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The Problem of the Maintenance of Monopolies and Dominant Market Positions via Preemptive Patenting: A Need for Legislative Reform in Order to Promote Competition

By Andis Kaulins

[See also the Preemptive Patenting Update 1]

Monopolies are the bane of the modern economic world because they impose artificial costs on economies. "Some" people must unnecessarily bear those costs and they are always paid for by SOMEONE ELSE other than the benefactor of monopoly power.

This creates a situation which ultimately leads to so-called negative economic externalities such as higher competitive costs, inequalities in income distribution and a whole slew of other economic evils that accompany facilitated monopoly power. To the degree that any monopolies can vigorously be eliminated by virtue of law, everything possible should be done by the legal system to do so.

Legislation against preemptive patenting would be a positive step forward in reducing monopolies in many industries, requiring patents filed to be seriously used or licensed within a reasonable period of time or to be considered void for blocking innovation by others and posing unnecessary harm to the economy by deterring competition and increasing costs for consumers.

One of the strategies that firms employ to protect monopolies in their own inventions is preemptive patenting. i.e. the patenting of alternative or substitute technologies to their own technology in order to eliminate competition before it occurs. Preemptive patents are also called "sleeping patents", because they are neither used nor licensed by the patenting firm but are only filed to keep competitors from using alternative technologies (in economics this is nicely called "entry deterrence").

Professor Robert S. Pindyck of the Massachusetts Institute of Technology, Industrial Economics for Strategic Decisions, in his Lecture Notes on
R&D and Patent Licensing (Revised July 2009) writes as follows:

"Let us see how R&D can be used strategically to deter entry.... a monopoly can use patents to deter entry. The basic idea is that a firm with monopoly power may have an incentive to patent new technologies before potential competitors do, but then never bring those patents to the market?i.e., hold "sleeping patents." ...

For most technologies and products, the R&D leading to a patent is typically much less costly than the development of the product itself. Pharmaceuticals provide a good example of this. The cost of the R&D required to develop a new compound, which would then be patented, is usually much less than the follow-on expenses required for testing and obtaining FDA approval, developing a full-scale production facility, marketing, etc. Furthermore, there is often considerable uncertainty about the future demand for the drug, in part because there is uncertainty about how many other drug companies will have similar drugs. Hence, we can view the patent as a call option. As with a financial call option, if the payout rate (which is the opportunity cost associated with waiting) is not too high, and if the variance of the underlying asset (the ability to produce and sell the drug) is sufficiently high, it will pay to wait rather than exercise this option immediately.

Hence, even in a very competitive environment, we would expect to see firms holding many patents, but letting most of them sleep, and only ?exercising? (developing) a few of them. This is indeed what many drug companies do. They typically develop and bring to market only a small fraction of all the patents they have."

Preemptive patenting is thus even taught in the classroom. That is an entirely different view of the patent world than is presented to the political body, where pro-patent argumentation often does not correspond to actual patent practice.

One reason, for example, that we strongly oppose patents on software and business methods is that such patents operate more as a vehicle to deter competition than to protect any "invention" as such.

Some literature on the topic:

Richard J. Gilbert and David M.G. Newbery, Preemptive Patenting and the Persistence of Monopoly, American Economic Review, 72, June 1982, 514-526.

Thomas A. Hemphill, Preemptive patenting, human genomics, and the US biotechnology sector: balancing intellectual property rights with societal welfare

Full post as published by LawPundit on March 25, 2011 (boomark / email).