Antitrust Limits to Patent Settlements

Shapiro, Carl, "Antitrust Limits to Patent Settlements" (May 1, 2001).

Abstract:

Intellectual property rights are widely recognized as critical assets in many industries, especially "high-tech" industries. Companies like IBM, Intel, and Hewlett-Packard regard their patents and copyrights, along with their other intangible assets such as know-how, as central elements giving them competitive advantage. Likewise, many software companies, from Microsoft to software startups seeking funding from venture capitalists, recognize that copyright protection is essential if they are to recoup their expenditures developing new software. Put simply, patents and copyrights are often the crown jewels in a high-tech company's collection of assets.

Intellectual property rights, while by no means the only way for firms to recoup their investments in research and development, are of increasing strategic importance in a range of industries, including semiconductors, networking equipment, and biotechnology as well as software. And now, with patents being issued for "business methods" like Amazon's one-click shopping, software patents are poised to have a major impact on the commercialization of the Internet. To cite one very recent example, InterTrust Technologies recently sued Microsoft for patent infringement associated with Windows Media, software that Microsoft plans to include in the new version of Windows, Windows XP, set to come out in August 2001. With InterTrust requesting an injunction to prevent Microsoft from violating the InterTrust patent, this suit, like many others, could potentially have a dramatic impact on competition, in this case for software that handles digital-rights management. As is common in these disputes, the lawsuit followed failed attempts to negotiate a license, and multiple patents are involved; InterTrust asserts that it holds 18 U.S. patents and has filed applications for 47 others.

The increasing importance and number of patents and copyrights inevitably is leading to more and more intellectual property disputes between rights holders and alleged infringers. In fact, since many products can potentially infringe multiple patents, the number of disputes, or the number of licenses needed to resolve those disputes, can easily grow more than proportionately with the number of patents. As I have described elsewhere, more and more companies are facing a patent thicket requiring them to obtain multiple licenses to bring their products to market. No doubt the majority of intellectual property disputes are settled rather than litigated to a final resolution.

The need to negotiate licenses or other settlements of intellectual property disputes is made even greater because of the danger of hidden or submarine patents, which make it all too easy for a company unintentionally to infringe on a patent that was not yet issued when the company's product was designed. Likewise, the need to resolve intellectual property disputes is arguably made yet greater to the extent that the U.S. Patent and Trademark Office has issued "bad" patents, i.e., patents on technology that does not in fact meet the novelty requirement. Many critics have charged that the PTO has had a poor understanding of prior art, especially in the software area, and improperly issued a number of patents. Bad or not, there is no dispute that the number of patents being issued is growing dramatically. In short, a compelling case can be made that intellectual property disputes are of increasing importance in determining just which firms can compete in which markets, and on what terms.

A wide range of commercial arrangements involving intellectual property can be regarded as settlements of intellectual property disputes, either literally (in the sense that litigation has been initiated and is dropped once an agreement is reached) or effectively (because negotiation takes place in the shadow of possible litigation). Virtually every patent license can be viewed as a settlement of a patent dispute: the royalty rate presumably reflects the two parties' strengths or weaknesses in patent litigation in conjunction with the licensee's ability to invent around the patent. The same is true of cross-licenses, where net payments reflect the strength of each party's patent portfolio along with its commercial exposure to the other's patents. Mergers and joint ventures are yet more ways to settle patent disputes.

Given the importance of patents and their licensing to innovation, and given the many commercial arrangements that are effectively settlements of intellectual property disputes, the legal rules governing the resolution of such disputes are of first-order importance. This importance is not confined to high-tech industries, much less to the software and Internet sectors, but extends to all industries where intellectual property rights are significant. In a very real sense, the rules governing settlements affect what is truly meant by the patent grant itself. In fact, in many fast-moving industries, the rules governing patent litigation and settlements are arguably far more important to patentees than the single variable on which economists have traditionally focused, namely patent length.

Facts on IBM Software

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