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1 Introduction
The Value of Patents and the Evolution of (Cross) Licensing
Patents and Their Value
The concept of patents has changed the way businesses operate. The grant of a patent allows any corporation to operate in the relevant market with a feeling of comfort otherwise unavailable to the corporation. This sense of security is due to the specific right created by the grant of the patent. The awarding of a patent allows companies considerable security, as patents give a company a definite right to operate by restricting or eliminating competition in its business field.
This is possible as a patent gives a company what is called freedom to operate. This is because the granting of a patent creates a monopoly right in favor of the corporation that either owns the patent or has acquired a license to use the patent.
But this is limited to the extent of the technique patented by that particular patent. The monopoly due to the granting of a patent is, therefore, a limited monopoly. This is governed by the respective patent laws of the state that grants the patent. Such an award is not in perpetuity but limited to a fixed period of time. After such a term, the patent so granted lapses and is open to the general public. This right is created by the state as a kind of quid pro quo arrangement.
In return for giving the inventor the monopoly for the fixed period (currently the term of a patent as dictated by the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights (WTO-TRIPS) is 20 years), the state demands that the inventor should sufficiently disclose the invention to the extent that a skilled person in their relevant field can achieve the same results as disclosed in that patent application.
That means that patent law demands full disclosure of the technique/technology/process and product to be patented. Such disclosure enables further development of technology and science in the field in which the patent was granted. This is the quid pro quo deal with the state.
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This means the advantage generated due to the patent is only temporary. As a result, every company tries very hard to get as many patents as possible. Attempts are also made to prolong the term of the patent by filing applications with some modifications that, though minor, still qualify for the grant of a new patent. This practice is also called ever-greening. This is a kind of patent hoarding: an attempt to monopolize the relevant field for a longer duration.
This is not possible if a competitor is doing the same thing. In such a race, it is possible that you may end up compromising freedom to operate, as efficiency may be split between the competitors. As the corporations are in the same business area they may block the efficient exploitation of technology by simply having a patent, because the patent held by the other party cannot be utilized without the patent holderās consent.
This denial of a license to use the patented technology may stop the further development of technology or, as mentioned earlier, lead to an insufficient or inefficient exploitation of technology. Such a refusal may be motivated only by marketplace competitiveness, but it in long run it damages everybody in the market.
The refusal to license also leads to higher economic costs, longer development periods, and stalled growth of a particular sector. It also denies incremental advantages generated by newer patents that are based on prior arts (earlier patents). This happens as a patent generates two different kinds of rights for its holder. A patent gives the patent holder freedom to operate and also provides another form of right directed against othersāthe nonholdersāit is a right to deny. These two rights are joined, one leads to the other. It is double-edged sword. One edge protects you while the other is used to cut down the competitor. But the problem is the competitor may also be holding a similar sword or swords.
In todayās field of technology-rich businesses, where the complexity of technology is considerable, it is all the more possible and probable that technology is like a jigsaw puzzle; each corporation may be holding just one piece of the puzzle. This one piece allows them the right to deny but not does not provide them with freedom to operate. Only when all the pieces fall into place does one get the complete picture. As it is not possible to utilize this small piece of technology, the only option is to use it as a blocking right; that is, to create obstacles or hurdles in the competitorsā path.
Similarly, one piece also reduces the economic value of the blockage strategy, as it is all the more possible that your rival may try to circumvent your blocking strategy by developing a solution. This amounts to everybody in the market reinventing the wheel, simply because your rival has patented the wheel and is denying it to you. It incurs avoidable repetitive costs and time spent. It expends scarce resources and delays further development. It benefits nobody.
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As everyone reinvents same thing, the value of the first holderās patent is reduced to zero as the first patentee can no longer monopolize the market and restrict access. The only solace the patentee has is a kind of negative satisfaction in forcing their business rivals into an expensive race. But, in this race, the patentee loses valuable assets. The value of the patent that could have been leveraged as a money-earning source is now nil.
To overcome such maneuvering and the problems faced when one comes across fractionally held technology, companies devised a comparatively simple solution in an earlier era.
Cross Licensing
The competitors, overcome by business sense and an overwhelming desire for market dominance, called a temporary truce and shook hands. They accepted the dominant character of patents and agreed to share them by generating a cross license.
Such cross licensing comes in handy as it reduces costs. Research and development (R&D) costs can be prohibitive and also time consuming. The amount spent simply to overcome the patent-based denial may be disproportionate to its actual value.
To avoid this kind of scenario, corporations, realizing the high costs of competition, rationalized their approach and created some kind of cross-licensing deal. This allowed better utilization of their patents and also reduced their expenditure on repetitive R&D expenses.
Such cross licenses were a first step towards accepting the inevitable: the high costs of R&D and technology dominance. To somehow reduce the burden as all the rivals were in same business they created a new model of revenue neutral licenses.
Revenue Neutral Licenses
Revenue neutral licenses depend on a circular trading concept. All the business rivals license to each other all of their relevant patents for exploitation. They charge license fees to each other as a right-of-access to patents fee. This fee is a license fee that all the parties pay to each other.
However, in the case of ārevenue neutralā licenses, the amount of the fee charged is so structured that expenditure incurred towards acquiring licenses by any corporation in that particular group equals, more or less, the income generated by that particular corporation via its earnings from the right-of-access fees charged to other member corporations of that particular group. In short, income from licenses more or less matches the expenditure on licenses by the corporation, so the eventual cost to the corporation is zero. Therefore, the company effectively neither earns nor pays for the license to exploit the patents. The effective revenue generation from its own patent is zero as it equals the effective expenditure to secure licenses for other patents.
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This is possible in the case of business enterprises which share the same technology profile, or which show a higher level of technological development. It also demands that businesses have reached a plateau in terms of the technology available. In other words, this is not the sort of market where it is a case of the early bird catching the worm; rather, where the level of exploitation of resources is greater, the number of players in the market is higher. The market is fragmented and well distributed. This is the kind of market where there are clear leaders based on market dominance, and others who trail the leaders.
Such a market shows signs of a certain level of technological maturity as well. Alternatively, the market may be in a development phase, though not early development. The technology in question has reached a certain level or phase of development and is well spread. But the next phase of development is where race is, and such development gives only an incremental advantage.
In such cases, more than one corporation holds more than one key piece of patented technology. This restricts access to such technology, but, as there are multiple claims and multiple patents, full exploitation is not possible. These patents are also termed overlapping patents. That is, they are patents that deal with nearly the same subject matter or try to achieve the same end result, perhaps by using a different pathway. As a result of this, they have similar claims on subject matter. Thus these blocking patents can constitute a blocking strategy.
Such a scenario also creates another perceived threat: patent litigation. Such multiplicity of patents always increases the probability of patent suits trying to invalidate patents on grounds of ālack of novelty.ā Another more expensive kind of suit that is borne out of this is the suit of infringement.
These suits are an expensive pastime for any corporation to engage in. They are very expensive to fight. These suits lead to uncertainty in the business environment. It is like hanging a sword of Damocles over the business. Any loss due to losing is considerable. This creates a kind of patent race. Such a race benefits nobody.
To overcome this, in the first place, the idea of the cross license was born. This eliminates the ever-hanging, ever-present threat of law suits. It also reduces the costly and repetitive nature of R&D expenses and legal fees. It frees up the corporationās resources from the race to be deployed in a more useful kind of market development and useful research in technology.
The cross license, when issued for a multitude of patents by the patentee, becomes another feature called the portfolio license. Here the entire collection of the patenteeās patents is given in license in return for a fixed license fee.
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This portfolio license is rather an inexpensive solution compared to piecemeal licenses or licenses to separate patents. The only point of objection (for competition authorities) is that frequently corporations pass off useless patents as well allowing access to the key blocking patents or essential patents.
This kind of license structure reduces the cost of licensing and allows freedom to operate on a larger landscape. This kind of mechanism is favored in business areas where each corporation holds multiple patents with a small but significant technology advantage. Each patent is required to operate that technology, as it is like an interlinked chain. Such a portfolio of patents is of immense use to corporations while negotiating terms of cross licensing or even licensing.
Cross-licensing agreements normally prevent the license holders from challenging the validity of patents, as all are beneficiaries under the collective umbrella of patent protection. Such deals do away with the incentive to innovate as they may include some mandatory clauses regarding new technology developed independently. However, when we take a closer look from the point of view of competition law, such agreements resemble a clear kind of danger to vigorous business competition. They may be termed to be anticompetitive.
These agreements have all the ingredients of an anticompetition agreement. First of all, they bring the competitors together. They (the competitors) come together only for mutual security, thereby reducing or eliminating the legal threat they each pose to the other and to their patents. As patents form the lifeblood of corporations, the removal of the threat automatically reduces their incentive to innovate.
This reduction of incentive to innovate happens because, by cross licensing, the corporations stabilize technology competition, eliminating the need to innovate to stay ahead of their competitors. This reduces consumer choice. It also brings down the level of technology development in the relevant sector.
It also serves to foreclose new entrants to the same area, as such newcomers are technology paupers. As result of this, the newcomer finds himself facing a huge barrier or wall of denial. This happens as pre-existing players are not interested in upsetting the already-leveled playing field. By such arrangements, corporations end up having de facto noncompete and no-litigation arrangements in the field of technology.
The next step that worries competition authorities in such arrangements is cartel behavior, as it is only a small step away from this kind of patent-licensing mechanism, whether revenue neutral or not.
The only difference between this conduct and the market-sharing cartel is that it is led by technology arrangement or by means of technology sharing. However, according to competition law authorities, it smells of a technology cartel by creating blockages in the flow and development of new technology. This can be effectively called a technology cartel. Such behavior may deny new entrants the benefit of the cross-licensing mechanism for pre-existing patents. Such a denial will amount to reducing market competition and be injurious to consumers.
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This denial also damages competition, as all the competing corporations/market players may not be party to such an arrangement. Some may refuse to join or a few may form a competing patent-sharing cartel or cross-licensing structure.
Whatever the case, the stake holders in such arrangements are not going to be pre-disposed towards welcoming new entrants with open arms and a smile on their face. Such arrangements are actually an obstacle in the path of a vigorous competitive market in technology-led business.
Cross Licensing and the Migration towards Patent Pooling
The primary benefit of the cross-licensing concept is the reduction of costs and of the threat perceived by the corporations to their patent portfolios, as the fear of an expensive and unsettling patent litigation disappears under this scheme.
A second benefit which may also be called a primary benefit is a kind of co-operative activity under ...