Mechanisms to Enable Follow-On Innovation: Liability Rules vs. Open Innovation Models (Munich Studies on Innovation and Competition, 15)

The patent system is based on "one-patent-per-product" presumption and therefore fails to sustain complex follow-on innovations that contain a number of patents. The book explains that follow-on innovations may be subject to market failures such as hold-ups and excessive royalties. For decades, scholars have debated whether the market problems can be solved with voluntary licensing i.e., open innovation, or with compulsory liability rules. The book concludes that neither approach is sufficient. On the one hand, incentives to engage in open innovation practices involving patents are insufficient. On the other hand, the existing compulsory liability rules in patent and competition law are not tailored to address follow-on innovator's interests. To transcend this problem, the author proposes a compulsory liability rule against the suppression of follow-on innovation, that paradoxically, fosters early-on voluntary licensing between patent holders and follow-on innovators. The book is aimed at patent and competition law scholars and practitioners, patent attorneys, managers, engineers and economists who either engage in open innovation involving patents or conduct research on the topic. It also offers insights to policy and law-makers reviewing the possibilities to foster open innovation initiatives or adapt the scope of patent remedies or employ compulsory licenses for patents. Preface Acknowledgements Contents About the Author Abbreviations List of Figures Chapter 1: Introduction 1.1 Cumulative Innovation in Patent Law 1.2 Liability Rules Enabling Innovation 1.3 Open Approaches to Innovation 1.4 Legal Sources 1.5 Methodology 1.6 Structure 1.7 Limitations Chapter 2: Theory 2.1 Underprotection 2.1.1 Market Failures 2.1.2 Incentive Theories 2.1.3 Prospect Theory 2.1.4 Disclosure Theory 2.1.5 Patents from the Perspective of Competition Law 2.1.5.1 The Economic Objectives of Competition Law 2.1.5.2 Competition Law and Follow-on Innovation 2.1.6 Towards a Dynamic Incentive Theory 2.1.7 Justifying Follow-on Innovation 2.2 A Typology of Subsequent Improvements 2.2.1 The Improvement Is Infringing and Not Patentable 2.2.2 The Improvement Is Infringing Yet Patentable 2.2.3 The Improvement Is Patentable and Does Not Infringe the Initial Patent 2.2.4 The Improvement Is a Follow-on Innovation Infringing the Initial Patent 2.3 Overprotection 2.3.1 The Increasingly Fragmented Patent Landscape 2.3.1.1 Patent Strategies 2.3.1.2 Patent Assertion Entities 2.3.1.3 Transitioning from Defensive to Offensive Strategies 2.3.1.4 Patent Quality 2.3.1.5 Interoperability Standards 2.3.1.6 Technological Changes 2.3.2 Market Failures Associated with Overprotection 2.3.2.1 The Tragedy of the Anticommons 2.3.2.2 Grounds for Categorization 2.3.2.3 Ex ante: Transaction Costs 2.3.2.4 Ex ante: Unjustified Refusals to License 2.3.2.5 Ex ante: Excessive Royalties 2.3.2.6 Ex ante: Royalty Stacking 2.3.2.7 Ex Post: Hold-up 2.3.2.8 Empirical Inconclusiveness 2.3.2.9 Market Failures and Their Potential Solutions Chapter 3: Open Approaches to Innovation 3.1 Openness Through Private Ordering 3.1.1 The Market Correction Model 3.1.1.1 Theoretical Foundations 3.1.1.2 The Conditions for Openness 3.1.1.3 Adequacy in Resolving Overprotection Problems 3.1.2 Open Innovation 3.1.2.1 Definition 3.1.2.2 Incentives to License and Social Welfare Effects 3.1.2.3 The Normative Component 3.1.3 User and Open Collaborative Innovation 3.1.3.1 Theoretical Foundations 3.1.3.2 Innovation As a Public Good 3.1.3.3 Incentives to Innovate 3.1.3.4 UOCI and Patents 3.1.4 Interim Conclusions 3.2 The Continuum of Openness 3.2.1 The Various Dimensions of Openness 3.2.2 Exclusive Use 3.2.3 Restricted Use 3.2.4 Semi-Open 3.2.5 Open Licensing 3.2.6 Open Viral Licensing 3.2.7 Public Domain 3.2.8 Non-enforcement 3.2.9 A Dynamic View of Openness 3.3 Private Liability Rules 3.3.1 Patent Pledges 3.3.1.1 Incentives 3.3.1.2 Enforceability 3.3.2 Licenses of Right 3.3.2.1 A Switch to a Liability Rule 3.3.2.2 License of Right in Germany 3.3.2.3 License of Right for Unitary Patents 3.3.2.4 Incentives to Declare 3.3.3 Patent Pools 3.3.3.1 Governance and Objectives 3.3.3.2 Patent Pools and Competition Law 3.3.3.3 Incentives to Participate 3.3.4 Clearing Houses 3.3.4.1 Definition 3.3.4.2 Efficiency Gains 3.3.4.3 Future Perspectives for Clearing Houses 3.3.5 Open Viral Patent Licenses 3.3.5.1 Definition 3.3.5.2 The Challenge of Meeting Patentability Criteria 3.3.5.3 The Incentives to Create Sustainable Access 3.3.5.4 Protection Against Hold-ups 3.3.5.5 Normative Recommendations 3.4 Conclusions Regarding Open Approaches to Innovation 3.4.1 The Sufficiency of OAI to Resolve Overprotection Problems 3.4.2 The Suitability of OAI to Alleviate Overprotection Problems Chapter 4: Economic Foundations of Compulsory Liability Rules 4.1 A Typology 4.2 A Context-Specific Instrument 4.3 Economic Considerations 4.3.1 Private vs. Compulsory Liability Rule 4.3.2 Effect on Incentives 4.3.3 Patent Evaluation Problems 4.3.4 Hold-Out Risks 4.3.5 Error Costs and Legal Uncertainty 4.3.6 Underuse Chapter 5: Legal Foundations and Sources of Compulsory Liability Rules 5.1 Early History 5.2 Paris Convention 5.3 TRIPS Agreement 5.4 Compulsory Liability Rules in the EU Law 5.5 Unitary Patent System 5.6 Human, Fundamental and Basic Rights 5.6.1 Human Rights and IP 5.6.2 Patents in the Light of Human Rights 5.6.3 Follow-on Innovation and Human Rights 5.6.4 The Freedom to Enact Compulsory Liability Rules Chapter 6: Compulsory Licenses in Patent Law 6.1 Property and Liability Rules Under TRIPS 6.2 Interrelationship of Art. 30 and Art. 31 TRIPS 6.3 General and Procedural Requirements 6.3.1 Prior Effort 6.3.1.1 The Objective of the Prior Effort Requirement 6.3.1.2 Interpretation of the Prior Effort Requirement ``Efforts ́ ́ ``Prior to Such Use ́ ́ ``Reasonable Commercial Terms ́ ́ Reasonable Time 6.3.1.3 Prior Effort in the Context of Overprotection Problems 6.3.2 Adequate Remuneration 6.3.3 Scope and Assignability 6.3.4 Duration and Termination 6.3.5 Individual Merits 6.3.6 Decision by an Authority 6.3.7 Judicial Review 6.3.8 Conclusions on the General and Procedural Requirements 6.4 Grounds for Compulsory Licenses 6.4.1 Dependent Patents 6.4.1.1 The Objectives of Art. 31 (l) TRIPS 6.4.1.2 The Conditions of Art. 31 (l) TRIPS 6.4.1.3 Review 6.4.2 Abuse of Rights 6.4.3 Failure to Work 6.4.3.1 A Subtype of Abuse of Patent Rights 6.4.3.2 The Controversy Over Local Working Requirement 6.4.3.3 Applicability to Market Failures 6.4.4 A Remedy to Anti-competitive Practices 6.4.4.1 Substantial Criteria 6.4.4.2 Procedural Criteria 6.4.4.3 Multiple Options for Implementation 6.4.5 Dynamic Efficiency as a Public Interest 6.5 Interim Conclusions Chapter 7: Denial of Injunctive Relief 7.1 Introduction 7.2 Limitations to Injunctive Relief Under TRIPS 7.3 eBay v. MercExchange 7.3.1 A Doctrine Based on Equity 7.3.2 Post-eBay Practice 7.3.2.1 Irreparable Harm and Inadequacy of Monetary Damages 7.3.2.2 Disproportionality of Hardships 7.3.2.3 Public Interest 7.3.3 Effect on Overprotection Problems 7.4 Patent Misuse Doctrine 7.4.1 An Equitable Defence 7.4.2 Applicability to Overprotection Problems 7.4.3 The Relevance of the Misuse Doctrine 7.5 Enforcement in Europe 7.5.1 Enforcement Directive 7.5.2 Implementation in Civil Law Countries 7.5.3 Equitable Discretion in the UK 7.5.4 Discretion Under the Unitary Patent System 7.5.5 Effect on Overprotection Problems 7.6 Interim Conclusions Chapter 8: Compulsory Liability Rules in Competition Law 8.1 Introduction 8.2 Compulsory License As an Antitrust Remedy 8.2.1 Compulsory License As a Behavioural Remedy 8.2.2 Commitments to Grant Access 8.2.3 Compulsory License As a Defence in Patent Infringement Proceedings 8.3 Market Definition 8.3.1 General 8.3.2 Market Definition and Follow-on Innovation 8.3.3 Definition of the Market for Technology 8.3.4 Defining the Markets for Follow-on Innovation 8.4 The Finding of Dominance 8.4.1 Substantial Market Power 8.4.2 Market Position 8.4.3 Barriers to Entry and Expansion 8.4.4 Special Responsibility 8.5 Exclusionary Abuses 8.5.1 The Essential Facilities Doctrine 8.5.2 Indispensability 8.5.3 Exclusion of Any Effective Competition 8.5.4 New Product Requirement 8.5.4.1 IMS Health 8.5.4.2 Microsoft 8.5.5 Objective Justification 8.5.6 Standard-Spundfass 8.5.7 Antitrust Interventions in Refusals to License in the US 8.5.7.1 The Essential Facilities Doctrine 8.5.7.2 Unilateral Refusals to Deal 8.5.7.3 Trinko 8.6 Exploitative Abuse 8.6.1 Unfair Prices for Licenses As a Form of Exploitative Conduct 8.6.1.1 The Controversy Concerning Price Control 8.6.1.2 Applying United Brands to Patents 8.6.1.3 Excessive Royalties for FRAND-Encumbered SEPs 8.6.2 Patent Ambush 8.6.3 Transferability of FRAND Obligations 8.6.4 Enforcement of FRAND-Encumbered SEPs 8.6.4.1 Motorola and Samsung 8.6.4.2 The Orange Book Standard 8.6.4.3 Huawei 8.6.4.4 Interpretation of Huawei 8.6.4.5 Huawei and TRIPS 8.6.5 Conclusions on Huawei 8.6.6 Conclusions Concerning Hold-ups Involving de jure SEPs 8.7 Evaluation 8.7.1 Structure 8.7.2 Refusals to License 8.7.2.1 Non-SEP 8.7.2.2 De facto SEPs 8.7.2.3 De jure SEPs 8.7.3 Hold-ups 8.7.3.1 Non-SEPs 8.7.3.2 De facto SEPs 8.7.3.3 De jure SEPs 8.7.4 Excessive Royalties and Royalty Stacking 8.7.5 Other Anti-commons Problems 8.8 Interim Conclusions 8.8.1 The Weaknesses of the Compulsory Liability Rules in Competition Law 8.8.1.1 Narrow Scope of Application 8.8.1.2 The Length and Costs of the Proceedings 8.8.1.3 The Lack of Legal Certainty 8.8.1.4 The Paradox of the Effects-Based Approach 8.8.1.5 The Implications of the Huawei Decision 8.8.2 The Strengths of Compulsory Liability Rules in Competition Law 8.8.2.1 Flexibility in Addressing Follow-on Innovators ́ Interests 8.8.2.2 The Wider Scope of the Compulsory Liability Rule 8.8.2.3 Market Failures That Do Not Originate from the Design of the Patent System Chapter 9: Normative Recommendation 9.1 Conclusions Regarding Compulsory Liability Rules 9.1.1 Scope of Application 9.1.2 The Ineffectiveness of the Existing Instruments 9.1.3 The Preference for Patent Law Over Competition Law 9.2 A Compulsory Liability Rule That Fosters Open Innovation? 9.3 Private Ordering Revisited 9.3.1 A Government-Initiated Clearing House 9.3.2 The Reverse License of Right 9.3.3 The Combined Effects of the Voluntary Instruments 9.4 What Qualifies as a Market Failure That Is Remediable with a Compulsory License? 9.4.1 Interpretation of TRIPS in the Light of Dynamic Incentive Theory 9.4.2 Overprotection as a Ground for a Compulsory Liability Rule 9.4.3 Conditions for an Ex Post Liability Rule 9.4.3.1 Overcoming the Prior Effort Requirement 9.4.3.2 Article 44 TRIPS: Constrained by Fundamental Rights 9.4.3.3 Article 31 (k) TRIPS: A Reinterpretation of ``Anticompetitive Practice ́ ́ 9.5 A Compulsory License Against the Suppression of Follow-On Innovation 9.5.1 The Substantial Criteria 9.5.2 General and Procedural Considerations Chapter 10: Conclusions 10.1 Follow-on Innovation May Be Threatened by Market Failures 10.2 Open Approaches to Innovation Do Not Resolve the Market Failures 10.3 The Existing Compulsory Liability Rules Do Not Resolve the Market Failures 10.4 A Compulsory License Against Abuse and in Favour of Voluntary Licensing References Case Law EU ECHR WTO Germany The UK The US Articles, Books and Book Chapters Briefs, Reports and Other Official Documents Other Sources