Q & A

Are ‘Patent Thickets’ Smothering Innovation?

One analysis estimated that a smartphone is covered by 250,000 patents. As technology grows increasingly complex, companies must navigate a web of intellectual property protections. Are innovation and competition suffering from the race to create enormous patent portfolios? Professor Stefan Wagner of the European School of Management and Technology (ESMT), a member of the Global Network for Advanced Management, talked with Yale Insights about the consequences of “patent thickets.”

Q: What is a patent thicket?

There’s not a single definition, but one common understanding comes from a 2001 paper by Carl Shapiro. He described “a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology.”

There aren’t patent thickets in industries where you have a relatively close link between a single patent, or a very small number of patents, and the product. For example, with pharmaceuticals, you can have a product that comes from one patent that protects one molecule. In these types of industries, patent thickets are less likely to exist, as companies do not need to obtain access to technologies patented by others.

On the other end of the spectrum, there are industries where you need many patent-protected technologies to manufacture a single product. The prime example is smartphones, where you need access to various technologies—the LCD screen, antennas, Wi-Fi standards, processors, batteries, and so forth. You have a similar situation with computational tools like audio or video codecs and with anything that relies on semiconductors—integrated circuits, memory chips, even light emitting diodes. Here, companies often acquire licenses for parts of the end product that are patented by others.

The idea of the thicket comes from situations where there are so many patents potentially held by different owners—and they may overlap in their protective scope—that it's not even clear which people you need to talk to get all the necessary licenses.

Q: What happens to the competitive landscape when there is a patent thicket?

If companies are in the situation where they need to negotiate with other companies—and potentially competitors—to get access to technologies or patents, there is mutual dependence. Samsung needs licenses from Motorola and Apple to manufacture a smartphone. Since the other companies also need licenses, they end up granting cross licenses; however, if one company has a bigger patent portfolio, it can demand payment to make the deal work.

It's a prisoner's dilemma. Everyone has an incentive to have the biggest patent portfolio.

When Google came up with the Android operating system, they had a fairly small patent portfolio. They were facing competitors like Apple, which has a huge portfolio. There was always the threat of Apple pulling access to the patents or taking them to court, so Google acquired Motorola, not for the hardware business, which they sold to Lenovo, but for the patent portfolio—to be an equal player at the table.

Q: So patent portfolios are assets in themselves?

When Kodak went into the bankruptcy, its patent portfolio was a major asset that is still being commercialized today by the new owners. Another example would be when Ericsson exited the mobile handset part of their business to focus on network infrastructure—they sold off more than 2,000 patents to an entity with the sole purpose of generating revenues by licensing this patent portfolio. Non-practicing entities like this are not active in any product market. They are basically patent aggregators.

I don't want to take sides here, but there is a lot of discussion and numerous observed cases of non-practicing entities strategically holding up players in the industry, saying, “I have a patent you might infringe upon, and if you don't give me a reasonable licensing fee right now, I’ll go to court and shut down your factory.”

The risk for non-practicing entities is zero. They don't have a factory someone could close down. However, the threat of being taken to court creates an incredible amount of uncertainty for companies active in product markets, running factories that could be shut down. And, in the United States' patent system, non-practicing entities have a relatively good opportunity to create this uncertainty. In other jurisdictions it is harder.

Q: What is the impact of patent thickets on innovation and competition?

The costs arising from patent thickets are adding to the cost of R&D. Does this really slow down innovation? Maybe. Probably. But there is no definite evidence.

Companies are squeezing more patents out of the same R&D expenditure as they did 10 or 20 years ago. Some academics talk about a patent explosion driven by the prisoner's dilemma these companies are in.

Large companies are always saying, “There is no problem with patent thickets because cross-licensing is cost-neutral. Everything is fine, and there is innovation and progress.”  But what they never talk about is if you don't bring any patents to the table, essentially you won't be allowed to enter the market. If you don't have anything to bargain with, they might not give you the licenses.

There is emerging literature that lays down empirically that thickets have a negative effect on entry into these industries. From a competition perspective, that's concerning. Additionally, there is a huge effect on transaction costs from thickets—filing fees, patent attorneys, everything associated with the drive to accumulate the biggest patent portfolio.

Q: Are there ways to reduce transaction costs?

Patent thickets are, in part, a result of company strategy, but more, they are the consequence of the nature of the technology that is needed for a product. In many cases, the ownership of all the technologies needed to manufacture a product is going to be fragmented across multiple players. That's, I think, a structural problem you can't tackle.

So the question is, given the nature of the technology that underlies certain markets, can you bring down the transaction cost? That isn’t a trivial problem, but one thing would be to make it easier to identify the right person to grant a license. Even if the situation is complex in the sense that many licenses are required, there could be certainty about who to approach.

Another thing that would probably help a lot is to cool down the patent explosion. For that, basically there are two parameters people are thinking about: increasing the cost of getting a patent and making it cheaper to get rid of low-quality patents. It would be possible to simply increase the cost of filing for patents, but there is a concern that would leave out small companies. So some argue for a subsidy program for small companies. It’s not that obvious what the right balance should be.

One of the consequences of the explosion in the number of patent applications is that the patents that are granted are legally weaker, because each application is getting less scrutiny.

In the ’90s there were a couple of case law decisions in the United States that basically wiped out many of the limitations on what can be protected by patent rights. There was a spike in patents that were not based on a physical invention. A door was opened to software and business method patents. Amazon patented one-click buying and enforced it. The patent was invalidated, later. But, due to the uncertainty, they were able to get some money out of it.

Another example is Apple’s swipe-to-unlock patent, which covers putting your finger on the lock screen and to moving your finger in a horizontal direction. The word “horizontal” is very important because you can avoid infringing on the patent by, for example as HTC did, putting a circle on the lock screen that you can pull in any direction to unlock your phone. These patents can have some strange consequences.

Over time, the courts have gotten stricter with these patents. I think this is beginning to regulate itself at the moment.

Another piece of dealing with weaker patents is when someone claims patent infringement, the potentially infringing party will often countersue through an invalidity suit. In effect they say, “I don't know whether I infringed on your patent, but you shouldn't have these patents in the first place.” If they can get a court to declare the patent invalid, it preempts any infringement. There has been debate on whether invalidity challenges can be made more efficient and cheaper as a way to weed out low-quality patents.

Q: How much do patent systems vary around the world?

The patent system itself is pretty harmonized through the WTO treaty, which includes the Trade Related Aspect of Intellectual Property, or TRIPS, agreement. It specifies the pillars of all intellectual property protection, which includes the patent system. The basic parameters are all the same. A patent can be given on an invention that is novel, useful, and not obvious.

The differences are largely on the implementation of the TRIPS agreement and on the enforcement side in courts. Patent laws govern how patents are granted and what rights are associated with patents. When it comes to enforcement of those rights, then you're usually entering civil law. And there you get everything you can imagine in terms of variation across the globe.

Q: Does that influence where companies seek patent protection?

Texas has become famous for being home to many patent litigation cases, because courts and juries in Texas courts are seen as friendly to patent owners and as awarding high damages.

Q: How about within Europe? 

Despite all the harmonization of the European Economic Area, at the moment, there is still not a single European patent right. What you can get is a bundle of national patents. You have a patent in Germany, another in the Netherlands, and so forth. If you litigate, it is in national courts, which can get complex.

When Apple was suing Samsung three years ago over tablets, the German court ruled that the Samsung tablet was in violation of intellectual property owned by Apple, whereas the Dutch court came to the opposite conclusion.

Q: Could patent thickets be reduced through more unified oversight?

It would be good to centralize this process. I don't know whether that would be done through a court or the UN’s World Intellectual Property Organization, but it would bring down costs tremendously to do everything in one place.

Unfortunately, Europe has been trying to come up with a single patent system for more than 30 years. It's going to happen soon, but we can learn from this exercise that coordinating nations is extremely complicated.

Watch an interview with Stefan Wagner about patent thickets on the ESMT website.

Interview conducted and edited by Ted O’Callahan.

Associate Professor and TUSIAD/TCCI Chair in European Economic Integration, ESMT