A Simple Theory of Defensive Patenting

This paper examines innovating firms’ incentives to engage in defensive patenting. It first establishes a “truce equilibrium” in patent enforcement: when litigation is costly, the equal strength of two symmetric parties’ patent portfolios deters any patent disputes along the equilibrium path. This equilibrium behavior generates two benefits of defensive patenting, namely, to prevent licensing outlays and to protect downstream investments. In addition, firms can use patents to coordinate non-contractible investment decisions. Depending on the joint interests, they can either reach a license in order to guarantee high investment incentives, or agree not to grant a license so that investments are deterred by the litigation threat. On the other hand, the strategic patenting concern may generate a bandwagon of patent accumulation, where firms rush to the patent office to get a patent, but the subsequent investment performance is the same as when there is no patent at all. The paper also argues that defensive patenting may weaken the effectiveness of patents as an appropriation scheme. This offers an explanation that the “pro-patent” policy shift in the United States since the 1980s may actually have undermined the incentive power of the patent system

Understanding the Doctrine of Patentable Subject Matter

The doctrine of patentable subject matter precludes basic inventions such as abstract ideas and laws of nature from patent protection. However, current economic thinking of the patent systemstresses the necessity of rewarding pioneering inventors in the cumulative innovation process. In a two-stage innovation modelwhere the first stage invention (basic invention) has no stand-alone value and the pioneer can also participate in the second stage, I show that patent protection to the basic invention may increase rather than hamper the second stage performance. Rejecting patents on the basic invention can promote technology progress when the pioneer has high capacity, but the follower has low capacity to engage in the second stage innovation

The Design of Post-Grant Patent Challenges

This paper proposes a patent challenge mechanism with partial patent rights previously granted to the patent-holder as the challenge reward. Transferring patent rights to a successful challenger raises the incentive to search for patent-defeating prior art, and, after the discovery of the information, helps deter collusion between the patent-holder and the challenger. It also reduces costly opportunistic patenting and therefore improves patent application quality. However, from an ex post point of view, over-search ensues when the collusion problem is severe. The optimal re-allocation of patent rights, then, calls for a careful balance between these costs and benefits

Technology Adoption and Fuzzy Patent Rights

This paper considers why a patentee may have little incentives to reduce the uncertainty of patent boundary. Clearer patent rights, i.e., when patent examination results better predict subsequent court decisions, provide better guidance to technologyspecific investment and encourage technology adoption. Undermild conditions, however, the patentee’s post-adoption payoff decreases in clarity. The patentee prefers to maintain “fuzzy” patent rights in order to monopolize the use of the technology, or when promoting technology adoption is not a strong concern. The latter happens when the patentee, as a pure licensor, has a low (ex ante) quality invention

The Patent Quality Control Process: Can We Afford An (Rationally) Ignorant Patent Office?

This paper considers patent granting as a two-tiered process, which consists of patent office examination (public enforcement) and court challenges (private enforcement). It argues that, when the patent-holder has private information about the patent validity, (i) a weak patent is more likely to be settled and thus escape court challenges than a strong patent; and (ii) when the economy suffers from the low patent quality problem, a tighter examination by the patent office may strengthen private scrutiny over a weak patent. Both work against Lemley (2001)’s hypothesis of a “rationally ignorant” patent office

In the shadow of giants

Intellectual giants provide broad shoulders for subsequent inventors. Their unfinished inquiry, however, also casts shadow on the prospect of future research. This paper incorporates this shadow effect into a two-stage innovation process and shows that patenting the first-stage result (the basic invention) may enhance the second-stage innovation. It is optimal to reject patent protection to the basic invention only when this beneficial effect does not arise, and when it is essential to preserve the pioneering inventor's incentive to continue research activities.Cumulative Innovation; Patentable Subject Matter; Probabilistic Patents; Search; Shadow Effect

Revisiting Antitrust Limits to Probabilistic Patent Disputes: Strategic Entry and Asymmetric Information

We consider separately strategic entry and asymmetric information in the design of the settlement policy governing patent disputes, with a focus on Shapiro (2003)’s consumer protection rule. We show that, when a potential entrant strategically incurs an entry cost before engaging in a patent dispute, a more stringent settlement policy of deterring costly entry is preferable to the patent-holder and may lead to higher static efficiency. Concerning asymmetric information, when the disputants, but not the court, learn the patent validity, we derive an “expectation test,” which requires that a laxer settlement policy be coupled with higher expected patent validity under settlement

The Value of Failures in Pharmaceutical R&D

We build a cumulative innovation model in which both success and failure provide valuable information for future research. To test this learning mechanism, we use a dataset covering outcomes of world-wide R&D projects in the pharmaceutical industry, and proxy knowledge flows with forward citations received by patents associated with each project. Empirical results confirm theoretical predictions that patents associated with successfully completed projects (i.e., leading to drug launch on the market) receive more citations than those associated to failed (terminated) projects, which in turn are cited more often than patents lacking clinical or preclinical information. We therefore offer evidence of the value of failures as research inputs in (pharmaceutical) innovation

Understanding the Doctrine of Patentable Subject Matter *

Abstract The doctrine of patentable subject matter precludes basic inventions such as abstract ideas and laws of nature from patent protection. However, current economic thinking of the patent system stresses the necessity of rewarding pioneering inventors in the cumulative innovation process. In a two-stage innovation model where the first stage invention (basic invention) has no stand-alone value and the pioneer can also participate in the second stage, I show that patent protection to the basic invention may increase rather than hamper the second stage performance. Rejecting patents on the basic invention can promote technology progress when the pioneer has high capacity, but the follower has low capacity to engage in the second stage innovation

In the shadow of giants

Intellectual giants provide broad shoulders for subsequent inventors. Their unfinished inquiry, however, also casts shadow on the prospect of future research. This paper incorporates this shadow effect into a two-stage innovation process and shows that patenting the first-stage result (the basic invention) may enhance the second-stage innovation. It is optimal to reject patent protection to the basic invention only when this beneficial effect does not arise, and when it is essential to preserve the pioneering inventor's incentive to continue research activities