Patent Enforcement in an Uncertain World: Widespread Infringement and the Paradox of Value for Patented Technologies

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The extent of the property rights bestowed by the issuance of a patent is inherently unclear (at least initially) and often context dependent. Therefore, the fuzzy boundaries of patent rights typically come into focus only as litigation or licensing activities build a legal and market-based picture of those boundaries. Given these fuzzy boundaries, the transaction costs associated with attempting to enforce patents rights in the context of widespread infringement can sometimes have important implications for the inferences that can be drawn from observed license rates. Specifically, when infringement is widespread, patent owners might have difficulties establishing licensing rates that reflect the true value of their patents. We outline a number of possible reverse bandwagon effects that suggest that the set of license rates observed in circumstances of widespread infringement might, in some circumstances, significantly understate the value of the patented technology due to transaction cost considerations and litigation-related risks.

When using observed license rates to help determine a reasonable royalty in litigation, we describe a “certainty adjustment” that is often considered to account for the fact that the hypothetical negotiation occurs under the assumption that the patents at issue are valid, infringed, and enforceable. Such a certainty adjustment can help account for the fact that observed license rates might be discounted due to uncertainty or disagreement about validity, infringement, or enforceability. In the context of widespread infringement, which can sometimes lead to the further depression of observed license rates relative to actual value, an even greater adjustment might be warranted to account for this greater degree of rate depression. Hence, observed prices for patent rights might not reflect a reasonable royalty in meaningful ways, sometimes making it difficult to assess the value of inventions that achieve widespread adoption ahead of the successful rollout of a licensing program.

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Cite as

Michael P. Akemann, John A. Blair & David J. Teece, Patent Enforcement in an Uncertain World: Widespread Infringement and the Paradox of Value for Patented Technologies, 1 Criterion J. on Innovation 861 (2016).