Has the Academy Led Patent Law Astray?

Abstract

Scholarly commentary widely asserts that technology markets suffer from a triplet of adverse effects arising from the strong patent regime associated with the establishment of the Court of Appeals for the Federal Circuit in 1982: “patent thickets” burdening innovation with transaction and litigation costs; “patent holdup” resulting in excessive payouts to opportunistic patent holders; and “royalty stacking” causing exorbitant patent licensing fees. Together these effects purportedly depress innovation and inflate prices for end-users. These repeated assertions are inconsistent with the continuing robust output, declining prices and rapid innovation observed in the most patent-intensive technology markets during the more than three decades that have elapsed since 1982.

Recent empirical studies relating to each of these assertions have found little to no supporting evidence over a variety of markets and periods. Nonetheless courts, legislators, and antitrust agencies have taken, or have proposed taking, actions consistent with these assertions. Most importantly, policymaking entities have sought to mitigate thickets, holdup, and stacking effects by limiting injunctive relief for important segments of the patentee population. Substituting monetary relief for injunctive relief — what I call the “depropertization” of the patent system — yields three potential efficiency losses. First, depropertization impedes efficient resource allocation by shifting the pricing of technology assets from the relatively informed marketplace to relatively uninformed judges and regulators. Second, depropertization distorts markets’ organizational choices by inducing entities to undertake innovation and commercialization through vertically integrated structures, rather than contractual relationships now clouded by the prospect of judicial re-negotiation. Third, depropertization may facilitate oligopsonistic efforts to depress royalties on patent-protected inputs, resulting in wealth transfers to downstream entities and discouraging innovation by upstream R&D suppliers. This possibility is consistent with lobbying behavior by downstream intermediate users in the smartphone market, who advocate limiting injunctive relief for significant categories of patent holders. These potential welfare losses, combined with the paucity of evidence for thicket, holdup, and stacking effects, recommend against policy actions that have weakened the remedies available to patent holders in information technology markets.