Patent – A derailed practise in hindsight
A research of new patenting strategies in light of the changing technological landscape.
Abstract
This thesis reviews the considerations behind patent law and asks the question whether or not the system still serves its initial purpose with the emergence of new business strategies. To answer this question this research will firstly discuss the historical emergence of patents in order to gain a better understanding of how it became a system and what the rationale behind this system was. After having defined the rationale, this research will discuss developments of the current patent system. The research will be limited to patent thickets, Non Practising Entities and patent misuse in the pharmaceutical industry. Where possible empirical data will be discussed to outline the effects of these strategies. In addition to empirical research the focus will lie on a multitude of legal doctrine and case studies. After discussing the
abovementioned strategies, this thesis will address the question of whether or not these new business strategies have had an effect on the policy intent of the patent system namely: to create an innovation incentive.
Author: Behdad Rahnamai Supervisor: Sven J.R. Bostyn Date: 29 july 2016
Definitions
Cumulative innovation An industry in which the inventions of previous generations form the basis for further innovation.
Generic companies Companies that make equivalent medicine to originator companies after the patent of the latter has expired. Generic companies do not invest in R&D and as a consequence can offer their equivalent medicine at cheaper prices.
Evergreening Any strategy that patent holders employ to prolong their right exclusionary right.
Non Practising Entity Companies that obtain patents and distract their revenue through enforcement without using or intending to use the patents to produce.
Originator companies Companies that are active in R&D, management and market authorization of innovative medicine.
Patent thicket A strategy where firms strengthen their patent portfolio by acquiring vast amounts of patents all relating to a certain technology, which often are overlapping each other.
Patent system A system in which an inventor gets an exclusionary right for a limited time for an invention which is novel, inventive and industrially applicable. In return for this right the inventor has to disclose his invention to a certain degree to the public. Software A set of instructions given to a computer (source code) and its
Abbreviations
Art. Article
AZ AstraZenica
EPO European Patent Office
EU European Union
FRAND Fair Reasonable and Non Discriminatory GPRS General Packet Radio Service
GMS Global System for Mobile Communications NPE Non Practising Entity
IP Intellectual Property IPR Intellectual Property Right R&D Research and Development SEP Standard Essential Patent
SPC Supplementary Patent Certificate SSO Standard Setting Organisation
UMTS Universal Mobile Telecommunication System USA/US United States of America
Index
1. Introduction……….5
2. Historical background of the patent system……….7
2.1 From privilege to property right…………...………….………7
2.2 From property right to abolition………...10
2.3 Comeback of the patent system………12
2.4. The reason to innovate………...12
3.0 The current patent system ……….14
3.1 Patent ≠ Monopoly………..………...…………...14
3.2 Alleged system abusers………..………...………17
3.2.1 Non Practising Entities……….………...17
3.2.1.1 Empirical studies on the effects of NPEs……….……….19
3.2.1.2 Are all NPE’s distortionists?...21
3.2.2 Patent thickets………..….………...25
3.2.2.1 Causes of the patent thicket problem……….26
3.2.2.2 Solutions to the patent thicket problem……...……….……..29
3.2.3 Pharmaceutical companies……….……….31
4.0 De-railed or still on track?...36
4.1 Incentive to innovate or make money?...36
4.2 Suggested solutions……….……...37
5.0 Conclusion………...……...42
1. Introduction
In today’s technology dependant society intellectual property (IP) plays an increasingly vital role. Due to the increase of easy to use communication methods that have emerged in the 21st
century there are new challenges facing IP lawmakers and the rationale of the system is put to the test in various ways. A good example of one of these technological communication advances is the role a mobile phone plays in our lives. Just about 20 years ago mobile phones were a luxury product for those few individuals fortunate enough to afford one. These
devices, which most probably will not be recognized by someone born after the second millennium, were used to call in case a landline was not in reach. Today smartphones are the centre of most of our communication and are used to text, tweet, snap, stream and ultimately to call someone. It is safe to say that we have redefined the way we use our mobile phones and that some of these new found uses are leading their own lives creating a big gap with what the devices were originally intended for, namely to call someone. However interesting these new found uses for mobile phones are it is not unique to see that things are used for alternative goals than what they were originally intended for. This thesis does not cover the change in use of mobile phones but rather the change in the use of patents in light of changing technology.
In short a patent is a tool to incentivise innovation. The inventor or the company that he works for share the innovation and in return can obtain a patent which allows them to exclude others from using their invention without prior consent. In this way the inventor is protected from free riders who could copy the invention without any prior investment. In return for this exclusive right the inventor must disclose his invention (at least to a certain degree) to the public who can then use the invention as a basis for the development of further inventions, which should ultimately stimulate the development of economy.
What may seem as a pretty straightforward system of rewarding innovation has turned into a sui generis market, which lies under intense scrutiny of many legal scholars. Instead of being a tool to create innovation incentives many critics allege that patents have become strategic instruments for big multinationals to increase or protect their market share and for that reason acquiring one has become a goal on its own. This strategic conduct has become infamous in patent practise which is shown by the multitude of critique and negative labels of certain strategic companies such as patent trolls. This research aims to investigate whether these new
strategic behaviours are signs that these companies ignore the original purpose of patents of rewarding innovation. With that aim in mind the research question of this thesis reads as follows:
“Do patents still serve their initial purpose as an incentive for innovation in light of rapid technological advancements and the emergence of new patenting
strategies?
Answering this question requires covering an ocean of legislation, case law and legal debate which cannot be dealt with within the framework of this research since the developments in patent practise are vast and increasingly faster than before. In that regard this research will be limited to the following business strategies Non Practising Entities (NPEs), patent thickets and misuse in the pharmaceutical industry. The focus of this thesis will be on the business strategies as such rather than a specific territory but since most NPEs are active in the
software industry most of the analysis on these business strategies will use empirical research, case law and scholarly debate from the United States. In general, however the material used to research will focus on the U.S- and European patent system. The research question will be answered as follows: Chapter 2 will firstly discuss the history of patents to serve as a background with regard to the ratio of the system. This will show that patents have changed quite a bit over time and an insight in its history clarifies some of the confusion with regard to the nature of the right. A common assumption about patents is that they are monopolies. There is a historical explanation why such assumption is there in the first place and why it is not correct anymore. In Chapter 3 the current patent system will be discussed by firstly discussing what patents are and what they are not. More importantly Chapter 3 will also discuss new strategies of patent holders namely Non Practising Entities, patent thickets and misuse by originator companies in the pharmaceutical industry. The focus will lie on the effects of these strategies in practise and whether or not they can be pinned down to a certain stereo type. Chapter 4 will then evaluate whether or not these strategies deter the patent system from its original purpose (which has been laid down in Chapter 2) and consequently Chapter 5 will address the question whether the system should or could be changed.
2. Historical background of the patent system
Before getting into new developments and types of uses of patents it is necessary to get a better understanding of why patents were originally developed and how it came into being a system. In light thereof, this chapter discusses historical developments of the patent system to serve as a background by discussing the origin and historical developments of the patent system to ultimately define what exactly the traditional policy intent of the system curtails. 2.1 from privilege to property right
Incentivising new ideas or inventions stems back as far as ancient Greece where monopolies were granted to chefs who created delicious recipes and even goes long before IP was a recognized right with commercial value, which is said to originate in the 19th century.1 Ever since man took credit for inventions rather than it being a gift of god, rulers saw economic opportunity in granting ‘inventors’ a privilege in return for their efforts.2 Such grant was given in the form of litterae patentes or letters patent, which translates to open letters originating from a system of royal letters that served as a means of communication of the ruler to the public i.e. public directives.3 These open letters were not limited to privileges but also contained information about revenue or foreign affairs or any other matter of which the public was expected to take heed from.4 The privilege given by the ruler was not the same as the property right that we now call a patent. Whereas patents we know today are seen as the property right of the inventor a privilege is rather an exemption that the ruler is willing to make in a specific case where he thinks an invention is of value.5 The recipients of such
grants were mostly medieval craftsmen called guilds and one can imagine that nepotism is at stake when a ruler grants privileges to a specific group. In that way the ruler could easily grant privileges to those who supported his view thus having little to do with rewarding innovation.6 Sometimes however, privileges were granted as an exemption to the rights of the guilds giving the inventor the right to an invention, which would normally come to the guilds. In that way privileges also differ from patent rights we know today since the latter solely 1 Bostyn 2001, p. 8. 2 Ibidem, p. 7. 3 Ibidem; Machlup 1958, p. 1. 4 Walterscheid 1994, p. 700-701; Machlup 1958, p. 2. 5 Walterscheid 1994, p. 699. 6 Machlup 1958, p. 2; Bostyn 2001, p. 11.
gives the inventor an exclusionary right where others are not allowed to use their invention without authorisation whilst privileges could have given the inventor an actual positive right to the trade on a certain market, which in some cases meant that an exemption on an existing monopoly was made.7
The rather apparent distinction of a property right vs. privilege was ever so clear to the beneficiaries of the latter, causing a lobby for the recognition of a ‘natural property right’ inherent to their inventions, which had to be protected by the state.8 Recognizing IP rights as such did not come from the purist and perhaps not so genuine philosophy that mankind had a natural right in case an invention was made. According to Walterscheid the recognition of IP depended on the legal premise that:
‘‘knowledge of craft processes and techniques and the development of
technological innovations are forms of intangible property with commercial value separate and distinct from that of the physical manifestation of the use of such knowledge, e.g., products or devices.’’9
Instead of IP and consequently patent rights being a right derived of nature it was rather a matter of societal acceptance of the commercial value of knowledge apart from its physical application, which clearly needed to be protected.10 The awareness of that value is
demonstrated in the 15th century where in Venice the guilds had developed innovative techniques in producing glassware. In order to maintain the secrecy, the Venetian guilds restricted access to the islands on which they produced glass as a means to exclude others from learning their craft. Aside from Venice being the leading glassware industry there was also a difference in the quality among Venetian glassware manufacturers. Some of them were better than the others and refused to share their trade secrets, which comes to show that there was also an awareness of the value of knowledge on an individual level next to a communal one.11 Most scholars claim that the awareness of the value of the trade secrets of producing glass gave rise to the first patent system with the patent act of 1474 in Venice but it should be noted that such allocation lies under scholarly debate since similar systems were also in place
7 For an explanation of current patent rights see 3.1. 8 Walterscheid 1994, p. 699; Janis 2002, p. 931. 9 Walterscheid, p. 702.
10 Ibidem, p. 703-705. 11 Bostyn 2001, p. 9.
in England, which ultimately resulted in the English Statute of Monopolies.12 The Venetian patent act pretty much set precedent for patents as we know today laying down familiar requirements such as but not limited to: novelty, disclosure and exclusion of others. The act reads as follows (translated to English):
‘We have among us men of great genius, apt to invent and discover ingenious devices; and in view of the grandeur and virtue of our city, more such men come to us very day from divers parts. Now, if provision were made for the works and devices discovered by such persons, so that others who may see them could not build them and take the inventor's honour away, more men would then apply their genius, would discover, and would build devices of great utility and benefit to our commonwealth. Therefore: be it enacted that, by the authority of this Council, every person who shall build any new and ingenious device in this City, not previously made in our commonwealth, shall give notice of it to the office of our General Welfare Board when it has been reduced to perfection so that it can be used and operated. It being forbidden to every other person in any of our territories and towns to make any further device conforming with and similar to said one, without the consent and license of the author, for the term of ten years. And if anybody builds it in violation hereof, the aforesaid author and inventor shall be entitled to have him summoned before any magistrate the said infringer shall be constrained to pay him [one] hundred ducats; and the device shall be destroyed at once. It being, however, within the power and discretion of the Government, in its activities, to take and use any such device and instrument, with this condition however that no one but the author shall operate it.’13
The Venetian way of looking at patents after 1474 proved to be a success and consequently causing a spill-over effect to countries such as but not limited to Germany, France, England and through the latter eventually the United States.14 A system in which the ruler would ‘grant favours’ had to make way for a quid pro quo mentality, which would ultimately get rid of a corrupt system of granting privileges by a ruler to those who would benefit him in return.
12 Bostyn 2001, p. 8, 11-13; Machlup 1958, p. 2; Walterscheid 1994, p. 704; Prager 1961, p. I. 13 Translated version of the Venetian patent act found at Bostyn 2001, p. 9-10.
2.2 From property right to abolition
It would be a misrepresentation of the facts by stating that the Venetian patent act of 1474 set precedent for a long lasting successful patent protection in several countries which knew no opponents. It was already not easy taking away power from rulers to create a fair patent system such as the crown in England, which hindered the institution of a system that is alleged to be the backbone of patents we still use today where only the first and true inventor was entitled to a patent right with the Statute of Monopolies in 1603.15 To make things worse, patents were becoming more and more unpopular in the 19th century. This was mostly caused by the start of the industrial revolution and with it the emergence of new economic
philosophies such as ‘classic economics’, which promoted an open economy with free trade and minimal government input.16 This liberal economic approach was followed by the Scottish philosopher Adam Smith and was applied by many European politicians such as Macfie, a British parliamentarian who compared the patent system as an unfair tax for manufacturers and therefor being a burden on economy.17 The emergence of the free trade movement caused by classic economics lead to the end of mercantilism, an economic school, which believed that it is most beneficial for states to regulate trade via import/export duties and the granting of monopoly rights, which was akin to the monarchies discussed in
paragraph 2.1.18 Consequently the rise of the free trade movement caused a division of two schools: the liberals who pleaded for an open economy without any state protection
whatsoever including patents; and on the other hand the protectionists who pleaded for duties, taxes and patent protection.19
The decrease of popularity of the patent system was surely not the sole consequence of a change of economic ideology. Next to the shift of state regulation towards liberalism there was also discontent with regard to patent practice. Obtaining a patent was often found expensive, burdensome and uncertain.20 In the Netherlands for instance there was a court
15 Machlup 1958, p. 2. Although it should be noted that the statute of monopolies was a registration system without a central authority granting patent rights so it was not the same system we use today see Walterscheid 1994, p. 18; Janis 2002, p. 902-903.
16 Noble et al 2008, p. 495. 17 Macfie 1869, p. 245. 18 Noble et al 2008, p. 658-659. 19 Ibidem.
ruling that private use of a patent (which in practise was also applicable to professional use) would not constitute an infringement making it easy to circumvent patent rights.21
After several parliamentary investigations and political pressure, Germany, England and Dutch parliaments were advocating the abolition of the patent system around the year 1850, which is described by Machlup as ‘the Anti-Patent Movement’.22 This movement gave rise to an open discussion as to the use of the patent system leading to several arguments in favour of having the system. Such justifications were that patents were: ‘natural rights’, ‘an incentive to disclose’ and ‘incentive to invent’.23 The first two justifications were discarded by the
opponents. The natural rights argument did not last long since it was believed that once an idea was disclosed it did not belong to the inventor himself solely.24 The ‘incentive to disclose
argument was refuted with the logic that it is simply impossible to keep an invention secret and at the same time to commercialize it.25 The last justification ‘incentive to invent’ was the only argument the opposition found difficult to refute.26
Even though several countries were contemplating the abolition of the patent system it was the Netherlands that found a majority to push for it leading to the abolition of Dutch patents in 1869.27 This was mostly caused by the fact that the Netherlands made their money mostly through trade and consequently had a large stake in the free trade movement. Having a liberal majority seems to be a logical explanation for the abolition of the patent system. Even more so since the Dutch were suffering under economic crisis and consequently were not
innovating. Abolishment of a patent system meant that they were free to copy innovators in other countries, which would repair the Dutch economy boost. It is safe to say that patent protectionism was questioned at this point of time throughout the European countries. Whereas governments saw use in granting patents in return for innovation in the 17th and 18th
century economists such as David Ricardo alleged that a patent system was not necessary to innovate at all and.28 In France Chevalier advocated that patent protection contributed to the secrecy of innovation, which would hinder the sharing of idea’s causing innovation to become more cumbersome. According to him innovators would be better of innovating rather than
21 Gerzon 1986, p. 2-4
22 Machlup & Penrose 1950, p. 3-5. 23 Janis 2002, p. 931.
24 Ibidem, p. 932.
25 On the contrary trade secrets have proven to be successful. Coca Cola managed to keep their recipe a secret much longer than they would have gotten patent protection. For more information see http://www.inventionresource.com (last visited 20 july 2016).
26 Janis 2002, p. 934. 27 Machlup 1958, p. 4. 28 Johns 2009, p. 262.
filing patent applications.29 It is safe to assume that patent protection is a theme that is akin to economic prosperity and the anti-patent movement shows us that when such prosperity is not in sight the system is under political scrutiny.
2.3 Comeback of the patent system
It did not last long until it became apparent that abolition of the patent system was also not a solution to economic crisis. Aside from several patent enthusiasts handing out pamphlets and advocating the use of patent protection it was still believed that an open economy would be the answer to the economic down fall leaving little room for debate. This all changed after 1873 when yet another economic crisis - the great depression - hit the European Countries.30 As a consequence, the free trade movement began to lose popularity and advocates of patent protection were making a comeback. The comeback was evidenced by several policy changes in the European states. In 1874 England had withdrawn a patent bill; by 1877 Germany had a uniform patent system and eventually the Netherlands adopted new patent legislation in 1912, which still is in use up to today.
2.4 The reason to innovate
Whether calling it a privilege or property right and regardless of any debate as to its origin or use, the theory behind patent as we know it today is relatively straightforward namely to create an innovation incentive. Historically, emperors and rulers have given exclusionary rights to those who invented something new. The rationale being that this would create an incentive for the people to give their best effort. Even back then the rulers knew that giving someone a prospective to an exclusionary right with a new invention will stimulate people to make an effort to come with something new.31 Not only was it beneficial to award people to innovate it was also important that those who had an invention would not keep it to
themselves but rather shared it with others so that the community as a whole could profit and build further on the efforts of the inventor. In that way the patent system also had as a
function to take away the risk that someone would steal a certain invention: the so-called free rider problem. This is evidenced by the early Venetian Guilds who would try their best not to
29 Macfie 1869, p. 271-272. 30 Machlup & Penrose (1950), p. 6. 31 See supranote 2.
disclose their glassmaking techniques. Up to today the same rationale in more or less the same words is seen as the traditional incentive theory on which the system is based. By giving inventors or the companies behind them an exclusionary right at low cost they will see more economic opportunity to get a return on their investment and ultimately they will invest more in R&D.32 This is the rationale that is often cited as the premise to which the system should adhere when discussing new and alternative patent strategies.33 For the sake of this research this will be the traditional incentive theory, which is the rationale of the system and
consequently will function as the ultimate test for the new tactical patent uses that will be discussed in chapter three.
32 Bessen & Hunt 2004, p. 13
33 See for instance Commission inquiry 2008; Lanjouw & Schankerman 2004; Janis 2002, p. 935; Bakels & Hugenholtz 2002, p. 22 at 4.3.3; Cohen et al 2002, p. 2; Gallini 2002, p. 131; Eisenberg 2011, p. 54; Bessen & Meurer 2008, p. 19 McCurdy 2009, p. 78.
3. The current patent system
This chapter’s function is two sided: firstly, the legal framework of patents will be discussed. To get a better understanding some prejudices as to the nature of patents will be discussed to clarify what patents really are (not). A common mistake is the presumption of patent rights being similar to monopolies leading to confusion with regard to the function of patents. This presumption will be critically discussed by comparing a patent right to an actual economic monopoly. After discussing the legal framework and what patents are this chapter will discuss alleged abuse by NPEs, patent thickets and misuse in the pharmaceutical industry.
3.1 Patent ≠ Monopoly
When looking at the development of the patent system it is not really surprising that patents are often mistaken for monopolies. As we have seen patents haven’t always been property rights. Patents were akin to monopolies back in the time when they were privileges granted by the ruler i.e. giving the right to be the sole practitioner with regard to the trade of certain goods or services.34 Even when patent came into being a system one of the first and foremost pieces of legislature was the English ‘statute of monopolies’ in which patents were treated as an exemption to monopolies, which were illegal by default.35 As a consequence patents are still seen as akin to monopolies by some while the right itself has changed quite a bit over time. Up to today legislators, scholars and politicians often use patents and monopolies in the same context contributing to the confusion that when a patent right is obtained the patent holder has complete market power over a certain good.36 This is a false premise and before
discussing why that is the case we must define first what a patent right is.
A patent is an exclusionary right. This right gives an individual the right to exclude others from using their patented invention without prior consent or put in more practical terms without a license given by the patent holder.37 To phrase more specifically with a patent, the holder can exclude others from making, using, offering for sale, selling etc. the patented
34 Bostyn, Petit 2013, p. 8. 35 Ibidem.
36 See for example Machlup 1958, 1. 37 Feldman 2008, p. 8 at 24.
subject matter.38 This means that a patent doesn’t give a positive right to practise the above mentioned rights as such but rather the ability to forbid others from doing so or to put in the exact words of the legislator: to forbid others from making, using offering for sale, selling etc. without a license granted by the patent holder.39 Patent however differs from monopoly rights
in a few ways:
No guaranteed market
A patent right does not give the right holder a guaranteed market i.e. patents do not necessarily lead to commercial success.40 In fact there are many patented inventions that
haven’t made it to the market or in some cases are not even allowed to be sold on the market. In the pharmaceutical industry for instance, where investment costs are very high, obtaining a patent on a certain molecule used in medicine does not have any effect on the market
authorisation of actually selling the patented medicine on the market.41 It could thus very well be that a patented drug does not have authorisation to be sold on the market meaning that the patent remains ineffective. Aside from not being allowed to actually sell on the market commercializing a product relies on much more than inventing it. Market success depends on a multitude of aspects such as, timing, substitution, pricing and marketing, which in some industries can exceed the burden and cost of obtaining a patent.42 To put in brief and clear words of Bostyn ‘‘patent rewards invention not commercialisation’’.43 With that being said it is not impossible that a patent gives rise to a monopoly under certain circumstances but as we shall see hereinafter they hardly ever do.44
Competition by substitution
Whereas a patent gives a right to exclude others from using the patented invention it does not give the right to exclude others from selling a product that fulfils the same need via different technology i.e. patent gives an exclusionary right on an invention not on a product. This is
38 Trips art. 28.
39 Feldman 2008, p. 8 at 23. 40 Bostyn 2001, p. 7. 41 Bostyn & Petit 2013, p. 5. 42 McCurdy, p. 81 43 Bostyn & Petit p. 7.
often the case in pharmaceuticals where a certain molecule in a drug is patented but there are also substitute drugs that provide the same effect via different means i.e. not using the patented molecule. For instance having a patent on a molecule that serves as a relief for headache this does not necessarily mean that you have a patent on painkillers.45
Patent holder is not single supplier
The modern definition of an economic monopoly ‘is the situation where there is a single seller’.46 Contrary to popular believe patent holders seldom claim the sole right to practise a certain invention. Instead right holders often grant licenses to third parties who then are allowed by law to market the invention. This is of course not the same for monopolies where the monopolist is in fact the only supplier on the market. Aside from licensing, patents are not single suppliers due to the fact that they don’t have a patent on a product but rather on the technology within the product. In that regard the smartphone industry is a good example where Apple and Samsung have many patents on their products but they still compete on the same market.47
In light of the above-mentioned differences between the patent and economic definition of monopoly it is apparent and important to note that patents are in no way the same as these monopolies even though legal practitioners use the same terminology. It seems that it is more often the case that the same terms have a complete different meaning depending whether they are used in a competition or patent law context.48 The relevance of the distinction lies within the debate of applying competition law legislation to patent misuse cases thus making it easier to control patent holders’ conduct with regard to their market behaviour, which has been a popular topic amongst legal and economic scholars. Some cases of alleged misuse of the patent system are discussed in the next paragraph.
45 Bostyn, p. 11.
46 Hylton 2003, p.1; http://www.oecd.org/regreform/sectors/2376087.pdf, p. 134; Bostyn & Petit 2013, p. 11. 47 Bostyn & Petit, p. 11.
3.2 Alleged system abusers
Patent protection is a theme that has been hard to accept throughout history due to its intangible form and its background of abuse, so much is clear from the previous chapter. Unfortunately, scrutiny of the system is not something unique to the past. With the emergence of new industries such as software technology right holders have found new ways to make use of their patents which have raised questions as to the contribution of such new developments to the innovation process. Since this research covers the recent developments in patent the focus will lie mostly on software patents since this is a relatively new field of technology with which a new strategic practise in patent law has emerged (NPEs) that has been heavily
critiqued amongst scholars. Furthermore, this chapter will also discuss two other forms of alleged misuse: patent thickets and patent misuse in the pharmaceutical industry. To discuss these business strategies relevant literature, case law and governmental inquiries will be discussed to clarify what they exactly entail.
3.2.1 Non Practising Entities
In 2001 the famous computer chip manufacturer Intel was facing companies demanding large sums of money for infringement of patents they owned whilst not having produced a single computer chip. As a reaction Intel’s general council Peter Detkins labelled these companies as ‘patent extortionist’ leaving Intel sued for defamation by the opposing parties.49 As a result Detkins altered his label into ‘patent trolls’, referring to mythical folklore creatures that live under bridges extorting those who pass by. In the meantime, other less derisive terms have been used in practise to identify companies showing similar strategic behaviour such as Non Asserting Entities, Patent Dealers and Non Practising Entities (NPE). Giving a legal definition of what NPEs exactly are is quite the challenge since there is no legal definition of such strategic conduct. Legal scholars however have given several definitions, which comes down to the following:
NPE’s are companies that obtain patents and distract their revenue through
enforcement without using or intending to use the patents to produce.50 In other words, NPEs
use patents solely to exclude others from making, using, offering for sale, selling etc. the
49 Sandburg 2001, http://www.therecorder.com/id=900005370205/Trolling-for-Dollars?slreturn=20160504074944> (last visited 27-07-2016).
patented invention without ever wanting to practise the above mentioned rights themselves but instead derive revenue through licenses and royalty fees or by simply suing those that use the patented invention without a license.51 The objective of the business strategy of some
these NPEs meets the eye when looking closer to their company profiles such as the German Papst Licensing GmbH that promotes itself under the slogan:
‘We transfer infringers into licensees’.52
It is safe to say that NPEs have become infamous mostly in the software industry. Criticism is flooding the legal landscape with vituperative comparisons of NPE business strategy to trolls, sharks, shake down and bottom feeders.53 The reason why NPEs are mainly active in this industry is due to
allegedly vague and obscure patent boundaries of software patents when compared to other industries such as chemicals and pharmaceuticals where the scope of the patents are described more precisely.54
With such vague boundaries the scope of patents could potentially reach future inventions that weren’t even accounted for by the patent applicant. Stereotypically, NPEs buy patents and then enforce them mostly against start-ups and small businesses for whom the threat of litigation is great making them more vulnerable to settle their dispute rather than spending lots of money on attorneys in Court.55
Infamous high profile cases such as NTP v. Blackberry56 where a small company sued Blackberry for infringement of their patent on wireless email service ending up in a $ 450 million settlement or MercExchange v. Ebay57 where MercExchange alleged that Ebay was infringing with their ‘Buy it now’ functionality on their price listing patent, which ended up with Ebay paying $ 30 million damages are evidence that the stereotype of the small extortionist NPE in fact does exist. In order to give more insight of the nature and effects of NPEs and to go beyond the stereotype as described in the above the following two subparagraphs will discuss empirical studies and some individual cases to see what the actual effects of NPEs in patent practise can be.
51 McDonough 2006, p. 189.
52 Seen on http://papstlicensing.com/#/corporate/about, Last visited on 4 june 2016.
53 See Luman III & Dodson 2006, p. 1; Menell 2007, p. 507; Walters, NY Times 23 january 2014
http://www.nytimes.com/2014/01/24/us/tech-companies-fight-back-against-patent-lawsuits.html?_r=0 (last visited 23 july 2016); Kolawole,
Washington post 27 july 2011 https://www.washingtonpost.com/blogs/innovations/post/is-us-innovation-experiencing-death-by-<patent/2011/07/26/gIQANnAubI_blog.html> (last visited 23 july 2016); Austen & Guernsey, NY Times 2 may 2005, C1
http://query.nytimes.com/gst/fullpage.html?res=9B00EFD61E31F931A35756C0A9639C8B63&pagewanted=all (last visited 23 july 2016); Bulkeley, Wall ST. J. 14 September 2005, at A1; Lemley 2006, p. 1.
54 Bessen & Meurer 2008, p. 47-51; See 3.2.2.1 for more about the alleged vague boundaries. 55 Shrestha 2011, p. 115.
56 NTP, Inc. v. Research In Motion, Ltd., 418 F.3d 1282 (Fed. Cir. 2005). 57 MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323 (Fed. Cir. 2005).
3.2.1.1 Empirical studies on the effects of NPEs
The effect of NPEs expressed in loss of income by their targets
Clearly NPEs have developed a business out of patents which can be highly lucrative at least according to various empirical studies that is. One study in 2011 shows that NPEs cost U.S. public registered companies an estimated half a trillion dollars throughout 1990 – 2010, 83 billion dollars of which only in the year 2010.58 This amount was a result of a study of the
stock price decline of public registered companies in the U.S. mostly companies that have affinity with the software industry.59 Needless to say that an estimate based on such data is incomplete since companies in the public registrar are a mere fraction of all companies that could potentially have been targeted by NPEs. In that regard it is important to note that start-ups are perhaps the easiest target of NPEs due to the risk of litigation costs as mentioned in the previous paragraph. These companies are completely left out of perspective in the study by Bessen, Meurer & Ford. In 2013 Feldman conducted a survey on the effects of NPEs on start-ups showing that 70 % of the surveyed start-ups were victims of threats by NPEs.60 Next to the study being incomplete it is also inaccurate to work with stock prices to determine what the actual income of a company is (and what income they have lost). Stock prices depend on speculation, economic welfare and lots of other variables meaning that they simply are not representative of the actual income of a company let alone that any decline can be pinned down to the effects of litigation against NPEs. Not much later in 2012 Bessen and Meurer published another study alleging to have more accurate data showing an annual cost of 29 billion dollars.61 Apparently another empirical research on the same subject matter by the same authors was needed. This research was based on a survey conducted by RPX and included small firms that were not in the public listings.62 RPX is a company that provides aid in risk management for patent litigation. In 2012 they invited 250 companies for a survey
58 Bessen et al 2012, p. 4. 59 Ibidem, p. 18.
60 Feldman 2013, p. 65 – 66. 61 Bessen & Meurer 2014, 4. 62 Ibidem.
disclosing their costs related to NPEs.63 This data is of course a step closer to empirical evidence when compared to looking at stock prices but still it must be noted that the data provided for relied entirely on the input of the participating companies, which may or may not have been accurate, false or precise. Let alone that each company most likely had their own interpretation of what they may or may not have considered as a direct cost of NPE litigation. Strangely enough it seems that the earlier study of 2011 showed a much larger amount of ‘loss of income’ by a smaller group of firms then the current one.
Europe vs. USA
Bessen & Meurer are not the only ones that have attempted to provide empirical evidence of the effects of NPEs. Another relevant study that has been conducted was by Fusco who compared the cost of NPEs in the U.S. to European countries to see whether there are any differences. In short he came to the conclusion that NPEs do exist in European countries but not as much as the United States due to the fact that the software industry is much bigger in the U.S. which seems to be the biggest target of NPEs.64 Yet another study by Love, Helmers and McDonagh researching NPE conduct in the U.K. shows that NPEs are far less successful in the U.K. due to fee-shifting since their allegedly infringing counterparts fight their battles in court rather than settling their case resulting in the risk of high attorney fees that can amount to well over £250,000, which is payable by the NPE in case the conduct of the counterparty has not been found infringing by the court.65 In other words Love , Helmers and McDonagh allege that the risk of high attorney fees in the U.K. discourage NPEs to litigate and make it more difficult to distort their targets.
The effects of NPEs on Innovation
To link NPE business strategy directly to innovation is very difficult to prove since innovation is relative and depends on a multitude of variables meaning that a decline or increase cannot directly be accredited to the patent system or more specifically in this case NPEs. In 2014 however Tucker has researched the conduct of Acacia (a well-known NPE) with regard to firms in medical imaging software. The research relied on information of medical databases
63 Ibidem, p. 9.
64 Fusko 2014, p. 463-464. 65 Helmers et al 2014, p. 516.
and the focus of the research was to find out whether or not ‘NPEs in the medical imaging business hamper the diffusion of innovation’.66 It was found that sales had dropped due to a lack of innovation in that specific field. Companies that were in litigation proceedings with NPEs were too busy fighting their battles in courts rather than innovating.67 Tuckers’ research
was limited to one specific NPE in a particular market and therefor it is difficult to state that such decline is also happening in other sectors however Tucker does say that it is very likely that this is the case but it must be noted that there is no empirical evidence to support this statement.68
When taking the current available empirical research into account a few conclusions can be drawn: (1) NPEs are mostly active in the software industry in the U.S. (2) Their targets are preferably smaller firms but are certainly not limited to any kind of business. (3) It is uncertain what the exact cost of NPEs are but research suggest that the figures are in the billions per year throughout the first decade of the second millennium. (4) The amount of money that is spent on litigation could have been potentially spent on innovation (5) In some European countries where the ‘loser pays all’ rule applies, NPEs are more hesitant to litigate due to the risk of high attorney fees. (6) In the medical imaging business a decline of sales was present as a direct consequence of medical companies investing their time in NPE litigation proceedings rather than innovation.
With that being said the amount of evidence at hand is perhaps insufficient to draw any conclusions as to the effects of NPEs in general. Where some studies rely on questionable methods others are too sector specific and cannot be applied to all cases.
3.2.1.2 Are all NPEs extortionists?
The strategic business conduct of NPEs has caused an overwhelming amount of disapproval and criticism amongst legal scholars.69 This discontent has led to several attempts of reform of the system in the United States.70 Critics accuse NPEs of being a negative factor for
66 Tucker 2014, p. 2. 67 Ibidem, p. 21-22. 68 Ibidem. 69 See supranote 53.
70 Patent Reform Act of 2005, H.R. 2795, 109th Cong. (2005); Innovation act of 2013, H.R. 3309 113th Cong. (2013); Innovation act II of 2015 H.R. 9.
innovation and a burden on the patent office and court.71 Before getting into such allegations a closer look at companies falling under the definition will be taken in order to determine the effects of NPEs on the patent system. As we shall see it is not easy to categorize all NPEs to the denounced stereotype extortionist that shakes down big firms for large sums of money. Even when a company’s business strategy is to enforce their patent, some of the critique is perhaps exaggerated. When researching their conduct, a problem arises at the outset. The current definition is simply too broad and covers a wide array of institutions that differ in their business conduct.
Universities
Universities are perhaps the largest group of institutions that do not produce anything and solely derive revenue via licensing fees and royalties. In the U.S. they are even encouraged by law under the Bayh-Dole Act to patent inventions funded by federal funds.72 Patents are perhaps one of the largest sources of income for universities with figures growing over $ 1 billion in licensing fees.73 In a strict sense, they would fall within the definition of NPEs but at the same time it would be unlikely that their conduct is being put to the question by any critics since universities are not there to produce but rather to educate or research.
Nevertheless according to Lemley the fact that universities are patent holders has led to frustration in the private sector where some commenters have even compared them to ‘‘crack-addicts driven by small-minded tech transfer offices’’.74 Why the frustration? Such as the NPE stereotype described in § 3.2.1 universities too do not produce any of their patented inventions. They do not carry the risk of any counter-suits and are not interested in any cross-licensing schemes.75 This gives them a very powerful bargaining position when it comes to
enforcing their patent rights. In fact universities are enforcing their patents more often and in some cases resulting in litigation proceedings.76 In Eolas Technologies v. Microsoft77 the University of California teamed up with an NPE to enforce one of the universities software
71 See supranote 53. 72 U.S.C. 35 § 200.
73 Thursby & Thursby 2003, p. 1052; Wysocki Jr., Wall St. J., 21 december 2004, at A1, A12
http://www.wsj.com/articles/SB110358988812705478 (last visited 27 july 2016). 74 Lemley 2008, p. 11.
75 Cross-licensing will be discussed in § 3.2.2.2. 76 Lemley 2008, p. 7.
patents to Microsoft where the jury awarded them $ 535 million. In the case of Ariad Pharmaceuticals et al. v. Eli Lilli & Co78 Harvard MIT teamed up with a pharmaceutical company to enforce a bio-patent on proteins where the jury awarded them a total amount $ 62.2 million. In any event universities are in fact a large group of patent holders and in that respect every patent holder has the right to enforce their right. Therefor it is not so strange to see that they sometimes end up in Court. Universities also are quite vital to the innovation process especially when it comes to technology transfer. The money they make through their patent portfolio is eventually re-invested in innovation (either in new research or indirectly via education) leaving little room for debate to label universities as a diminishing factor on innovation. Lastly, universities do not hide or wait with their patent until the market evolves like the stereotype patent troll is alleged to do.79 Aside from universities we will see that it is still not easy to channel all NPE’s to the stereotype of ‘the evil enterprise trying to extort legitimate business by demanding lots of money for frivolous patents’.
Intermediaries
Generally speaking, one of the main functions of IP and more specifically patent is to give the right holder the ability to enforce his right.80 Therefor in an ideal setting a patent holder has the right to exclude others from using their invention without having a license given by the patent holder. Unfortunately, patent holders are not always able to make use of their right to enforce. A good example is given in the case of small companies who simply cannot afford to start litigation proceedings when a large firm is infringing their patent.81 In that case they are simply strong armed into accepting the situation in which their patented invention is being infringed. According to several researches small firms are in fact at a disadvantage when it comes to enforcing their patents.82 The data suggest that small companies have greater risk of facing law suits than bigger companies. The European Commission has also surveyed this phenomenon where it was found that the majority of surveyed SMEs were intimidated by bigger firms threat which formed significant threat on their R&D.83 According to this study
78 Ariad Pharmaceuticals et al. v. Eli Lilly and Company, 598 F.3d 1336 (Fed. Cir. 2010). 79 Lemley 2008, p. 19.
80 See preamble (3) directive 2004/48/ec; U.S. Constitution article 1 (8); http://ec.europa.eu/growth/industry/intellectual-property/enforcement/index_en.htm (last visited 28 June 2016).
81 It however falls outside of the scope of this research to discuss the excessive cost of patent litigation in detail. 82 See Lanjouw & Schankerman 2004, p. 25; Chien 2011, p. 299; Allison et al 2004, p. 6.
the cost of litigation for patent in general is just too high. This is not unique to SMEs but they are the ones that are most affected by it.84 The threat of litigation for SMEs carries such a burden that it has become a disincentive to invest in R&D and consequently is at odds with the tradition incentive theory as described in § 2.4.85
Another example is where the alleged infringer is one of the patent holders’ biggest clients and simply refuses to pay any license fee or threatens to take its business elsewhere. This was the case in IP COM where IP COM had acquired over 1000 patents from Bosch. Some of these patents were related to GMS, GPRS and UMTS network. Initially Bosch tried to license these patents itself without success. One of its biggest customers Nokia simply refused to pay and threatened to cancel orders.86
Both examples show that there are situations in which the patent holder is left without remedy when their patent is being infringed. NPEs can mitigate this situation by performing as a mediator and enforcement enabler without whom a patent would be left unenforceable. NPEs create a credible threat of litigation whilst a company that is dependent upon the business of the alleged infringer or the small company that cannot afford to sue will pose no real threat.87 This proves that the value of a patent is not only dependent upon its intrinsic values but also by whom it is owned.88 In light of the above NPEs are in some cases intermediaries in the patent market. According to McDonough NPEs are intermediaries in the sense that they ‘centralize the patent market’. They create a market for ideas in which the NPE ‘provides for liquidity and facilitates market clearing’ i.e. NPEs make the licensing market more efficient by ‘finding those who make use of a patent’ and in case they do not pay to pose a real threat of litigation.89 This thought is also shared by NPE companies, which is evidenced by the
reaction of Intellectual Ventures as a reaction to the accusation of them being ‘a patent troll’ stating that:
‘’Our ultimate value proposition is simple: we provide an efficient way for patent holders to get paid for the inventions they own, and in turn, for technology
84 Ibidem, p. 47.
85 See Buzzachi & Scellato 2008, p. 1; Bessen & Meurer 2008, p. 128. 86 Pohlmann & Opitz 2010, p. 9-14.
87 McDonough 2006, p. 212. 88 Chien 2011, p. 301-302. 89 Ibidem, p. 211.
companies to gain easy access to the invention rights they need now or may need as they enter new markets.’’90
NPE criticism refuted
Whereas critics often put NPE’s out to be these extortionists filing frivolous law suits the opponents of NPE business strategy are sceptic of this allegation.91 According to them such strategy just won’t work since defendants will not settle for frivolous cases. The costs for mounting a case are too high for plaintiffs adding up to an estimated $ 4 million.92 For an NPE to start a meritless case for such cost is arguably naïve.
Another point of criticism is the excessive licensing fees NPEs demand of alleged infringers. This problem however is not unique to NPEs but rather a problem that the patent system carries with it as such.93 NPEs demand a certain license fee because they can and whether or not such fees are excessive is a policy question for the patent system in general. 94 NPEs demand certain licensing fees because they think that their patent is worth it. Whether or not the fee is too excessive has little do to with the fact that the plaintiff in fact does not produce any of the patented product i.e. the excessive fee problem could very well arise with a plaintiff that does produce the patented product but still waited for the market to evolve in order to enforce its right. This view is also shared by Magliocca who states that opportunistic license fees are just the price for a legal remedy on infringement in general rather than it being a specific NPE problem.95 -
3.2.2 Patent thickets
Criticism regarding tactical patent practices is not unique to NPEs. Another denounced business strategy is the one of fragmented rights i.e. ‘patent thickets’. As was the case with
90 http://www.intellectualventures.com/insights/archives/disruption-invites-controversy/ (Last visited on 27-06-2016). 91 Magliocca 2007, p. 1837; Shrestha 2010, p. 120; Hosie 2008, p. 80.
92 Hosie 2008, p. 80.
93 Disproportionate compensation was already a concern among opponents of a patent system during the industrial revolution see Levine 2002, p. 934-935.
94 Shrestha 2010, p. 121 -122. 95 Magliocca 2007, p. 1837.
NPEs, the patent thicket too lacks a legal definition but instead has defined itself in practice. Shapiro has given a definition which seems to be a common cited one:
‘‘a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology.’’96
So what does this mean? Basically it comes down to a strategy where firms strengthen their patent portfolio by acquiring vast amounts of patents all relating to a certain technology, which often are overlapping each other. Hence the rights with regard to that technology are fragmented among several patents and potentially among several patent holders.97 In this way
a company can create a better bargaining position on the market when facing competitors that allegedly infringe or the other way around basically coming down to a strategy to stay ahead of the competition where patents serve as ammo in litigation proceedings. In that way patent thickets constitute a new dimension of use of patent rights. Whereas patents are there to incentivise innovation and are supposedly intertwined to one invention, acquiring patents has become a goal on its own where several patents are acquired solely to protect market share with regard to a certain technology.
3.2.2.1 Causes of the patent thicket problem
Like NPEs, patent thickets mostly occur in the software industry. Unlike chemicals or DNA, software does not necessarily have a concrete definition. Instead the nature of software is more abstract and such as the case with law, the function of the software often surpasses the code on which it is written.98 Consequently, the patent claims of software patents are written more functionally when compared to pharmaceutical patents. The software industry has been the black sheep among industries when looking for causes of the thicket problem. Critics often claim that the software industry bares with it overly broad patents i.e. functional patent claims due to its nature.99 Essentially, the argument comes down to functional patent claims written by patent lawyers, which consequently claim the goal of an invention itself rather than the means to achieve it.100 Therefor the granted patent could also cover other inventions than
96 Shapiro 2001, p. 120. 97 Bessen 2003, p.2. 98 Gonzalez 2006, p. 2.
99 Lemley 2012, p. 907; Shapiro 2010, p. 283; Hunt 2007, p. 464; Bessen & Meurer 2008, p. 54.
the one the patent is granted for leading to opportunism when it comes to filing for patents.101 Next to the software industry critics also say that patenting business methods is also prone to such ‘overly broad’ patents.102 According to Shapiro it is in the firms’ interest to obtain such
‘overly broad’ patent so they can anticipate on inventions that might come in the future. Scholars say the Patent Offices are the ones to blame for granting patents to inventions that are too weak and consequently causing a decline in patent quality.103 The widespread criticism isn’t limited to the work of the patent office per se but also the patenting of subject matters in industries which are more abstract such as software and business methods, which according to some critics are are better off not being patentable.104 It should however be noted that there is no empirical evidence of patent thickets in the software industry or any of the above mentioned criticism for that matter.105 Next to that it is fairly subjective to say whether a certain patent claim is broad or not. It should also be noted that functional patent claims existed well before software became patentable and has been rejected as being incompatible with the goals of the patent system.106 It is however safe to presume that patent claims in the pharmaceutical industry are more precise whereas in the software industry or patents on business methods the claims are more functional. By lack of evidence this research will refer to the cause of the patent thicket problem one of functional patent claims instead of broad patent claims. However it may this issue has given innovators leeway to file for overlapping functional patents more easily thus enabling patent thickets to emerge. Thickets have far reaching effects with consequences such as higher litigation cost, transaction cost and ultimately a decline in R&D as will be briefly discussed hereinafter.107
Transaction costs
Because of patent thickets it is much harder to obtain a patent for innovators. They must check whether their invention potentially infringes on one of many patents out there and additionally to see whether there is a way to circumvent the existing patents costing a lot of time and money to sift through the vast amounts of patents. This is the so called clearance
101 Bessen & Meurer 2008, p. 187. 102 Ibidem.
103 Diver 2008, p. 135; Hunt 2001, p. 12. 104 See Chapter 4 for more detailed analyses. 105 Allison & Tiller 2003, p. 987.
106 Halliburton Oil Well Cementing Co. v. Walker, 329 U.S. 1 (1946). 107 Mossoff 2009, p. 167.
cost problem.108 Thickets also carry a lot of cost for new inventors when it comes to license fees. Due to the amount of patents that all relate to one product new inventors have to pay several license fees ultimately leading to high prices to make us of an invention. Especially in industries such as the software industry where there is cumulative innovation meaning where innovators must build upon the invention of their predecessors the transaction cost can be devastating.109
First come first serve
Due to patent thickets the dynamic of patent practise has changed. Many companies file for patents just to make sure the competitor doesn’t get one before they do thus acquiring patent rights has become a defence mechanism of companies to make sure they will not get sued often referred to as defensive patenting.110 Innovation these days is more about who gets a relevant patent first rather than who has the best invention. When companies have too many patents covering a certain resource they simply can spur the way to that resource for new inventors. This phenomenon is often referred to as blocking patents. Research has shown that blocking the competition is the second largest motive to obtain a patent after the fear of being copied.111 Aside from blocking others from a patented invention, patent holders ask excessive license fees from manufacturers who have already invested in their product before negotiating a license fee.112 In that way the manufacturer is already committed to the product which makes it easier for the patent holder to ask for excessive license fees since the manufacturer is already financially committed. This is described by Shapiro as ‘the hold-up’ problem.113 Less investments in R&D
As described by Heller and Eisenberg as the ‘anti-commons problem’, blocking patents are dangerous when it comes to R&D.114 When too many blocking patents exist the inventors’ access will be spurred to certain resources. As a consequence, the blocked patents will be left
108 Bessen & Meurer 2008, p. 10 – 11; Heller & Eisenberg 1998, p. 699 – 700. 109 Menell 2007, p. 492.
110 Chien 2010, p. 317. 111 Cohen et al 2000, p. 17. 112 Bessen 2003, p. 8.
113 Shapiro 2001, p. 7; Lemley & Shapiro 2007, p. 1993. 114 Heller, Eisenberg 1998, p. 699.
unused and if the inventor cannot design his way around the patent he will have to refrain from any further investments.115 This has a direct negative effect on investments in R&D and consequently any commercial developments of the blocked patent right.116 Blocking patents
are not the only cause of decline of R&D, the transaction cost in general and more specifically in areas of cumulative patents carry such a high cost-threshold for innovators that they refrain from any further steps in the pursuit of their research.117 In that regard it should be noted that several scholars have linked patent thickets directly to the decline of investments in R&D.118 3.2.2.2 Suggested solutions to the patent thicket problem
Cross licensing
Cross licensing is nothing more than a barter agreement between two patent holders that both have patents that relate to a certain technology where they agree that they can freely use each other’s patents instead of blocking each other from using the competitors’ patent.119 One should however remain sceptic whether this truly solves the problem of companies acquiring too many patent rights. Participation in cross licensing is only possible if you have a patent portfolio to start off with i.e. cross licensing may only take away the transaction cost for those few that have vast patent portfolio’s but cross licensing as such could potentially create an incentive to acquire more patent rights to be able to participate in cross licensing.120
Patent pools
Another suggested solution to the patent thicket problems are patent pools. Like cross licensing, the patent pool is also an agreement between patent holders and finds its roots in the industrial revolution where an attorney suggested a patent pool as a successful solution to patent wars in the sewing machine business.121 However instead of bartering their patents to
115 See above supranote 110. 116 Mossoff 2009, p. 167.
117 See Diver 2008 p. 135; Bessen & Hunt 2004, p. 14; Bessen 2003, p. 1-4; Bessen & Meurer 2008, p. 81; Shapiro 2001, p. 3; Lemley & Shapiro 2007, p. 2010.
118 Menell 2007, p. 493. 119 Shapiro 2001, p. 9. 120 Bessen 2003, p. 15. 121 Mossoff 2009, p. 194-195.
one and other with a patent pool different patent holders agree to license their patents
altogether in one licensing agreement.122 Whereas the patent pool solution is applauded as an effective solution it remains questionable whether it truly solves the patent thicket problem or merely attempts to mitigate the cost factor of it.123 In order to participate in such patent pool
patent holders must have patents that matter, which often comes down to having standard essential patents (SEP) in their portfolio i.e. patents that protect innovation that is essential to a standard which does not have any substitutes.124 Having a big patent portfolio is
advantageous in patent pools since an innovator with a lot of patents (preferably ones that are essential) will be more likely to participate in the pool and extract large license fees ultimately leading to the SME with few patents being the victim of high costs.125
Patent pools also don’t necessarily mitigate the transaction cost of patent thickets. In Standard Sanitary Manufacturing Co. v. United States126 for instance the U.S. Supreme Court dissolved a patent pool due to price fixing and other anti-trust violations. The patent pool is thus a remedy that is prone to abuse and there are lots of examples where the Court had to step in due to anticompetitive behaviour.127 It however falls outside of the scope of this research to discuss any regulatory or anti-trust violation of patent use.
Standard setting organisations and (F)RAND terms
Lastly it is also possible to join Standard setting organizations (SSOs): which are essentially Non Profit organizations of competitors that establish an industry standard.128 Holders of
SEPs can join an SSO, which are then obligated to adhere to the bylaws of the SSO. This comes down to SEP holders being held to license under Fair Reasonable and Non
Discriminatory (FRAND) terms or as referred to in the U.S. just RAND, which in short means
122 Lerner, Tirole 2004, p. 1-2. 123 Ibidem.
124 European Commission 2014. Competition policy brief available at <http://ec.europa.eu/competition/publications/cpb/2014/008_en.pdf> (last visited 22-06-2016).
125 Bakel & Harison 2005, p. 70.
126 Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20 (1912).
127 For a detailed analyses of patent pools and antitrust violation see Clark et al 2000, p. 4-7. 128 Speegle 2012, p. 850.
that they cannot distort or ask excessive license fees.129 In return the SEP holder gets the prospect of a higher surplus of royalty payments of other patent holders which are also member of the SSO. These SSOs are mostly active in the smartphone industry where
communication standards are vital to commercial success.130 Patent holders can join SSOs on a voluntary basis. Unfortunately, there have been cases of misuse by SEP holders that were member of an SSO. In Broadcom Corp v. Qualcomm where Qualcomm disregarded FRAND terms and still demanded excessive license fees despite its membership of an SSO, which resulted in misuse according to the Federal Circuit.131 It seems as if these SSOs are a good basis for a remedy for thickets but according to Speegle lacking disincentive to prevent misuse and being sensitive to the patent hold up problem that has already been described in § 3.2.2.1.132
3.2.3 Pharmaceutical companies
The pharma-industry is perhaps the poster child for the traditional incentive theory described in §2.4: the cost for R&D is very high and once a medicine is out in the market it is very cheap and easy to replicate (at least for the amateur chemist among us) since all the
information is embodied in the product itself. Unfortunately this industry too is prone to abuse and for that reason the European Commission initiated an inquiry in 2008 to see whether or not there is misuse in this industry. Before getting into the details of the Commission inquiry it is important to describe a few aspects of the pharmaceutical industry since it differs in some aspects with other industries, which allows for different methods of strategic patenting.
129 Sidak 2015, p. 1. 130 Carrier 2012, p. 3.
131 Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 310 (3d Cir. 2007). 132 Speegle 2012, p. 850-853.
SPCs
While companies invest lots of money and time in R&D, obtaining a patent should give them a prospective of return on such investment under normal circumstances. The circumstances of pharmaceuticals often require various tests, approvals and steps in order to assure that they do not cause any harm especially when they are intended to be administered to human beings. Such care is of vital importance from a moral perspective since drugs could have detrimental effects to human health if they have not been tested properly. A dramatic yet realistic example is the one referred to as ‘the Thalidomide disaster’ where a drug for morning sickness –
Thalidomide- caused an approximated 10.000 pregnant women to give birth to deformed children.133 To prevent such catastrophe legislators have strict rules when it comes to bringing new drugs on the market.134 As a consequence, the approval time can be of such long duration that the patent is nearing or well over its timespan. To mitigate this issue European legislators have introduced the Supplementary Protection Certificate (SPC) Regulation where in such cases patents can be extended with a maximum duration of five years.135
While medicine should be affordable the quality of drugs and pace of innovation have a direct effect on human welfare in general. This all makes the pharmaceutical industry difficult to assess. Whereas the inventors should have a prospective of a return of their investment, medicine should be accessible to the public at an affordable rate while at the same time the quality of the end product and pace of innovation should be safeguarded.
Commission inquiry 2008
According to the introductory words the inquiry stresses the importance of competition in the pharmaceutical industry where generic companies are essential to widespread access to affordable drugs.136 These companies are different from originator companies who are active in R&D of new medicine and often have a patent on their products. Generic companies in fact do not participate in R&D of new drugs and produce products that are similar to the one of the
133 http://news.bbc.co.uk/2/hi/uk_news/2031459.stm (last visited 17 july 2016). 134 See Directive 65/65/EEC;
135 Council Regulation (EEC) No 1768/92; The U.S. has a similar regulation called the Hatch-Waxmann act (P.L. 98-417), which also creates an incentive for generic companies to compete next to extending the duration of patent protection of pharmaceutical patents. 136 Commission inquiry 2008, p. 3-4.
