the dilemma of defensive patenting - hitotsubashi...

Introduction Dilemma DPL amp DPA Ex Ante Licensing More DPA

The Dilemma of Defensive Patenting

Jing-Yuan Chiou

NTPU San-Shia

Hitotsubashi University February 2014

Chiou (NTPU) Defensive Dilemma February 2014 1 19


Patents for defense Microsoft

ldquoAt Microsoft we used to pay little attention to patents One of these bigcompanies could dig through their patent portfolio find something close towhat we had done then sue us and we would have to go through anelaborate defense and possibly lose So Microsoft did what most bigcompanies do which is start to build what is called a lsquodefensiversquo patentportfolio So if a big company tried to sue us we could find something inour portfolio they were afoul of and countersue In the cold war days thisstrategy was called lsquomutual assured destructionrsquo since it was intolerablefor all parties to engage it resulted in a state called lsquodetentersquo or lsquostandoffrsquoThis is what you see today for the most part in lots of industriesrdquo (ChrisPratley manager at Microsoft 2004)



Power of counter-suits Semi-conductor industry

ldquoFirm Arsquos corporate patent department will wait to be notified by attorneysfrom firm B that it is suspected that Arsquos activities are infringing Brsquospatents Because possibly germane patents and their associated claims areso numerous it is in practice usually impossible for firm A mdash or firm B mdashto evaluate firm Brsquos claims on their merits Firm A therefore responds mdashand this is the true defensive value of patents in the industry mdash by sendingfirm B copies of lsquoa pound or tworsquo of its possible germane patents with thesuggestion that although it is quite sure it is not infringing B itsexamination shows that B is in fact probably infringing A The usual resultis cross-licensing rdquo (von Hippel 1988)



The best defense is a good offense

Patents help defense Taylor and Silberston (1973) von Hippel (1988)Cohen et al (2000) Hall and Ziedonis (2001)X bargaining chips at cross-licensing deterrence of litigationX freedom of operationrArr easier to develop products further RampD

But why stop at defenseX Microsoft vs the Android camp both Google and manufacturers



Landscape of patent litigation Smartphones



How to commit to ldquodefense-onlyrdquo litigations

Twitter ldquonot use the patents from employees inventions in offensive litigationwithout their permissionrdquo

Defensive Patent License (DPL Schultz and Urban 2012) peace amongmembers of the ldquotruce alliancerdquo

Defensive patent aggregation (DPA) licensing patent portfolio only fordefensive purposeX commitment also covers non-licensees

Hybrid Open Invention NetworkX specific to LinuxX royalty-free as long as you agree not to sue all Linux developers

harr Can defend against ldquopatent trollsrdquo



A dilemma

Defense by countersuing for infringement is effective only againstoperating patent-holders

But non-practicing entities (NPEs) have nothing to infringeX bigger firms better prey

rArr Effective defensive patenting (vis-a-vis operating firms)rArr higher investmentsrArrmore (purely) offensive patentingX defensive patenting can breed patent trollsX DPL and DPA are not immune to this dilemma



A simple model

Two types of (atomless) firms observable and binary decisionsX type 1 only patenting decision no investment opportunity size T1

lowast trolls individual inventors universities

X type 2 both patenting and investment decisions size T2

X firm heterogeneity at the cost side

Patenting stage distributions of patenting cost iid F1(middot) and F2(middot)Investment stage distribution of type-2rsquos investment cost iid K(middot)X NPEs manufacturing firms vertically integrated firms (VI)

Litigation stageX unilateral infringement or mutual blocking



Summary of setting

t1 2 3

patent acquisitionvalidityinfringementprobability α

investmentvalue v

enforcementif unilateral infringement winner getsrmiddotv losers gets -lmiddotvif mutual blocking both gets -lmiddotvtruce probability t

patent no patent

investment vertically integratedfirms (VIs)

pure manufacturing firms

non-practicing entities (NPEs)

operating firms

patent-holding firms

no investment



Reduced-form patent enforcement

No enforcementlitigation costX always sue for infringement

Identical infringement suitsX all operating firms may infringe on all patentsX common investment value v and patent infringement probability α

Infringement remedy licensing revenue not forced exitX unilateral infringement rv (for infringed party) vs minuslv (for infringing

party)rArr R equiv αrv and L equiv αlvX between two VIs ldquotrucerdquo with probability tX litigation war mutual blockingrArr minuslv for bothrArrW equiv [α2 l+ α(1 minus α)(lminus r) + (1 minus α)2 middot 0]v



Investment

Aggregate variables total patents P1 and P2 total investmentM and I

Wo patent a manufacturer may infringe on P1 + P2 patentsX investment return πM = vminus (P1 + P2)LrArrM = (T2 minus P2) middot K(πM)

W patent offense vs defenseX not investsrArr NPE with payoff πN = (M+ I)R

X investsrArr vertically integratedlowast vulnerable to NPEs loss (P1 + P2 minus I)L

lowast offensive against manufacturers gainM middotRlowast other VIs loss (1 minus t)W

rArr investment revenue πI = πM +πN + ID

lowast defensive premium

D equiv LminusRminus (1 minus t)W = [t(lminus r) +α(1 minus t)(lminus rminus l)]αv

X invests if cost lt πI minus πN = πM +DI

X D gt 0rArr strategic complementarity I = P2 middot K(πM +DI)

lowast stability P2DKprime lt 1



Stability I = P2 middot K(πM +DI)

I

45deg

P2K(πM+DI)

I

45deg

D



Defensive patenting and investment

Assume positive defensive premium D gt 0X holding a patent raises investment incentives πI minus πN gt πM

X NEC l gt r

Proposition (Patents and investment)For a stable investment equilibrium (M I) (i) M darr in P1 and P2 (ii) I uarr in D and darrin P1 but uarrdarr in P2

dM

dP2= minusK(πM) minus (T2 minus P2)LK

prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)

1 minus P2DK prime(c)

∣∣∣∣c=πM+DI

M+ I uarrdarr in P2 larger pool of potential VIs vs lower πM

D uarr (1 minus P2DKprime) darr if K prime does not dominate

X eg investment cost sim UNIF[0 1κ]



The dilemmaType-1 purely offensive patenting P1 = T1 middot F1(π

N)

Type-2 an option value of patentX if not patents then can only be a manufacturer laterX if patents then can decide between NPE or VI laterX obtains a patent if the cost is smaller thanf = K(πM)(πN +DI) +

intπM+DI

πM(πI minus c)dK+ [1 minus K(πM +DI)]πN

X P2 = T2 middot F2(f)

Strategic dependence between P1 and P2 via investment incentivesX P1 uarr rArr M and I darr rArr P2 darrX P2 uarr rArr (M+ I) uarrdarr rArr P1 uarrdarr

Proposition (The dilemma of defensive patenting)For a stable patenting equilibrium (Plowast1 Plowast2 )

D uarr rArr Plowast1 or Plowast2 uarr or both

when M+ I uarr in P2 then Plowast1 uarr in D



When P2 uarr rArr M+ I

P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)



DPL as a ldquotruce alliancerdquo

A club of patent-holders that promise no litigation among members butfree to sue outside the club

NPEs will not participate

VIsX suppose a portion microI participateX litigation propensity φM and φI against non-membersharr before φM = 1 and φI = 1 minus t

X joins if [microIφI + (1 minus microI)(1 minus tminus φI)]IW gt (1 minus φM)RM whereW gt 0X cannot be too lenient against non-members

Let φM = 1 and φI gt 1 minus t

X both microI = 0 and microI = 1 are equilibriaX under microI = 1 πM the same πI uarr as if D uarrrArr if M+ I uarr in P2 then DPL uarr purely offensive patenting by type-1



DPArsquos defense-only commitment

DPA licenses patent portfolios in defense only no offensive litigationagainst all including non-clients

Clients with size A no patents maintain full truce with (non-client) VIs

Aggregate investments M I IAX πM the same M = (T2 minus P2)K(π

M)

X offensive value πN = R(M+ I+ IA)

X payoff of VI πI = πM + πN +DIminus RIA darr in IAX DPArsquos commitmentrArr no need to defend against IA rArr offensive value uarrX clients πA = πM + LI

Proposition (DPA)

For a stable equilibrium higher ArArr I darr and when total investment (I+ IA + M) uarrin A then purely offensive patenting by type-1 also uarr in A



Ex ante licensing

Some NPEs size P0 lt T1 already own a patent portfolio and commit tolicensing offer l0 lt αlX let L0 equiv l0vX FRANDX no investmentharr litigation patterns among VIsX no patenting decisionsharr broader strategic concerns

Modifications πM0 = vminus (P01 + P

02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)

X if (M0 + I0) uarr in P02 then patenting equilibrium

P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)

rArr P0L0 uarr rArr P01 uarr

X lower l0 would generate the dilemmaX preemptive acquisition (P0 uarr) could alleviate the problem



Discussion

Patents as weapons to drive out competitorsX NPEs wonrsquot use it this wayX VIs may want to shut down competing manufacturersrArr lessMX but defensive patenting may still work among VIsrArr dilemma

Supply of patents here only a matter of cost

harr if limited supplyrArr bidding warX Nortel Apple + Microsoft + RIM vs GooglerArr $45 billion for 6000+

patents

DPA preemptive acquisitionX deeper pockets free-riding from defense-only commitmentX catch and releaserArr delaying offensive litigationX a window for operating firms to license or to invent around

lowast invention aroundrArr free-riding



Patents for defense Microsoft

ldquoAt Microsoft we used to pay little attention to patents One of these bigcompanies could dig through their patent portfolio find something close towhat we had done then sue us and we would have to go through anelaborate defense and possibly lose So Microsoft did what most bigcompanies do which is start to build what is called a lsquodefensiversquo patentportfolio So if a big company tried to sue us we could find something inour portfolio they were afoul of and countersue In the cold war days thisstrategy was called lsquomutual assured destructionrsquo since it was intolerablefor all parties to engage it resulted in a state called lsquodetentersquo or lsquostandoffrsquoThis is what you see today for the most part in lots of industriesrdquo (ChrisPratley manager at Microsoft 2004)























A dilemma






A simple model









Summary of setting

t1 2 3


investmentvalue v


patent no patent




operating firms


no investment










Investment















I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents

























A dilemma






A simple model









Summary of setting

t1 2 3


investmentvalue v


patent no patent




operating firms


no investment










Investment















I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents





A simple model









Summary of setting

t1 2 3


investmentvalue v


patent no patent




operating firms


no investment










Investment















I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents





Summary of setting

t1 2 3


investmentvalue v


patent no patent




operating firms


no investment










Investment















I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents












Investment















I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents






I

45deg

P2K(πM+DI)

I

45deg

D





X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents







X NEC l gt r


dM


prime(πM) anddI

dP2=K(c) minus P2LK

prime(c)









N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents






N)


intπM+DI










P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents






P1

D

P2

P2 (P1 D)

P1 (P2 D)(+)

(-)

(+)

(+)
















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents


















M)



Proposition (DPA)




Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents





Ex ante licensing



02)Lminus P0L0 P0

1 = (T1 minus P0)F1((M0 + I0)R)


P01 = P0

1( P02

(+)

P0L0

(minus)

) and P02 = P0

2( P01

(minus)

P0L0

(minus)

)





Discussion




patents





Discussion




patents




the dilemma of defensive patenting - hitotsubashi...

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