Antitrust Policy Toward Patent Licensing: Why Negotiation Matters

Competition Policy and Antitrust, Interoperability, Standards, Intellectual Property and Patents

Article Snapshot

Author(s)

Daniel Spulber

Source

Minnesota Journal of Law, Science & Technology, Vol. 22, Issue 1, pp. 83-161, 2021

Summary

Some are concerned that patents for complex innovations give rise to problems such as royalty stacking or patent thickets. However, empirical data shows that patent pools and negotiation of patent licenses tend to eliminate these concerns.

Policy Relevance

Negotiation of patent licenses promotes competition and overall consumer welfare.

Main Points

  • Complex complementary inventions such as the Internet of Things (IoT), artificial intelligence (AI), data analytics, and virtual reality are growing in importance.
     
  • Some antitrust authorities theorize that patent license royalties from complementary inventions will rise and discourage innovation; these concerns are founded in an economic model known as the "Cournot Effect."
     
    • The Cournot model wrongly assumes that royalties are set by patent holders without negotiation.
       
    • The model implausibly assumes that patent holders have total market power.
       
    • It further assumes that all costs are passed through to consumers.
       
    • Predictions based on this model are highly inaccurate.
       
  • Strong empirical evidence from intellectual property organizations, courts, government agencies, and standard-setting bodies shows that patent license agreements outside of patent pools are negotiated.
     
  • Economic modeling shows that in a competitive market negotiated royalties should be contingent on the market price of the product; this prediction is consistent with real-world royalty arrangements.
     
    • Negotiations between patent holders avoid royalties that are constant per unit of output.
       
    • Royalties vary with product prices, and include profit-sharing or lump sum fees based on prices.
       
  • When patent royalties are negotiated, both parties to the negotiation share the value created by the invention, and the incentives of patent owners and technology adopters are aligned; both prefer that the adopter maximize profits.
     
  • Standard economic models treat patent pools as bundling monopolists; in practice, however, technology adopters and patent holders have the option of negotiating a contract outside the pool.
     
    • Patent pool royalties will not exceed negotiated prices.
       
    • Patent pool pricing practices show that markets are competitive.
       
    • Patent pools reduce transaction costs and improve coordination, but do not result in monopoly prices.
       
  • Concerns such as royalty stacking, patent hold-up in standard-setting, patent thickets, and blocking patents are not supported by plausible economic models or by empirical evidence.
     
  • The market power of inventors in standard-setting proceedings is constrained by many substitute technologies, component suppliers, and distributors.
     
  • Policymakers should avoid policies that discourage the negotiation of patent license royalties; policies that benefit technology adopters over patent holders will reduce incentives to invest in high-quality innovations.
     

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