51 Pages Posted: 26 Sep 2015 Last revised: 5 May 2016
Date Written: September 24, 2015
Scholars understandably devote a great deal of effort to studying how well patent law works to incentive the most important inventions. After all, these inventions form the foundation of our new technological age. But very little time is spent focusing on the other end of the spectrum, inventions that are no better than what the public already has. At first blush, studying such “horizontal” innovation seems pointless. But this inquiry actually reveals much about how patents can be used in unintended, and arguably, anticompetitive ways.
This issue has roots in one unintuitive aspect of patent law. Despite the law’s goal of promoting innovation, patents can be obtained on inventions that are no better than existing technology. Such patents might appear worthless, but companies regularly obtain these patents to cover interfaces. That is because interface patents actually derive value from two distinct characteristics. First, they can have “innovation value” that is based on how much better the patented interface is than existing technology. Second, interface patents can also have “compatibility value.” In other words, the patented technology is often essential to make products operate (i.e. compatible) with a particular interface. In practical terms, this means that an interface patent that covers little or no meaningful advance can give a company the ability to extract rents and foreclose competition.
This undesirable result is a consequence of how patent law has structured its remedies. For years, patent law has implicitly awarded both innovation and compatibility values. Recently, the courts have taken a sensible first step and excluded compatibility value from reasonable royalty recoveries for standard essential patents. This Article argues that the law needs to go further and do the same for all essential interface patents. Additionally, patent law should discard the use of injunctions and lost profits in these contexts because both of these remedies inevitably award compatibility value. The sole remedy should be an innovation-value-based reasonable royalty. This proposal has two benefits. First, it would eliminate the incentives for wasteful patents on horizontal technology. Second, and more importantly, the value of all interface patents would be better aligned with the goals of the patent system.
Keywords: Patents, Interfaces, Standards, Tying, Remedies, Damages, Injunctions
JEL Classification: 034
Suggested Citation: Suggested Citation
Chao, Bernard, Horizontal Innovation and Interface Patents (September 24, 2015). 2016 Wisconsin Law Review 287 (2016); U Denver Legal Studies Research Paper No. 15-50. Available at SSRN: https://ssrn.com/abstract=2665325