Corporate lawsuits may sometimes be signaling games. Here is one example. In 2003, AT&T filed suit against eBay, alleging that its Billpoint and PayPal electronic-payment systems infringed on AT&T’s 1994 patent on “mediation of transactions by a communications system.” Let’s consider this situation from the point in time when the suit was filed. In response to this suit, as in most patent-infringement suits, eBay can offer to settle with AT&T without going to court. If AT&T accepts eBay’s settlement offer, there will be no trial. If AT&T rejects eBay’s settlement offer, the outcome will be determined by the court. The amount of damages claimed by AT&T is not publicly available. Let’s assume that AT&T is suing for $300 million. In addition, let’s assume that if the case goes to trial, the two parties will incur court costs (paying lawyers and consultants) of $10 million each.
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