IP Antitrust: Caught in a Thicket

As a economics student with a basic/baby understanding of monopolistic markets, I would like to draw on some research from Berkeley Law faculty Rubinfield and Maness, who investigated patent usage's implications on antitrust. Hurrah!

In my last post on how firms change behavior given impending patent expiration, I introduced the significance of patents as monopoly builders during their active 20 year period. Indeed, the intersection of IP and antitrust continue to be a hotly debated subject in both academia and industry. In the spirit of Rubinfield and Maness' paper, this post is particularly concerned with the ability for firms to use their IP portfolio to raise rivals' costs. This plays two effects: firms may act with predatory motives against competitors, or competitors may collude to raise prices.

In industries where innovation and design are key to competition between rivals, the paper suggests that the price-raising strategy is potentially effective for disadvantaging rivals, whether or not through explicit collusion. I will outline some patent portfolio strategies that caught my attention in this antitrust conversation.

One use of a patent portfolio is what is known as a "patent flooding strategy." Basically, a firm files various patent applications that claim minor variations on a competitor's existing technology. This is especially advantageous for prosecutors with large market power if its patents surround competitors' key technologies. There is in fact some stealth involved. A company can strategically create a patent thicket by patenting new technology and features that it never intends to commercialize- known as "submarine patents." This creates tremendous uncertainty for competitors and makes it hard for them to design and sell products without running the risk of infringement, so we can think of it as an overshadowing threat.

One beneficial solution may be for the firms to sign a cross-licensing agreement, though at the cost of the public. Alternatively, the incumbent might strategically force its competitors to accept a licensing agreement- and the fee that comes hand in hand. While one may argue that package licensing saves resources and negotiation costs necessary to value patents or run litigation, the patent thicket ultimately forces concessions from rivals. The result may be a race to grow one's patent portfolio.

On the other hand, the public may benefit from rival firms who are forced to innovate around the existing patent, which consequently increases the quality, variety, and diversity of product offerings. However, the risk of infringement upon submarine patents persists, and many firms prefer eliminating this costly risk of litigation by accepting a license at unfavorable terms to bring its product to market.

The patent thicket is but one IP strategy in a deep basket of case studies, which I will explore later. To sum up, strategic use of patents to assert "patent floods" or "thickets" raise rivals' costs in three ways: to raise expenses on designing around patented technology, delay the introduction of new products, or accept a license with fees and royalties.

If you're interested, read on in my next post for a case study on the strategic use of package licenses: Yamaha vs Bombardier.