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Mechanisms to Enable Follow-On Innovation

Part of the book series: Munich Studies on Innovation and Competition ((MSIC,volume 15))

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Abstract

The economic justifications for patent protection are primarily concerned with the market failures that stem from imitation with little consideration of the cumulative nature of innovation. This chapter reviews the role of follow-on innovation under disclosure, prospect, and incentive theories as well as paradigms of competition law. The prospect theory is opposed to exceptions to the right to exclude, whereas incentive theories are accommodating towards the use of liability rules in patent protection. The dynamic incentive theory is selected as a normative benchmark for the subsequent analysis because it ties the justification for patent protection to considerations for dynamic competition. Following a typology of improvements to a patent, the book focuses on more complex follow-on innovations that improve upon the initial patent yet infringe it. The occurrence of such follow-on innovations is becoming more prevalent due to the changes in the patent landscape: the adoption of defensive and offensive patent strategies, the rise of patent assertion entities, and the increasing importance of interoperability. As a consequence, follow-on innovations may become subject to five different number of market failures, the most important being excessive transaction costs, refusals to license, and hold-up problems. The chapter also reviews the debate on the empirical occurrence of and solutions to market failures.

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Notes

  1. 1.

    Market failures can be defined as failures “of a more or less idealized system of price-market institutions to sustain ‘desirable’ activities or to estop ‘undesirable’ activities. The desirability of an activity, in turn, is evaluated relative to the solution values of some explicit or implied maximum-welfare problem.” F. M. Bator, “Anatomy of Market Failure,” Quarterly Journal of Economics 72, no. 2 (1958): 351, [footnote omitted]. Market failures can be divided into several types: For example, the Chicago school of law and economics recognizes the market failures of imperfect competition and asymmetrical information, public goods, the problem of externalities, and the problem of positive transaction costs. Information goods may simultaneously be subject to several market failures. Niva Elkin-Koren and Eli M. Salzberger, Law and Economics of Intellectual Property in the Digital Age. The Limits of Analysis (New York: Routledge, 2013), 58-59.

  2. 2.

    The most important moral justifications for patents are provided by the natural rights theory and reward theory. The former is based on the assumption that an inventor has a “natural property right” to his creations, such as inventions, and that society has a moral duty to protect his inventions, as property rights, from the immoral theft of others. In contrast, the reward theory rests on the assumption that it is just to reward an inventor for his inventive activity by granting him a temporally limited exclusive patent right because his invention is useful to society. Fritz Machlup, Economic Review of the Patent System, Study of the Subcomittee on Patents, Trademarks, and Copyrights (Washington, DC: Government Publishing Office, 1958), 21. Similarly, Rudolf Kraßer and Christoph Ann, Patentrecht : Lehrbuch zum deutschen Patent- und Gebrauchmusterrecht, Europäischen und Internationalen Patentrecht, 7th revised ed. (Munich: C. H. Beck, 2009), at § 3 II 8-9.

  3. 3.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 57, 120, 126.

  4. 4.

    Two other economic patent justifications are acknowledged but not considered further in this thesis: The first is the signaling theory, which explains the role of patents in communicating information about their owners. Clarisa Long, “Patent Signals,” Chicago Law Review 69, no. 2 (2002): 625. For example, patents may be employed by start-ups to attract venture capital. Mark A. Lemley, “Reconceiving Patents in the Age of Venture Capital,” Journal of Small and Emerging Business Law 4 (2000):143-144. The second justification emphasizes the role played by patents in the facilitation of contractual know-how transfer. Ashish Arora, “Licensing Tacit Knowledge : Intellectual Property Rights and the Market for Know-How,” Economics of Innovation and New Technology 4, no. 1 (1995), 41.

  5. 5.

    Jeffrey L. Harrison and Jules Theeuwes, Law and Economics (London: W. W. Norton & Company, 2008), 48–55, 147–151.

  6. 6.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 59–60, 87.

  7. 7.

    Harrison and Theeuwes, Law and Economics, 149.

  8. 8.

    Machlup, Economic Review of the Patent System, 21.

  9. 9.

    Guellec Dominique and Bruno van Pottelsberghe de la Potterie, Economics of the European Patent System : IP Policy for Innovation and Competition (New York: Oxford University Press, 2007), 49.

  10. 10.

    Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14. The argument underlying the incentive theory has also been attributed to Thomas Jefferson. See Thomas Jefferson, “To Isaac Mcpherson Monticello (August 13, 1813),” Temple University, last modified n.d., accessed 1 December 2015 http://www.temple.edu/lawschool/dpost/mcphersonletter.html, 48–49.

  11. 11.

    See, for example, David B. Conrad, “Mining the Patent Thicket : The Supreme Court’s Rejection of the Automatic Injuction Rule in eBay v. MercExchange,” Review of Litigation 26, no. 1 (2007): 133.

  12. 12.

    Kraßer and Ann, Patentrecht, § 3 II 9, § 3 II 12; Machlup, Economic Review of the Patent System, 23–24; see also Sect. 2.1.1, note 66.

  13. 13.

    Samuel Oddi, “Un-Unified Economic Theories of Patents—the Not-Quite-Holy Grail,” Notre Dame Law Review 71, no. 2 (1999): 277, in which the author refers to the incentive-to-invent theory as patent-induced theory. In the absence of patent protection, a company may maintain incentives to invest in innovation due to the time that it takes for imitators to develop a profitable imitative product, the costs of imitation, the first-mover advantage, and the structure of a market. Frederick Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton Mifflin Company, 1990), 626-628.

  14. 14.

    Machlup, Economic Review of the Patent System, 21, 54-55. “[T]he beneficial effects of this incentive system must flow, not from existing patents, but from the hope for future profits from future patents; this hope may induce people to undertake certain risky investments and useful activities—to wit, financing and arranging industrial research—which they might not undertake otherwise.” Ibid, 55. Lemley refers to this as “ex ante justification” for IP. Mark A. Lemley, “Ex Ante Versus Ex Post Justifications for Intellectual Property,” University of Chicago Law Review 71 (2004): 129-130. Cf. Julie S. Turner, “Nonmanufacturing Patent Owner : Toward a Theory of Efficient Infringement,” California Law Review 86, no. 1 (1998): 188.

  15. 15.

    See Edmund W. Kitch, “Nature and Function of the Patent System,” Journal of Law & Economics 20, no. 2 (1977): 282-283.

  16. 16.

    Scherer and Ross, Industrial Market Structure, 618.

  17. 17.

    See Joseph A. Schumpeter, Capitalism, Socialism and Democracy, Taylor & Francis e-Library ed. (London: Routledge, [1942] 2010), 83-88; F.M. Scherer, Economic Effects of Compulsory Patent Licensing (New York: New York University Press, 1977), 7-8; Turner, “Nonmanufacturing Patent Owner,” 192; Scherer and Ross, Industrial Market Structure, 622-624.

  18. 18.

    Turner, “Nonmanufacturing Patent Owner,” 192.

  19. 19.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 124-126.

  20. 20.

    Lemley, “Justifications for Intellectual Property,” 131.

  21. 21.

    Joseph Farrell et al., “Standard Setting, Patents, and Hold-Up,” Antitrust Law Journal 74, no. 3 (2007): 610.

  22. 22.

    Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 49.

  23. 23.

    Thomas F. Cotter, Comparative Patent Remedies : A Legal and Economic Analysis (New York: Oxford University Press, 2013), 30. Moreover, the theory leaves open the definition of society, as well as the time frame for the maximization of social welfare. Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 124-126.

  24. 24.

    Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 50.

  25. 25.

    See, for example, Ted Sichelman, “Purging Patent Law of ‘Private Law’ Remedies,” Texas Law Review 92 (2014): 517, 523, 536, 554, 557, 571, representing a more radical approach; Cotter, Comparative Patent Remedies, 47. For example, under the incentive-to-invent theory, a liability rule would be viable when the objectively defined remuneration for the use of an invention ensures that the patent holder maintains the incentives to continue investing in R&D.

  26. 26.

    Kitch, “Nature and Function of the Patent System,” 271, 290.

  27. 27.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 126-127. The prospect theory represents an ex post justification for patent protection, focusing on “encouraging efficient use of the existing works”. Lemley, “Justifications for Intellectual Property,” 132.

  28. 28.

    Kitch, “Nature and Function of the Patent System,” 270-273, 276.

  29. 29.

    The tragedy of the commons has been articulated by Hardin through the use of the open pasture metaphor: Each individual rational herdsman will aim to maximize his utility by increasing the number of cows in his herd. This behaviour leads to a tragedy, namely the overgrazing of the pasture, as the herdsmen do not sufficiently take into account the overuse of this resource in their decision-making. The establishment of property rights to such common resources is among the solutions to such a problem. Garrett Hardin, “Tragedy of the Commons,” Science 162, no. 3859 (1968): 1244-1245.

  30. 30.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 121; Mark A. Lemley, “Economics of Improvement in Intellectual Property Law,” Texas Law Review 75 (1997): 1046. An alternative perspective on the tragedy of the commons is adopted in economic theories on patent races (which have no connection to patent portfolio races). These theories view patented inventions as rival, common pools and subject to competition to invent and patent first. Excessive investments on the part of competitors in attempting to create an invention can, in total, exceed the social value of the invention in question and amount to the market failure equivalent of overexploiting a physical common resource, such as a fishery. Yoram Barzel, “Optimal Timing of Innovations,” Review of Economics and Statistics 50, no. 3 (1968): 348, 452; Robert P. Merges and Richard R. Nelson, “On the Complex Economics of the Patent Scope,” Columbia Law Review 90, no. 4 (1990): 870 and fn 133 with the references mentined there; Mark F. Grady and Jay I. Alexander, “Patent Law and Rent Dissipation,” Virginia Law Review 78, no. 1 (1992): 306-308; William M. Landes and Richard A. Posner, Economic Structure of Intellectual Property Law (London: Belknap Press of Harvard University Press, 2003), 300-301. Kitch’s Prospect theory has been viewed to acknowledge the relevance of the costs of the races to patent for the allocation of a property right, Merges and Nelson, “On the Complex Economics of the Patent Scope,” 871. However, the prospect theory has been criticized for disregarding the rent-dissipating effect of races to patent; for a discussion thereof, see John F. Duffy, “Rethinking the Prospect Theory of Patents,” University of Chicago Law Review 71, no. 2 (2004): 441-442. Duffy notes that the early granting of patent rights incentivises races to patent and pushes them to occur earlier, possibly inefficiently early, and involves duplicative investments before patenting, both of which incur private and social costs. However, in his view, competition to patent early diminishes the period of time during which a patent holder can exploit her innovation in a commercializable form. As a consequence, a patent which is granted at the early stage of an R&D effort has the social welfare-enhancing effect of bringing inventions to the public domain sooner. Ibid, 443-445, 474-475. Moreover, Landes and Posner suggest that patent races create positive externalities, as the information that is created as a side effect of such a race can be beneficial to firms that “lose” it. The authors also note that, in certain industries, there can be several prizes for the participants involved in a race to win. Landes and Posner, Economic Structure of Intellectual Property Law, 301-302. The final argument, which questions the underlying assumption, is particularly convincing given that R&D efforts may result in the invention of substitutes. However, the theory of rent-dissipating races to invent relies on the assumption of a single patent protecting a single product; as such, it provides little in the way of explanation for innovation in complex industries in which R&D efforts may result in a number of patents.

  31. 31.

    See Harold Demsetz, “Toward a Theory of Property Rights,” American Economic Review 57, no. 2 (1967): 343, 348, 358-359. Demsetz considers overconsumption of a resource, such as overhunting, to be an externality problem. Externalities are positive or negative effects that impact interacting parties but are excessively costly to define and, consequently, to transact upon. Establishment of property right enables the internationalization of the costs and benefits of an externality and facilitates sustainable allocation of resources and their efficient use. For example, allocating ownership to one person, rather than to a community, incentivizes the owner to maximize the value of the land in the future. Ibid, 348-349, 351, 354-356. Demsetz implicitly refers to the tragedy of commons when discussing the problem of externalities. Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 118-119.

  32. 32.

    See Demsetz, “Toward a Theory of Property Rights,” 354, 359. Authors sometimes use the terms “property rights theory” Lemley, “Economics of Improvement in Intellectual Property Law,” 1044, and the “proprietary model of intellectual property” Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 115, to refer to the prospect theory.

  33. 33.

    Coase, “Problem of Social Cost,” 2, 5-6, 8, 12, 15; Lemley, “Economics of Improvement in Intellectual Property Law.”1044-1047; Demsetz, “Toward a Theory of Property Rights,” 349.

  34. 34.

    Kitch, “Nature and Function of the Patent System,” 276. See also Alberto Galasso and Mark Schankerman, “Patents and Cumulative Innovation : Causal Evidence from the Courts,” The Quarterly Journal of Economics 130, no. 1 (2015): 297.

  35. 35.

    Kitch, “Nature and Function of the Patent System,” 276; Lemley, “Economics of Improvement in Intellectual Property Law,” 1047. The active dissemination of information concerning patents by a patent holder differs from the disclosure theory, which assumes only passive publication of a patent. Kitch, “Nature and Function of the Patent System,” 278.

  36. 36.

    For additional overviews of more general criticisms of prospect theory, see, for example, Oddi, “Un-Unified Economic Theories of Patents,” 282; Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 127-128.

  37. 37.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 82.

  38. 38.

    Lemley, “Economics of Improvement in Intellectual Property Law,” 1048-1062; Merges and Nelson, “On the Complex Economics of the Patent Scope,” 874, 876, 877, fn 160.

  39. 39.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 127, 131.

  40. 40.

    Kitch, “Nature and Function of the Patent System,” 286.

  41. 41.

    Merges and Nelson, “On the Complex Economics of the Patent Scope,” 843–844, 970, 972, 975. See also Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 129; Lemley, “Justifications for Intellectual Property,” 135.

  42. 42.

    Merges and Nelson, “On the Complex Economics of the Patent Scope,” 872-874, 908. The authors’ argument is derived from Arrow’s thesis on lowered innovation incentives for a monopolist and the superiority of competition in terms of fostering innovation. Kenneth Arrow, “Economic Welfare and the Allocation of Resources for Invention,” in Rate and Direction of Inventive Activity: Economic and Social Factors, ed. Universities-National Bureau Committee for Economic Research and Committee on Economic Growth of the Social Science Research Council (Princeton, NJ: Princeton University Press, 1962), 620-621.

  43. 43.

    See Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 133; Lemley, “Justifications for Intellectual Property,” 143; Lemley, “Property, Intellectual Property and Free Riding,” Texas Law Review 83 (2005) 1050-1051; Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 52. See also Duffy, “Rethinking the Prospect Theory of Patents,” 491.

  44. 44.

    Full internalization of social value is not desirable, let alone possible, even with physical property, as it would require perfect price discrimination on the part of the producer and monopolistic pricing in order to capture maximum consumer surplus. Lemley, “Property, Intellectual Property and Free Riding,” 1046-1050. For a rejection of the full internalization of a patent’s social value in the assignment of damages for patent infringement, see Ted Sichelman, “Purging Patent Law of ‘Private Law’ Remedies,” 540-544.

  45. 45.

    Brett M. Frischmann and Mark A. Lemley, “Spillovers,” Columbia Law Review 107, no. 1 (2007): 259–261, 268–271.

  46. 46.

    Ibid, 273–274.

  47. 47.

    Ibid, 278. The fact that the subsequent developer of an invention may not necessarily capture all of the positive externalities of his contribution further undermines the argument in favour of full internalization of externalities. Ibid, 279-282.

  48. 48.

    See Sect. 2.3.1 on the increasingly fragmented patent landscape.

  49. 49.

    Duffy, “Rethinking the Prospect Theory of Patents,” 456-457.

  50. 50.

    Kraßer and Ann, Patentrecht § 3 II 11; Machlup, Economic Review of the Patent System, 21. The disclosure function rests on the assumption that the publication of an invention is more desirable from a social welfare perspective than protecting it as a trade secret. Kitch, “Nature and Function of the Patent System,” 275. Cf. Turner, “Nonmanufacturing Patent Owner,” 189, 191, who uses the “incentive to disclose” to describe this theory. She argues that that the commercialization of an invention, which requires significant efforts to educate a company’s employees, is a more efficient means of diffusing knowledge of an invention.

  51. 51.

    Machlup, Economic Review of the Patent System, 21.

  52. 52.

    Ibid, 21, 24.

  53. 53.

    Daniel Gervais, TRIPS Agreement : Drafting History and Analysis, 4th ed. (London: Sweet & Maxwell 2012), at 2.112-2.113; Susy Frankel and Jessica C. Lai, “Recognized and Appropriate Grounds for Compulsory Licenses : Reclaiming Patent Law’s Social Contract,” in Compulsory Licensing: Practical Experiences and Ways Forward, ed. Reto M. Hilty and Kung-Chung: Liu (Heidelberg: Springer Verlag, 2015), 150.

  54. 54.

    Gervais, TRIPS Agreement, 2.113.

  55. 55.

    Friedrich-Karl Beier and Joseph Straus, “Patent System and Its Informational Function - Yesterday and Today,” IIC - International Review of Intellectual Property and Competition Law 8 (1977): 404. See also Friedrich-Karl Beier, “Future Problems of Patent Law,” IIC - International Review of Intellectual Property and Competition Law 3 (1972): 448.

  56. 56.

    Beier, “Future Problems of Patent Law,” 445-447.

  57. 57.

    Friedrich-Karl Beier and Joseph Straus, “Patent System and Its Informational Function - Yesterday and Today,” IIC - International Review of Intellectual Property and Competition Law 8 (1977): 404. Moreover, patents have been empirically found to foster efficient transfer of complementary know-how between patent holders and licensees; thus, they play a role in the development of markets for unpatented technology. Ashish Arora, Andrea Fosfuri, and Alfonso Gambardella, Markets of Technology : The Economics of Innovation and Corporate Strategy (Cambridge, MA: MIT Press 2001), 139-141.

  58. 58.

    Conrad, “Mining the Patent Thicket,” 137.

  59. 59.

    Turner, “Nonmanufacturing Patent Owner,” 189.

  60. 60.

    See Posner, Economic Analysis of Law, 49.

  61. 61.

    Machlup, Economic Review of the Patent System, 76.

  62. 62.

    Conrad, “Mining the Patent Thicket,” 141.

  63. 63.

    Posner, Economic Analysis of Law, 53.

  64. 64.

    Conrad, “Mining the Patent Thicket,” 140-143, discussing USPTO.

  65. 65.

    For further arguments concerning the incompleteness of the disclosure theory, see Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 51.

  66. 66.

    Alison Jones and Brenda Sufrin, EU Competition Law : Text, Cases and Materials (Oxford: Oxford University Press, 2016), 2.

  67. 67.

    Giorgio Monti, EC Competition Law (Cambridge: Cambridge University Press, 2007), 4. For a discussion of the different policy objectives of competition law, see Massimo Motta, Competition Policy : Theory and Practice (New York: Cambridge University Press, 2004), 20-30. In the neoclassical economic approaches to competition, the focus is on “the effects of the behaviour of firms on economic welfare”. In this approach, it is only market failures that require governmental interventions. Monti, EC Competition Law, 22-24.

  68. 68.

    Motta, Competition Policy, 18-20; Jones and Sufrin, EU Competition Law 2016, 86-87. The two standards may also conflict with each other, as a policy focused on consumer welfare involves a value judgement concerning the redistribution of the surplus. Ibid, 11.

  69. 69.

    See FTC, To Promote Innovation : The Proper Balance of Competition and Patent Law and Policy (Washington, DC: Federal Trade Commission, 2003), 4; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty. 2009 O.J. (C 45) 2, paras 1 and 5-6.

  70. 70.

    Jones and Sufrin, EU Competition Law 2016, 7.

  71. 71.

    Monti, EC Competition Law, 45.

  72. 72.

    Motta, Competition Policy, 40-43.

  73. 73.

    Ibid, 89.

  74. 74.

    See Monti, EC Competition Law, 45; Jones and Sufrin, EU Competition Law 2016, 7.

  75. 75.

    Motta, Competition Policy, 45-52. See also Communication from the Commission — Notice — Guidelines on the Application of Article 81(3) of the Treaty 2004 O.J. (C 101) 97, para 92. A firm may become “X-inefficient”, as there may be insufficient motivation for managers to reduce the costs of production and innovate new means of production and new products. Harvey Leibenstein, “Allocative Efficiency vs. ‘X-Efficiency’,” American Economic Review 56, no. 3 (1966): 401, 406, 408.

  76. 76.

    Monti, EC Competition Law, 45.

  77. 77.

    Van den Bergh and Camesasca, European Competition Law and Economics, 30. Hence, X-inefficiency (see note 75) is argued to be detrimental to dynamic efficiency. Motta, Competition Policy, 48.

  78. 78.

    Monti, EC Competition Law, 56; Guidelines on the Application of Article 81(3) of the Treaty, para 105.

  79. 79.

    Van den Bergh and Camesasca, European Competition Law and Economics, 31.

  80. 80.

    Jones and Sufrin, EU Competition Law 2016, 7-9, 11-12.

  81. 81.

    Communication from the Commission — Guidelines on the Application of Article 101 of the Treaty on the Functioning of the European Union to Technology Transfer Agreements. 2014 O.J. (C 89) 3 [hereinafter Technology Transfer Guideline (2014)], paras 7-8. Schumpeter views patents as a form of armour for companies that allows them to make long-term investments in contexts that are characterized by unstable competitive circumstances and to participate in competition. Patents, in his view, are one of the instruments that enable the introduction of new technologies, products, and processes. Schumpeter, Capitalism, Socialism and Democracy, 87-88.

  82. 82.

    Drexl, “Intellectual Property in Competition,” 210.

  83. 83.

    Steven Anderman and Hedvig Schmidt, “EC Competition Law and IPRS,” in Intellectual Property Rights and Competition Policy, ed. Steven Anderman (Cambridge: Cambridge University Press, 2007), 38. Historically, IPRs have been associated with monopolies. Ibid, 37. In modern competition law, the legal monopoly of holding an exclusive IPR is not considered to constitute an economic monopoly that amounts to a dominant position on the market. See for example Joined cases C-241/91 and C 242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission [Magill], 1995 E.C.R. I-743, para 46. It is generally accepted that very few patents confer the degree of market power that could subject them to the scrutiny of competition law, and even fewer constitute a monopoly in the economic sense.

  84. 84.

    TTBER Guidelines (2014), paras 20-23. See also Communication from the Commission. Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-Operation Agreements, 2011 O.J. (C 11) 1, para 116.

  85. 85.

    TTBER Guidelines (2014), para 26. The Commission previously used the term “innovation market” to refer to competition in innovation; see Guidelines on the Application of Article 81(3) of the Treaty, para 25. See also DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (Washington, DC: DOJ and Federal Trade Commission, 1995), 10-13. A technology transfer agreement may delay competition in innovation, TTBER Guidelines (2014), para 26. Ultimately, this could prevent the replacement of existing products with new ones and forestall the creation of new markets with completely new demands. Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 119, 121.

  86. 86.

    For an overview of the Schumpeterian, evolutionary, Austrian, path-dependent, and resource-based theories of dynamic competition, see Jerry Ellig and Daniel Lin, “Taxonomy of Dynamic Competition Theories,” in Dynamic Competition and Public Policy: Technology, Innovation and Antitrust, ed. Jerry Ellig (Cambridge: Cambridge University Press, 2001).

  87. 87.

    Ibid, 19-21, with references to Schumpeter, Capitalism, Socialism and Democracy, 83.

  88. 88.

    Schumpeter, Capitalism, Socialism and Democracy, 83.

  89. 89.

    Ibid; Arrow, “Economic Welfare,” 619; Van den Bergh and Camesasca, European Competition Law and Economics, 30-31.; see also FTC, To Promote Innovation, ch 12, 12-15.

  90. 90.

    See Kitch, “Nature and Function of the Patent System,” 286.

  91. 91.

    See Monti, EC Competition Law, 56. Guidelines on the Application of Article 81(3) of the Treaty, para 105.

  92. 92.

    Monti, EC Competition Law, 4-5, 73. For a historical analysis of the influence of Chicago school on US antitrust law; see ibid, 63-68.

  93. 93.

    See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP [Trinko], 540 U.S. 398, 407 (2004); Josef Drexl, “Intellectual Property and Antitrust Law - IMS Health and Trinko - Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases,” IIC - International Review of Intellectual Property and Competition Law 35, no. 7 (2004): 796-797, 803.

  94. 94.

    Anderman and Schmidt, “EC Competition Law and IPRS,” 38, 107.

  95. 95.

    Over time, the separation doctrine has varied in scale, ranging from absolute immunity of IP law to antitrust interventions to doctrines in which some practices were deemed inherent or part of the specific subject matter of an IP right, thus justifying greater immunity from competition law. See Thorsten Käseberg, Intellectual Property, Antirust and Cumulative Innovation in the EU and the US (Oxford: Hart Publishing, 2012), 24-34.

  96. 96.

    Monti, EC Competition Law, 68-70. See also Jones and Sufrin, EU Competition Law 2016, 20.

  97. 97.

    Käseberg, Intellectual Property, 24-34.

  98. 98.

    However, in Europe, the doctrine of complementarity is argued to have less normative weight than in the US, as EU competition law accommodates objectives other than consumer welfare. Ibid, 35, 40, 45.

  99. 99.

    This complementarity was expressed in the EC’s guidelines for technology transfer agreements as follows: “Indeed, both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources. Innovation constitutes an essential and dynamic component of an open and competitive market economy. Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition by putting pressure on undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.” TTBER Guidelines (2014), para 7. Similar views are expressed in DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 1.0; DOJ and FTC, Antitrust Enforcement and Intellectual Property Rights. Promoting Innovation and Competition (Washington, DC: DOJ and FTC, 2007), 1.

  100. 100.

    TTBER Guidelines (2014), para 7.

  101. 101.

    Ibid.

  102. 102.

    DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 1.0; Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); FTC, Antitrust Enforcement, 1.

  103. 103.

    TTBER Guidelines (2014), para 7.

  104. 104.

    Case C-457/10 P, AstraZeneca AB & AstraZeneca plc v. Commission, 4 C.M.L.R. 7 (2013), para 129; Steven Anderman, “Competition Law Perspective II : The Relationship between Patents and Competition Rules,” in Unitary EU Patent System, ed. Justine Pila and Christopher Wadlow (Oxford: Hart Publishing, 2014), 136-137.

  105. 105.

    Commission Notice — Guidelines on the Application of the Article 81 of the EC Treaty to Technology Transfer Agreements. 2004 O.J. (C 101) 2, para 9; TTBER Guidelines (2014), para 9; Anderman and Schmidt, “EC Competition Law and IPRS,” 38. Licensing may also foster integration of complementary technology, in addition to further R&D on blocking technologies. DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), 5. Beyond promoting dynamic efficiency, technology transfer agreements are usually deemed pro-competitive. Commission Regulation (EU) No 316/2014 on the Application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Technology Transfer Agreements, 2014 O.J. (L 93) 17 [hereinafter TTBER], rec 4.

  106. 106.

    Drexl, “Antitrust Placebo,” 807. A substitute may also be unprotectable with IPRs. Ibid.

  107. 107.

    Drexl “Intellectual Property in Competition,” 210.

  108. 108.

    See TTBER Guidelines (2014), para 8; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 75.

  109. 109.

    Reto M. Hilty, “Law against Unfair Competition and Its Interfaces,” in Law against Unfair Competition: Towards a New Paradigm in Europe?, ed. Reto M Hilty and Frauke Henning-Bodewig (Heidelberg: Springer Verlag, 2007), 4-5, 19, 47-49.

  110. 110.

    TTBER Guidelines (2014), para 7. The exercise of IPRs may become subject to antitrust scrutiny when horizontal and vertical practices involve IPs, such as licensing agreements between undertakings that have anticompetitive effects, see Art. 101 TFEU; Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 111-149, 263-299, TTBER Guidelines (2014), paras 5-18; DOJ and FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995) 7-22; when they confer market power and are used in an abusive manner, see Art. 102 TFEU; Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty; and upon merger regulation, see Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings. 2004 O.J. (C 31) 5; Guidelines on the Assessment of Non-Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings, 2008 O.J. (C 265) 6. See also Commission Notice on Remedies Acceptable under Council Regulation (Ec) No 139/2004 and under Commission Regulation (Ec) No 802/2004, 2008 O.J. (C 267) 1, paras 62 and 65.

  111. 111.

    Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty, para 87; Cases C-241-2/91 P, Magill, 1995 E.C.R. I-743; Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2004 E.C.R. I-5039; Case T-201/04, Microsoft Corp. v. Commission, 2007 E.C.R. II-3601.

  112. 112.

    Hanns Ullrich, “Protecting Technology - Property or Policy,” in Economics, Law and Intellectual Property - Seeking Strategies for Research and Teaching in a Developing Field, ed. Ove Granstand (Alphen aan den Rijn: Kluwer Law International, 2003), 448-449; Josef Drexl et al., “Comments of the Max Planck Institute for Intellectual Property, Competition and Tax Law on the Directorate-General Competition Discussion Paper of December 2005 on the Application of Art 82 of the EC Treaty to Exclusionary Abuses,” IIC - International Review of Intellectual Property and Competition Law 37 (2006): 568-569. The royalty rate should mitigate the effect of the intervention on the incentives of a patent holder. Ibid, 569.

  113. 113.

    The effect of the economically and empirically driven post-Chicago approach is also reflected in the Patent Declaration, Matthias Lamping et al., “Declaration on Patent Protection - Regulatory Sovereignity under TRIPS,” IIC - International Review of Intellectual Property and Competition Law 45, no. 6 (2014): 679-680.

  114. 114.

    Ibid, 682; similarly Reto M. Hilty and Peter R. Slowinski, “Patenting Coffee - IP Protection and Its Impact on Innovation in the Coffee-Capsule Market,” in Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz, ed. Kai Purnhagen and Peter Rott (Heidelberg: Springer Verlag, 2014), 494-495.

  115. 115.

    See Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1098-1099.

  116. 116.

    Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14, 16; Hilty and Slowinski, “Patenting Coffee–IP Protection,” 495. Similarly, see Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 52, 58. Cf. Sidak, who argues that patent protection should compensate a patent holder for the opportunity costs of providing second comers with the real option value of a technology on the market, which requires the patent holder to make a risky sunk investment. Gregory J. Sidak, “Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement : Reply to Lemley and Shapiro,” Minnesota Law Review 92, no. 3 (2008): 717, 736, 738.

  117. 117.

    Lamping et al., “Declaration on Patent Protection,” 682.

  118. 118.

    Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 15.

  119. 119.

    Lamping et al., “Declaration on Patent Protection,” 683.

  120. 120.

    Annette Kur and Jens Schovsbo, Expropriation or Fair Game for All? Gradual Dismantling of the IP Exclusivity Paradigm, Research Paper No. 09-14 (Munich: Max Planck Institute for Intellectual Property, Competition & Tax Law, 2009), 2.

  121. 121.

    See Frischmann and Lemley, “Spillovers,” 258, 276, 272, 282; Lemley, “Property, Intellectual Property and Free Riding,”; 1032; Elkin-Koren and Salzberger, Law and Economics of Intellectual Property; Lamping et al., “Declaration on Patent Protection,” 57-64, 134.

  122. 122.

    See also Conrad, “Mining the Patent Thicket,” 137.

  123. 123.

    See Hilty, “Economic, Legal and Social Impacts of Counterfeiting,” 14, 16; Hilty and Slowinski, “Patenting Coffee–IP Protection,” 495.

  124. 124.

    Lamping et al., “Declaration on Patent Protection,” 683.

  125. 125.

    Richard C. Levin et al., “Appropriating the Returns from Industrial Research and Development,” Brookings Papers on Economic Activity 1987, no. 3 (1987): 793-796.

  126. 126.

    Ibid, 796.

  127. 127.

    This holds true even in the case of Schumpeterian competition. Drexl, “Intellectual Property in Competition,” 211-213. On the inapplicability of the prospect theory to multicomponent products, see James E. Bessen, Patent Thickets : Strategic Patenting of Complex Technologies (Boston: Technology & Policy Research Initiative - Boston University School of Law, 2003), 4. Cf. Kitch, “Nature and Function of the Patent System,” 286, who views the fragmentation of rights to reflect the problems associated with innovation though competition, as opposed to concentrating innovation efforts to a monopolist.

  128. 128.

    Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1992.

  129. 129.

    Mark A. Lemley, “Economics of Improvement in Intellectual Property Law,” 1004, Figure 1, 1005-1014, 1073, 1083, 1084.

  130. 130.

    Ibid, 1000-1013.

  131. 131.

    Cf. Lemley 1007-1013, who distinguishes follow-on innovations according to the social value of an improvement to minor, significant, and radical improvers.

  132. 132.

    Art. 69 (1) EPC, § 14 PatG. Under German patent law, the scope of patent protection extends from the literal wording of patent claims to the equivalent solutions that may be discoverable to a person skilled in the art. This doctrine of equivalents seeks to balance the objective of rewarding the inventor with the objective of maintaining legal certainty. The existence of equivalency is determined on the basis of the claims as interpreted by a person skilled in the art. Formstein, BGH, 29 April 1986, GRUR 1986, 803. The conditions–the equivalent solutions, the objectively identical effect, retrievability to a person skilled in the art, and equivalence in value– were confirmed in 2002 by five BGH decisions; Custodiol I, BGH 12 March 2002, GRUR, 2002, 523; Custodiol II, BGH, 12 March 2002, GRUR 2002, 527; Kunststoffrohrteil, BGH, 12 March 2002, GRUR 2002, 511; Schneidmesser I, BGH, 12 March 2002, GRUR 2002, 515; Schneidmesser II, BGH, 12 March 2002, GRUR 2002, 519; Uwe Scharen, “PatG14 §,” in Patentgesetz, ed. Georg Benkard, 11th ed. (Munich: C. H. Beck, 2015), 101; Henrik Timmann, “Extension of the Scope of Protection to Equivalents,” in Patent Law: A Handbook on European and German Patent Law, ed. Maximilian W. Haedicke and Henrik Timmann (Munich: Nomos Verlagsgesellschaft mbH & Co KG, 2014), 647-648. For further analysis, see ibid.

  133. 133.

    See also Lemley, “Economics of Improvement in Intellectual Property Law,” 1007-1008.

  134. 134.

    § 9 PatG.

  135. 135.

    Lemley, “Economics of Improvement in Intellectual Property Law,” 990, 1007-1008.

  136. 136.

    From another perspective, minor improvers are not protected against free-riding on their contribution to the patented invention. Ibid, 1008.

  137. 137.

    Ullrich, “Mandatory Licensing under Patent Law and Competition Law,” 339.

  138. 138.

    Michael Nieder, Die Patentverletzung (Munich: C. H. Beck, 2004), 31-33. For a review of the interrelationship of equivalency and dependency of patents see ibid, 31-33, 296-299; Eberhard Körner, “Äquivalenz und abhängige Erfindung,” Gewerblicher Rechtsschutz und Urheberrecht Internationaler Teil 58, no. 2 (2009), 97-102.

  139. 139.

    Suzanne Scotchmer, Innovation and Incentives (Cambridge, MA: MIT Press, 2004), 132.

  140. 140.

    Lemley, “Economics of Improvement in Intellectual Property Law,” 1052-1062; Robert P. Merges, “Intellectual Property Rights and Bargaining Breakdown : Case of Blocking Patents,” Tennessee Law Review 62 (1994): 84-91. On Arrow’s information paradox, see Arrow, “Economic Welfare,” 615.

  141. 141.

    For a detailed analysis of Art. 31 (l) TRIPS, see Sect. 6.4.1.

  142. 142.

    Sect. 6.4.1.3.

  143. 143.

    Lemley, “Economics of Improvement in Intellectual Property Law,” 1010-1012, 1023. See also Merges, “Case of Blocking Patents,” 91-99.

  144. 144.

    See Samuel F. Ernst, “Lost Precedent of the Reverse Doctrine of Equivalents,” Vanderbilt Journal of Entertainment & Technology Law 18, no. 3 (2016): 467, 472-473.

  145. 145.

    See eBay, 126 S. Ct. 1837, 1839, 1841. For a detailed analysis of the eBay decision as an liability rule, see Sect. 7.3.

  146. 146.

    Careful drafting of claims can contribute to the independence of a subsequent invention from an initial patent.

  147. 147.

    Lemley, “Economics of Improvement in Intellectual Property Law,” 1007-1013.

  148. 148.

    Cf. Scotchmer, who, implicitly relying on the prospect theory, found that there is no socially optimal solution for balancing the incentives of an initial patent holder and the inventor of a dependent patent. Suzanne Scotchmer, “Standing on the Shoulders of Giants : Cumulative Research and the Patent Law,” Journal of Economic Perspectives 5, no. 1 (1991): 34-35.

  149. 149.

    See Wesley M. Cohen, Richerd R. Nelson, and John P. Walsh, Protecting Their Intellectual Assets : Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not), Working Paper No. 7552 (Cambridge, MA: National Bureau of Economic Research, 2000), 18-19.

  150. 150.

    Scotchmer, Innovation and Incentives, 132.

  151. 151.

    For examples of such follow-on innovations, see National Research Council. Intellectual Property Rights and Research Tools in Molecular Biology. Summary of the Workshop Held at the National Academy of Science, February 15-16, 1996. Washington, DC: National Academies Press, 1997, 14-16, 40-55.

  152. 152.

    Scotchmer, Innovation and Incentives, 132.

  153. 153.

    Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 19.

  154. 154.

    Ibid, 19, 21.

  155. 155.

    On complementarity in innovation, see Scotchmer, Innovation and Incentives, 144-146. Cf. Michael Mattioli, “The Data Pooling Problem,” Berkeley Technology Law Journal 32, no. 1 (2017), 191, who employs a term “recombinant innovation” to refer to a reassembly of existing components “in a useful and complementary way”, without innovating individual components of one’s own.

  156. 156.

    Alternatively, in accordance with the prospect theory, all follow-on development of a technology could be executed by one company. Kitch, “Nature and Function of the Patent System.,” 276 285, 288-289; FTC, To Promote Innovation, ch 2, 18-19.

  157. 157.

    Scotchmer, Innovation and Incentives, 146.

  158. 158.

    There may be also situations in which a follow-on innovation has considerable economic and social value yet does not meet the patentability criteria not because of its obviousness but rather due to the fact that it was published during the process of its development. Such innovation is likely to be treated as infringing, subpatentable improvement. They may emerge, for example, following the practice of free revealing in UOCI, See Sects. 3.1.3.2 and 3.3.5.2.

  159. 159.

    For example, drawing the line between the research tool and cumulative innovation scenarios with respect to a biotechnological innovation may prove difficult. Similarly, depending on their products, follow-on innovators in the field of telecommunications may encounter both cumulative innovation and sequential innovation scenarios.

  160. 160.

    For an analysis of transaction costs associated with licensing, see Lemley, “Economics of Improvement in Intellectual Property Law,” 1048-1064, and Sect. 2.3.2.3.

  161. 161.

    See Alexandra Abello, La License, Instrument de Régulation des Droits de Propriété Intellectuelle (Paris: LGDJ, 2008), 217-218.

  162. 162.

    World Intellectual Property Organization., World Intellectual Property Indicators (Geneva: WIPO, 2014), 3, 13. Bronwyn H. Hall, Exploring the Patent Explosion, Working Paper No. 10605 (Cambridge, MA: National Bureau of Economic Research, 2004): 4-5 and 17, Figure 2. The number of patent applications filed to patent offices globally rose from 1 to 2.5 million between 1995 to 2013, while grants rose from 0.4 to 1.17 million during the same period. World Intellectual Property Organization., World Intellectual Property Indicators, 9, 18, 23. See also OECD, Patents and Innovation : Trends and Policy Challenges (Paris: OECD Publishing, 2004), 5. In the US, the trend towards a rapid increase in the number of patent applications can be traced to the mid-1980s. Between 1967 to 1984, the number of patent applications in the US grew from 94,629 to 111,284; between 1985 and 2014, the number rose from 117,006 to 578,802. U.S. Patent and Trademark Office and Patent Technology Monitoring Team (PTMT), “Number of Utility Patent Applictions Filed in the United States, by Country of Origin, Calendar Years 1965 to Present (1),” U.S. Patent and Trademark Office, last modified 2015, accessed 25 November 2015 http://www.uspto.gov/web/offices/ac/ido/oeip/taf/appl_yr.htm. A similar acceleration in the number of patent applications filed with the EPO has occurred since the mid-1990s. Dominique and van Pottelsberghe de la Potterie, Economics of the European Patent System, 9. In the last decade, many of the Asian countries, particularly China and Korea, have demonstrated rapid growth in terms of the number of patents filed, while patent filings in Japan have been declining; the EPO, however, has not kept pace with the US. World Intellectual Property Organization, World Intellectual Property Indicators, 13-15. Similarly, a decline had been observed also in Sweden. Ove Granstand and Marcus Holgersson, “Anatomy of Rise and Fall of Patenting and Propensity to Patent : Case of Sweden,” International Journal of Intellectual Property Management 5, no. 2 (2012) 169.

  163. 163.

    OECD, Patents and Innovation, 5, 13, 16-18.

  164. 164.

    Dietmar Harhoff et al., Strategic Use of Patents and Its Implications for Enterprise and Competition Policies, Report Entr/05/82 (Brussels: European Commission), 7.

  165. 165.

    Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 17-19, 21-25. See also Levin et al., “Appropriating the Returns from Industrial Research and Development,” 795-796, 798, 810.

  166. 166.

    Bronwyn H. Hall and Rosemarie Ham Ziedonis, “Patent Paradox Revisited : An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995,” RAND Journal of Economics 32, no. 1 (2001): 101.

  167. 167.

    Conrad, “Mining the Patent Thicket,” 144. Conrad views the cross-licensing of large patent portfolios as indicating that patents do not function as incentives in complex industries. Ibid, 144-145.

  168. 168.

    In an empirical study conducted in Germany, Knut et al. did not discover differences in patenting motives between discreet and complex industries; they thus argue that technological complexity is prevalent in every modern industry. For example, the chemical and biotech fields have adopted certain aspects of complex industries and also patent with the intention of cross-licensing. Knut Blind et al., “Motives to Patent : Empirical Evidence from Germany,” Research Policy 35, no. 5 (2006): 664-665, 671.

  169. 169.

    Bessen, Patent Thickets, 2.

  170. 170.

    Turner, “Nonmanufacturing Patent Owner,” 195-196.

  171. 171.

    Most importantly hold-ups, discussed Sect. 2.3.2.7.

  172. 172.

    Cf. Harhoff et al., Strategic Use of Patents, 6, who employ a narrow definition of the strategic use of the patent system which covers only behaviour that has anticompetitive effects.

  173. 173.

    Defensive patenting strategies initially emerged in response to two events that occurred in the 1980s. The first was the Polaroid v. Kodak patent dispute, which amounted to an injunction against Kodak, together with 1 billion dollars in damages and a prohibition from participating in the market for instant-cameras. Following this case, the perception of the risk of being subject to permanent injunction in patent disputes on the part of incumbent manufacturing companies changed. The second event was the new business strategy employed by Texas Instruments at the turn of the 1980s, which saw the company begin to actively enforce its patents and consequently charge higher licensing fees. Hall and Ziedonis, “Patent Paradox Revisited,” 108-110.

  174. 174.

    Futoshi Yasuda, “Issues and Possible Solutions in Japan : Patent Filing Activities of Japanese Companies, Resulting Backlog Problem and Possible Solutions,” in Future of the Patent System, ed. Ryo Shimanami (Cheltenham: Edward Elgar Publiching, 2012), 179, 217.

  175. 175.

    In such a case, the initial patenting activity would be aligned with the incentive theory.

  176. 176.

    See Colleen Chien, “From Arms Race to Marketplace : The New Complex Patent Ecosystem and Its Implications for the Patent System,” Hastings Law Journal 62 (2010): 307-309, 321-322. Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 19, 22, 25, 27; Hall, Exploring the Patent Explosion; Rosemarie Ham Ziedonis, “Don’t Fence Me In : Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms,” Management Science 50, no. 6 (2004); 804; FTC, To Promote Innovation, 33.

  177. 177.

    Bessen, Patent Thickets, 1, 3. In addition, Cohen et al. hypothesized that, in complex product industries, patent portfolio races are the consequences of non-cooperative game interactions between companies. They are socially wasteful because companies apply for patents predominantly for reasons other than protecting inventions. Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 27-29. Cf. Chien, reporting on selectively aggressive litigation behaviour from holders of defensive patent portfolios. Colleen Chien, “Of Trolls, Davids, Goliaths, and Kings : Narratives and Evidence in the Litigation of High-Tech Patents,” North Carolina Law Review 87, no. 8 (2009), 1572, 1592, 1606.

  178. 178.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 98.

  179. 179.

    For a discussion on the tragedy of anticommons, see Sect. 2.3.2.2.

  180. 180.

    Strategic patenting is not a new phenomenon: Offensive patent strategy was already described in the 1906 US Supreme Court case Continental Paper Bag Co. v. Eastern Paper Bag, in which a plaintiff sued a rival for infringing a patent which the patent owner itself had never put to use. According to the circuit court of appeals’ statement cited in the case, “The record also shows that the complainant, so to speak, locked up its patent. It has never attempted to make any practical use of it, either itself or through licenses, and apparently its proposed policy has been to avoid this. In this respect, it has not the common excuse of a lack of means, as it is unquestioned that the complainant is a powerful and wealthy corporation. We have no doubt that the complainant stands in the common class of manufacturers who accumulate patents merely for the purpose of protecting their general industries and shutting out competitors.” Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 427-28 (1908).

  181. 181.

    Firms that operate in complex industries have also been reported as facing increasing amounts of litigation from non-rival practicing companies. In her sample of large high-tech companies, Chien found that almost 40 percent of patent litigation concerned companies with whom large portfolio holders had overlaps, yet almost a third of suits were raised against completely non-rival companies. Chien suggested that these results indicate that companies adopt more offensive patenting strategies in order to exploit asymmetries in the patent portfolios of non-rival companies. Chien, “From Arms Race to Marketplace,” 335-336. Furthermore, the likelihood of companies from the semiconductor industry being subject to the patent assertion of non-rivals from outside the industry has been reported to have risen significantly. The risk is not attributed to PAEs but instead predominantly to companies competing in markets connected to the semi-conductor industry. In addition, many of the rival firms that had filed suits were found to be in the process of exiting the industry. Hall and Ziedonis, Empirical Analysis, 15-18.

  182. 182.

    Cohen, Nelson, and Walsh, Protecting Their Intellectual Assets, 28.

  183. 183.

    Mark A. Lemley and A. Douglas Melamed, “Missing the Forest for the Trolls,” Columbia Law Review 113, no. 8 (2013).

  184. 184.

    Chien, “From Arms Race to Marketplace,” 300.

  185. 185.

    FTC, Patent Assertion Entity Activity (Washington, DC: FTC, 2016), 1.

  186. 186.

    The hold-up problems are discussed Sect. 2.3.2.7.

  187. 187.

    Chien, “From Arms Race to Marketplace,” 318-320.

  188. 188.

    See ibid, 325-332.

  189. 189.

    Lemley and Melamed, “Missing the Forest for the Trolls,” 2118. A study conducted by the FTC identified two types of PAEs: The “Portfolio PAEs”, which specialize in acquiring and licensing large patent portfolios, rarely litigate and typically produce large revenues. This type of PAE is typically backed by investors. In contrast, “Litigation PAEs” are small companies with little capital that actively litigate a limited number of patents against large numbers of alleged infringers and obtain smaller royalties per patent than portfolio PAEs. FTC, Patent Assertion Entity Activity, 42-50. For other categorisations of PAEs, see, for example, Lemley and Melamed, “Missing the Forest for the Trolls,” 2126-2127; Chien, “From Arms Race to Marketplace.”; “Of Trolls, Davids, Goliaths, and Kings,” 1577-1590.

  190. 190.

    FTC, Evolving IP Marketplace : Aligning Patent Notice and Remedies with Competition (Washington, DC: FTC, 2011), 8-9.

  191. 191.

    Chien, “From Arms Race to Marketplace,” 319. Practicing entities may be inhibited from adopting such strategy due to their interest in maintaining their own reputations. See Lemley and Melamed, “Missing the Forest for the Trolls,” 2165; Fiona M. Scott Morton and Carl Shapiro, Patent Assertions : Are We Any Closer to Aligning Reward to Contribution?, Working Paper No. 21678 (Cambridge, MA: National Bureau of Economic Research, 2015), 1-2.

  192. 192.

    Chien, “From Arms Race to Marketplace,” 319. This behaviour bears similarities to the patent ambush strategy encountered in standard settings, in which an ambusher conceals its ownership of a SEP in the standard-setting process with the purpose of holding up implementers of the standard; see Case COMP/38.636 Rambus, Summary of Commission Decision of 9 December 2009, 2010 O.J. (C 30) 17. For a discussion on patent ambushes in the context of competition law, see Sect. 8.6.2.

  193. 193.

    Lemley and Melamed, “Missing the Forest for the Trolls,” 2168.

  194. 194.

    Fiona M. Scott Morton and Carl Shapiro, “Strategic Patent Acquisitions,” Antitrust Law Journal 79 (2014): 478, 480.

  195. 195.

    James F. McDonough, “Myth of the Patent Troll : An Alternative View of the Function of Patent Dealers in an Idea Economy,” Emory Law Journal 56 (2006): 211.

  196. 196.

    James E. Bessen and Michael J. Meurer, “Direct Costs from NPE Disputes,” Cornell Law Review 99, no. 2 (2014): 422.

  197. 197.

    Robert Feldman and Mark A. Lemley, “Do Patent Licensing Demands Mean Innovation,” Iowa Law Review 101 (2015): 137, 173.

  198. 198.

    Chien, “From Arms Race to Marketplace,” 313.

  199. 199.

    Ibid, 328; Lemley and Melamed, “Missing the Forest for the Trolls,” 2136-2137. See ibid, 2135-2136, for a list of examples of companies that have changed their patent assertion strategies. Rambus, for example, appears to have adopted an offensive strategy upon becoming an NPE. Chien, “Of Trolls, Davids, Goliaths, and Kings,” 1607.

  200. 200.

    Conrad, “Mining the Patent Thicket,” 146.

  201. 201.

    Chien, “From Arms Race to Marketplace,” 312.

  202. 202.

    See Lemley and Melamed, “Missing the Forest for the Trolls,” 2150, 2152, 2161.

  203. 203.

    Lemley and Melamed, “Missing the Forest for the Trolls,” 2137-2139.

  204. 204.

    Chien, “From Arms Race to Marketplace,” 313. Indeed, both portfolio and litigation PAEs appear to acquire and license patents from owners who wish to “outsource” their patent assertion activity. See FTC, Patent Assertion Entity Activity, 47-49.

  205. 205.

    Chien, “From Arms Race to Marketplace,” 300, 342.

  206. 206.

    Lemley and Melamed, “Missing the Forest for the Trolls,” 2120-2121, 2150, 2152, 2161.

  207. 207.

    Ibid, 2120-2121.

  208. 208.

    In the US, the invalidation rate in lawsuits filed between 2008–2009 was 43 percent. John R. Allison, Mark A. Lemley, and David L. Schwarz, “Understanding the Realities of Modern Patent Litigation,” Texas Law Review 92 (2014): 1770, 1773, 1801. In the UK, 42 percent of litigated patents were revoked or partially revoked. Christian Helmers and Luke McDonagh, “Patent Litigation in the UK : An Empirical Survey 2000-2008,” Journal of Intellectual Property Law & Practice 8, no. 11 (2013), Table 12. Between 2010–2013, the invalidation rate of the German Federal Patent Court (BPatG) was 79 percent, of which 36.5 percent represented partial invalidations. The invalidation rate for software and telecommunications patents was higher, at 88 percent, of which 30 percent were partially invalid. These high rates were attributed to patent examiners’ errors, the emergence of new prior art, and differences in the examinations standards of the German Patent Office, the EPO, and the BPatG. Peter K. Hess, Tilman Stoy-Müller, and Martin Wintermeier, “Are Patents Merely ‘Paper Tigers’?,” Bardehle Padenberg, last modified November 2014. accessed 9 January 2018 https://www.bardehle.com/de/ip-news-wissen/publikation/publikationen/ipnews/info/are-patents-merely-paper-tigers.html, 4, 6–7, 27–30. More generally in Europe, on average, 31 percent of challenged patents are found invalid during the period of 2000–2010. Stuart J. H. Graham and Nicolas van Zeebroek, “Comparing Patent Litigation across Europe,” Stanford Technology Law Review 17 (2014): 695, Table 10. The study covered Germany, France, Spain, the UK, and the Netherlands.

  209. 209.

    See Case AT.39985, Motorola - Enforcement of GPRS Standard Essential Patents, Commission decision of 29 April 2014, C(2014) 2892 final, http://ec.europa.eu/competition/antitrust/cases/dec_docs/39985/39985_928_16.pdf, para 383.

  210. 210.

    Galasso and Schankerman, “Patents and Cumulative Innovation,” 317, 321. The sample covered only patents invalidated by the Federal Circuit, ibid, 321.

  211. 211.

    Ibid, 320-322, 354.

  212. 212.

    Ibid, 356. The study did not investigate whether there was an initial attempt to acquire a license and whether the initiator of the invalidation proceedings was a licensee.

  213. 213.

    See ibid, 366.

  214. 214.

    Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 257.

  215. 215.

    See Michael L. Katz and Carl Shapiro, “Systems Competition and Network Effects,” Journal of Economic Perspectives 8, no. 2 (1994): 96-98, 105-106.

  216. 216.

    Ibid, 108, 108.

  217. 217.

    See Case T-201/04, Microsoft, 2007 E.C.R. II-3601, paras 661-662.

  218. 218.

    Standard-setting organizations may feature very heterogeneous organizational and contractual structures, and the initiative for standard setting may arise both from a private organization or the government. See Mark A. Lemley, “Intellectual Property Rights and Standard-Setting Organizations,” California Law Review 6, no. 3 (2002): 1898-1901, 1903-1908.

  219. 219.

    See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 308.

  220. 220.

    FTC, Antitrust Enforcement, 34. De jure standard setting, when executed in compliance with the guidelines for horizontal co-operation agreements, is generally deemed to be pro-competitive. See, TTBER Guidelines (2014), paras 280, 309, 315-319; Carl Shapiro, “Navigating the Patent Thicket : Cross Licenses, Patent Pools, and Standard Setting,” in Innovation Policy and the Economy, Volume 1, ed. Adam B. Jaffe, Josh Lerner, and Scott Stern (Cambridge, MA: MIT Press, 2001), 138.

  221. 221.

    See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 308.

  222. 222.

    See ibid. Pro-competitive effects are deemed most likely to occur when a de jure standard establishes “compatibility on a horizontal level between different technology platforms”. Ibid, para 264.

  223. 223.

    On problems related to SEPs, see also European Commission, Patents and Standards. A Modern Framework for IPR-Based Standardisation, Ecsip Consortium (Brussels: European Commission, 2014), 109-131; Knut Blind et al., Study on the Interplay between Standards and Intellectual Property Rights (IPRs) Tender No. Entr/09/015 (Luxembourg: Publications Office of the European Union, 2011): 23-24, 27, 61-66, 81, 85 115, IPLytics for the European Commission, “Landscaping Study on Standard Essential Patents (SEPs),” European Commission, last modified December 12, 2016, accessed April 6, 2018 https://ec.europa.eu/growth/content/landscaping-study-standard-essential-patents-europe-0_de, 56.

  224. 224.

    Shapiro, “Navigating the Patent Thicket,” 136.

  225. 225.

    See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, para 286.

  226. 226.

    Farrell et al., “Standard Setting, Patents, and Hold-Up,” 607-608.

  227. 227.

    Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 269, 286, 311.

  228. 228.

    Shapiro, “Navigating the Patent Thicket,” 136, 141; Farrell et al., “Standard Setting, Patents, and Hold-Up,” 605. See also Case COMP/38.636 Rambus, Summary 2010 O.J. (C 30) 17; Communication from the Commission. Intellectual Property Rights and Standardisation. COM (92) 445 final (27 October 1992), para 4.4.1.

  229. 229.

    See Case AT.39985, Motorola (29 April 2014); Case AT.39939, Samsung - Enforcement of UMTS Standard Essential Patents, Commission Decision of 29 April 2014, C(2014) 2891 final. http://ec.europa.eu/competition/antitrust/cases/dec_docs/39939/39939_1501_5.pdf.; Case C-170/13, Huawei Technologies Co. Ltd v. ZTE Corp. and ZTE Deutschland GmbH, 5 C.M.L.R. 14 (2015).

  230. 230.

    Geertrui Van Overwalle, “Exclusive Ownership Versus Open Commons : The Case of Gene Patents,” WIPO Journal 4, no. 2 (2013): 140.

  231. 231.

    Gordon E. Moore, “Cramming More Components onto Integrated Circuits,” Electronics 38, no. 8 (1965): 115.

  232. 232.

    Clive-Steven Curran and Jens Leker, “Patent Indicators for Monitoring Convergence - Examples from NFF and ICT,” Technological Forecasting and Social Change 78, no. 2 (2011): 258. Curran and Leker distinguish between two terms referring to “the blurring of boundaries between two or more industries”: “convergence”, in which a new field is created in response to a new demand, and “fusion”, in which industries merge in response to existing demands. Ibid.

  233. 233.

    Directorate-General for Enterprise and Industry, Patents and Standards, 84-88, 93-94, 108.

  234. 234.

    See Curran and Leker, “Patent Indicators for Monitoring Convergence,” 261-262.

  235. 235.

    ITU, Overview of the Internet of Things, Series Y: Global Information Infrastructure, Internet Protocol Aspects and Next-Generation Networks (Geneva: International Telecommunication Union, 2012); 1.

  236. 236.

    A. T. Kearney, Internet of Things : A New Path to European Prosperity (Chicago: A. T. Kearney, 2016), 3.

  237. 237.

    Ibid, 4.

  238. 238.

    Jan Smit et al., Industry 4.0 (Brussels: European Parliament - Policy Department A: Economic and Scientific Policy, 2016), 20.

  239. 239.

    By 2025, IoT applications are predicted to produce an annual economic surplus of 3.9–11.1 trillion per year. James Manyika et al., Internet of Things : Mapping the Value Beyond the Hype (New York: McKinsey Global Institute, 2015), 2. The predicted market of IoT applications in Europe is 80 billion, and it is predicted to generate a surplus of one trillion. A. T. Kearney, Internet of Things : A New Path to European Prosperity, 1.

  240. 240.

    Manyika et al., Internet of Things, 4.

  241. 241.

    A. T. Kearney, Internet of Things : A New Path to European Prosperity, 17. For an overview of standardisation initiatives in the context of IoT, see, for example, Patrick Guillemin et al., “Internet of Things Global Standardisation - State of Play,” in Internet of Things – from Research and Innovation to Market Deployment, ed. Peter Friess and Ovidiu Vermesan (Gistrup: River Publishers, 2014); OECD, Internet of Things : Seizing the Benefits and Addressing the Challenges, Background Report for Ministerial Panel 2.2 (Paris: OECD Publishing, 2016); Patrick Guillemin et al., eds., Internet of Things - Position Paper on Standardization for IoT Technologies (Brussels: European Research Cluster on the Internet of Things, 2015), 29-31.

  242. 242.

    See A. T. Kearney, Internet of Things : A New Path to European Prosperity, 23.

  243. 243.

    A consensual prediction on the basis of discussions at the IoT Connectivity Standards Workshop, the Max Planck Institute for Innovation and Competition, Munich 04.07.2017.

  244. 244.

    Beatriz Conde Gallego and Josef Drexl: “IoT Connectivity Standards: How Adaptive is the Current SEP Regulatory Framework,” IIC - International Review of Intellectual Property and Competition Law 50 no. 1 (2019): 144-145, 153-155.

  245. 245.

    On fragmented ownership of IoT-related patents, see LexInnova, “Internet of Things : Patent Landscape Analysis,” World Intellectual Property Organization, last modified 2016, accessed 31 December 2018 https://www.wipo.int/edocs/plrdocs/en/internet_of_things.pdf.

  246. 246.

    Geertrui Van Overwalle, “Patent Pools and Clearinghouses in the Life Sciences : Back to the Future,” in Research Handbook on Intellectual Property and the Life Sciences, ed. Duncan Matthews and Herbert Zech (Cheltenham: Edward Elgar Publishing, 2017), 309. Alternatively, a thicket can be defined as an “overlapping set of patent rights requiring those seeking to commercialize new technology to obtain licenses from multiple patentees.” Shapiro, “Navigating the Patent Thicket,” 119.

  247. 247.

    Michael A Heller, “Tragedy of the Anticommons : Property in the Transition from Marx to Markets,” Harvard Law Review 111 (1998): 670.

  248. 248.

    Michael A. Heller and Rebecca S. Eisenberg, “Can Patents Deter Innovation? The Anticommons in Biomedical Research,” Science 280, no. 5364 (1998): 698-700.

  249. 249.

    Ibid, 673-674. The authors employ the term “hold-out”.

  250. 250.

    Heller, “Tragedy of the Anticommons,” 624. The tragedy of the anticommons mirrors the tragedy of the commons.

  251. 251.

    § 9 PatG, Arts. 28 and 31 (b) TRIPS.

  252. 252.

    See Coase, “Problem of Social Cost,” 2, 5-6, 8, 12, 15; Anastasia P. Winslow, “Rapping on a Revolving Door : An Economic Analysis of Parody and Cambell v. Akuff-Rose Music, Inc.,” Southern California Law Review 69, no. 3 (1996): 780; Lemley, “Economics of Improvement in Intellectual Property Law,” 1046-1047.

  253. 253.

    See Lamping et al., “Declaration on Patent Protection,” 680. Ziedonis argues that the distribution of the holders of patents that cover an innovation may have an effect on the willingness of a new innovator to engage in ex ante licencing negotiations, as fragmentation raises the transaction costs involved in locating the right holder(s) and evaluating the validity of patents and increases the likelihood of patent assertion. Ziedonis, “Don’t Fence Me In,” 807-808.

  254. 254.

    Correa reports that the developers for downstream products related to SARS faced additional costs due to ex ante uncertainty concerning how many upstream patents the final cure would cover and the associated transaction costs of negotiating licenses for them. Carmen Correa, “The SARS Case,” in Gene Patents and Collaborative Licensing Models, ed. Geertrui Van Overwalle (Cambridge: Cambridge University Press, 2009), 45.

  255. 255.

    Heller and Eisenberg, “Can Patents Deter Innovation?,” 698-700; see also Heller, “Tragedy of the Anticommons,” 673-674.

  256. 256.

    Merges, “Case of Blocking Patents.” 84-91; Arti K. Rai, “Fostering Cumulative Innovation in the Biopharmaceutical Industry : Role of Patents and Antitrust,” Berkeley Technology Law Journal 16, no. 2 (2001): 831. See also Rebecca S. Eisenberg, “Patents and the Progress of Science : Exclusive Rights and Experimental Use,” University of Chicago Law Review 56 (1989): 1073.

  257. 257.

    A bargaining breakdown that results from the disagreement over price is referred to as a market failure of excessive royalties, discussed Sect. 2.3.2.5.

  258. 258.

    Heller and Eisenberg, “Can Patents Deter Innovation?,” 700-701. Heller and Eisenberg discuss these issues in detail in connection with regard to the biomedical sector. Cf. Rai, who suggests that the heterogeneity of the biomedical industry could be a temporary phase that precedes deeper vertical integration. Rai, “Role of Patents and Antitrust,” 847.

  259. 259.

    Merges, “Contracting into Liability Rules,” 1317.

  260. 260.

    Shapiro, “Navigating the Patent Thicket,” 119-120, 122.

  261. 261.

    Mark A. Lemley and Carl Shapiro, “Probabilistic Patents,” Journal of Economic Perspectives 19, no. 2 (2005); Chien, “From Arms Race to Marketplace,” 338-339.

  262. 262.

    “From Arms Race to Marketplace,” 339-341.

  263. 263.

    Cotter, Comparative Patent Remedies, 60. “Patents on trivial or already existing inventions are particularly hard to monitor, since the engineer intending to use them may not perceive them as patentable at all and hence may not find a patent search worthwhile.” Markus Reitzig, Joachim Henkel, and Christopher Heath, “On Sharks, Trolls, and Their Patent Prey—Unrealistic Damage Awards and Firms’ Strategies of “Being Infringed”,” Research Policy 36, no. 1 (2007): 147.

  264. 264.

    Mark A. Lemley, “Ignoring Patents,” in Future of the Patent System, ed. Ryo Shimanami (Cheltenham: Edward Elgar Publishing, 2012), 79-81. In this manner, a company also avoids being charged for wilful infringement. Ibid, 80.

  265. 265.

    Reitzig, Henkel, and Heath, “On Sharks, Trolls, and Their Patent Prey,” 147.

  266. 266.

    Farrell et al., “Standard Setting, Patents, and Hold-Up,” 618-619.

  267. 267.

    Drexl, “Antitrust Placebo,” 807.

  268. 268.

    Harrison and Theeuwes, Law and Economics, 149; Ilkka Rahnasto, “How to Leverage Intellectual Property Rights” (Doctoral Dissertation, University of Helsinki, 2001), 32.

  269. 269.

    By refusals to license, I refer to situations in which a rightful holder is not willing to give a license at all. Situations in which a follow-on innovator cannot afford to agree to the requested royalty rate are discussed in relation to the market failure of excessive royalties.

  270. 270.

    I owe this argument to Dr. Marius Fischer.

  271. 271.

    The applicability of the essential facilities doctrine to standard essential patents, is discussed Chap. 8 on compulsory liability rules in competition law.

  272. 272.

    Alfred Früh, Immaterialgüterrechte und der relevante Markt : Eine wettbewerbsrechtliche und schutzrechtliche Würdigung technologischer Innovation, Schriftenreihe zum Gewerblichen Rechtsschutz. Band 181. (Cologne: Carl Haymanns Vorlag, 2012), 462-463.

  273. 273.

    Drexl et al., “Comments of the MPI on the Application of Art 82 EC,” 568-569.

  274. 274.

    Rahnasto, “How to Leverage Intellectual Property Rights,” 28.

  275. 275.

    See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1992-1993. When investigating sequential innovation, Green and Scotchmer found that ex ante negotiations enable more socially optimal divisions of profits between initial and subsequent innovators, because, in ex post negotiation, profits would be eroded by competition. Jerry R. Green and Suzanne Scotchmer, “On the Division of Profit in Sequential Innovation,” RAND Journal of Economics 26, no. 1 (1995): 28. However, this study does not take into account the effect of injunctive relief on subsequent licensing negotiation and different ways of calculating damages for patent infringement in courts.

  276. 276.

    James E. Bessen and Eric Maskin, “Sequential Innovation, Patents, and Imitation,” 40, no. 4 (2009): 613.

  277. 277.

    Arrow, “Economic Welfare,” 224; Eisenberg, “Patents and the Progress of Science,” 1073-1074; Merges, “Case of Blocking Patents,” 89-90.

  278. 278.

    Heller and Eisenberg, “Can Patents Deter Innovation?,” 701; Merges, “Case of Blocking Patents,” 90-91. On the endowment effect, see Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Experimental Tests of the Endowment Effect and the Coase Theorem,” Journal of Political Economy 98, no. 6 (1990): 1339-1342.

  279. 279.

    See Guiseppe Dari-Mattiacci and Francesco Parisi, “Substituting Complements,” Journal of Competition Law & Economics 2, no. 3 (2006): 338, 345; the authors presume that patent holders compete by price.

  280. 280.

    Lemley and Shapiro found that prices negotiated ex ante do not reflect the likelihood of a patent being invalid and that they therefore lead to overcompensation in a manner similar to that found in hold-up situations. Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2003-2005. In ex ante negotiations, a follow-on innovator’s alternative to licensing is designing around the patent, which assumes that the patent in question is valid. Carl Shapiro, “Injunctions, Hold-up, and Patent Royalties,” American Law and Economics Review 12, no. 2 (2010): 298-300. Follow-on innovators are likely to be insufficiently incentivized to invalidate weak patents because successful revocation can create positive externalities that benefit competitors. Lemley and Shapiro, “Probabilistic Patents,” 88-89. However, the game theoretic model disregards companies’ freedom to evaluate the strength of patents or entire portfolios and to address this issue upon setting the royalty rates or determining the scope of cross-licensing agreements. In addition, specialized services that evaluate the validity of patents are available; see, for example, “Patent Validity Search,” IP.com, last modified n.d., accessed 10 March 2017 http://ip.com/solutions/professional-services/patent-validity/.

  281. 281.

    Elkin-Koren and Salzberger, Law and Economics of Intellectual Property, 88.

  282. 282.

    Farrell et al., “Standard Setting, Patents, and Hold-Up,” 615.

  283. 283.

    Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993.

  284. 284.

    See Lemley and Melamed, “Missing the Forest for the Trolls,” 2172-2173, 2178.

  285. 285.

    A market failure that is closely related to Cournot’s problem of complements is the double marginalization problem, which “arises when input suppliers with market power (here, the patentees) sell to a downstream firm that also has some power over price”. Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2014. This market failure also translates into higher consumer prices and a larger deadweight loss. However, it primarily harms consumers, not follow-on innovators.

  286. 286.

    Ben Depoorter, “Putting the Humpty Dumpty Back Together : Experimental Evidence of Anticommons Tragedies,” Journal of Law, Economics & Policy 3, no. 1 (2007): 1.

  287. 287.

    Lemley and Melamed, “Missing the Forest for the Trolls,” 2157-2158.

  288. 288.

    Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2015-2016.

  289. 289.

    Depoorter, “Putting the Humpty Dumpty Back Together,” 21.

  290. 290.

    Dari-Mattiacci and Parisi, “Substituting Complements,” 338, 345.

  291. 291.

    See Lemley and Melamed, “Missing the Forest for the Trolls,” 2157-2158; Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2014-2015; On patent fragmentation dynamics in semiconductor industry, see generally Ziedonis, “Don’t Fence Me In.”

  292. 292.

    Damien Geradin and Miguel Rato, “Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-up, Royalty Stacking and the Meaning of FRAND,” European Competition Journal 3, no. 1 (2007): 127.

  293. 293.

    See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1991-1993. See also Damien Geradin, Anne Layne-Farrar, and A. Jorge Padilla, “Complements Problem within Standard Setting : Assessing the Evidence on Royalty Stacking,” Boston University journal of science & technology law 14, no. 2 (2008), 145-148. However, Geradin et al question the relevance of the royalty-stacking problem. See Ibid. 150-15, 154 163, 176. In standard implementation, SEPs are rarely cleared ex ante. Typically, however, the owners of SEPs have given FRAND declarations for patents that they own that have been incorporated into a de jure standard; these declarations are intended to ensure that licenses granted ex post implementation will reflect the value of the patent prior to its incorporation into the standard and the standard’s possible subsequent market dominance. See Guidelines on the applicability of Article 101 of TFEU to horizontal co-operation agreements, paras 269, 285, 287.

  294. 294.

    For example, reach-through royalties, where the royalty fee is calculated on the basis of sales of products incorporating the technology or resulting from the use of the technology, may, on some occasions, overreward the initial right holder. Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law, vol. X (New York: Wolters Kluwer Law and Business, 2011), at 1782g. Reach-through royalties are characteristic for patents on research tools. Daryl Lim, Patent Misuse and Antitrust Law : Empirical, Doctrinal and Policy Perspectives. (Cheltenham: Edward Elgar Publishing, 2013), 124. Therefore, they pose a risk of royalty-stacking and raising transaction costs of licensing for downstream companies.

  295. 295.

    Farrell et al., “Standard Setting, Patents, and Hold-Up,” 610-613, provide an economic model of a hold-up in the light of incentive theory. The market power to demand excessive royalties in a hold-up situation is distinct from the justified market power that stems from the superiority of a particular technology. Ibid, 615-616. For a model of how the threat of injunction impacts licensing negotiations between a single patent holder and the innovator of a complex product ex post and ex ante, see Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1994-2005; Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 1994-2005; see also Mark A. Lemley and Carl Shapiro, “Reply : Patent Holdup and Royalty Stacking,” Texas Law Review 85 (2007), 2163-2170.

  296. 296.

    Cotter, Comparative Patent Remedies, 59.

  297. 297.

    Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993.

  298. 298.

    Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 23.

  299. 299.

    Farrell et al., “Standard Setting, Patents, and Hold-Up,” 614.

  300. 300.

    See Heller and Eisenberg, “Can Patents Deter Innovation?,” 698-700. Furthermore, due to the risk of hold-ups, some innovators may decide not to produce their innovations, particularly when economies of scale are present. Shapiro, “Navigating the Patent Thicket,” 126.

  301. 301.

    Excluding hold-ups resemble unjustified refusals to license, with the difference being that inventing around a held-up patent is more costly due to the follow-on innovator’s sunk investments.

  302. 302.

    Communication from the Commission. Intellectual Property Rights and Standardisation. COM (92) 445 final (27 October 1992), para 4.4.1. On patent ambushes from the perspective of competition law see Sect. 8.6.2.

  303. 303.

    For further discussion on hold-outs, see Sect. 4.3.4.

  304. 304.

    See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 1993; Alexander Galetovic and Stephen Haber, “Fallacies of Patent-Holdup Theory,” Journal of Competition Law & Economics 13, no. 1 (2017): 1, 28-33 for critiques of this conceptual ambiguity.

  305. 305.

    Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 17, 32.

  306. 306.

    Cf. ibid, 12, in which the authors argue that a hold-up can occur only once. However, the authors presume that all “firm’s quasi rents (the difference between its revenues and its short run costs) can only be extracted once” in an individual hold-up. In contrast, in this thesis, a hold-up is considered to encompass a royalty rate that is excessive from the perspective of the ex ante value of a patent, even if the royalty rate does not exhaust all of the quasi rents of the follow-on innovator.

  307. 307.

    A permanent injunction may be granted either because a patent holder refuses to pay an excessive royalty fee (i.e. an exploitative hold-up) or because the patent holder did not intend to license a patent on the basis of an offensive–anticompetitive strategy (i.e. an exclusionary hold-up).

  308. 308.

    See generally Sidak, “Reply to Lemley and Shapiro.”; John M. Golden, “‘Patent Trolls’ and Patent Remedies,” Texas Law Review 85 (2007). Cf. Mark A. Lemley and Carl Shapiro, “Reply : Patent Holdup and Royalty Stacking.”

  309. 309.

    Sidak, “Reply to Lemley and Shapiro,” 741-743.

  310. 310.

    Ibid, 746.

  311. 311.

    Golden, “‘Patent Trolls’ and Patent Remedies,” 2161.

  312. 312.

    Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 43-44.

  313. 313.

    Ibid, 20.

  314. 314.

    Ibid, 22-27.

  315. 315.

    See, for example, Farrell et al., “Standard Setting, Patents, and Hold-Up,” 610-621.

  316. 316.

    Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 262-227, 234-235.

  317. 317.

    Ibid, 26-28.

  318. 318.

    Golden, “‘Patent Trolls’ and Patent Remedies,” 2161.

  319. 319.

    For a discussion on patent strategies and PAEs, see Sects. 2.3.1.1–2.3.1.3. One of the famous patent war resolutions is a 612,5 million dollar settlement between NTP Inc., a PAE, and Research in Motion Ltd., the producer of Blackberry mobile phones. Kelley, Rob. “BlackBerry maker, NTP ink $612 million settlement.” CNN Money. Last modified 3 March 2006. Accessed 23 July 2019. https://money.cnn.com/2006/03/03/technology/rimm_ntp/. The settlement has been viewed to have been influenced by the earlier injunction granted against Research in Motion Ltd. Shapiro, “Injunctions, Hold-up, and Patent Royalties,” 281. For the procedural history of the dispute, see Jennifer Lane, “NTP, Inc. v. Research in Motion, Ltd. : Inventions Are Global, but Politics Are Still Local—an Examination of the Blackberry Case,” Berkeley Technology Law Journal 21, no. 1 (2006) 64-66.

  320. 320.

    The patent wars have also concerned design patents and utility models; see Jessie Yang, “Use and Abuse of Patents in the Smartphone Wars : A Need for Change,” Case Western Reserve Journal of Law, Technology and the Internet 5 (2014): 241, 276. On competition law cases arising from standard wars in telecommunications sector see Sect. 8.6.4.

  321. 321.

    See Michael A. Carrier, “Roadmap to the Smartphone Patent Wars and FRAND Licensing,” CPI Antitrust Chronicle 2, no. April (2012) 2; Alison Jones, “Standard-Essential Patents : FRAND Commitments, Injunctions and the Smartphone Wars,” European Competition Journal 10, no. 1 (2014): 9-16.

  322. 322.

    Don Clark and Nicas Jack, “Chinese Court Says Apple Infringed on Qualcomms Patents,” The New York Times, last modified 2018, accessed 28 March 2019, https://www.nytimes.com/2018/12/10/technology/apple-qualcomm-patents-ruling.html; David Faber, “China Court Grants Qualcomm Injunction against Apple, Banning Sale of Some Iphones,” CNBC, last modified 2018, accessed 27 March 2019, https://www.cnbc.com/2018/12/10/china-court-grants-qualcomm-injunction-against-apple.html; Si Ma and Yin Cao, “Fuzchou Court Sides with Qualcomm over Apple,” ChinaDaily.com.cn, last modified 2018, accessed 28 March 2019, http://www.chinadaily.com.cn/a/201812/12/WS5c1043f3a310eff3032906d6.html; Jim McGregor, “Apple Banned from China as a Result of Battle with Qualcomm,” Forbes, last modified 2018, accessed 27 March 2019, https://www.forbes.com/sites/tiriasresearch/2018/12/10/apple-banned-from-china-as-a-result-of-battle-with-qualcomm/#10b473897ca1; LG München, 20 December 2018, 7 O 10495/17, BeckRS 2018, 33489.

  323. 323.

    BeckRS 2018, 33489; Mathieu Klos, “Qualcomm Hit Apple Hard,” Juve Patent, last modified 2018, accessed 31 March 2019, https://www.juve-patent.com/news-and-stories/cases/another-big-win-for-qualcomm-against-apple/.

  324. 324.

    McGregor, “Apple Banned from China”.

  325. 325.

    See LG Düsseldorf, 9 November 2018, 4a O 17/17, [Beck Rechtsprechung] [BeckRS]2018, 35570; LG Düsseldorf, 12 December 2018, 4b O 5/17, BeckRS 2018, 38605; Konstanze Richter, “MPEG LA Scores Another Victory in SEP Dispute,” Juve Patent, last modified 2018, accessed 28 March 2019, https://www.juve-patent.com/news-and-stories/cases/mpeg-la-scores-another-victory-in-sep-dispute/; “Verdicts Agaist Huawei and ZTE Enforced in Germany,” Business Wire, last modified 2018, accessed 28 March 2018, https://www.businesswire.com/news/home/20181227005324/en/Verdicts-Huawei-ZTE-Enforced-Germany.

  326. 326.

    Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2025-2029. Cf. Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 159-162, questioning the strenght of Lemley and Shapiro’s empirical fidnings.

  327. 327.

    Galasso and Schankerman, “Patents and Cumulative Innovation,” 320-322, 354, 366.

  328. 328.

    Bronwyn H. Hall et al., Study of Patent Thickets, Final Report Prepared for the UK Intellectual Property Office (London: National Institute of Economic and Social Research, 2012), 50-52.

  329. 329.

    Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 145-162.

  330. 330.

    See Charles R. McManis and Brian Yagi, “Bayh-Dole Act and Anticommons Hypothesis : Round Three,” George Mason Law Review 21, no. 4 (2014): 1090; Jonathan M. Barnett, “Anti-Commons Revisited,” Harvard Journal of Law & Technology 29, no. 1 (2015): 144-147. For example, Walsh et al. found no evidence of bargaining breakdowns and failures to obtain access to patented research tools, as “firms and universities have been able to develop ‘working solutions’ that allow their research to proceed. These working solutions combine taking licenses, inventing around patents, infringement (often informally invoking a research exemption), developing and using public tools, and challenging patents in court.” John P. Walsh, Ashish Arora, and Wesley M. Cohen, “Effects Research Tool Patenting and Licensing and Biomedical Innovation,” in Patents in Knowledge-Based Economy, ed. Wesley M. Cohen and Stephen A. Merrill (Washington, DC: National Academies Press, 2003), 286. However, the study focused on anticommons problems in research, and the results may differ in the context of product development. Van Overwalle, “Exclusive Ownership Versus Open Commons,” 141 fn 14.

  331. 331.

    OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, Evidence and Policies (Paris: OECD Publishing, 2002), 77.

  332. 332.

    See Barnett, “Anti-Commons Revisited,” 142-144.

  333. 333.

    For a broad overview, see Gregory J. Sidak, “Antitrust Division’s Devaluation of Standard-Essential Patents,” Georgetown Law Journal 104 (2015): 60-62 and fn 49, with the following references.

  334. 334.

    Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 159-163, 174-176.

  335. 335.

    Alexander Galetovic, Stephen Haber, and Ross Levine, “Empirical Examination of Patent Holdup,” Journal of Competition Law & Economics 11, no. 3 (2015) 549, 554. See also Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 149. Industries that are reliant on SEPs have also displayed an accelerated pace of innovation. Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 8-9.

  336. 336.

    OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, 60; Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 165-168; Walsh, Arora, and Cohen, “Effects Research Tool Patenting and Licensing and Biomedical Innovation,” 286; Galetovic, Haber, and Levine, “Empirical Examination of Patent Holdup,” 572-573.

  337. 337.

    Richard A. Epstein and Bruce N. Kuhlik, “Is There a Biomedical Anticommons?,” Regulation 27, no. 2 (2004): 55-56.

  338. 338.

    Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 162-163.

  339. 339.

    Geradin and Rato, “Can Standard-Setting Lead to Exploitative Abuse?,” 147-148. Galetovic and Huber stress that “the profit-maximizing royalty rate falls with the number of patent holders.” Galetovic and Haber, “Fallacies of Patent-Holdup Theory,” 32. Some commentators have even claimed that companies’ incentives to hold up in anti-commons contexts are lower because many other patent-holders have the same power to create a hold-up. Douglas Gary Lichtman, Patent Holdouts and the Standard Setting Process, John M. Olin Program in Law and Economics: Working Paper No. 292 (Chicago: Chicago Working Paper Series, 2006), 8. This argument, however, implicitly presupposes that a patent holder has an interest in utilizing a technology that is subject to an anti-commons problem.

  340. 340.

    Scott Morton and Shapiro, “Strategic Patent Acquisitions,” 477.

  341. 341.

    Heller, “Tragedy of the Anticommons,” 688. Similar views have been expressed in connection to prospect theory, see Kitch, “Nature and Function of the Patent System,” 270-273, 276.

  342. 342.

    Heller and Eisenberg, “Can Patents Deter Innovation?,” 701.

  343. 343.

    Merges and Nelson, “On the Complex Economics of the Patent Scope,” 916.

  344. 344.

    Carl Shapiro, “Patent Reform : Aligning Reward and Contribution,” Innovation Policy and the Economy 8 (2008): 135-137.

  345. 345.

    Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1090. Exceptions to patent protection narrow down the scope of the initial entitlement and do not determine the means of its enforcement. Krauspenhaar, Liability Rules in Patent Law, 18-19.

  346. 346.

    Calabresi and Melamed, “Property Rules, Liability Rules, and Inalienability,” 1092.

  347. 347.

    See ibid, 1106-1110.

  348. 348.

    See Lemley and Shapiro, “Patent Holdup and Royalty Stacking,” 2036-2037, 2044-2045; Lemley and Shapiro, “Reply,” 2163, asupporting stays to permanent injunctions in infringement proceedings.

  349. 349.

    See Merges, “Contracting into liability rules,” 1295, 1298, 1392-1393; Barnett, “Property as Process,” 411, 431-433, 455-456.

  350. 350.

    On OAI theories, see generally Sect. 3.1.

  351. 351.

    Improved patent quality could also have the indirect effect of reducing defensive and offensive motivations to apply for patents.

  352. 352.

    Van Overwalle, “Exclusive Ownership Versus Open Commons,” 146.

  353. 353.

    Rosa Castro Bernieri, Ex-Post Liability Rules in Modern Patent Law, European Studies in Law and Economics (Rotterdam: Intersentia, 2010), 24.

  354. 354.

    Lamping et al., “Declaration on Patent Protection,” 688.

  355. 355.

    Geradin, Layne-Farrar, and Padilla, “Assessing the Evidence on Royalty Stacking,” 175-176.

  356. 356.

    However, the eBay decision represents an exogenous shock. Kirti Gupta and Jay P. Kesan, Studying the Impact of eBay on Injunctive Relief in Patent Cases, Research Paper No. 17-03 (Champaign, IL: University of Illinois - College of Law, 2016) 4. Therefore it allows for more comprehensive studies on the impact of ex-post liability rules on market failures of overprotection.

  357. 357.

    See Sects. 2.3.1.1–2.3.1.2.

  358. 358.

    Darts-ip, NPE Litigation in the European Union. Facts and Figures (Brussels: IP2Innovate, 2018), 6, 11. The report defined NPEs as “independent organizations (legal entities) which own or benefit from patent rights but do not sell or manufacture goods or services associated with them (i.e., non-operating companies) and which have an active (offensive) assertion or litigation role as plaintiffs towards the enforcement of their patent rights.” The definition covers also NPEs that may engage in R&D activities but excludes universities and sole inventors. Ibid, 19.

  359. 359.

    OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices, 77-78.

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    Alina Wernick

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Wernick, A. (2021). Theory. In: Mechanisms to Enable Follow-On Innovation. Munich Studies on Innovation and Competition, vol 15. Springer, Cham. https://doi.org/10.1007/978-3-030-72257-9_2

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