Saturday, March 07, 2015

Bessen and Meurer on "the patent litigation explosion"

From --The Patent Litigation Explosion -- , 45 Loy. U. Chi. L.J. 401 (2013):

But unlike real property, where, say, few disputes arise over land boundaries after buildings have been erected, technology adopters do end up in court for investments they have made in allegedly infringing technologies.

Two different stories might explain the origin of these disputes. In one, the patent holder may not know about the infringer. In this "cheating" story, the technology adopter observes and imitates a patented technology, and may take steps to avoid detection. This behavior induces the patent holder to expend resources monitoring for infringement and, on the occasion that infringement is discovered, to expend additional resources on negotiating a license and/or on litigation. These costs effectively increase the cost of patenting, making patents less attractive, and thus ultimately reducing R&D incentives.

In the other story, the adopter develops its own technology and is unaware of another firm's putative patent rights. This kind of innocent infringement occurs because patent rights often have uncertain boundaries or questionable validity. Patents differ from real property where the boundaries of a plot of land and the validity of a title usually can be verified at little cost and with little uncertainty. In contrast, the validity of a patent may be challenged and firms often have difficulty determining whether a technology infringes the boundaries of a patent's claims. Indeed, even district court judges have difficulty determining the boundaries of patent claims - 30-40% of their claim interpretation decisions are reversed on appeal. n6 In addition, the sheer number of patents facing a typical innovator makes careful assessment quite burdensome. Furthermore, patent claims are often hidden (sometimes strategically) until after firms have sunk technology investments.

We call this the "exposure" story, because the more that firms invest in technology, the more they are exposed to the risk of a patent dispute. These disputes yield litigation or licensing under the threat of litigation, and sap rents from innovative firms. The reduction in rents relative to a situation with clearly defined and certain property rights can be viewed as the cost of patent disputes. This cost reduces innovators' incentives to invest in R&D.


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