintiff. Hence, a defense based on good faith is possible; moreover, if the good is very differentiated, trademark protection cannot be applied to obtain reparation<fnref n="25" />. Thus, in the case of type III imitations, the odds are more evenly distributed, the case is less clear-cut and the parties may find it harder to reach a settlement agreement<fnref n="26" />.

There are however several counteracting forces that may impede the conclusion of a settlement agreement when imitations are of type I or II. First, asymmetric information and negotiation strategies aimed at capturing a larger share of the negotiation surplus can entail the break-up of negotiations. While this phenomenon is presumably possible, in that case,

<footnote>from turnover data from the EAE dataset.</footnote>

<footnote n="24">²⁴Some respondents have given non-exclusive answers, meaning that (for example) some of their imitations were similar while others were differentiated.</footnote>

<footnote n="25">²⁵A trademark provides protection only in fields and segments related to the original activity.</footnote>

<footnote n="26">²⁶The type of imitation may also affect the imitation loss with type II imitations being the most damaging. However, there is no significant correlation between the imitation loss and the type of imitation.</footnote>
settlement agreements will be even less likely when the imitation is of type III since the room
for asymmetric information is conceivably larger with this type of imitation. More generally
speaking, the empirical evidence gathered by Lanjouw and Lerner (1997) and Siegelman and
Waldfogel (1999) stresses that compared to other types of conflicts, IPR conflicts are charac-
terized by a symmetric and well distributed information.

The most prevalent obstacle to settlement might be that of asymmetric stakes. Indeed, because the IPR owner fights for a monopoly while his opponent only fights to share this monopoly, the plaintiff has more to gain in a trial than the defendant has to loose. As a result, what the defendant is willing to abandon in a settlement agreement is less than what the plaintiff seeks to win through a trial. As the probability of a plaintiff win increases, so does the asymmetry and the likelihood of a trial. Lanjouw and Schankerman (1997) do find evidence of such asymmetry by comparing the occurrence of patent infringement conflicts to patent challenges. Stake asymmetry may also be strengthened by reputation concerns on the part of the plaintiff, a possibility explored by Siegelman and Waldfogel (1999) who do find that plaintiffs are more repeat-players than defendants are<fnref n="27" />.

To summarize, in the case of a strong stake asymmetry, type II imitations will be more severely addressed than type I imitations, which in turn will be more severely treated than type III imitations. When the stake asymmetry is low, parties will be more likely to settle the case in the cases of type II and type I imitations. There are as yet no empirical evidence on this regard, though Harhoff and Reitzig (2000) have found that “high-quality” patents (as rated by the European Patent Office during their prior examination) are less likely to be opposed by third parties.

- *The destination market of the imitations*

Sample statistics reveal that 72 % of the imitations are commercialized in France, 60 % in the European Union (France excluded) and 48% (EU excluded) elsewhere. Of course, caution is required when interpreting these results as the perception of imitation is higher when the imitation is commercialized in France. These answers are non-exclusive one from the other and a first solution would be to define three dummy variables (NFR, NUE, NHUE) that take the value of 1 if the imitation is commercialized (also) in France/if it is (also) commercialized in the EU (France excluded)/if it is (also) commercialized in other countries than the EU.

The imitations that are not commercialized in France will be more costly to litigate since
litigation has to be located in the country of the unlawful conduct. Indeed, Lanjouw and
Schankerman (1997) find that US patents owned by foreign inventors are less likely to be
litigated. On the other hand however, imitations commercialized outside France may attain
many more consumers than those confined to the French market. Moreover, those imitations
commercialized outside the EU are often also commercialized within it<fnref n="28" />. Therefore, imitations
that are commercialized in many different regions will be more fiercely reacted upon because
they result in a higher imitation loss (which may not be well captured by the imitation loss

<footnote n="27">²⁷"Intellectual property suits have a higher proportion of repeat players among plaintiffs than among defendants: for instance, Louis Vuitton, Cross Pens and Jordache together account for more than 8 % of all trademark suits filed in the Southern district of New York, while the same firm rarely appeared more than once as the defendant." (Siegelman and Waldfogel, 1999, p. 111).</footnote>

<footnote n="28">²⁸More than 50 % of the imitations that are commercialized outside the EU are also commercialized in France and in the EU.</footnote>
variable).

Thus, I distinguish the destination markets and their numbers. A dummy variable is created for each possible destination combination (France (F), EU (reference), others (HUE), France and the EU (FUE), France and other countries than the EU (FHUE), the EU and other countries than France (UEHUE), all countries (FUEHUE)). I expect imitations commercialized in France as well as those that are commercialized in many markets to be more aggressively reacted upon.

Also note that these variables are not necessarily of the same empirical relevance at all stages of the enforcement procedure. Indeed, they may influence the ease of detection or the credibility of the trial threat and thus the reaction strategy of the imitated firms but they may not have any influence on the trade-off between litigation and settlement because the relative costs of litigation and negotiation may not exhibit much variation across countries.

### 3.4.2 Imitated firm's characteristics

- Litigation costs

Our dataset does not provide us with any direct measure of litigation costs. Like many other studies, I resort to proxies to incorporate these litigation costs in the empirical test. Two proxies are used. The financial strength of the firm is taken from the EAE dataset and measured by the log of the mean internal financing capacities between year 1990 and 1992. Lerner (1995a) uses a similar variable to approximate the litigation costs of biotechnology firms and finds that firms with lower financing capacities tend to avoid technological fields where patents have recently been granted to financially strong firms. The firms in my sample are however of a much larger size than those in the Lerner study, so that even those firms with a comparatively low financial strength may have the necessary means to finance a legal conflict. Another point is that although no direct estimation of the costs associated with IPR conflicts for American and European firms has yet been made and/or published, the survey data assembled by Combe and Pfister (2000) tend to indicate that these costs are higher in the United States than in any other country. Therefore, litigation costs may be a barrier to effective enforcement in the United States but not in European countries. For instance, Duguet and Kabla (1997) do not find any link between the sensitivity to enforcement costs (as evaluated through survey data) and the propensity to patent.

Our second proxy is the presence within the firm of a department in charge with detecting imitations. This dummy variable takes the value of 1 if there is a department and of 0 otherwise. This variable is probably partially endogeneous to our model in the sense that firms that are often imitated will tend to build an in-house capacity to detect these imitations; there may also be unobservable characteristics of firms which lead them to prosecute frequently which would also lead them to set up such a department; in particular, the existence of this department might be an indication of whether the firm also owns a legal department handling the litigation process. For these reasons, three models will be compared : one where the dummy is included in the regressions, one where it is omitted and another one where I use an instrumental variable defined as the residuals of a logit estimation analyzing the presence of a detection department within the firm<fnref n="29" />.

<footnote n="29">²⁹The detection department dummy is regressed over all of the independent variables plus the number of settlements and the number of filed complaints. Only size and the number of complaints are significant at the</footnote>
- *Advertisement expenditures.*

Firms with high advertisement expenditures, measured as the log of mean advertisement expenditures between 1990 and 1992 (taken from the EAE datasets), should react more frequently and more aggressively to imitation because they are more likely to rely on brand strategies; thus they might seek to build a reputation of toughness in order to deter further imitations. Indeed, what matters in reputation building is the harm done to the infringer and to his profits (more than the current profits of the trademark owner). There is no doubt then that firms who need to build a reputation of toughness will prefer reaction to no reaction and litigation and trial to out of court and court settlements (respectively) because such strategies increase the risk taken by the future infringer when he imitates a trademark<fnref n="30" />

These reputation concerns are very intuitive and yet have rarely been tested empirically. Again, the only paper I know of that expresses an explicit concern for reputation strategies is Lanjouw and Schankerman (1997). In particular, they find that corporate (but not individual) patentees are more likely to litigate when subsequent patent citations come from firms working in closely related areas and when the patentees hold subsequent innovations in these areas. Again, however, a mutually consistent hypothesis is simply that these patents are more valuable and thus more imitated. Our own measurement of reputation effect does not avoid criticism either. Indeed, trademarks that are heavily advertised face a higher probability of winning at trial because notorious trademarks are generally more favorably considered by the courts.

- *Sales*

As documented in many studies such as Cohen & al. (1997), large size often implies lower litigation costs. Therefore, larger firms should be more responsive to imitation because it is less costly for them to be so. On the other hand, however, there is only scant evidence indicating that size itself is a crucial component of firms' litigation strategies. One could arguably propose that larger firms will be less responsive to imitation because they do not feel threatened by infringers. Alternatively, they could also enjoy more significant advantages in negotiation strategies because they can credibly threaten a weaker opponent of a commercial war if he does not comply to the plaintiff's terms.

The empirical evidence so far is mixed. While some studies (Lerner, 1995b) do find that larger firms resort more to patents than smaller ones, possibly indicating that they enforce their patents more easily, others, such as Duguet and Kabla (1997) find no such relationship. An intriguing result is also obtained by Lanjouw and Schankerman (1997), who find that patents owned by individual inventors get significantly more litigated than those owned by firms, as if individual inventors and smaller firms by extension had no other alternative than litigation. Given this background, it should come as no surprise that the impact of size on enforcement strategies is largely indeterminate.

<footnote n="1">1 and 5 % level of confidence respectively. The precise results of this regression are available on request from the author.</footnote>

<footnote n="30">³⁰We are well aware that the possibility of reputation-based strategies starkly contrast with the complete information assumption of the baseline framework. Incomplete information in this regard may concern the extent of the imitation loss or the level of litigation costs or both.</footnote>
<table><caption>Table 2: The independent variables</caption><thead><tr><td>Symbol</td><td>Variable</td></tr></thead><tbody><tr><td>CRU, INT, DIF</td><td>Dummies for the imitation type (non exclusive answers)</td></tr><tr><td>F, HUE, FUE, FHUE, UEHUE, FUEHUE</td><td>Dummies for destination markets (the EU is used as a reference)</td></tr><tr><td>NF, NUE, NHUE</td><td>Dummies for destination markets (non-exclusive answers)</td></tr><tr><td>LOSSFF</td><td>Log of imitation loss expressed in nominal terms (FF)</td></tr><tr><td>LOSS%</td><td>Log of the imitation loss expressed in percentage of the turnover</td></tr><tr><td>SIZE</td><td>Log of the mean 1990–1992 sales</td></tr><tr><td>CAF</td><td>Log of the mean 1990–1992 self-financing capacity</td></tr><tr><td>ADV</td><td>Log of the mean 1990–1992 advertising expenditures</td></tr><tr><td>MS</td><td>Log of the mean 1990–1992 market share</td></tr><tr><td>DD</td><td>Dummy variable for detection department</td></tr><tr><td>DDres</td><td>Proxy for the exogeneous probability of owning a detection department</td></tr></tbody></table>

### - Market share

The role of market share in explaining litigation strategies has never been considered in any theoretical model (those being mainly incumbent-entrant models), nor in any empirical studies that I know of. There is yet a clear rationale for considering this impact. Indeed, a dominant firm may not feel much threatened by infringers in the long term, but still, its profit losses can be quite important as the volume of sales that is diverted from the original producer to the infringer may be much more important. Reputation concerns may also be more prominent for dominant firms as they are very likely to imitated again in the future since their products are more successful. On the other hand, however, dominant firms may fear to risk their trademarks as losing the trial often implies the entrance of many infringers. Again, this possibility is very likely to concern dominant firms rather than fringe competitors (whose trademarks are less valuable). Like for size, the analysis here is mainly exploratory as the theoretical relationships that can be expected are multiple and contradictory.

Finally, a set of 13 (14-1, the minerals' industry being taken as the reference industry)
industry dummies is included in the regressions to account for sector-specific effects. Many studies, such as Levin and al. (1987), have indicated that the efficiency of patents against imitators is highly sector-specific. Because the same might be true of trademarks, these effects must be taken into account in the estimations.

# 4 Statistical and econometric results

The dataset has undergone two distinct treatments. In a first step, a statistical analysis is conducted to evaluate the scale of the imitation loss, which industries and which firms are most affected by imitation, which enforcement strategies are the most chosen and how they differ with industry and firm size. In a second step, an econometric treatment is performed to identify the determinants of enforcement strategies.

## 4.1 Statistical results

I consider the loss and costs associated with imitation as well as the most frequent enforcement strategies chosen to respond to imitation. These estimations use a weighting scheme provided by the French Industry Ministry to reduce potential sample selection effects. Also note that the percentage calculations will not match those made in monetary terms<fnref n="31" /> because the mean nominal imitation loss is calculated through individual percentage losses, not through the average percentage loss.

### 4.1.1 The extent of imitation

The “imitation loss” is the percentage of individual turnover or, alternatively, the turnover expressed in monetary terms, lost because of imitation (tables 3 and 4).

<table><caption>Table 3: Imitation loss – 397 firms</caption><thead><tr><td>Imitation loss</td><td>Number of firms</td><td>Sample percentage</td><td>Cumulated sample percentage</td></tr></thead><tbody><tr><td>0-1%</td><td>149</td><td>37.5</td><td>37.5</td></tr><tr><td>1-2%</td><td>57</td><td>14.3</td><td>51.8</td></tr><tr><td>2-5%</td><td>93</td><td>23.4</td><td>75.2</td></tr><tr><td>5-10%</td><td>57</td><td>14.3</td><td>89.5</td></tr><tr><td>10-20%</td><td>28</td><td>7.0</td><td>96.5</td></tr><tr><td>20%-50%</td><td>12</td><td>3.0</td><td>99.5</td></tr><tr><td>50%-100%</td><td>1</td><td>0.25</td><td>99.75</td></tr><tr><td>Total</td><td>397</td><td>100</td><td></td></tr></tbody></table>

Half of the imitated firms in the sample did not suffer from losses higher than 2% of their turnover, with the mean slightly above 6% and amounting to slightly less than FF 11 millions.

<footnote n="31">³¹That is, a mean percentage loss of x% associated with a mean nominal loss of X FF does not correspond to a mean turnover of (100 * X)/x FF.</footnote>
<table><caption>Table 4: Imitation loss – 397 firms</caption><thead><tr><th>Variables</th><th>Total loss</th><th>Mean loss</th><th>Minimum loss</th><th>Maximum loss</th><th>Standard deviation</th></tr></thead><tbody><tr><td>%</td><td></td><td>6.10</td><td>0.1</td><td>70.0</td><td>8.99</td></tr><tr><td>In thousands of FF</td><td>4 296 541.00</td><td>10 822</td><td>10.29</td><td>589 829.10</td><td>33 643.81</td></tr></tbody></table>

The table 5 below presents similar but much lower estimates for the whole sample, i.e., imitated and non-imitated firms. The mean loss is slightly above 1% of the 1993 turnover, but still represents FF 2.8 millions.

<table><caption>Table 5: Imitation loss – 1983 imitated and non-imitated firms</caption><thead><tr><th>Variables</th><th>Total loss</th><th>Mean loss</th><th>Minimum loss</th><th>Maximum loss</th><th>Standard deviation</th></tr></thead><tbody><tr><td>%</td><td></td><td>1.18</td><td>0</td><td>70.0</td><td>4.51</td></tr><tr><td>In thousands of FF</td><td>4 296 541.00</td><td>2 822.30</td><td>0</td><td>589 829.10</td><td>31 258.47</td></tr></tbody></table>

The extent of imitation can also be compared to firm size. The tables 6 and 7 indicate that as turnover increases, the imitation loss expressed in monetary terms increases as well. The relationship between between size and the percentage of imitation loss is not so clear-cut however. Overall, the most affected firms are the small (between 100 and 200 employees) and the very large (more than 2000 employees) firms. If I consider imitated firms only (table 7), then the percentage of imitation loss clearly decreases with size<fnref n="32" />. This tends to indicate that the large firms face a higher probability of being imitated but that the impact in percentage terms of this imitation is stronger for small firms.

Table 7 also considers the protection and enforcement costs necessary to deter imitation<fnref n="33" />. Imitated firms spend an average of 1% of their turnover to detect, deter and fight imitation. In monetary terms, the costs related to imitation clearly increase with size. Again however, the evaluation in percentage stresses the importance of smaller firms' imitation costs. Unsurprisingly, larger firms are more prone to own a detection department in charge with identifying infringing products and producers.

The tables 8 and 9 present similar statistics by industry. Whether for the whole sample or for the imitated firms only, the imitation loss varies considerably not only with the industry but also with its measurement (FF or sales percentage). In the whole sample (tableau 8), the most affected industries in FF are the transport, pharmaceutical and the car industries, which roughly correspond to the largest mean turnovers<fnref n="34" />. The least affected ones are the printing, steel and wood and paper industries – industries characterized by a smaller than average mean turnover. These estimations contrast with those made on a percentage basis. Indeed, the most affected industries in turnover percentage are the textile, minerals and electric and electronic

<footnote n="32">³²Though the small and very large firms still seem to enjoy a “special” treatment.</footnote>

<footnote n="33">³³Statistics on the imitation costs were only available for imitated firms.</footnote>

<footnote n="34">³⁴Though the importance of imitation in the transport industry contrasts with its smaller mean turnover compared to the car industry.</footnote>
<table><caption>Table 6: Size and imitation loss – 1983 firms</caption><thead><tr><th>Employees</th><th>N</th><th>Mean sales</th><th>Imitation loss (FF)</th><th>Imitation loss (%)</th></tr></thead><tbody><tr><td>&lt;100</td><td>636</td><td>46 442.13</td><td>437.27</td><td>0.97</td></tr><tr><td>100-200</td><td>418</td><td>104 675.20</td><td>1 457.05</td><td>1.51</td></tr><tr><td>200-500</td><td>352</td><td>258 794.36</td><td>2 607.10</td><td>1.28</td></tr><tr><td>500-1000</td><td>278</td><td>683 084.14</td><td>6 555.52</td><td>1.05</td></tr><tr><td>1000-2000</td><td>183</td><td>1 416 943.67</td><td>13 499.96</td><td>1.07</td></tr><tr><td>&gt;2000</td><td>116</td><td>7 099 256.08</td><td>79 627.72</td><td>1.47</td></tr><tr><td>Sample</td><td>1983</td><td>262 926.60</td><td>2 822.30</td><td>1.18</td></tr></tbody></table>

<table><caption>Table 7: Size and imitation loss – 397 firms</caption><thead><tr><th>Employees</th><th>N</th><th>Mean sales</th><th>Imitation costs (FF)</th><th>Imitation loss (FF)</th><th>Detection department</th></tr></thead><tbody><tr><td>&lt;100</td><td>94</td><td>56 582.01</td><td>533.48</td><td>2 707.93</td><td>6.27</td><td>0.17</td></tr><tr><td>100-200</td><td>64</td><td>112 451.65</td><td>1 366.98</td><td>7 497.25</td><td>8.06</td><td>0.31</td></tr><tr><td>200-500</td><td>71</td><td>262 269.41</td><td>2 150.40</td><td>11 761.95</td><td>5.64</td><td>0.32</td></tr><tr><td>500-1000</td><td>72</td><td>664 006.13</td><td>5 276.12</td><td>17 977.37</td><td>3.23</td><td>0.57</td></tr><tr><td>1000-2000</td><td>58</td><td>1 162 519.30</td><td>7 987.83</td><td>22 415.44</td><td>2.06</td><td>0.60</td></tr><tr><td>&gt;2000</td><td>36</td><td>10 929 285.12</td><td>61 670.85</td><td>117 255.99</td><td>2.73</td><td>0.79</td></tr><tr><td>Sample</td><td>397</td><td>496 048.93</td><td>3 400.39</td><td>1.03</td><td>10 822.52</td><td>6.11</td><td>0.31</td></tr></tbody></table>

components industries (with the leather and clothes industry ranking a close fourth), the least affected ones being the printing, steel and car industries.

<table><caption>Table 8: Imitation loss on a by-industry basis – 1983 firms</caption><thead><tr><th>Industry</th><th>N</th><th>Mean sales</th><th>Imitation loss (FF)</th><th>Imitation loss (%)</th></tr></thead><tbody><tr><td>Leather and clothes</td><td>185</td><td>84 057.96</td><td>2 498.50</td><td>1.78</td></tr><tr><td>Printing</td><td>97</td><td>156 521.25</td><td>635.47</td><td>0.23</td></tr><tr><td>Pharmaceuticals and cosmetics</td><td>146</td><td>607 410.86</td><td>7 908.07</td><td>1.18</td></tr><tr><td>Household equipment</td><td>143</td><td>174 439.44</td><td>2 322.65</td><td>1.11</td></tr><tr><td>Cars</td><td>91</td><td>1 471 875.34</td><td>6 741.95</td><td>0.66</td></tr><tr><td>Transport</td><td>58</td><td>749 795.42</td><td>24 216.25</td><td>1.63</td></tr><tr><td>Mechanical equipment</td><td>255</td><td>151 226.28</td><td>1 431.17</td><td>0.98</td></tr><tr><td>Electric and electronic equipment</td><td>109</td><td>422 149.85</td><td>3 950.45</td><td>0.97</td></tr><tr><td>Minerals</td><td>126</td><td>232 313.83</td><td>3 370.71</td><td>2.29</td></tr><tr><td>Textiles</td><td>118</td><td>106 271.49</td><td>3 122.08</td><td>3.12</td></tr><tr><td>Wood and paper</td><td>119</td><td>179 639.76</td><td>1 271.49</td><td>0.19</td></tr><tr><td>Chemicals</td><td>204</td><td>328 902.15</td><td>2 207.94</td><td>1.01</td></tr><tr><td>Steel</td><td>242</td><td>170 928.19</td><td>1 053.61</td><td>0.52</td></tr><tr><td>Electric and electronic components</td><td>89</td><td>256 834.51</td><td>3 433.60</td><td>2.23</td></tr><tr><td>Sample</td><td>1983</td><td>262 926.60</td><td>2 822.30</td><td>1.18</td></tr></tbody></table>
A similar distinction is clearly visible when looking at the sample of imitated firms (table 9). Most affected industries in FF are the car, wood and paper and transport industries, indicating that firms in the wood and paper industry are not frequently imitated but that when they are, their losses can be quite substantial. Also note that with few exceptions, the mean turnover of imitated firms is very significantly larger than the mean turnover for the whole sample thus confirming that larger firms face a higher probability of being imitated. The least affected industries in nominal terms are the leather and clothes, printing and household equipment industries. In percentage, the most affected industries are the minerals, electric and electronic components and the textile industry, while the wood and paper, car and household equipment are the least affected ones.

<table><caption>Table 9: Imitation loss on a by-industry basis – 397 firms</caption><thead><tr><th rowspan="2">Industry</th><th rowspan="2">N</th><th rowspan="2">Mean sales</th><th colspan="2">Imitation loss</th></tr><tr><th>(FF)</th><th>(%)</th></tr></thead><tbody><tr><td>Clothes and leather</td><td>35</td><td>120 835.34</td><td>4 187.18</td><td>6.89</td></tr><tr><td>Printing</td><td>12</td><td>320 851.41</td><td>6 800.94</td><td>2.50</td></tr><tr><td>Pharmaceuticals and cosmetics</td><td>40</td><td>549 359.10</td><td>20 215.29</td><td>4.22</td></tr><tr><td>Household equipment</td><td>50</td><td>232 100.72</td><td>6 475.64</td><td>3.62</td></tr><tr><td>Cars</td><td>21</td><td>6 300 937.83</td><td>36 294.23</td><td>3.51</td></tr><tr><td>Transport</td><td>12</td><td>519 448.43</td><td>26 055.08</td><td>7.19</td></tr><tr><td>Mechanical equipment</td><td>53</td><td>200 745.02</td><td>7 593.41</td><td>5.34</td></tr><tr><td>Electric and electronic equipment</td><td>17</td><td>408 026.48</td><td>8 524.32</td><td>6.17</td></tr><tr><td>Minerals</td><td>23</td><td>307 324.50</td><td>14 334.55</td><td>13.37</td></tr><tr><td>Textiles</td><td>37</td><td>116 588.31</td><td>7 825.33</td><td>7.94</td></tr><tr><td>Wood and paper</td><td>7</td><td>501 690.19</td><td>32 049.97</td><td>4.76</td></tr><tr><td>Chemicals</td><td>42</td><td>519 152.28</td><td>8 898.05</td><td>4.77</td></tr><tr><td>Steel</td><td>25</td><td>240 381.10</td><td>10 115.85</td><td>5.68</td></tr><tr><td>Electric and electronic components</td><td>23</td><td>442 012.05</td><td>15 785.73</td><td>10.43</td></tr><tr><td>Sample</td><td>397</td><td>496 048.93</td><td>10 822.52</td><td>6.11</td></tr></tbody></table>

Finally, table 10 considers the costs associated with imitation in terms of protection and enforcement costs. In FF, the car, wood and paper and pharmaceutical industries display the highest imitations costs while the mechanical equipment, leather and clothes and the printing industries spend the lowest amounts. However, in percentage, it appears that the textile, leather and clothes and the household equipment industries spend a significant part of their turnover in deterring and prosecuting imitation, while the wood and car industries now rank among the lowest-spenders.

### 4.1.2 The firms' responses to infringement

45% of the sampled imitated firms never reacted to the infringement(s). On the contrary, 24% of the imitated firms systematically reacted, either through negotiations or through prosecution. 22% of the firms in the sample reacted occasionally while 9% reacted often.

Looking at how firms chose to react to infringement, the preferred option is that of litigation and, further, of trials. The proportion of firms that never/sometimes/often or always chose
<table><caption>Table 10: Imitation costs on a by-industry basis – 397 firms</caption><thead><tr><th rowspan="2">Industry</th><th rowspan="2">N</th><th rowspan="2">Mean sales</th><th colspan="2">Imitation costs</th></tr><tr><th>(FF)</th><th>(%)</th></tr></thead><tbody><tr><td>Clothes and leather</td><td>35</td><td>120 835.34</td><td>1 603.64</td><td>1.29</td></tr><tr><td>Printing</td><td>12</td><td>320 851.41</td><td>1 637.55</td><td>0.64</td></tr><tr><td>Pharmaceuticals and cosmetics</td><td>40</td><td>549 359.10</td><td>6 469.57</td><td>1.06</td></tr><tr><td>Household equipment</td><td>50</td><td>232 100.72</td><td>1 694.56</td><td>0.75</td></tr><tr><td>Cars</td><td>21</td><td>6 300 937.83</td><td>28 868.46</td><td>0.48</td></tr><tr><td>Transport</td><td>12</td><td>519 448.43</td><td>3 931.83</td><td>0.61</td></tr><tr><td>Mechanical equipment</td><td>53</td><td>200 745.02</td><td>1 352.12</td><td>1.00</td></tr><tr><td>Electric and electronic equipment</td><td>17</td><td>408 026.48</td><td>3 986.05</td><td>1.46</td></tr><tr><td>Minerals</td><td>23</td><td>307 324.50</td><td>2 484.87</td><td>1.13</td></tr><tr><td>Textiles</td><td>37</td><td>116 588.31</td><td>2 233.76</td><td>1.78</td></tr><tr><td>Wood and paper</td><td>7</td><td>501 690.19</td><td>4 883.81</td><td>0.81</td></tr><tr><td>Chemicals</td><td>42</td><td>519 152.28</td><td>2 865.04</td><td>0.65</td></tr><tr><td>Steel</td><td>25</td><td>240 381.10</td><td>2 539.94</td><td>0.87</td></tr><tr><td>Electric and electronic components</td><td>23</td><td>442 012.05</td><td>3 405.37</td><td>0.90</td></tr></tbody><tfoot><tr><td>Sample</td><td>397</td><td>496 048.93</td><td>3 400.39</td><td>1.03</td></tr></tfoot></table>

<table><caption>Table 11: Enforcement strategies by industry – 397 firms</caption><thead><tr><th>Industry</th><th>Reaction</th><th>Litigation</th><th>Out of court settlement</th><th>Trial</th><th>Court settlement</th></tr></thead><tbody><tr><td>Clothes and leather</td><td>0.69</td><td>0.65</td><td>0.04</td><td>0.59</td><td>0.05</td></tr><tr><td>Printing</td><td>0.95</td><td>0.95</td><td>0</td><td>0.95</td><td>0</td></tr><tr><td>Pharmaceuticals and cosmetics</td><td>1.51</td><td>1.19</td><td>0.32</td><td>1.14</td><td>0</td></tr><tr><td>Household equipment</td><td>1.45</td><td>1.07</td><td>0.37</td><td>1.06</td><td>0.01</td></tr><tr><td>Cars</td><td>1.23</td><td>0.79</td><td>0.43</td><td>0.47</td><td>0.31</td></tr><tr><td>Transport</td><td>0.37</td><td>0.26</td><td>0.10</td><td>0.26</td><td>0</td></tr><tr><td>Mechanical equipment</td><td>1.06</td><td>0.57</td><td>0.49</td><td>0.51</td><td>0.05</td></tr><tr><td>Electric/electronic equipment</td><td>0.94</td><td>0.88</td><td>0.06</td><td>0.54</td><td>0.33</td></tr><tr><td>Minerals</td><td>0.28</td><td>0.18</td><td>0.09</td><td>0.18</td><td>0</td></tr><tr><td>Textiles</td><td>0.79</td><td>0.36</td><td>0.43</td><td>0.36</td><td>0</td></tr><tr><td>Wood and paper</td><td>2.29</td><td>0.99</td><td>1.29</td><td>0.99</td><td>0</td></tr><tr><td>Chemicals</td><td>0.94</td><td>0.64</td><td>0.30</td><td>0.63</td><td>0</td></tr><tr><td>Steel</td><td>0.78</td><td>0.47</td><td>0.31</td><td>0.47</td><td>0</td></tr><tr><td>Electric/electronic components</td><td>0.92</td><td>0.84</td><td>0.07</td><td>0.73</td><td>0.11</td></tr></tbody><tfoot><tr><td>Sample</td><td>0.98</td><td>0.67</td><td>0.31</td><td>0.62</td><td>0.04</td></tr></tfoot></table>

litigation are, respectively, of 59, 17, 7 and 17%. The analogue proportions for settlement are only of 84, 5, 3 and 9%. The preference for litigation holds on even after a complaint has been
<table><caption>Table 12: Enforcement strategies and size – 397 firms</caption><thead><tr><th>Employees</th><th>Reaction</th><th>Litigation</th><th>Out of court settlement</th><th>Trial</th><th>Court settlement</th></tr></thead><tbody><tr><td>&lt;100</td><td>0.91</td><td>0.65</td><td>0.26</td><td>0.59</td><td>0.06</td></tr><tr><td>100-200</td><td>0.91</td><td>0.52</td><td>0.39</td><td>0.47</td><td>0.04</td></tr><tr><td>200-500</td><td>1.12</td><td>0.84</td><td>0.27</td><td>0.84</td><td>0.00</td></tr><tr><td>500-1000</td><td>1.15</td><td>0.83</td><td>0.31</td><td>0.71</td><td>0.10</td></tr><tr><td>1000-2000</td><td>1.01</td><td>0.61</td><td>0.41</td><td>0.51</td><td>0.04</td></tr><tr><td>&gt;2000</td><td>1.41</td><td>1.15</td><td>0.25</td><td>1.15</td><td>0.00</td></tr><tr><td>Sample</td><td>0.98</td><td>0.67</td><td>0.31</td><td>0.62</td><td>0.04</td></tr></tbody></table>

filed since the above proportions for trials now are 62, 17, 6 and 15% – while they are only of 97, 1, 0.5 and 1.5% for court settlement agreements<fnref n="35" />. Looking only at the sample of firms that reacted at least occasionally to imitation (216 firms), about three thirds of the sample prefer litigation to settlement agreements. Similarly, 95% of the 161 firms that litigated an infringer subsequently proceeded to a full trial (thus rejecting court settlement).

Overall, firms thus prefer litigation to out of court settlement and trials to court settlements. Unfortunately, there are only few statistics with which to compare these results since the practice of out of court settlement has barely been studied in empirical terms. Nonetheless, it is worth pointing out that, using all cases filed in civil courts for the year 1995³⁶, Doriat and Deffains (2000) also find a surprisingly low rate of settlement, varying between 20 and 34% of the cases considered. This situation contrasts with the American case where a very large proportion of cases is said to be settled before the trial occurs<fnref n="37" />.

That settlement agreements are concluded prior to litigation is less surprising. Indeed, the theoretical model outlined in section 2 does state that the trade-off between the two types of settlement only depends on their respective costs. Out of court settlements may imply larger negotiation costs (because there is no mediation organized by the courts for instance) but on the other hand, the plaintiff firm does not have to pay litigation costs, nor does it have to afford other forms of negotiation costs (arbitration and the like). Finally, early agreements should minimize the imitation loss compared to late agreements<fnref n="38" />.

Finally, the theoretical prediction that the trade-off between court and out of court settlement only depends on their respective costs also seems to borne out by the data since there are no firms in the sample that combines both negotiation strategies. If I account for the firms that have been taken out of the sample, it means that at least the four fifths of the imitated

<footnote n="35">³⁵These percentages are of 86, 5, 2 and 7% for out of court settlement agreements.</footnote>

<footnote n="36">³⁶668 683 cases in diverse areas such as contracts, labour or family law taken from the statistics of the French Justice Ministry.</footnote>

<footnote n="37">³⁷For instance, Miceli (1997) finds a settlement rate of 95% in civil cases for those filed between 1987 and 1993.</footnote>

<footnote n="38">³⁸In several cases, litigation can entail the withdrawal of the presumed imitation from the market through preliminary injunctions procedures. Therefore, firms that do not have a sufficient bargaining power to reach a satisfactory agreement fast enough may litigate instead. On the other hand, the data assembled by Lanjouw and Lerner (1996) tend to indicate that the procedures are especially used by larger firms to increase their bargaining power over smaller defendants. Indeed, preliminary injunctions procedures often imply a significant increase in both parties' litigation costs.</footnote>
firms have a preferred negotiation strategy.

The enforcement strategies also vary with the industry and with the size of the imitated firm<sup>39</sup> (tableau 11 and 12). The wood and paper, pharmaceutical and household equipment industries are the least tolerant to infringement while the minerals and transport industries stand out as the least reactive to infringement. As for the mode of enforcement, again, there appears to be wide disparities between industries. The pharmaceutical and household equipment industries prefer trials while the wood and paper industry prefers out of court settlements. Last, court settlement are most frequent in the car and electronic/electric equipment industries.

Size also appears to matter in the enforcement strategies of imitated firms (table 12) : in particular, larger firms react more often to infringement and tend to prefer trials over settlements.

## 4.2 An econometric analysis of the enforcement strategies of imitated firms

We consider three sequential decisions : whether an imitated firm reacts or not to the infringement, whether it chooses to litigate the infringer or concludes a settlement agreement – in the case when the firm reacts to imitation – and whether the parties engage in a trial or conclude a court settlement – if litigation has been indeed been chosen. The first trade-off is analyzed through an ordered multinomial logit estimation, the other two through a conditional logit estimation.

### 4.2.1 The reaction strategies of the imitated firms

The *Reaction* variable is defined as the sum of a firm's propensity to litigate and of its propensity to find an out of court settlement. As pointed out above, more than half of the firms that are imitated choose not to react.

In the first column of table 13, one observes that the propensity of a firm to react to an infringement depends positively on its advertisement expenditures and on its imitation loss. The reputation effects associated with advertisement appear to be very large since their impact is stronger than that of the imitation loss. As expected, imitations commercialized in France as well as those commercialized in two regions or more face a higher chance of being reacted upon (than those that target only the rest of the European Union or countries that do not belong to the EU). Finally, firms with a high market share seem to be less sensitive to infringement, either because they do not feel threatened enough, or because their trial threat is not credible given the high losses that they may endure if they loose the trial. As for industry specific effects, one observes significant industry-specific effects in almost all of the industries and more specifically in the household equipment and the wood and paper industries.

In column 2, I consider the inclusion of a dummy variable indicating whether the firms owns a detection department or not. We observe that the results are only marginally altered although this detection department dummy exerts a strong and very significant positive influence on the probability of reaction (but it is very plausibly endogeneous to the relationship I am trying to estimate). Also note that this inclusion substantially lowers the coefficients attributed to the destination market variables.

<footnote n="39"><sup>39</sup>In the tables 11 et 12, a mark of 0/1/2/3 is given to a firm that never/sometimes/often/always adopted the indicated behavior.</footnote>
The columns 3 and 4 present similar estimations except that we substitute a percentage measurement of the imitation loss to the nominal one used in equations 1 and 2. This new variable is not significant in either of the regressions. Its inclusion even turns size into significance. Thus, only the imitation loss measured in nominal terms exerts a positive influence on whether firms react to infringement. This implies that smaller firms, while reporting important imitation losses in terms of percentage, still fail to react because the gains associated with reaction are small compared to the costs and risks of the procedure.

In an attempt to correct for the endogeneity of the detection department dummy, I use the residuals from an empirical model instead and note that this proxy is a lot less significant than the previous measure but still attains the 10% level of significance (columns 5 and 6). Other results are left unchanged.

### 4.2.2 Litigation versus negotiation : the determinants of litigation

The above section has analyzed the determinants of the reaction decision. In this section, I consider how, given that a firm does react to infringement, it chooses to react to this infringement. At this stage of the conflict, the imitated firm has the choice between litigating his opponent or concluding an out of court settlement agreement. The sample now comprises 216 firms, the two thirds of which prefer litigation to settlement.

The first equation of table 14 reveals that the probability that litigation is chosen is higher when the imitations consist in type I (crude) and type II (intelligent) imitations<fnref n="40" />. As argued above, this indicates that firms are sensitive to the type of imitation they face when deciding the course of their enforcement strategies but also that a sufficient stake asymmetry surrounds this type of conflict (otherwise an agreement would certainly be found for these imitation types). Another result consistent with my expectations is that firms with large advertisement expenditures and large imitation loss will often prefer litigation to settlement. Note also that neither the destination market of the imitation, nor market share play any role in deciding whether to negotiate or to litigate. There are no industry specific effects to be noted.

An important and somewhat more surprising result is that large firms tend to have a strong preference for out of court settlements over litigation. This result, which can be put in parallel with Lanjouw and Schankerman (1997)'s conclusion that individual patents get more litigated than those owned by corporations, has several plausible explanations: large firms may have a higher bargaining power while smaller firms may be more sensitive to the preliminary injunctions sometimes granted by the courts. It is also possible that in a world of incomplete information, larger firms can more credibly threaten to go to trial while the threats of smaller firms are not as persuasive. In the outcome, large firms manage to impose settlement agreements while smaller firms have to prove that they are ready to risk a trial.

In column 2, I consider the inclusion of the dummy variable indicating the presence of detection department. This modification does not alter the above results and the variable is not significant. Similarly, the use of the imitation loss in percentage does not bring out significantly new results (columns 3 and 4) though it is positive and significant. Note however that the negative coefficient for size is reduced when the percentage loss is used, indicating that because of their higher losses, larger firms still have preference for litigation. Using the residuals from an empirical model (columns 5 and 6) does not really alter the results : this new variable is not significant at conventional confidence levels. However, when used in conjunction with

<footnote n="40">⁴⁰As expected, the effect is stronger and more robust for “intelligent” imitations.</footnote>
<table><caption>Table 13: The determinants of reaction upon infringement</caption><thead><tr><th rowspan="2">Model :</th><th colspan="6">Dependent Variable<br>Propensity to react<br>Ordered multinomial logit estimations</th></tr><tr><th>(1)</th><th>(2)</th><th>(3)</th><th>(4)</th><th>(5)</th><th>(6)</th></tr></thead><tbody><tr><td>CRU</td><td>0.08<br>(0.25)</td><td>-0.05<br>(0.25)</td><td>0.08<br>(0.25)</td><td>-0.05<br>(0.25)</td><td>0.00<br>(0.26)</td><td>0.01<br>(0.26)</td></tr><tr><td>INT</td><td>0.21<br>(0.25)</td><td>0.08<br>(0.25)</td><td>0.22<br>(0.25)</td><td>0.08<br>(0.25)</td><td>0.22<br>(0.26)</td><td>0.22<br>(0.26)</td></tr><tr><td>DIF</td><td>0.08<br>(0.26)</td><td>0.04<br>(0.26)</td><td>0.09<br>(0.26)</td><td>0.05<br>(0.26)</td><td>0.08<br>(0.27)</td><td>0.09<br>(0.27)</td></tr><tr><td>F</td><td>1.30***<br>(0.43)</td><td>1.17***<br>(0.43)</td><td>1.29***<br>(0.43)</td><td>1.16***<br>(0.43)</td><td>1.31***<br>(0.42)</td><td>1.30***<br>(0.42)</td></tr><tr><td>HUE</td><td>0.62<br>(0.47)</td><td>0.46<br>(0.47)</td><td>0.62<br>(0.47)</td><td>0.46<br>(0.47)</td><td>0.60<br>(0.47)</td><td>0.59<br>(0.47)</td></tr><tr><td>FUE</td><td>1.15***<br>(0.45)</td><td>0.94**<br>(0.45)</td><td>1.14**<br>(0.45)</td><td>0.94**<br>(0.45)</td><td>1.15**<br>(0.44)</td><td>114**<br>(0.44)</td></tr><tr><td>FHUE</td><td>1.34**<br>(0.65)</td><td>1.13*<br>(0.66)</td><td>1.34**<br>(0.65)</td><td>1.13*<br>(0.66)</td><td>1.33**<br>(0.65)</td><td>1.32**<br>(0.66)</td></tr><tr><td>UEHUE</td><td>2.10***<br>(0.58)</td><td>2.07***<br>(0.58)</td><td>2.08***<br>(0.58)</td><td>2.05***<br>(0.58)</td><td>2.21***<br>(0.59)</td><td>2.18***<br>(0.59)</td></tr><tr><td>FUEHUE</td><td>1.13**<br>(0.44)</td><td>0.92**<br>(0.45)</td><td>1.12**<br>(0.44)</td><td>0.92**<br>(0.45)</td><td>1.06**<br>(0.45)</td><td>1.05**<br>(0.45)</td></tr><tr><td>LOSSFF</td><td>0.13*<br>(0.08)</td><td>0.13*<br>(0.08)</td><td></td><td></td><td>0.15*<br>(0.08)</td><td></td></tr><tr><td>LOSS%</td><td></td><td></td><td>0.18<br>(0.12)</td><td>0.18<br>(0.12)</td><td></td><td>0.20<br>(0.13)</td></tr><tr><td>SIZE</td><td>0.13<br>(0.17)</td><td>0.04<br>(0.17)</td><td>0.26*<br>(0.15)</td><td>0.17<br>(0.15)</td><td>0.08<br>(0.17)</td><td>0.22<br>(0.15)</td></tr><tr><td>CAF</td><td>-0.01<br>(0.02)</td><td>-0.01<br>(0.02)</td><td>-0.01<br>(0.02)</td><td>-0.01<br>(0.02)</td><td>-0.01<br>(0.02)</td><td>0.00<br>(0.02)</td></tr><tr><td>ADV</td><td>0.14**<br>(0.07)</td><td>0.13*<br>(0.07)</td><td>0.14**<br>(0.07)</td><td>0.12*<br>(0.07)</td><td>0.18**<br>(0.08)</td><td>018**<br>(0.08)</td></tr><tr><td>MS</td><td>-0.28**<br>(0.12)</td><td>-0.27**<br>(0.12)</td><td>-0.28**<br>(0.12)</td><td>-0.27**<br>(0.12)</td><td>-0.28**<br>(0.12)</td><td>-0.28**<br>(0.12)</td></tr><tr><td>DD</td><td></td><td>0.92***<br>(0.23)</td><td></td><td>0.92***<br>(0.23)</td><td></td><td></td></tr><tr><td>DDres</td><td></td><td></td><td></td><td></td><td>0.17*<br>(0.10)</td><td>0.17*<br>(0.10)</td></tr><tr><td>N</td><td>397</td><td>397</td><td>397</td><td>397</td><td>387</td><td>387</td></tr><tr><td>R<sup>2</sup></td><td>0.076</td><td>0.093</td><td>0.076</td><td>0.092</td><td>0.082</td><td>0.08</td></tr></tbody></table>

Note: Standard errors in parentheses with ***, ** and * respectively denoting significance at the 1%, 5% and 10% level.
<table><caption>Table 14: The determinants of the trace-off between litigation and settlement</caption><thead><tr><th rowspan="2">Model :</th><th colspan="6">Dependent Variable :<br>Propensity to litigate given reaction<br>Conditional logit estimations</th></tr><tr><th>(1)</th><th>(2)</th><th>(3)</th><th>(4)</th><th>(5)</th><th>(6)</th></tr></thead><tbody><tr><td>CRU</td><td>1.21**<br>(0.62)</td><td>1.14**<br>(0.58)</td><td>1.21**<br>(0.60)</td><td>1.14*<br>(0.64)</td><td>1.15*<br>(0.60)</td><td>115*<br>(0.59)</td></tr><tr><td>INT</td><td>1.23**<br>(0.56)</td><td>1.16**<br>(0.55)</td><td>1.26**<br>(0.55)</td><td>1.19**<br>(0.61)</td><td>1.32**<br>(0.56)</td><td>134**<br>(0.53)</td></tr><tr><td>DIF</td><td>-0.28<br>(0.56)</td><td>-0.28<br>(0.55)</td><td>-0.20<br>(0.54)</td><td>-0.20<br>(0.59)</td><td>-0.12<br>(0.56)</td><td>-0.05<br>(0.55)</td></tr><tr><td>F</td><td>0.70<br>(0.88)</td><td>0.59<br>(0.69)</td><td>0.61<br>(1.09)</td><td>0.51<br>(1.13)</td><td>0.84<br>(0.96)</td><td>0.74<br>(0.82)</td></tr><tr><td>HUE</td><td>0.57<br>(0.95)</td><td>0.44<br>(0.75)</td><td>0.45<br>(1.16)</td><td>0.34<br>(1.15)</td><td>0.85<br>(1.03)</td><td>0.72<br>(0.90)</td></tr><tr><td>FUE</td><td>0.53<br>(0.86)</td><td>0.41<br>(0.70)</td><td>0.43<br>(1.08)</td><td>0.31<br>(1.10)</td><td>0.64<br>(0.96)</td><td>0.53<br>(0.80)</td></tr><tr><td>FHUE</td><td>8.02<br>(13.00)</td><td>7.86<br>(11.80)</td><td>7.83<br>(12.49)</td><td>7.64<br>(11.19)</td><td>8.97<br>(20.76)</td><td>8.85<br>(36.86)</td></tr><tr><td>UEHUE</td><td>1.75<br>(1.13)</td><td>1.69*<br>(0.99)</td><td>1.57<br>(1.32)</td><td>1.51<br>(1.22)</td><td>1.85<br>(1.18)</td><td>1.65<br>(1.09)</td></tr><tr><td>FUEHUE</td><td>1.25<br>(0.91)</td><td>1.15<br>(0.75)</td><td>1.04<br>(1.13)</td><td>0.93<br>(1.15)</td><td>0.97<br>(0.99)</td><td>0.71<br>(0.87)</td></tr><tr><td>LOSSFF</td><td>0.48***<br>(0.16)</td><td>0.49***<br>(0.16)</td><td></td><td></td><td>0.52***<br>(0.17)</td><td></td></tr><tr><td>LOSS%</td><td></td><td></td><td>0.78***<br>(0.29)</td><td>0.79***<br>(0.29)</td><td></td><td>0.87***<br>(0.32)</td></tr><tr><td>SIZE</td><td>-1.12***<br>(0.40)</td><td>-1.17***<br>(0.39)</td><td>-0.63*<br>(0.35)</td><td>-0.67*<br>(0.39)</td><td>-1.23***<br>(0.42)</td><td>-0.70<br>(0.47)</td></tr><tr><td>CAF</td><td>0.01<br>(0.03)</td><td>0.01<br>(0.03)</td><td>0.02<br>(0.03)</td><td>0.02<br>(0.03)</td><td>0.02<br>(0.03)</td><td>0.03<br>(0.03)</td></tr><tr><td>ADV</td><td>0.50***<br>(0.15)</td><td>0.47***<br>(0.16)</td><td>0.50***<br>(0.15)</td><td>0.48**<br>(0.19)</td><td>0.57***<br>(0.18)</td><td>0.59<br>(0.38)</td></tr><tr><td>MS</td><td>0.10<br>(0.28)</td><td>0.14<br>(0.26)</td><td>0.09<br>(0.28)</td><td>0.13<br>(0.30)</td><td>0.06<br>(0.28)</td><td>0.04<br>(0.27)</td></tr><tr><td>DD</td><td></td><td>0.43<br>(0.42)</td><td></td><td>0.40<br>(0.45)</td><td></td><td></td></tr><tr><td>DDres</td><td></td><td></td><td></td><td></td><td>-0.15<br>(0.20)</td><td>-0.17<br>(0.21)</td></tr><tr><td>N</td><td>216</td><td>216</td><td>216</td><td>216</td><td>206</td><td>206</td></tr><tr><td>R<sup>2</sup></td><td>0.255</td><td>0.259</td><td>0.249</td><td>0.252</td><td>0.263</td><td>0.260</td></tr></tbody></table>

Note: Standard errors in parentheses with ***, ** and * respectively denoting significance at the 1%, 5% and 10% level.
the percentage loss, it leads to the disappearance of the size and advertisement effects. One interpretation is this : first, size is no longer negative because larger firms have higher nominal imitation losses which lead them to favor litigation over settlement. At the same time, larger firms also have a preference for settlement all other things equal. Because larger firms have higher advertisement expenditures, the positive influence of advertisement disappears when the turnover no longer accounts for the preference of large firms.

### 4.2.3 Trials vs court settlements

We now consider the trade-off between trials and court settlements. As pointed out above, the probability that an agreement is concluded once litigation has begun is very low, presumably because it is less costly to reach a settlement agreement before litigation has begun. Actually, the number of firms (7) who have at least once preferred a court settlement to a trial is so low that it has hard to give a strong credit to these results. Moreover, there are several variables that cannot be included in the regressions. In particular, I have to neglect all industry specific effects and to replace the six destination market(s) dummies with three non-exclusive dummy variables indicating whether a given market was concerned by the imitation.

The results that emerge from table 15 are relatively straightforward. Though their influence seems rather fragile, given the very low number of negative results, court settlements will mainly involve differentiated imitations and firms with low financial capacities. All other variables are insignificant.

## 5 Conclusion

This paper has used a survey on the enforcement strategies of French trademark owners to produce estimates of imitation loss and of the determinants of enforcement strategies. On average, about 1% of the individual turnover of French firms is dissipated through imitation with wide discrepancies between firms, industries and the way the imitation loss is measured. Similarly, the sums devoted to deter, detect and prosecute infringers vary markedly between firms and industries and reach 1% of the average turnover of *imitated* firms. Regarding enforcement strategies, almost half of the 397 imitated firms in the sample prefer not to react to these infringements of their intellectual property rights. When they do, the three quarters of them prefer litigation to settlement agreement. Along with this result, it turns out that a vast majority of firms prefer out of court settlements to court settlements.

A very stylized model is developed to explain these strategies. It describes the main forces at work in IPR conflicts and leads to several theoretical predictions that I set out to test. To this end, I group several independent variables relating to the propensity of a firm to react given infringement, to prefer litigation to out of court settlements (given reaction) and to prefer trials to court settlements (given litigation).

Using an ordered multinomial logit estimation, I find that the propensity of a firm to react to an infringement depends on its level of advertising, on the lost profits associated with the imitation, on the destination market(s) of the imitation and on whether the firm owns an internal detection department. These are variables that were expected to make reaction more likely. More surprisingly, I also find that dominant firms are less likely to react to an infringement of their trademarks. Using a conditional logit, I analyse the trade-off between litigation and out of court settlements given the firms' reaction propensity and find that the probability of litigation
<table><caption>Table 15: The determinants of the trade-off between trials and settlement</caption><thead><tr><th rowspan="2">Model :</th><th colspan="6">Dependent Variable :<br>The propensity to go to trial given litigation<br>Conditional logit estimations</th></tr><tr><th>(1)</th><th>(2)</th><th>(3)</th><th>(4)</th><th>(5)</th><th>(6)</th></tr></thead><tbody><tr><td>CRU</td><td>-0.60<br>(0.94)</td><td>-0.61<br>(4.77)</td><td>-0.60<br>(1.02)</td><td>-0.61<br>(1.33)</td><td>-0.77<br>(1.98)</td><td>-0.79<br>(1.16)</td></tr><tr><td>INT</td><td>0.65<br>(1.33)</td><td>0.48<br>(14.44)</td><td>0.63<br>(0.88)</td><td>0.64<br>(1.38)</td><td>0.90<br>(2.85)</td><td>0.86<br>(1.24)</td></tr><tr><td>DIF</td><td>-2.90***<br>(0.87)</td><td>-3.06<br>(6.24)</td><td>-2.93***<br>(0.00)</td><td>-3.04*<br>(1.78)</td><td>-2.90*<br>(1.67)</td><td>-2.93*<br>(1.52)</td></tr><tr><td>NF</td><td>-0.01***<br>(0.00)</td><td>-0.04<br>(11.35)</td><td>-0.04<br>(5.18)</td><td>0.06<br>(1.58)</td><td>0.00<br>(2.97)</td><td>-0.07<br>(1.34)</td></tr><tr><td>NUE</td><td>-0.53<br>(1.02)</td><td>-0.52<br>(7.34)</td><td>-0.49<br>(1.32)</td><td>-0.53<br>(1.22)</td><td>-0.88<br>(2.02)</td><td>-0.82<br>(1.09)</td></tr><tr><td>NHUE</td><td>-0.19<br>(0.73)</td><td>-0.11<br>(20.74)</td><td>-0.18<br>(3.63)</td><td>-0.09<br>(1.29)</td><td>-0.53<br>(1.90)</td><td>-0.52<br>(1.15)</td></tr><tr><td>LOSSFF</td><td>-0.12<br>(0.31)</td><td>-0.10<br>(4.26)</td><td></td><td></td><td>-0.19<br>(0.47)</td><td></td></tr><tr><td>LOSS%</td><td></td><td></td><td>-0.15<br>(0.47)</td><td>-0.12<br>(0.59)</td><td></td><td>-0.20<br>(0.60)</td></tr><tr><td>SIZE</td><td>-0.24<br>(0.62)</td><td>-0.31<br>(15.39)</td><td>-0.36<br>(1.77)</td><td>-0.46<br>(0.75)</td><td>-0.25<br>(0.95)</td><td>-0.44<br>(0.72)</td></tr><tr><td>CAF</td><td>0.17***<br>(0.04)</td><td>0.17<br>(0.31)</td><td>0.17***<br>(0.05)</td><td>0.17**<br>(0.09)</td><td>0.18**<br>(0.08)</td><td>0.18**<br>(0.08)</td></tr><tr><td>ADV</td><td>0.51***<br>(0.18)</td><td>0.51<br>(1.27)</td><td>0.51<br>(0.42)</td><td>0.52*<br>(0.30)</td><td>0.60<br>(0.37)</td><td>0.60*<br>(0.32)</td></tr><tr><td>MS</td><td>0.41<br>(0.45)</td><td>0.44<br>(8.74)</td><td>0.42<br>(1.35)</td><td>0.49<br>(0.62)</td><td>0.46<br>(0.68)</td><td>0.47<br>(0.58)</td></tr><tr><td>DD</td><td></td><td>0.32<br>(19.47)</td><td></td><td>0.30<br>(1.21)</td><td></td><td></td></tr><tr><td>DDres</td><td></td><td></td><td></td><td></td><td>-0.34<br>(0.85)</td><td>-0.29<br>(0.55)</td></tr><tr><td>N</td><td>161</td><td>161</td><td>161</td><td>161</td><td>151</td><td>151</td></tr><tr><td>R<sup>2</sup></td><td>0.356</td><td>0.332</td><td>0.353</td><td>0.337</td><td>0.339</td><td>0.348</td></tr></tbody></table>

Note: Standard errors in parentheses with ***, ** and * respectively denoting significance at the 1%, 5% and 10% level.
increases with the imitation loss and with the advertisement expenditures but decreases with the differentiation between the original and fake trademark. Beside these expected results, I also find that larger firms will be more prone than others to conclude an out of court settlement agreement. A similar methodology is used to assess the determinants of the trade-off between trials and court settlements : trials will be more frequent when the imitation is not differentiated from the original trademark and when the imitated firm has sufficient financial capacities. These results are more fragile than the previous ones however, given the low number of firms that prefer court settlement to trials (given litigation).

The aim of this paper was to bring out thoroughly needed empirical considerations regarding the enforcement strategies of intellectual property rights owners. There are several directions into which this line of research could be further pursued. A first aspect of future work should try to integrate the imitation strategies of infringers, given the enforcement strategies of the IPR owners. For instance, this paper has shown that dominant firms are less aggressive towards infringers. But whether dominant firms are more frequently imitated than others is still questionable however because competing against a dominant firm may not prove much rewarding. Similarly, although firms with high advertisement budgets (and many trademarks) are more aggressive towards infringers, they may be more frequently imitated because their trademarks have a higher commercial value.

Future work should also seek to expand the existing theory of IPR conflicts. In particular, the enforcement strategies that are available should be considered in an oligopolistic setting, where the decisions of the firms as well as the outcome of their negotiations and/or of the trial impacts on the profits and strategies of firms that are not directly involved in the conflict. This should help us understand why dominant firms are less aggressive towards infringers and why large size tends to facilitate settlement strategies.

A third aspect of future developments concerns the policy measures to be taken to ensure a better enforcement of intellectual property rights. It is not in the scope of this paper to debate about whether IPR protection should be strengthened. Still, the enforcement of IPR should be equally effective for all firms and it should be as cost efficient as possible. In particular, the enforcement process should not be easier for larger than for smaller firms and, as far as possible, firms should prefer out of court settlements to litigation. To ensure a better protection of smaller firms against infringers, the French Ministry of Industry has proposed the creation of an insurance funds for litigation costs as well as an increase in damage awards (Lombard, 1998). While my results do indicate that smaller firms may indeed be at a disadvantage when faced with infringers (because they do not own a detection department, because their loss in nominal terms – and hence their damage awards – are smaller than for larger firms and because they lack the bargaining power to secure an out of court settlement agreement), they do not provide a strong support to the litigation costs hypothesis since financial strength exerts a significant influence only on the trade-off between court settlement and trials, a stage at which data may be too sparse to deserve a strong credit. My results also indicate that as the imitation loss increases, the probability that a settlement can be found decreases. This should not be taken to mean that increasing the level of damage awards will blockade settlement agreements. Indeed, *provided both parties are well informed about the characteristics of the case and thus share similar subjective probabilities regarding the outcome of the trial*, the level of damage awards will merely entail an increase in the terms of settlement (the sums the defendant will pay to the plaintiff) and it may even reduce the stake asymmetry at the core of IPR conflict, thus encouraging higher settlement rates.
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