Alternative Strategies for Navigating through the Patent Thicket
ANN ARBOR, Mich.---An unprecedented surge in the patenting of new technologies in the United States, coupled with stronger legal enforcement, presents challenges for companies seeking to avoid being "fenced in" by the external patent holders of technologies they use---knowingly or unknowingly---in the design or manufacture of their products.
"Cumulative innovation is vital to both firm performance and economic growth," said Rosemarie Ziedonis, assistant professor of corporate strategy and international business at the University of Michigan Business School.
"Yet, the challenges firms face in assembling rights to outside technologies have received relatively little attention in management studies of innovation and technology transfer. These challenges have become the subject of considerable debate, however, within the economics, legal and public-policy communities."
U.S. firms, for example, spent more than $1 billion defending against or enforcing patent lawsuits filed in 1991 alone, an amount equal to nearly one-third of their investments in R&D that year, Ziedonis says.
In a recent study of patenting activity by 67 U.S. semiconductor companies over a 14-year period, Ziedonis examines how the distribution of ownership rights affects the patenting decisions of firms. Her findings suggest that "patent portfolio races" are driven in large part by capital-intensive firms, such as semiconductor manufacturers, that build upon fragmented pools of outside technologies.
These companies, she says, must navigate successfully through the "patent thicket" while avoiding "minefield patents," which can explode late in the development or adoption of a new technology.
When patents are held by widely distributed external owners rather than a concentrated set of parties, the cost and potential delays of negotiating contracts in advance can increase substantially for firms seeking the right to use those patented technologies in their design and manufacturing processes, Ziedonis says. In such cases, these firms may feel compelled to file patents of their own more aggressively and to amass large patent portfolios in an effort to safeguard their investments later on (e.g., by threatening reciprocal suits or improving their negotiating positions in licensing agreements).
"The combined effects of fragmented rights and capital intensity play an even greater role in shaping these firms' patenting behavior under a stronger legal enforcement regime (such as the patent reforms instituted in the 1980s)," said Ziedonis, who developed a "fragmentation index" for testing her theories (the index measures the distribution of outside intellectual-property rights using patent-citations data from 1980 to 1994). "Patents play an important role in the overall innovation process. It is important to understand both their intended and unintended effects."
Her research paper, titled "Don't Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms," is forthcoming in Management Science.
The paper can be downloaded at http://papers.ssrn.com/so13/papers.cfm?abstract_id-475601.
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