By: Alexandra Li
Edited By: Cynthia Huang
Every person interacts with some form of intellectual property every day. From the components of a smartphone to a logo on a shirt, ideas, inventions, symbols, and other substances are protected by intellectual property law. Intellectual property specifically in the forms of inventions and processes is protected by patents, an exclusive right granted for a development, protecting the innovator from having their invention produced, used, or sold without permission.
A good patenting system should encourage innovation by giving inventors financial motive, generating interest in investment in research, and stimulating overall innovation. However, the manipulation and profiteering of the current patent system has transformed patents into an anti-competition tool for corporations to increase their market share, often pushing the true goal of patents—to boost overall innovation—out of focus. Today, at the forefront of the patent and antitrust conversation are three key concerns: private patenting arrangements, patent quality, and quality of patent litigation. The aforementioned factors, when exercised and addressed incorrectly, have the potential to pose antitrust concerns harmful to innovation and the economy.
The Problem with Anti-Competitive Markets
With the elimination of competition, surviving corporations do not have to focus on making the best product at the best price possible; instead, their enlarged market share increases their chances of monopolization, allowing a higher hold on pricing. This pushes consumers to bear inflated prices and slows innovation due to a lack of financial incentive to invest in research and development (R&D).
A dearth of competitive forces lesser enforced antitrust practices as well, a pressing issue of the last century. While the number of antitrust cases has decreased dramatically in recent decades: from 1970-1979, there was an average of 6.2 oligopoly and monopoly enforcement cases, only 1 was filed in over the past ten years ("Antitrust Division," "Antitrust Division"). From 1970-1979, there was an average of 267.1 Sherman §1 (restraint of trade) investigations annually, while this number was a mere 39.4 investigations annually from 2010-2019. Civil non-merger actions and Federal Trade Commission (FTC) non-merger antitrust enforcement actions saw similarly dramatic declines in recent years.
When Myriad Genetics patented two genes, BRCA1 and BRCA2, linked to breast and ovarian cancer, their patents allowed them to restrict other institutions from using and studying the genes. While the testing conducted by Myriad on breast and ovarian cancers benefited some, the hefty $2,400 price tag deterred many, with only 22% of self-pay patients opting for testing (Cook-Deegan, Kieran).
When the Supreme Court in Association for Molecular Pathology v. Myriad Genetics, Inc. suspended Myriad Genetics’s patents on the basis that genes are unpatentable, five other labs started offering to test that day, ending Myriad Genetics’s “gene monopoly” (Park). The added competition did not negatively impact innovation or drive investors to take back their funds. Instead, it increased R&D, quality of testing, and expanded testing availability.
Antitrust cases like Association for Molecular Pathology v. Myriad Genetics, Inc. protect consumers by protecting competition and innovation. But what is a healthy level of competition? And how can patents be assessed for their “pro competitiveness?” It can be difficult to tell when a patent blocks competition and innovation as the very definition of a patent, an individual monopoly held over an invention, blurs the already slim line between when patents do and do not violate antitrust law. This, coupled with the variety of networks, arrangements, and situations patents are used in and low levels of antitrust enforcement, give rise to patents that, instead of being beneficial, create a negative impact on society and the economy as a whole.
Private Patenting Arrangements
Every year, hundreds of thousands of patents are filed and three quarters are approved (Adam, Lemley). Today, companies, particularly in technology sectors, have amassed massive patent portfolios; for instance, there are an estimated 250,000 patents per smartphone. The sheer number of patented components in each product makes it, in certain industries, virtually impossible for inventors to launch a product without facing the risk of patent litigation on grounds of patent infringement ("Form S-1").
To compensate, companies ally themselves by sharing their patents in private arrangements. Cross-licensing, which licenses two or more parties to use patented (or copyrighted) material in exchange for a similar license, and patent pools, where two or more patent owners agree to license a patent or patents to one another or additional parties, are common examples of such private arrangements. Private patent arrangements are widely used among many industries, with one study estimating that “cross-licensing accounts for 50% of all licensing arrangements in the telecommunications and broadcasting industry, 25% in the electronic components sector, and 23% in the pharmaceutical industry” (Jeon and Lefouili).
Conducted with consideration to antitrust law and without the intent to hurt competition, cross-licensing and patent pools have a multitude of pro-competitive benefits on both corporate and economic levels. To corporations, such arrangements nullify the risk of patent litigation by clearing blocking patents, or patents that would cause other inventions to infringe on the earlier patent, while simultaneously allowing for more efficient R&D. In particular, pooling two-way blocking patents, or patents that would otherwise require licenses from one another to be practiced, have pro-competitive benefits that allow for more efficient production and development of a product. Many companies have broad cross-licensing agreements and patent pools, with Apple and Microsoft having broad cross-licensing arrangements from as far back as 1997, Google and SAP having long-term patent cross-licensing agreements on product and software patents, and Google and Samsung having arrangements lasting until 2024 (Jalfin).
Cross-licensing, on occasion, can create a barrier for industry newcomers by blocking access to patents that, in some cases, are essential to businesses, hindering innovation and eliminating competition, but patent pools containing substitute, or competing, patents generally pose a larger antitrust concern. While complementary patent pools, pools consisting of patents that must be used together to create a certain output, generally have recognized benefits, including increased efficiency of innovation and ability to clear blocking patents, pools consisting of substitute patents pose antitrust concerns by allowing the patent holders to consolidate their market shares, eliminate competition, and even, in more extreme instances, collude to create a duopoly (or oligopoly) allowing the setting of setting monopoly prices on an originally competitive market, such as Pillar Point Partner’s restrictive patent pool on laser eye surgery techniques (Carlson 338). Licensing restrictions and lack of incentive for R&D are among substitute patent pools’ antitrust concerns as well. Smaller competitors, facing such a scenario, must navigate their way through thousands of patents, sometimes including blocking patents, to avoid infringement (Takenaka). It should be noted, however, that in some scenarios, such an arrangement would still be more beneficial than none at all, with one study noting that “even if firms produce substitutable products, the outcome of full cooperation in the input market can be superior to the outcome of no agreement at all” (Jeon and Lefouili 25).
Cross-Licensing and Patent Pooling Reform
Analysis of courts’ decisions on antitrust cases featuring cross-licensing and patent pools found that the largest determinant in antitrust review of patent arrangements was the presence of restrictive licensing terms and that the Department of Justice (DOJ) often fails to accurately determine what kind of patents are involved within the pool. Measuring the degree of substitutability of patents within pooling arrangements (whether patents were one-way blocking, two-way blocking, or substitute), it was found there was “essentially no relationship between cases that violated the antitrust laws and the degree of patent substitutability,” with there being a mere 0.2 difference in index between cases that were held to violate and were not held to violate antitrust law (Gilbert). Meanwhile, when analyzing the presence of restrictive downstream licensing terms in a case, a large difference was found between cases deemed to violate and not violate antitrust law, with the average score being 0.3 for cases that passed review and 2.6 for those that did not, a statistically highly significant difference (Gilbert).
Rather than focusing on the extent of licensing restraints on downstream products, concentrating on the examination of the competitive relationships between the patents within a pool paints a better picture of the true extent of the patent pool’s influence and legality. While the Department of Justice’s (DOJ’s) focus on licensing restraints shows arrangements’ downstream effects, such analyses can fail to wholly address whether the agreements in question prevent competition that would have happened in their absence. In substitute pools, the risk remains that competition is eliminated among licensors to increase royalties regardless of the presence of restrictive licensing terms, but still would be beneficial in output and innovation. In this scenario, a more economically analytical approach would be able to more objectively and accurately weigh the benefits and shortcomings of the arrangement and come to a conclusion more inclusive of both of these possibilities (Gilbert).
Patent Quality
The number of patents granted has increased exponentially in recent decades, from growing less than 1% annually from 1930-1982 to 5.7% in recent years ("Too Many Patents"). On average, the average patent examiner spends a mere eighteen hours examining patents, in which they conduct a review of the original application, research relevant inventions, talk to the inventor and their attorney, and make a final evaluation of the invention (Lemley). In one study conducted by the University of San Diego, it was found that some 28% of all patents were either partially or completely invalid, according to the requirements of the Patent Act, with this estimate being as high as 39-56% for software and business methods (Jones). Some other estimates suggest that as much as 90% of prominent high-tech companies’ portfolios contain dubious or invalid patents (Berman). With this rapid growth in patents and the size of patent portfolios, patent quality has been pushed into the forefront of patent politics.
Generally, definitions of patent quality focus on its validity (patentability and likeliness to be upheld in the face of litigation) and valuation (driven by supply and demand), but valuation and validity do not correlate to the innovativeness of the patent. An innovative patent can be worthless if it has no real-life application or revenue-generating potential, while an invalid patent with no innovation can derive value from its giving the patent owner the right to sue. Thus, establishing criteria for patent quality is difficult, highly individual, and often uses subjective opinion. While programs like USPTO’s inter partes review have tried to reduce the complexity and arduousness of analyzing, limited success has been found (Berman).
Patent Quality Reform and Quality of Litigation
The basis for concerns surrounding patent quality comes from the argument that poor patent quality poses a threat to competition by having invalid, vague patents used as the basis for patent infringement lawsuits, wrongly implicating and damaging businesses, and hurting the integrity of the patent system. While the quantity and quality of patents have become a great concern, ultimately, most low-quality patents do not hurt markets as by filing patent lawsuits, with one study finding that 46% of litigated patents being invalidated, making litigation risky for the underlying patent (Allison & Lemley). Other studies have similarly found that “lack of invention” led to most litigated patents being held as invalid across regional circuits, leading to only 35% of litigated patents being held to be valid (Koenig).
Since most low-quality patents cannot be used on the grounds of patent litigation and simply do not generate profits, patent offices should focus their resources on important and potentially bad patents that derive value from their usability in court in patent infringement claims instead of posing new regulations and restrictions, as doing so could ultimately make markets more anticompetitive by increasing the price of R&D, deterring new entrants. Patent offices should focus on increasing due process and creating explicit and established goals for patentability and patent validity.
Any new legislation must strike a careful balance between regulation and patent freedom by focusing on the proportionality of increased patent quality from increased regulation to the cost of such regulation, including loss of competition and larger entry barriers. By explicitly weighing the benefits and losses of new legislation through the proportionality principle and greater clarification and enforcement of due process, patent law will be clearer and will reduce anti-competitive practices by restricting harmful litigation arising from patent infringement claims based on invalid patents without creating new entry barriers.
In addition to patent quality, practices like patent trolling, where patents are bought to sue others on the basis of patent infringement, have been pushed into the spotlight. Patent trolls do exist, usually in the form of non-practicing entities (NPEs), relying on small, quick settlements to compensate for the high cost of litigation. However, litigating patents often puts the patent at risk for invalidation, and thus, the majority of NPEs look for high-quality patents that can remain in the face of litigation to bring in profits (Berman). According to one study, NPEs accounted for only 21% of software-related patent suits and only 9% of hardware suits (Chien). Overall, NPEs very rarely win their cases, with NPEs only winning 8% of cases and 9.2% counting default judgments, compared to 40% and 50% in product-producing companies, respectively (Allison et al.).
Though patent trolls are less widespread than often reported, addressing and prohibiting patent-trolling and similar practices will protect the integrity of the patent system and help restore healthy levels of competition among various markets. Patent litigation is expensive: as of 2020, patent litigation can cost as much as $4 million (Krajec). Because of this expensiveness, victims often decide to settle, rather than pursue further legal action, to save costs. Adding transparency to legal systems by requiring plaintiffs to post a bond at the beginning of their case and requiring plaintiffs to prove exactly what they are suing upon and informing defendants of every benefactor from the case would protect inventors by exposing patent trolls’ often anticompetitive intentions before patent litigation cost inventors millions.
The Importance of Public R&D Investment
As per the Bayh-Dole Act of 1980, inventions arising from government-funded research gives the government a “nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world” regardless of the degree of investment commensurate to the invention, while allowing inventors, including large corporations, to retain ownership (35 U.S.C. � 202(c)(4), "Intellectual Property Policy").
Government investment in R&D fuels innovation by allocating resources for organizations in need while also funding research in areas corporations would otherwise not engage in. In addition, federal funding encourages the discovery of new inventions in the private sector, with one study conducted in the NIH showing that “a $10 million boost in NIH funding leads to a net increase of 2.3 patents” and another showing that around a third of U.S. patents rely on government-funded research (Azoulay, Fleming). Similar incentives, like R&D tax incentives and direct government support, have been shown to boost innovation (Westmore).
However, despite federal R&D funding’s established benefits, government funding in proportion to GDP has declined since the 1970s. Government and private-sector interests are often not in alignment, as while the government seeks to protect the consumer, the private sector seeks to generate the maximum profit possible. Because of this disagreement and the expensiveness of R&D, the attempted “technology transfer” of the 1970s-1980s failed to generate the same pace of R&D as with government funding ("Federal R&D"). The failure resulted from private corporations’ appropriating funds to maximize profit. Thus, lack of federal research funding continues to cause an imbalance favoring corporate interests over research in the interest of consumers ("The Government's").
Having greater federal funding of scientific and technological research is indirectly pro-competitive by clearing future blocking patents while also boosting overall innovation. Because of the Bayh-Dole Act, instead of an exclusive license to the inventor, government-funded patents are also licensed to the government, introducing the government as a competitor in the market. This, however, is a concern to inventors (mainly those who do not do much government contracting) as government involvement in the market could potentially damage their market share or profitability.
Conclusion
Patents are essential components of today’s economy that, when functioning properly, encourage innovation, competition, and ultimately bettering the lives of society as a whole. However, the increased number of patents on increasingly complex, and often abstract ideas, along with larger and more intricate private patenting arrangements among the private sector have raised several antitrust concerns in recent years. Government action and reform must be taken to ensure that the current patent system adapts to a changing world, maintaining its integrity and validity and taking a more holistic approach to patenting and antitrust concerns.
Action to change the patent system should focus on reconfiguring the balance between the DOJ, private industry, and patent office, as in recent decades, the patenting system has been skewed in favor of the private sector, which has overburdened and misused the patenting system for anti-competitive practices. For instance, the DOJ’s overall tendency to focus on licensing arrangements rather than the substitutability of the arrangement in cases involving patent pools and other arrangements can fail to accurately address whether the relationship, by its nature, is a violation of antitrust law. By encouraging investigations to take a more complete and economic approach, cases can be more accurately investigated with more impactful addresses. In contrast, the focus on patent quality has largely been inflated, as data proves that the majority of “bad patents” are not an antitrust matter. Patent quality issues do exist and should be addressed, but they should not take top priority in the adjustments of the patenting system.
The current patent system, while supporting many new inventions every year and creating a more innovative economy, has several flaws. In this rapidly evolving world with new, rapidly evolving technologies, the policy and framework surrounding intellectual property protection must adapt to facilitate a more competitive and more efficient economy.
Comments