Why Rapidly Growing Patent Thickets Threaten Business Innovation
ResearchNowadays, thousands of patents are protecting innovative products like the smartphone. Such growing patent thickets increasingly hinder the innovation process of national economies. For many firms, the patent legislation represents an almost incalculable risk. Patent litigations between major technology corporations such as Apple, Google, or Motorola have recently highlighted this phenomenon. Meanwhile, many companies hesitate to market an innovative product due to this development. Smaller companies refrain from investing in innovative products or processes, especially if various owners of patents are involved. In such cases, it is difficult and expensive for them to secure the rights necessary to introduce innovative products. Bigger companies, on the other hand, are deterred by legal uncertainties resulting from patent thickets. These are the findings of an empirical study on the impact of patent thickets, i.e. of webs of overlapping patents, on companies’ innovation performance, conducted by the Centre for European Economic Research (ZEW) in Mannheim.
The ZEW study is concerned with the ambivalent impact of patents on the innovation activities of firms. It shows that the innovation activities of both, smaller and bigger firms are influenced by patent thickets, albeit for different reasons. At first sight, this appears rather surprising since the provision of patent rights by state authorities is supposed to encourage investment in technological progress. Inventors are granted patents in order to protect their inventions and to give them the opportunity to prohibit the use of their inventions for commercial products. Patent litigations at the arrival of new technologies are thus no new phenomenon. What is new, however, is the high number of patents necessary for innovative products.
Today, thickets of patent rights which are difficult to distinguish from one another protect new information and communication technologies as well as the products based upon these technologies. Every single patent grants the right to block the introduction of innovative products since patent holders have to give their approval to the commercial use of their invention. The market introduction of new products protected by numerous patents hence requires major coordination efforts and a settlement between patent holders. These negotiations grow more and more difficult with an increasing number of participating parties and diverging interests. Individual parties that attend licensing negotiations often possess numerous, relevant patent rights. Companies with a broad patent portfolio have an advantage in licensing negotiations where every single party has a veto right, because their approval is essential to the outcome. The negotiating position of smaller companies with fewer patents, though, is rather weak in such a situation. If a small company wishes to use a new technology in its products, its position grows even weaker with an increasing number of parties involved, with whom it will have to conclude a licence agreement.
Patent thickets may turn out to be a problem for bigger companies with broad patent portfolios, too. Even legal experts and engineers often find it difficult to determine the essential patents for a product. This legal uncertainty increases the risk that is associated with the introduction of innovative products, particularly since companies are in a disadvantageous negotiating position with possible patent holders after the market launch of new products. Usually, the introduction of innovative products includes substantial investment. A court-approved prohibition of an innovation’s marketing may quickly end in a financial fiasco. Patent holders with unexpected claims usually benefit from this potential threat in the case of subsequent licensing negotiations. The lesser these patent holders are affected by a sales stop of the innovation the stronger grows their negotiating position. In fact, the ZEW study shows that bigger companies are less willing to invest in innovations if smaller companies possess relevant patents. "In the context of technological progress, the trend towards inventions protected by many different patents is unstoppable", says ZEW researcher Fanz Schwiebacher, who is responsible for the study. "However, state authoriti could act like standard-setting organisations and introduce transparency to patent thickets and unclear technological ownership rights. Thus, innovative companies would at least profit from fewer legal uncertainties and lowered transaction costs."
The study is based on business data of 1,016 companies in the manufacturing industry in Germany provided by the Mannheim Innovation Panel. Facts about patent applications at the European Patent Office were assigned to these business data. The study period covers the years 1993-2006.