Magazine article Regulation

Are There Really Patent Thickets? Markets Are Highly Adept at Identifying and Preempting Transactional Blockages

Magazine article Regulation

Are There Really Patent Thickets? Markets Are Highly Adept at Identifying and Preempting Transactional Blockages

Article excerpt

In the ongoing debate over patent reform, it is common to assert that there are "too many" patents, or that patents are "too strong," or both. The result, so the argument goes, is that the patent system is being turned on its head. Rather than promoting innovation, the patent system slows innovation by entangling companies in a "thicket" of licensing negotiations and infringement litigation. But a minority school of thought has always expressed skepticism that thickets would ever persist. The reason is simple: markets don't like to leave money on the table. When a patent thicket persists and the commercialization pathway is blocked, then money is being left on the table because a deal that could be made is not being made. That missed opportunity would seem to provide a powerful incentive to think constructively about how to unravel the thicket. If so, then markets would be expected to arrive at a solution, unlock the suppressed value, and divide it accordingly.

This debate reduces to a factual question: do markets really tolerate thickets for any significant period of time so that innovation is actually delayed or hindered to a significant extent? In recent published research, I have tackled this question. The results are remarkably consistent across more than a century of experience in a variety of U.S. markets and survive close scrutiny of contemporary information and communications technology (ICT) markets characterized by intensive levels of patent acquisition and litigation. Contrary to the thicket argument, markets are adept at identifying, preempting, and unraveling intellectual property (IP) webs that could have slowed down innovation and commercialization. Whether it's radio, aircraft, and automobiles in the 1900s and 1910s, petroleum refining in the 1920s and 1930s, or ICT from the 1990s through the present, patent-intensive markets do not appear to suffer from the increased prices, reduced output, and delayed innovation that should appear if the thicket thesis were correct. This is true if the number of IP holders is small, which might be expected since the costs of reaching agreement are relatively low; but it is also often true when the number of IP holders is large, which is not expected.

I started by looking closely at the ICT market. This would seem to be an especially fertile environment for a patent thicket. Hundreds to thousands of patents can cover various components of a single device and those patents are typically dispersed among multiple holders. In theory, it is plausible that holders would fail to cooperate, a thicket would arise, and such products as the iPhone would never see the light of day. Yet big-picture trends in ICT markets all point away from that dark scenario. Simply compare the price and functionality of a laptop, tablet, or any other personal computing device today with the closest equivalent device 10 years ago. The comparison is remarkable: functionality continues to improve significantly while, adjusted for quality, prices decline significantly. Despite being "burdened" by heavy patenting activities, the electronics market shows every symptom of a healthy innovation ecosystem: lots of new features, declining prices, and expanding output.

All of this suggests that the right question to ask is not, how are patents delaying innovation, but rather, how are innovation markets doing so well even though patents are being acquired and enforced intensively?

ICT MARKET

ICT markets have figured out two solutions to patent thickets: standard-setting organizations (SSOs) and patent pools. The SSO structure is well-known: firms cooperate to agree upon a technology standard and then commit to license "essential" patents relating to the standard on "reasonable and non-discriminatory" (RAND) terms. The problem, as is also well known, is that the meaning of what constitutes "essential" and RAND is sometimes unclear.

A next step taken in some market segments is the pooling mechanism. …

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