Surabhi Shekhawat, Final Year Law Student, B.L.S. LL.B, Government Law College, Mumbai
Patents are instituted to provide an incentive to innovate, which is an important key driver for economic prosperity. Yet, what happens if the company that holds the patent right does not want to produce anything, but instead holds-up other patent right holders creating a patent thicket? The terms “patent thicket” has been used somewhat indiscriminately in competition law circles to describe various types of concentration of Intellectual Property Rights (IPRs). ((See for example the Axalto/Gemplus (2006—Comp/M.3998) case.))A thicket is especially thorny when combined with the risk of holdup, namely the danger that new products will inadvertently infringe on patents issued after these products were designed ((Shapiro, Carl, Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard–Setting, in INNOVATION POLICY AND THE ECONOMY 1 (eds: Jaffee, Lerner & Stern) Nat.Bureau.Econ.Res. (MIT Press, Cambridge) at 118-150.)). The need to navigate patent thickets and holdup is especially announced in industries such as telecommunications and computing in which formal standard setting is a core part of bringing new technologies to the market ((Id.)). Patent thickets have been a concern of antitrust agencies and regulators in the United States for over ten years ((Federal Trade Commission, 2003; U.S. Department of Justice and Federal Trade Commission, 2007; Federal Trade Commission, 2011)). In Europe, interest in the phenomenon picked up with some delay ((Arundel, A., Patel, P., 2003. Strategic Patenting, Background Report for the Trend Chart Policy Benchmarking Workshop New Trends. Available at http://proinno.intrasoft.be/reports/documents/TCW15_background_paper.pdf.; Harhoff, D., 2006. Patent Quantity and Quality in Europe – Trends and Policy Implications Collection. In B. Kahin and F. Foray (eds), Advancing Knowledge and the Knowledge Economy. Cambridge, MA: MIT Press, 331-350)), although it has taken a back seat to reforms of the European patent system such as the unified patent court.
This article discusses patent thickets, in light of competition laws, as being an antithesis to a healthy market for competitors. Part II provides an overview of what patent thickets are and the factors contributing to its growth. Part III examines the impact that patent thickets have on various markets, thereby adversely affecting competition as well as the consumers. Part IV deals with sectors that are majorly affected by patent thickets. Part V deals with ways in which disputes arising due to patent thickets can be resolved.
What are Patent Thickets?
(A) Understanding the term ‘patent thickets’
A patent is an exclusive right granted for an invention, a product or process that provides a new way of doing something, or that offers a new technical solution to a problem ((http://www.wipo.int/export/sites/www/freepublications/en/intproperty/450/wipo_pub_450.pdf)). A patent thicket is described as “an overlapping set of patent rights which requires innovators to reach licensing deals for multiple patents from multiple sources ((Digital Opportunity, A review of Intellectual Property and Growth, An independent report by Ian Hargreaves, May 2011, page 18)).” Berkeley economist Carl Shapiro in his influential critique of the IP system’s side effects has discussed the term ‘patent thicket’ as:
“In several key industries, including semiconductors, biotechnology, computer software, and the Internet, our patent system is creating a patent thicket: an overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees. The patent thicket is especially thorny when combined with the risk of holdup, namely the danger that new products will inadvertently infringe on patents issued after these products were designed ((Supra note 2)).”
Some writers ((Ballardini, Rosa Maria, The Software Patent Thicket: A Matter of Disclosure, 6 SCRIPTED 207 (Aug. 2009).))attribute an earlier conceptual understanding of patent thickets to the early-80s xerography infringement cases such as those raised in the well-known SCM Corp. v. Xerox Corp. Case ((SCM Corp. v. Xerox Corp, 645 F. 2d 1195 (2d Cir. 1981). (SCM lost on appeal alleging patent misuse in Xerox refusal to license a sequential series of overlapping xerography patents that excluded SCM from the xerography market).)). But, antecedents date back at least to the 19th century sewing machine patents ((Mossoff, Adam, The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s 53 ARIZ.L.REV.165-211 (2011) (arguing sewing machines as archetype of 19th Century industrial revolution’s innovation incentive resulting in very numerous serial-linked and parallel functioning technologies).)). Thickets are not precisely defined ((EU report conclusion))but may include complex webs of related patents, technologies, and blocking patents.
Patent thickets are said to have become common in fields like nanotechnology as more fundamental science is patented and some authors have expressed concern that this could reduce technological development and innovation ((Mushtaq, U., & Pearce, J. M. (2012). Open source appropriate nanotechnology. Nanotechnology and global sustainability, 191-213 ; Clarkson, G., & DeKORTE, D. A. V. I. D. (2006). The problem of patent thickets in convergent technologies. Annals of the New York Academy of Sciences, 1093(1), 180-200; Sabety, T. (2004). Nanotech Innovation and the Patent Thicket: Which IP Policies Promote Growth. Nanotech. L. & Bus., 1, 262)). In some industries, such as computer hardware and software, firms can require access to dozens, hundreds, or even thousands of patents to produce just one commercial product. Many of these patents overlap, with each patent blocking several others. Much of this thicket of overlapping patent rights results from the nature of the technology; computer hardware and software contain an incredibly large number of incremental innovations.
Patent thickets are also sometimes called “patent floods” ((European Commission (28 November 2008). “Pharmaceutical Sector Inquiry: Preliminary Report”. DG Competition Staff Working Paper: 9. “One commonly applied strategy is filing numerous patents for the same medicine (forming so called ‘patent clusters’ or ‘patent thickets’)“.)), or “patent clusters” ((Digital Opportunity, A review of Intellectual Property and Growth, An independent report by Ian Hargreaves, May 2011, page 5)). According to a report by Professor Ian Hargreaves, published in May 2011 ((Sabety, T. (2004). Nanotechnology innovation and the patent thicket: Which IP policies promote growth. Alb. LJ Sci. & Tech., 15, 477)), patent thickets “obstruct entry to some markets and so impede innovation.”
(B) Reasons for the emergence of patent thickets
The current economic and legal literature has identified the following factors as contributing to the growth of patent thickets ((B. H. Hall, C. Helmers, G. von Graevenitz, C. Rosazza-Bondibene, A Study of Patent Thickets, Intellectual Property Office 2013/26.)):
1. The strengthening of patent rights and the broadening of patentable subject-matter;
2. The growth and extension of science and technology resulting in complexity of many technologies;
3. Strategic and planned patenting by corporations;
4. Lack of resources and misaligned incentives at patent offices dealing with a flood of patent applications;
6. Growth in trade of high technology products, leading to an increase in demand for patents by foreign firms and to the spread of patenting trends from Japan and the United States to other jurisdictions.
Impact of Patent Thickets on Competition
“The aims and objectives of patent and antitrust law may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry, and competition ((Atari Games Corp. v. Nintendo of America, 897 F.2d 1572, 1576 (Fed. Cir. 1990).)).”
Competition law and patent law intersect at three levels. The first level includes concerns about the patent-holder’s own use of the patent. Within the first category, one would find the usual issues of abuse of dominant position ((Régibeau, Pierre and Katharine Rockett. 2007. The Relationship between Intellectual Property Law and Competition Law: An Economic Approach. In The Interface between Intellectual Property Rights and Competition Policy. Edited by Steven D. Anderman. Cambridge UK: Cambridge University Press.)). The second point of interaction between competition law and patent law concerns the behaviour of patent applicants and patent–holders within IP’s own regulatory process. The third level of interaction between IP and competition law involves the regulation of mergers, as these transactions can lead to an excessive concentration of IP rights ((Pierre Regibeau, “Assessment of potential anticompetitive conduct in the field of intellectual property rights and assessment of the interplay between competition policy and IPR protection”, November 2011. Prepared for the European Commission (contract COMP/2010/16).)).
From the perspective of patent thickets, the first and third levels of intersection are important, as discussed below.
(A) Abuse of dominant position by patent holders
Barriers to enter the market
A firm that is holding the patent would be a dominant player in the relevant market as it ‘enjoys a position of strength’ ((‘Dominant player’ – Section 4 Explanation (a) to The Competition Act, 2002))against the other competitors who have no access to the patented object. When thickets arise, each party essentially controls one of the several complementary inputs into a production process. As is well-known from economic theory, independent pricing of such complementary goods leads to a total price for the final product that is higher than if all inputs were controlled by a single agent. Intuitively, each independent IP owner prices its own IPR without taking into account that a higher price, by reducing the sales of the final product, also hurts the income of other IPR holders. This problem is also referred to as “royalty stacking”. ((Anticompetitive conduct and IPR – European Competition Commission November 2011))In the broadest terms, the antitrust concerns flow from occasions in which firms use patent portfolios ((A patent portfolio is a collection of patents owned by a single entity, such as an individual or corporation))to undertake strategic actions that raise rivals’ costs. This is done in order to gain an advantage over the other competitors in the market ((Salop, Steven C. and David T. Scheffman. 1983. Raising Rivals’ Costs. American Economic Review 73(2): 267-271 ; Krattenmaker, Thomas G. and Steven C.Salop. 1986. Anticompetitive exclusion: Raising Rivals’ Costs to Achieve Power over Price. The Yale Law Journal, 96(2):209-293)).
The strategic use of IP to increase a rival’s costs can come in various forms. First, the patent-holder could employ a litigation strategy that burdens its rivals with patent suits which are costly to defend and which increases the rival’s uncertainty about its ability to sell competing products ((Sankaran, Sri Krishna. 2000. Patent Flooding in the United States and Japan. IDEA, The Journal of Law and Technology 40: 393-425)). Second, short of litigating patents, the firm may threaten law suits to compel competitors to accept all or any of the patent holder’s licence ((See Rubinfield and Cooter (1989).)). The royalty payment associated with such licenses would also add to the rival’s costs. Moreover, forcing a rival to accept a license for a package of patents, some of which may include technology that the rival does not need or use, can be highly profitable. This is referred to as ‘package licensing’ ((For further analysis on this issue see Jackobson (2002) and Vitnes (2002).)).
A successful raising of rival’s cost strategy can lead to foreclosure of competition and/ or to be predatory; the higher costs imposed on the rival enables the predator to profitably undercut the rival’s prices, to gain market share, and in some cases, to drive out a firm from the market. Further, in a dynamic market, where innovation is an important aspect of the competition between firms, the abuse of IP that reduces the rival’s incentives to innovate may lessen innovation competition and hamper consumer welfare ((See Pitofsky (2001). See also, Carlton and Gertner (2002), p. 20. The DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property also acknowledges that the anticompetitive abuse of intellectual property can lessen dynamic competition and thereby reduce consumer welfare)).
Strikingly, a raising rival’s cost strategy need not necessarily foreclose competition to serve an anticompetitive purpose. If rivals choose not to contest the strategy and are content with raising prices in response to the cost increase, a rising rival’s cost strategy can help to achieve a tacitly collusive outcome ((See Krattenmaker and Salop (1986), p. 224)). Especially if additional costs are imposed on virtually all rivals, each rival would have a unilateral incentive to raise prices, and all firms, including the licensor, could enjoy supra-competitive prices. Such an artificial increase in costs would ultimately hurt the consumer as he would end up paying more than what should be paid.
Entry into markets with existing incumbents often requires new entrants to make investments that cannot be recovered on exit – these investments are termed sunk costs. In principle, a patent will function to increase fixed (and most likely sunk) costs of entry into a market where the invention protected by the patent is practiced. This will reduce entry and therefore competition. From a welfare perspective, this is the price society pays in order to encourage invention and innovation by the initial entrant. What results is a trade-off between the interests of the incumbent holding the patent and the potential entrant excluded by it, with a knock-on effect on consumers who face higher prices as a result of the temporary monopoly ((Anticompetitive conduct and IPR – European Competition Commission November 2011)).
Restricting technical or scientific development
One use of patent portfolio involves a ‘patent flooding’ strategy ((See, for instance, Spero (1990), Wolfson (1994), Sankaran (2000), or Shapiro (2001).)). With patent flooding, a firm files a multitude of patent applications that claim minor variations in a competitor’s technology. Because its patent surrounds the competitor’s key technologies, the firm is in a position to act (through litigation or a threat of litigation) to gain a strategic advantage over its competitors. There is considerable evidence that patent flooding has become more prevalent in recent years ((See Shapiro (2002), pp. 4-5.)). There have also been several law suits involving patent flooding ((See Sankaran (2000), pp. 411-17 for a discussion of the prior litigation involving claims of patent flooding.)). A result of such flooding is that, other competitors in the market are not at the liberty to make new developments. Under Section 4(2)(b)(ii) of the Indian Competition Act, any firm that enjoys a dominant position would have abused such dominance if its acts impede technical or scientific development, prejudicial to the interests of the consumers.
A company can patent a new technology before its competitors, including features and technologies that it may never intend to commercialize (referred to as ‘submarine patents’). ((See Gilbert and Newberry (1982).))The patent thickets create considerable uncertainty for competitors about whether their technology infringes, especially with respect to a hidden or submarine patent. Even if a firm is not practicing submarine patents, there is still a lot of uncertainty for a competitor to design and sell its products without infringing upon the competitor’s patent.
In certain instances, a rational response for a firm that sells a product in competition with a rival product that embodies patented technology is for the firm to design around the rival firm’s technology. Such ‘design competition’ can benefit the consumers by increasing quality, variety and diversity of product offerings. However, in an industry where there are many patents issued and potentially more pending, a firm cannot be certain if its attempted designed-around product also does not infringe. In such a situation, a firm maybe willing to accept a licence at unfavourable terms to bring its product in the market as opposed to heavy costs of infringement litigation even if the likelihood of a successful design-around is high ((Previous research has characterised the ‘hold-up’ problem from patent thickets. (See Shapiro (2001), pp. 124-26.) However, this research has not characterised how the ‘hold-up’ problem may affect the incentives of parties to enter into license arrangements that potentially raise costs and allow the patent-holder to profitably increase prices ex post.)). The result maybe a ‘race’ to grow one’s IP portfolio. Unfortunately, it is not clear whether the race would be ‘to the top’ (i.e. in the social interest) or to the bottom (i.e. harmful from a social point of view).
Exclusive licensing agreement
Licensing agreements are essentially vertical agreements where one party, the licensor, sells the right to use an IP input to another party, the licensee. The input to which access is granted can be protected by a host of IP rights, ranging from patents to copyrights or trade secrets. Such licensing agreements can take the form of exclusive licensing agreements between the patent-holder and a competitor, possibly in return for something the patent-holder requires from the competitor. Such an exclusive license deprives other competitors from smoothly functioning in the market. Section 3 of the Competition Act prohibits such agreements as being anti-competitive. Since the competitor would acquire such a license from the patent holder at some cost, the ultimate price of the product belonging to the competitor would be higher than that of the patent-holder. Thus, the patent-holder would be in a position to monopolize the market as the demand for his product would be lower, owing to lesser costs. The consumer would be subjected to discriminatory prices owing to such collusion between the two parties and other competitors would not be provided with a fair opportunity to compete.
(B) Regulation of mergers between patent-holders
It is well understood that mergers can give rise to undesirable levels of concentration not only in product markets but also in technology and innovation markets. Clearly a merger between two firms that control a set of patents on substitute technologies can have an effect that is very similar to a merger between two firms producing substitute goods. What is sometimes less well understood is that a merger between firms that control complementary pieces of intellectual property can also have anti-competitive effects. One reason for this is that the joining of complementary patents might facilitate the emergence of an industry standard that the merged entity might then be reluctant to license to others. There are, however, other less obvious situations in which concerns might arise. For example, even in the absence of any standard-setting considerations, a merger can affect the relative bargaining positions of market participants in the licensing “game” through which situations of dispersed ownership of complementary assets usually get resolved.
Bargaining and foreclosure was the concern in the Axalto/Gemplus case ((Case No COMP/M.3998 – Axalto/Gemplus))in which the European Commission opined:
“The parties can use their portfolio of IP rights to worsen the bargaining position of their competitors…the new entity would switch from the current…strategies that fetch royalties to aggressive strategies by refusing the licensing of its patents…”
The main lesson from this example is that mergers – or other agreements resulting in increased horizontal concentration of IPRs – might raise IP-related issues even if they include complementary IPRs. The root of such issues is that, while the joint control of the merging parties’ complementary IP rights eliminates any possible “thicket” issues between the two parties, it might also decrease the merged entity’s incentives to settle potential infringement/complementarity issues with third parties ((Mattias Ganslandt, Intellectual Property Rights and Competition Policy, IFN Working Paper No. 726, 2008)). While the identification of possible antitrust concerns will of course depend on the specifics of each individual transaction, at least one general guiding principle seems to be useful.
In industries, such as electronics, where patent thickets appear to be an on-going concern, firms “arm” themselves for the threat of litigation – or more simply the difficulties of negotiation – by amassing significant patent portfolios. Such patent portfolios help improve the firm’s bargaining position but also facilitate the resolution of conflict by ensuring that various parties come to the table with enough “bargaining chips” of mutual interest. This latter “facilitating” function of patent portfolios works best when interested parties have relevant patent portfolios of broadly similar size ((Ideally, a more thorough assessment of the blocking value of various patents in the portfolios would be used but, given the difficulty of such a task, IP lawyers routinely use portfolio size as a useful approximation of the true strength of the portfolios.)).
INDUSTRIES IN WHICH PATENT THICKETS PREVAIL
Here we briefly review the discussion of patent thickets in four specific technology areas.
Commercially relevant patent thickets arose in semiconductor technology first ((Hall, B., R. Ziedonis (2001) “The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995” The RAND Journal of Economics 32( 1), 101-128)). Here the threat of hold-up had such strong commercial implications that firms changed their patenting strategies ((Grindley, P. C., Teece, D. J., 1997. Managing Intellectual Capital: Licensing and Cross-Licensing in Semiconductors and Electronics. California Management Review 39, 8–41.; Somaya, D., 2003. Strategic determinants of decisions not to settle patent litigation. Strategic Management Journal 24, 17–38)). It is these technologies that are most seriously affected by PAEs ((Berneman, L.P., Cockburn, I., Agrawal, A., Shankar, I., 2009. U.S./Canadian Licensing In 2007-08: Survey Results. les Nouvelles 1–8))and where patent litigation is affecting important commercial decision such as mergers and acquisitions ((Carrier, M., 2012. A Roadmap to the Smartphone Patent Wars and FRAND Licensing. CPI Journal 12(4).)).
Software became patentable in the United States via a sequence of court decisions ((Bessen, J., Hunt, R.M., 2007. An empirical look at software patents. Journal of Economics and Management Strategy 16, 157–189.)). Initially these decisions were viewed as negative for downstream application software firms by financial markets ((Hall, B. H., MacGarvie, M., 2010. The private value of software patents. Research Policy 39, 994–1009.)). It appears that its main consequence was an increase in software patenting by hardware firms rather than an increase in inventive activity by software firms, most of which still do not patent today ((Noel, M., Schankerman, M. (2006) “Strategic Patenting and Software Innovation” LSE STICERD Research Paper E143.)). Thus the result of this subject-matter expansion was an increase in defensive patenting rather than an increase in invention. Innovation in the software industry is typically cumulative and relies heavily on the combination of existing components and processes, which means that interoperability standards are particularly important ((Supra note 44.)). Patents on software face considerably uncertainty over patent eligibility and patentability, and built-in difficulties in defining claims ((Cockburn and MacGarvie, 2011 Cockburn, I. M., MacGarvie, M. J., 2011. Entry and Patenting in the Software Industry. Management Science 57, 915–933.)).
Heller and Eisenber raised the spectre of patent thickets affecting the progress of biomedical research in a widely cited paper ((Heller, M. A., Eisenberg, R. S., 1998. Can Patents Deter Innovation? The Anticommons in Biomedical Research. Science 280, 698–701)). Their argument was based on the increasing use of patents by academic researchers working in this field and the complexity and modularity of biotechnology research ((Pénin, J., Wack, J.-P., 2008. Research tool patents and free-libre biotechnology: A suggested unified framework. Research Policy 37, 1909–1921)). More recently Cohen, Walsh, et al. ((Walsh, J. P., Arora, A., Cohen, W. M., 2003. Research Tool Patenting and Licensing and Biomedical Innovation Collection.))find that academic researchers are not much impeded by patents. Rather it may be secrecy amongst researchers that is holding back progress. Their results are based on surveys of biomedical researchers in the United States. Most recently, Huys et al ((Huys, I., Berthels, N., Matthijs, G., Van Overwalle, G., 2009. Legal uncertainty in the area of genetic diagnostic testing. Nature Biotechnology 27, 903–909))undertook a detailed analysis of the claims contained in patents related to inherited diseases. From this very detailed analysis they conclude that there is a patent thicket, which affects genetic diagnostic methods. However, this thicket affects mainly non-profit applicants, which may mean that currently the thicket does not have strong commercial implications. The authors also show that many claims on the patents studied are broad and imprecise, leading to high levels of uncertainty. This is likely to be as important, if not more important, than the thicket itself in creating obstacles to commercialization and future research in this technology area.
In 2010 the validity of certain claims in US patents covering genes was thrown into question by Judge Robert W. Sweet ((Hemphill, T. A., 2012. The biotechnology sector and US gene patents: Legal challenges to intellectual property rights and the impact on basic research and development. Science and Public Policy, first published online August 9, 2012 doi:10.1093/scipol/scs051)). This case ((In Association for Molecular Pathology, et al v. United States Patent and Trademark Office, et al. 569 U.S. 12-398))has created additional uncertainty in the field of biotechnology at a time when the commercial application of the genetic testing and genetic treatments is coming within reach. Thus far there is little evidence of strategic patenting in this technology area that would resemble anything that has been seen in semiconductor technology. However, this may simply be the consequence of the small number of products currently in the market that are using patents held by private entities willing or able to go to court ((Holman, C. M., 2012. Debunking the myth that whole-genome sequencing infringes thousands of gene patents. Nature Biotechnology 30, 240–244)).
Nanotechnology is poised to be the first major technological revolution of the 21st century, yet there is a growing concern that future innovation and commercialization will be inhibited by the explosive rate of nanotechnology patenting and the potential for the formation of patent thickets. The nanotechnology patent space experiences an even greater level of these problems because it is much more complicated than other technology areas ((GAVIN CLARKSON AND DAVID DEKORTE, The Problem of Patent Thickets in Convergent Technologies, University of Michigan, Ann Arbor, Michigan 48109-1107, USA)).
The first discussions of a potential patent thicket in this field are provided by Bawa ((Bawa, R., 2005. Will the nanomedicine “patent land grab” thwart commercialization? Nanomedicine: Nanotechnology, Biology and Medicine 1, 346–350))and Lemley ((Lemley, M., 2005. Patenting nanotechnology. Stanford Law Review 58, 601)). However, both of these papers and others at the time are outlining a possibility based on large volumes of patenting and a complex technology.
RESOLVING PATENT DISPUTES
(A) Stricter patenting regime
Generally speaking, competition law authorities have legitimate concerns that parties may settle their intellectual property law disputes in a way that will stifle competition. Moving to the question of the effects of patent thickets, there are many anecdotes about the harm done by the dispersion of the ownership of complementary IP rights, but there are very few rigorous studies of their impact. Galasso and Schankerman (2008) analyse how the fragmentation of patent rights (‘patent thickets’) affected the duration of patent disputes. Based on a model of patent litigation, they predict that settlement agreements are reached more quickly in the presence of fragmented patent rights. This prediction is confirmed in their empirical work. This means that patent thickets have two opposite effects on the speed with which functional licensing agreements can be reached. On the one hand, the presence of thickets increases the number of required patent negotiations; on the other hand, patent disputes are resolved more quickly. The belief that patent thickets are one of the most crucial IP issues of the day has naturally reawakened interest in how such thickets might be efficiently cleared.
There are two main possible approaches. The first approach consists in reforming if not patent law at least the application of this law at the patent office. The underlying assumption is that the recent (perceived) proliferation of thickets comes largely from an excessive leniency in applying traditional patentability criteria. In particular, it is felt that many patents that are actually granted do not in fact represent a sufficient “inventive step”. If patents are easily obtained on “small bits” of knowledge, then it is more likely that the “bits” that are necessary to produce anything useful will fall in a large variety of hands. Recent commentators suggest that lower patenting standards encourage patent thickets, creating difficulties for innovators ((Gallini, Nancy T. 2002. The Economics of Patents: Lessons from Recent U.S. Patent Reform. Journal of Economic Perspectives 16(2): 131–154.)). Therefore, the laws under which applications for patents are made must raise the threshold for granting of patents. This will result in lesser patents thereby resulting in lesser patent thickets.
In patent law, a cross-licensing agreement is an agreement according to which two or more parties grant a license to each other for the exploitation of the subject-matter claimed in one or more of the patents each owns ((Shapiro, Carl, “Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting” Innovation Policy and the Economy, MIT Press 2001, p119 et seq.)). Usually, this type of agreement happens between two parties in order to avoid litigation or to settle an infringement dispute ((Statement of Jeffery Fromm, Hewlett-Packard Company, “Patent Pools and Cross Licensing”, 2002, p8)). Very often, the patents that each party owns, covers different essential aspects of a given commercial product. Thus by cross licensing, each party maintains their freedom to bring the commercial product to market. The term “cross licensing” implies that neither party pays monetary royalties to the other party.
Microsoft and JVC entered into a cross license agreement in January 2008 ((Ed Oswald, “Microsoft, JVC agree to cross-license patents” BetaNews January 16, 2008, 2:29 PM)). Each party, therefore, is able to practice the inventions covered by the patents included in the agreement. This benefits competition by allowing each more freedom to design products covered by the others patents without provoking a patent infringement lawsuit.
Firms can also sign ex ante licensing agreements promising to share all or some future IPRs within some fields of research. Such ex ante agreements are better treated as patent pools. As such ex ante cross licensing agreements have a number of relevant characteristics. Firstly, such agreements are not open to third parties, which is a drawback. On the other hand cross licensing agreements do not usually stipulate a mechanism for the joint sale (or joint setting of royalties) to others and, unless they are excusive, do not preclude each partner from licensing its own IP independently to third parties. So, if one abstracts from the possible effect on innovation, one would only object to ex ante cross-licensing agreements if they are exclusive and the parties have significant joint market power in the relevant technology and product markets.
As for incentives, to innovate ex ante cross licensing does unambiguously reduce total investment in research projects that are substitutes but has an ambiguous effect on investment when the projects pursued by the firms are complementary. Under a grant-back clause, at least one of the two parties to the licensing contract knows that he will have to share any future innovation (including improved know-how) that falls within the scope of the clause. If this sharing is not associated with any payment from the receiving party and the future innovations of the two parties are not complementary ((For the purpose of this discussion two innovations are complementary if their joint value – in terms of quality improvements and/or cost savings – is higher than the sum of their stand-alone values.)), then grant-back clauses tend ((While this has been the presumption of much of the discussion on grant-backs, Choi, J. P. (2002) “A Dynamic Analysis of Licensing: The Boomerang Effect and Grant-Back Clauses” International Economic Review43, 803-829.) shows that one way grant-back clauses might in fact lead to higher total investment in innovation.))to reduce the total investment of the two parties into acquiring further know-how and/or developing further improvements of the technology. Reduction in investment also reduces the ultimate cost of the product in the market, thereby reducing monopolization by a single firm.
Patent thickets are defined by a number of observers as a dense web of patents with overlapping claims that are held by several (competing) companies. As discussed in this article, such thickets can arise for a multitude of reasons; they are mainly driven by an increase in the number of patent filings (and its consequences for patent quality) as well as increased technological complexity and interdependence. The recent economic literature on the interaction between competition law and intellectual property rights shows that these regulatory systems are consistent in terms of basic principles. Significant tensions exist, however, and it is difficult to balance IPR and competition law in practice. There are numerous factual and institutional sources of these tensions. It is generally impossible to find a fully optimal balance between IPR incentives for innovation and antitrust intervention for competition.
In our context, patent thickets can represent a barrier to entry if potential social benefits of the factors that give rise to thickets do not outweigh the social costs induced by lower entry rates than in the absence of thickets. The ultimate aim of Competition Law is to protect the interests of the consumers. There must be formulation of better policies at national and international level to tackle patent thicket issues so that there can be a healthy and competitive market for the competitors to participate in and consumer interest are upheld.