Grantbacks, Territorial Restraints and Innovation

We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee’s ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for” defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations. Under the 2004 EU Technology Transfer Guidelines, and the guidelines for some other jurisdictions, grantback clauses that apply to “non-severable” (read “infringing”) innovations are considered to be less controversial than clauses that apply to “severable” innovations. We show, to the contrary, that grantback clauses do not increase the patent-holder’s incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for” defence might be valid for severable innovations but not for non-severable ones. Moreover , for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs. Our research also has implications for the analysis of the optimal “vertical” scope of patent protection as the availability of grantback clauses makes large patent scope less desirable.