https://flic.kr/p/bYEkm

Most innovations are the result of a cumulative R&D process, i.e., their production requires the combination of knowledge contained in previous innovations (for a general presentation, see my previous ‘Dig It!’ post).

Cumulative innovations raise specific problems that put the patent system under stress. We already explained on this blog that holdup strategies or licensing difficulties may make patents counterproductive.

The patent system may also impose an unnecessary drag on innovation by enabling multiple rights owners to ‘tax’ new products or processes. When multiple firms control essential patents for a new product or process, separate licensing results in higher total prices due to multiple marginalization (or ‘royalty-stacking’). As the transaction costs of contracting with each patent holder also pile up, the total costs of the new product or process necessarily increase.

This situation is sometimes referred to as the tragedy of the anticommons to describe the fact that when several individuals own rights of exclusion and exercise those rights, they restrict the access, and therefore the use, of common resources (see here for some illustrations). As Heller and Eisenberg (1998) explain, this can be seen as the mirror image of the well-known tragedy of the commons (which refers to the fact that a resource – like fishing grounds or clean water – can be overused if it is not protected by property rights).

How serious is this problem? In other words, what is the impact of patent rights on cumulative innovation? This is what Galasso and Schankerman (2013) try to estimate empirically. Before stating their results, it is important to stress that this type of estimation raises three empirical difficulties.

• First, one needs to identify comparable technologies with and without patent protection. The author address this issue by exploiting patent invalidation decisions by the US Court of Appeal for the Federal Circuit (which has exclusive jurisdiction in appellate cases involving patents); their sample comprises 1357 decisions from 1983 to 2008, with about 40% of these decisions having led to a loss of patent protection for the technology.
• The second empirical difficulty is that subsequent innovations are difficult to identify. Here, the authors follow the strategy that is commonly used in the literature: they exploit citations by later patents. A patent can only be granted if it is deemed sufficiently novel with respect to the prior art; patent applicants have thus to describe the prior art and for that matter, they have to cite all relevant patents, even those that have been invalidated.
• The last and major challenge is endogeneity: the factors that make invalidated patents differ from those that are upheld may also affect patent citations; for instance, the commercial potential of a patent may be a common explanation for the facts that this patent led to subsequent innovations and that its owner fought hard to avoid invalidation. To circumvent this problem, the authors exploit a couple of institutional facts: judges are randomly assigned to patent cases, and they form panels of three that decide by majority voting. Because judges differ in their propensity to invalidate patents, the author can use these facts to construct an instrumental variable that addresses the potential endogeneity of invalidation decisions.

It is thus possible to estimate the impacts of patent rights on cumulative innovation by examining how invalidation of a patent affects the rate of subsequent citations to that patent. The main result is that the removal of patent protection leads to about a 50% increase in subsequent citations to the focal patent. This lends credence to the idea that patent rights do impede cumulative innovation.

However, the authors stress the facts that the 50% increase is an average estimate, and that large variations are observed across sectors. Actually, the positive impact of patent invalidation on subsequent innovation is significant (and large) only in sectors with complex technology (namely computers and communications, electronics, and medical instruments). This is not a surprise as these sectors are also those where the patent thicket is particularly dense. The authors also observe variations across firms along the size dimension: it is mainly the invalidation of patents held by large firms that triggers subsequent innovation by small firms.

I would like you to investigate how common anticommons are. More generally, can you find other empirical and/or theoretical arguments regarding the effects that patent rights have on cumulative innovations?

(This is an updated and slightly modified version of this post, published on April 25, 2012.)

In April 2012, Lucy Koh, a US District Court Judge, tried to force a truce on one of the fiercest fronts of what is now commonly known as the “Smartphone Patent Wars”. She ordered Tim Cook and Choi Gee-Sung, the CEOs of Apple and Samsung, to meet and work out their bitter and prolonged patent disputes. The two firms had indeed spent long months suing and countersuing each other, all over the world, for alleged patent infringements (this infographic nicely summarizes the main episodes of this “battle”).

As most companies in the smartphone industry are fighting similar battles (for a very effective presentation of the existing feuds, see the animated graphic proposed by the Financial Times), the peacemaking process that Lucy Koh initiated may prove crucial for saving the industry from a potential collective suicide.

The legal quagmire that currently plagues the smartphone industry results from a combination of forces that regular readers of this blog should be familiar with by now.

1. Smartphones are the archetypal example of a cumulative innovation. They exhibit indeed the two types of cumulativeness: complementarity and sequentiality.

• Complementarity describes the fact that a second-generation product requires the combination of a number of different first-generation innovations (‘many-to-one’). This is clearly the case for smartphones as they result from the collision between computers and mobile-phones, which are themselves already cumulative in nature.
• Sequentiality refers to the notion that a first-generation innovation leads to the creation of many second-generation innovations (‘one-to-many’). This is also the case for smartphones insofar as all handsets have to incorporate a number of existing standards (for, e.g., wi-fi access, email transfers or video display).

2. The previous technical features raise important-and potentially conflicting-economic issues regarding the allocation of intellectual property rights. On the one hand, complementarity raises the prospect of the ‘tragedy of the anticommons’: the allocation of strong property rights to separate right-holders results in higher prices (‘royalty-stacking’) and higher transaction costs. In this respect, some form of ‘collective’ or ‘shared’ property is more prone to favor interoperability and easy access to interfaces.

Sequentiality, on the other hand, is likely to create hold-up opportunities for first-generation innovators if intellectual property rights are defined too broadly (i.e., if the first-generation innovation confers the patentee rights over subsequent innovations). For an explanation of the hold-up problem, see my post on ‘patent privateers’.

3. The importance of the previous two problems is magnified by the sheer density and size of the ‘patent thicket’ that engulfs the smartphone industry: according to estimates, a smartphone is open to a quarter of a million patent claims. If you factor in the diversity of players (as companies flock from industries as diverse as equipment manufacturing and software development), the crucial need for interoperability (just try to imagine how painful your life would be if several incompatible email services were coexisting), and the high profitability of the whole market (the global mobile phone industry reached a value of US$1.18 trillions in 2011), you easily understand why even though private solutions to the previous problems do exist (patent pools and standard-setting organizations address the tragedy of the anticommons while licensing agreements may solve the hold-up problem), these solutions are very hard to achieve in the smartphone arena.

Accordingly, some players in the market have called upon the competition authorities to sort out the mess. Some observers have been rather critical of the authorities’ abilities to do so. For instance, in an article posted on this blog, Yann Ménière expresses doubts that competition authorities would be able to impose sanctions that address the fundamental problem(s).

What do you think?

1. Was Lucy Koh’s move effective? Did the ‘Smartphone Patent Wars’ calm down over the last months or did they go on with a vengeance? 
2. Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where  consumers benefit more of inventions than patent litigators?

Answer one or the other question in your comment. 

Source: http://blog.thomsonreuters.com/index.php/mobile-patent-suits-graphic-of-the-day/

Last Wednesday (April 18, 2012), Lucy Koh, a US District Court Judge, may have paved the way towards a truce on one of the fiercest fronts of what is now commonly known as the “Smartphone Patent Wars”. She ordered Tim Cook and Choi Gee-Sung, the CEOs of Apple and Samsung, to meet and work out their bitter and prolonged patent disputes. The two firms have indeed spent the last months suing and countersuing each other, all over the world, for alleged patent infringements (this infographic nicely summarizes the main episodes of this “battle”).

As most companies in the smartphone industry are fighting similar battles (for a very effective presentation of the existing feuds, see the animated graphic proposed by the Financial Times), the peacemaking process that Lucy Koh initiated may prove crucial for saving the industry from a potential collective suicide.

The legal quagmire that currently plagues the smartphone industry results from a combination of forces that regular readers of this blog should be familiar with by now.

1. Smartphones are the archetypal example of a cumulative innovation. They exhibit indeed the two types of cumulativeness: complementarity and sequentiality.

• Complementarity describes the fact that a second-generation product requires the combination of a number of different first-generation innovations (‘many-to-one’). This is clearly the case for smartphones as they result from the collision between computers and mobile-phones, which are themselves already cumulative in nature.
• Sequentiality refers to the notion that a first-generation innovation leads to the creation of many second-generation innovations (‘one-to-many’). This is also the case for smartphones insofar as all handsets have to incorporate a number of existing standards (for, e.g., wi-fi access, email transfers or video display).

2. The previous technical features raise important-and potentially conflicting-economic issues regarding the allocation of intellectual property rights. On the one hand, complementarity raises the prospect of the ‘tragedy of the anticommons’: the allocation of strong property rights to separate right-holders results in higher prices (‘royalty-stacking’) and higher transaction costs. In this respect, some form of ‘collective’ or ‘shared’ property is more prone to favor interoperability and easy access to interfaces.

Sequentiality, on the other hand, is likely to create hold-up opportunities for first-generation innovators if intellectual property rights are defined too broadly (i.e., if the first-generation innovation confers the patentee rights over subsequent innovations).

3. The importance of the previous two problems is magnified by the sheer density and size of the ‘patent thicket’ that engulfs the smartphone industry: according to estimates, a smartphone is open to a quarter of a million patent claims. If you factor in the diversity of players (as companies flock from industries as diverse as equipment manufacturing and software development), the crucial need for interoperability (just try to imagine how painful your life would be if several incompatible email services were coexisting), and the high profitability of the whole market (the global mobile phone industry reached a value of US$1.18 trillions in 2011), you easily understand why even though private solutions to the previous problems do exist (patent pools and standard-setting organizations address the tragedy of the anticommons while licensing agreements may solve the hold-up problem), these solutions are very hard to achieve in the smartphone arena.

Accordingly, some players in the market have called upon the competition authorities to sort out the mess. Some observers have been rather critical of the authorities’ abilities to do so. For instance, Yann Ménière recently posted an article on this blog expressing doubts that competition authorities would be able to impose sanctions that address the fundamental problem(s).

What do you think?

Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where  consumers benefit more of inventions than patent litigators?

Under what circumstances could the litigation of patents (or other IP rights) become abusive and objectionable from a competition point of view? (In responding, you should refer, where possible, to the ECJ case law and take into account, among others, the fundamental right of private parties to defend their rights before the courts).

What do the following stories have in common?

1. During the Middle Ages, it became impossible to carry on commercial trade on the Rhine River because of the toll booths built by all sorts of barons.

Augustin Cournot (1801-1877)

2. Augustin Cournot explained in 1838 that the price of brass would fall if a monopoly zinc producer and a monopoly copper producer could merge.

Biplane (www.airlandseaweapons.com)

3. In the second decade of the twentieth century, it was almost impossible to build an airplane in the United States.

(Credit: Warner Brothers)

4. Filmmakers must often make significant changes in their work because of the costs or complications of rights clearances.

Use you brain (and/or your favorite search engine).