Patent Thickets and Idiosyncrasy of Patent Strategy

Patent Thickets and Idiosyncrasy of Patent Strategy
2
LIU Lin-qing1, ZHAO Hao-xing
1.Institute of Business Strategic management, Wuhan University,P.R.China,430072
2. Zhejiang Normal University, Jinhua, P.R.China,321004
Abstracts: This article took the phenomenon of patent thickets as the start point and main clue of
research, and inquired the patenting motives in the context of Complex Product and Systems
(CoPS) ,and then set up a new conceptual frameworks of patent strategy by analyzing the Idiosyncrasy
of patent’s competitive advantage.
Keywords: Patent Thickets, Patent Strategy, Patent attitude
In a knowledge economy, the knowledge assets built and owned by firms are vital for commercial
success. Intellectual property assets like patents constitute an important category of these knowledge
assets, and are therefore of substantial interest to modern corporations. Patents cannot be left to
technology managers or corporate legal staff alone, but must be a matter of concern for most senior
officers during the formulation of corporate strategy. Patents not only are the tool of the technique
safeguard, but the weapon of helping a company gain competitive advantage. But, the research of
patents has been traditionally the field of economists and jurists for long time, while studies form the
view of the management science, especially the patent strategy got heavily behind with the business
practices. Doesn't the patent strategy deserve researching? Therefore, this article took the phenomenon
of patent thickets as the start point and main clue of research, and inquired the patenting motives in the
context of Complex Product and Systems (CoPS) ,and then set up a new conceptual frameworks of
patent strategy by analyzing the Idiosyncrasy of patent’s competitive advantage.
In this article, the definition of patent strategy should be taken firstly. The property rights embodied
in patent are created y law and implemented by agencies (e.g. patent of offices) and the courts. Since the
domain of industrial innovation and global competition to which these rights are applied is both
complex and constantly evolving, these rights are often modified over time, as well as being applied in
the specific context of each new technological invention. Thus, there is a substantial element of
“non-market” strategy in patents (Somaya, 2002). While at some level all patent strategy is non-market
in nature, a conceptual distinction can be drawn between strategies that seek to shape patent policies and
institutions(e.g. national patent strategy, regional patent strategy), and those that primarily operate
within an existing non-market environment in response to market imperatives(e.g. industrial patent
strategy, corporate patent strategy).While acknowledging the importance of the non-market perspective
in patents generally, the rest of this paper will focus primarily on patent strategies of the latter type – i.e.
where the role patents play in commercial market success is center stage, operating within a largely
exogenous non-market context.
1
Patent thickets and patent paradox in the context of CoPS
Doesn't the patent strategy deserve researching? In the field of management, researchers took
patents only as one of legal results of the R&D , thus patent strategy always belonged to the R&D
strategy and couldn’t be studied independently. Therefore, traditional patent race models presented a
picture where patents provided strong incentives for innovation because the winner of the innovation
race was also the winner of a patent and thus gains monopoly rents. But there was a basic assumption in
those models that an innovator wins the only patent covering a product (Bessen, 2003). This assumption
of a one-to-one correspondence between products and patents is suitable for discrete inventions, but too
simplistic in the context of CoPS. In particular, when technologies are complex and patents are uncertain,
patenting and the performance of R&D become two distinct, but related, activities.
Scientific progress is cumulative process. As Sir Isaac Newton put it, each scientist “stands on the
shoulders of giants” to reach new heights. Every invention veritably builds on many previous inventions.
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This kind of accumulative innovation seems to build pyramid. Of course, a pyramid can rise to far
greater heights than could any one person, especially if the foundation is strong and broad. But most
basic and applied researchers are effectively standing on top of a huge pyramid, not just on one set of
shoulders. In order to scale the pyramid and place a new block on the top, a researcher must gain the
permission of each person who previously placed a block in the pyramid, perhaps paying a royalty or tax
to gain such permission. To complete the analogy, Shapiro describes these patents as blocking patents.
Newberg notes that the “connection between blocking relationships and innovation bears emphasis
because what is paradigmatically ‘blocked’ in a ‘blocking’ relationship among patents is the practice of
an innovative, patented improvement upon an existing patented invention” (Newberg, 2000).In addition,
there also exists complementary patents which cover technologies which complement each other by the
use of one making use of the other more valuable. They result when inventors independently patent
different components of a larger invention. For example, patents that cover the manufacture of pen
refills and patents that cover the manufacture of the outside pen structure can be viewed as
complementary. The patents are not substitutes for each other because they perform totally different
functions. For complementary patents, access to one patent increases, rather than decreases, demand for
the other. In the absence of cooperation, the effect can be that a product is blocked and prevented from
development. Because of the existence of the blocking and complementary, further innovation might be
thwarted. The situation can be described as a patent thicket, a dense web of overlapping intellectual
property rights that a company must hack its way through in order to actually commercialize new
technology. With cumulative innovation and multiple blocking patents, stronger patent rights can have
the perverse effect of stifling, not encouraging, innovation (Shapiro, 2001).
In addition to patent tickets, patent paradox is also interesting. The standard justification for the
existence of patent protection is that patents are necessary to solve an appropriability problem that
would otherwise plague the production of innovative products and processes. For the appropriability
story to hold, patents must be shown to be an effective means of capturing value. In otherwords, patent
protection must be valuable for inventors. But several survey evidence suggests that firms in most
industries haven not increased their reliance on patents for appropriating the returns to R&D over the
decade of the 1980s,and consistently reported that patents were among the least effective mechanisms
for appropriating returns to R&D investments(Levin et al. 1987;Cohen et al.,2000).Meanwhile, Kortum
and Lerner (1998) demonstrated that an unprecedented surge in patenting in the United States
unaccounted for by increases in R&D spending alone in the late 1980s and early 1990s, that is the
intensity of research effort leveled off while patenting rates continued to climb. These phenomenons, of
course, raise the obvious question—why are so many firms obtaining so many patents? if patents have
value, where does that value lie? If firms in most industries do not rely heavily on patents to profit from
innovation, then why are they patenting so aggressively? We refer to this puzzle (as do others) as the
patent paradox: patent intensity—patents obtained per research and development dollar—has risen
dramatically even as the expected value of individual patents has diminished.
Because of phenomenon of Patent thickets and patent paradox, the mechanism of promoting
innovation through patent system couldn’t operate efficiently. With the development of research on this
problem, we found the patenting motivation of corporate has being changed in this context.
2
Transferring Patent attitudes from supply- orientation to demand- orientation
At first glance, some firms seem to behave irrationally with regard to patents. Consider Oracle
Corporation, the software firm that has developed leading, innovative database management systems
since 1979. Oracle could have obtained a large portfolio of patents on many of its well-known
innovations, but chose not to. Although patents have been issued on database techniques at least since
the early 1970s, and especially since 1990, Oracle did not obtain its first patent until 1995 and acquired
only 161 patents during the 1990s. This was a conscious strategy as described by Jerry Baker, Senior
Vice President of Oracle: “Our engineers and patent counsel have advised me that it may be virtually
impossible to develop a complicated software product today without infringing numerous broad existing
patents. …As a defensive strategy, Oracle has expended substantial money and effort to protect itself by
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selectively applying for patents which will present the best opportunities for cross-licensing between
Oracle and other companies who may allege patent infringement. If such a claimant is also a software
developer and marketer, we would hope to be able to use our pending patent applications to
cross-license and leave our business unchanged” (USPTO Hearings, 1994).
Like Oracle, these corporate neither aim to assert patents against (non-suing) competitors, nor do
they license all patents that they might possibly infringe, in the hope that other firms will follow a
similar strategy. Such a strategy of “mutual non-aggression” or “mutual forbearance” was also common
in the early semiconductor and computer industries. In contrast to Oracle, which views cross-licensing
as an unfortunate last resort, other companies aggressively seek to build large patent portfolios and to
use them to extract benefits from competitors. For instance, IBM acquired nearly one hundred times as
many patents as Oracle during the 1990s although IBM’s R&D budget is only about five times as large
as Oracle’s. IBM expresses their strategy this way “The IBM patent portfolio gains us the freedom to do
what we need to do through cross-licensing —it gives us access to the inventions of others that are key
to rapid innovation. Access is far more valuable to IBM than the fees it receives from its 9,000 active
patents. There’s no direct calculation of this value, but it’s many times larger than the fee income,
perhaps an order of magnitude larger”. (Smith, 1990) Note that IBM now earns nearly two billion
dollars per year in royalties. Such aggressive strategies are expressly patent portfolio strategies—firms
interact over entire portfolios rather than over individual patents.
Instead of licensing carefully chosen individual patents—as in most of the economics literature on
licensing—firms in semiconductors, electronics and computers negotiate based on the relative heights of
their stacks of all related patents, and they license entire portfolios for a technology field, including
patents for which they have not yet filed applications (Grindley and Teece, 1997, Hall and Ziedonis,
2001).This finding confirms what was already observed with the Carnegie–Mellon survey (Cohen et al.
2000), i.e.firms patent for many more reasons than merely protecting their intellectual capital from
imitation. Applying for a patent is indeed a strategic decision that is not only driven by the desire to
protect innovation rents (e.g., Teece 1998; Rivette and Kline 2000; Sherry and Teece 2004). A patent is
also a highly valuable tool for technological negotiations with competitors or with potential
collaborators, for the exclusion of rivals from a particular technological area, for licensing agreements
and attraction of capital, for avoiding to be blocked by competitors’ patents, and for building
competitive advantage (e.g., Parr and Sullivan 1996; Teece 1998; Glazier 2000; Reitzig 2004).
Furthermore, the shift of motivation for patent application actually implicates a shift from
supply-orientation to demand- orientation in perspective of a company’s view on patent. The implication
of this shift is quite similar to the conversion of product-orientation to market-orientation in marketing.
In retrospect of the evolution of ideas on business management, it can be easily seen that a shift from
self-orientation to customer-orientation has been penetrating into every aspects. To demonstrate the
far-reaching impact and importance of such kind of change, the author will quote different phases in
marketing progress as an illustration. The fore-runner of marketing theory-Philip Cotler (1998)
summarized ,in his famous book Marketing Management, five phases in the process of marketing
production orientation, product orientation, sales orientation ,market orientation and social marketing .In
the phase of production orientation, the main focus was mass production in order to attract customer by
lowering prices. Product concept emphasized the improvement and consummation of the product quality.
With the development of social production, the efficiency of manufacturing has been greatly enhanced
consequently. Therefore, a buyer’s market began to emerge, which inevitably resulted in keen
competition among companies on sales. Then, the sales concept laid its focus on various kinds of selling
and promotion measures to stimulate and persuade customers to buy more. The mutual characteristic of
above three concepts is that the company employed economic forces to gain profits by “spurring”
customers. However, the usual result went contrary with their wishes and many company ended with
overstock. In the mid 20 century, the prosperity of market concept catalyzed the company’s shift from
production orientation product orientation to customer orientation. The objective of marketing is to
identify the exact needs of target customer groups and then organize the production according to them.
The popularization of such concept is mainly because it lives up to the principle of approaching
the success with a definite and clear goal. With the help of this concept, the efficiency of resource
——
、
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allocation and utilization has been substantially improved.
Research
Strategy
Production
Technology
Marketing
Product
Patent Market
Purchase & license
Customers
Sale & license
Patent
Research
Patent
Patent
commercialization
defensive,
alliance strategy
Figure 1:Focus shifts from research to patentSources: Personal analysis
As the figure 1 shown, the integration of research, production and sales is the traditional
operational mode for a company. Under such operational mode, all the business activities are organized
to provide “needed” products or services to customers. So a visible hand “strings” and coordinates
research, production and sales harmoniously. The purpose of research activities is to design products
that can satisfy customers’ need. And patent protection is only an assistant process, especially when the
research result is not patented but only becomes the company’s confidentiality. However, in the context
of complex product and systems and patent policy proneness, whether a company can possess or utilize
patents legally becomes the crucial issue for free design and production. Thus, nowadays patent
acquisition and utilization has already become an indispensable process for companies, especially for
hi-tech companies, and also a new goal for companies’ research activities. Otherwise, even if a research
has been accomplished, the new technology can not be used in the production process smoothly.
The superiority of the shift of a company’s view on patent from supply orientation to demand
orientation is obvious. Compared with demand orientation view on patent, the drawbacks of supply
orientation are as follows:
1) Similar to product orientation in marketing, supply orientation will easily trap a company into
egocentric researches. Usually, under this principle, companies lack a macroscopical analysis on the
patent developing trends and needs in the whole patent system. Hence, some new knowledge gained
from researches may probably have already been patented by others. Even if the company has obtained
patent ultimately, it can be only counted as an innovation nominally which only enlarges the patent
supply but has no economic value because it is redundant. Only those market entries do make economic
sense, which can be regarded as real innovations. Which innovation will enjoy a bright future? Recent
researches show that an analysis on patent citation before implementing research activities will greatly
increase the probability for success. Some scholars have put forward the ideas to establish research
procedures for patent tendency to aid the analysis on patent trend.
2) As the figure 1 shown, in the context of complex product and systems, to acquire the legal right
to utilize patents is extraordinarily important. But relying only on the internal channels of company
researches is far from enough because of the limitations on time, resources and abilitly. So on one hand,
only relying on internal researches is impossible and on the other hand, it is also unnecessary.
Companies can acquire Patent Sourcing by merger and acquisition or patent licensing. These two
channels are also the main dimensions of a company’s patent strategy. The diverse functions and diverse
sources of patent make PATENT, instead of RESEARCH, become the focus of a company’s activities.
3
Idiosyncrasy of Patent Strategy
From an economic perspective, the crucial features of patents are that (1) they deal with new
knowledge, as embodied in an innovative product or process, and (2) they confer (limited) monopoly
rights to the inventor. New knowledge that makes possible the production of new products and/or
processes obviously carries considerable economic value, but it has features that make it problematic for
the market system to handle properly (Arrow 1962). Specifically, knowledge is a quintessential public
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good. Pure public goods have two basic attributes. First, they are non-rival in consumption, meaning
that a person’s use of a public good does not affect the amount of it that is available for others. Second,
they are non-excludable, meaning that it is not possible to prevent individuals from enjoying the public
good once it is available. An example of a pure public good is national defense. It is clear that, absent
intellectual property rights, most discoveries and inventions would exhibit public good attributes.
The problems that a competitive system has with public goods are readily apparent. An inventor
may bear all the cost of an innovation, but everyone benefits (possibly to varying degrees) from a
discovery, and thus everyone has an incentive to free ride on the innovative efforts of others. The
inherent externalities associated with this class of public goods generate a market failure: a competitive
market system may be expected to provide an inefficiently low level of innovations. Intellectual
property rights in general, and patents in particular, address this problem by attacking the
non-appropriability of knowledge that lies at the heart of this market failure. Specifically, by endowing
innovators with property rights on their discoveries, patents are a legal means of affecting the
excludability attributes of an otherwise pure public good.
The patent system entails a fundamental trade-off— inventors are given a monopoly position
(which entails inefficiencies) in order to provide them with incentives to innovate (which carries
economic benefits). In other words, the dynamic efficiency of encouraging invention leads to static
inefficiency created by a monopolistic situation. Given that, a natural question to ask is, what is the
optimal degree of patent protection? The degree of
Height
market power provided by a patent essentially depends
the
competition
advantage of the on three elements: the length (duration) of the patent, the
breadth of the patent, and the height of the patent. We
patent
analyze these features of patent protection for the case of
a single innovation first, and consider the issues related to
cumulative innovations later on. The market power of
Length
patent essentially depends on three elements: duration of
the monopoly power, the scope of a patent and the height
of patent (scherer, 1972; Langinier& Moschini, 2002).
The patent system provided a series of institutions on
Breadth
these three elements to balance the interrelationship
Figure2:The scope of patent advantage
between the innovation and monopoly (see figure 2).
1) Duration of the monopoly power
Sources: Personal analysis
The length of the patent determines the duration of
monopoly power that a patentee can expect and thus affects the static inefficiency as well as the
incentive role of patents. The benefit to the innovator increases with the length of the patent. But from
society’s point of view, too short a patent may dissuade research, whereas a patent that is too long may
give excessive rent to the owner and may block further improvement. The optimal patent length must
now balance the social gain from the innovation due to a larger reduction in cost and the social loss
associated with a longer delay in the exploitation of the innovation by rival firms(Nordhaus ,1969).
2) The scope of a patent
Whereas the length of the patent protection characterizes the duration of the monopoly power, the
scope of a patent bears on the intensity of the induced monopoly power (Merges and Nelson 1990). The
breadth of a patent defines the range of products that are encompassed by the claims of the patent and
therefore protects the patent holder against potential imitators. In general, the less specific the claims of
the patent are, the broader the patent. The height of a patent, on the other hand, confers protection
against improvements or applications that are easy or trivial. The value of a patent to a firm depends on
how effective its protection is in these two dimensions (breadth and height), in addition to being related
monotonically to the patent length.
Unlike its maximum length, which is fixed by law, patent breadth is, to a certain extent,
endogenous. Patent breadth depends on the claims put forth by the patentee and also is a feature over
which the patent office has some discretion (at the examination stage).Clearly, a reduction in the breadth
of patents would induce more competition (e.g., imitation), which benefits consumers. But too narrow a
625
patent reduces the incentive to innovate. What is the optimal breadth for patents? Economic analysis
suggests two kinds of results in this setting. Narrow and long patents can be found to be optimal because
broad patents are costly for society in that they give excessive monopoly power to the patent holder
(Gilbert and Shapiro 1990). Central to this conclusion is that the flow of payoff from holding a patent
has a negative impact on the social surplus. Thus, a minimum level of flow of payoff (breadth), with
duration adjusted accordingly, would be socially optimal. In Klemperer’s (1990) more general model,
both narrow and long, or broad and short, patents can be optimal, depending on the structure of demand.
Broad and short patents can also be optimal when they discourage imitation and thus enhance the
incentive to innovate (Gallini 1992). Specifically, imitation is discouraged when it is too costly (broad
patent) and when imitators do not have enough time to enter the market.
3 The height of patent
It referred to as the novelty requirement, also called “height” (van Dijk 1992) or “leading breadth”
(O’Donoghue, Scotchmer, and Thisse 1998). Competitions from follow-up innovations are clearly
affected by the height of the patent, and too high a patent gives excessive monopoly power to the patent
holder. As for the interaction between height and duration, La Manna (1992) shows that a patent of
infinite duration and finite height can e optimal.
In my opinion , the monopolization and innovation which patent system has to face the paradox ,
makes the competition advantage of patent hold the nature of many kinds of rent and space-time unique
(see figure 2) , and also has brought up the multi-dimension and complexity of patent competition. This
has not merely stressed the necessity and importance to launch the study on the patent strategies, and
also offered enormous space and abundant theory source for the fact that patent difference strategy is
designed.
Obviously, such make positioning the core of patent strategy. When it comes to patent strategy,
offensive and defensive strategies are usually mentioned. But their preconditions are the same---a
correct insight into position. Actually, it is a tradition to focus on the position in the strategic researches.
Michael Porter, a representative of position schools, has pointed out that strategy is positioning. And in
the author’s opinion, taking the concept of “patent niche” as the core of the framework of patent strategy
will be more appropriate. When we view patent from the perspective of social network, it can be easily
found that patent system is actually a patent network in which the nodes signify patents and
technological ties refer to patent citation (Jaffe, 1993). Every innovation is an egocentric niche, which is
symbolized by a niche entry or niche emergence in the network. Compared with the traditional theories
of positioning, the advantage of “patent niche” is that it emphasizes the way in which a position in a
network constricts its strategy. Firstly, the management and time limitation on the existing patent to
some extent confine the future direction of patent application. Secondly, position not only depends on
the actor’s own deeds, but also the actions of other actors, including competition and cooperation, rather
than only competition in the traditional strategic theories.
）
Patent culture
patent strategy design
Analysis on the
existing patents
internal resources
·portfolio
·commercia
lization
·license
Utilizing
Organizing
Litigating
·Franchise ·Time
·Factors
·Integration ·Content
·Enforceme
·Alliance
nt
Position and Portfolios
626
Performance
assessment
Analysis on the
Acquiring
Implementation
Patent niche
Aims
and
princi
ples
·Purchase
·Franchise
·R & D
·Alliance
Figure 3: New Conceptual frameworks of patent strategySources: Personal analysis
As the Figure 3 shows, on the basis of traditional framework of strategic management, the author
puts forward a framework of patent strategy, which regards patent niche as a core. Now that the concept
of patent niche is viewed as a core, the precondition is inevitably a way to position correctly. And this
depends on an analysis on the existing patents. A visible “patent atlas” is an effective tool to present the
space-time unique of patent and their relationships clearly. It is also indispensable for designing the
patent portfolio patent alliance to implement patent strategy. Not only that. Some Japanese enterprises
even regard patent analysis as a learning strategy, which is a crucial force to propel the establishment
internal patent culture (Pitkethly, 2000).
、
4
Conclusion
In the context of complex product and systems, the emergence of patent tickets, patent paradox and
so on shows that the companies have shifted from supply-orientation to demand- orientation. Patent has
been laid more and more emphasis and has become the focus of competition. Therefore, some strategy
researches on patent system will not only complete the theoretical absence, but also meet the urgent
industrial needs. Furthermore, the limitation of time and region on monopoly results in the existence of
complementary and blocking patents, which is the internal reason for the phenomena of patent tickets.
From the perspective of strategic management, such mechanism actually set a scope concerning time
and region for the competitive advantages of every patent. And this makes position a core for patent
strategy. What the author explored in the thesis, especially the emphasis on the potentiality of the
concept “patent niche” is only an initial step. Many problems deserve further and deeper research in the
future, such as the recognition and perception of patent niche, the dynamics and the competitive model
of patent niche, and the strategic framework of patent centered on patent niche, etc. It is believed that
with the further research, theoretical guidance and practical tools will be offered to the managerial
people to emphasize patent strategy and make proper ones.
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