How to Make a Patent Market

Abstract:     
Imagine a stock market in which buyers and sellers couldn't find out the prices at which anyone else sold a share of stock. If you wanted to buy (or sell) a share of stock, you'd have to guess what it was worth. The result, everyone would agree, would be massively inefficient. Willing buyers and sellers would often miss each other. Patents, however, exist in just such a blind market. Want to know if you're getting a good deal on a patent license, or acquiring rights in a technology? Too bad. Even if that patent or ones like it have been licensed dozens of times before, the terms of those licenses, including the price itself, will almost invariably be confidential. Patent owners who want to put their rights up for sale face the same problem.

The result? Willing licensors and licensees can't find each other. Patent auctions often fizzle, because without a thick market - one with an array of buyers and sellers bidding on price - no one can know whether they are getting a steal or being had. When parties do license patents, the prices are (to the extent we can tell) all over the map. And the rest of the world has no idea what those prices are. This in turn means that courts lack adequate benchmarks to determine a ¿reasonable royalty¿ when companies infringe patents.

The solution is straightforward: require publication of patent assignment and license terms. Doing so won't magically make the market for patents work like a stock exchange; there will still be significant uncertainty about whether a patent is valid and what it covers. But it will permit the aggregate record of what companies pay for rights to signal what particular patents are worth and how strong they are, just as derivative financial instruments allow markets to evaluate and price other forms of risk. It will help rationalize patent transactions, turning them from secret, one-off negotiations into a real, working market for patents. And by making it clear to courts and the world at large what the normal price is for patent rights, it will make it that much harder for a few unscrupulous patent owners to hold up legitimate innovators, and for established companies to systematically infringe the rights of others.

Working Paper Series