The role of courts in technology policy

When established firms sue a newcomer who has developed a technology that threatens their business, and the copyright and patent laws are unclear as to whether the challenged use is illegal, what are the welfare consequences of various judicial rulings? This question is usually answered by conceptualizing the court’s decision as the final choice of policy. But that is misleading because the court’s decision merely forms the baseline from which Congress, lobbied by interest groups, enacts the final policy. I present a formal model that captures this dynamic context. The model shows that the court’s optimal decision is to rule for the resource-constrained party, which is often the newcomer, even when the opposite ruling would be preferable if the court were the final policy maker. The model’s logic is illustrated by case studies of Supreme Court decisions on copyright law.