By: Michael Risch, Professor of Law, Villanova University School of Law
Read the whole draft here, forthcoming in the George Mason L. Rev. It is about half the length of a typical law review article, so I call it an essay.
Back in October, I presented at the Center for the Protection of Intellectual Property Conference on The Commercial Function of Patents in Today’s Innovation Economy. I spoke on a panel entitled “Patent Licensing: New Business Models and New Opportunities.” I decided to focus on the commercialization benefits of licensing patents purchased from another – thus, my highly creative title: Licensing Acquired Patents.
This was actually a tall order. On the one side, licensing has been around for 150 or more years, so arguing that licensing acquired patents is a new opportunity took some work. On the other side, economic theory holds that late stage licensing (that is, ex post licensing) offers the least commercialization benefits, so convincing skeptics (read: licensees) that there are commercial benefits to the practice was also no easy task. This is why acquisition is important. Original owners usually have a chance at early stage licensing. Acquirers almost never do.
I begin the essay with a short section on the stages of patent licensing, but I’ll start here with the historic part. There’s no real dispute that there has long been licensing, sale, and other secondary market activity for patents, dating into the early 1800’s. Economic historians have done a great job of tracing this history, and I cite several articles and books in my essay. But a sustained business model of acquiring patents and licensing them was not really common. For the most part, secondary markets involved inventors attempting to sell or license patents to those who would practice the invention, not to those who would – in turn – license others.
Of course, there were exceptions, and I focus on them in the essay. The big ones were railroad, agriculture, and dental patents. In each case, there were a few higher profile non-producer patent buyers who attempted to license others (and sued those that refused). While there is a smattering of other activity, licensors aren’t discussed by name in the press and they did not buy and license more than two or three patents each. In the essay, I discuss what we might learn from the rise and fall of these patent “sharks,” which appeared to thrive only in limited industries at a very particular time in our patent history. Both laws and producer behavior were part of the equation.
Following the history discussion, I turn to commercialization benefits of licensing. I make some key assumptions in the paper about such licensing – most primarily that pricing is negotiated in good faith. In other words, if a patent owner refuses to acknowledge low quality patents and insists on too high prices, then commercial benefits are unlikely. Similarly, if manufacturers refuse to acknowledge high quality patents and insist on too low prices, then commercial benefits are unlikely. And finally, I note that there may be private commercial benefits that are not socially beneficial (that is, they enhance private but not total welfare).
I discuss several commercialization benefits. The first is a signaling benefit. There are a lot of patents, and even if a company attempted to find all of them associated with a complex product (which often doesn’t happen), it likely will not. But owners know what patents they have. Thus, owners are the least cost information producers, and informing manufacturers of relevant patents can have some commercialization benefits. Even if the patents are of low quality, the manufacturer is in a better information position than before; it can buy, license, or challenge the patents.
This signaling leads to a second benefit: some freedom to operate that was unavailable before, assuming a reasonable license is entered. At least one study shows that litigation costs more than simply “litigation costs.” Litigation can also hamper investment in the product itself. This is not surprising, of course: litigation is a drag, literally and figuratively. So avoiding litigation can enhance commercialization of the accused product. I acknowledge that investment would be really enhanced if nobody enforced their patents, but that’s an unlikely scenario and this is an essay about licensing.
I make a few other suggestions of commercialization benefits, and finally discuss how licensing acquired patents may help drive licensing toward the earlier, more beneficial stages of licensing – where technology licenses predate investments in products, even if it winds up cutting out the acquirers. I give a few examples of how this might happen and how the process has already begun.
There is more in the essay than I can write about here. If you are interested, please take a look at the full version.