The paper discusses the benefits and costs of settlements and explains why antitrust limits on settlements are needed to prevent abuse of the settlement process. A general rule for evaluating proposed settlements is developed.

This paper explores a simple antitrust rule governing settlements of intellectural property disputes: a settlement cannot lead to lower expected consumer surplus than would have arisen from ongoing litigation. It argues that this rule respects intellectural property rights while encouraging efficient settlements. Under extremely general conditions, there exists a settlement that leaves consumers better off and raises the joint profits of the two firms engaged in the dispute. This general test is then applied to several types of settlements: mergers; agreements specifying the timing of entry; and patent pools.