From Efficient Licensing to Efficient Infringement

Those who have followed the U.S. patent system for an extended period are familiar with proverbs like “what goes up must come down” and “deja vu all over again,” as the late great Yogi Bera once said. Indeed, U.S. patent holders have seen the strength of their patent rights fluctuate significantly over the last several decades. In 1982, the Court of Appeals for the Federal Circuit was created to harmonize patent rulings coming up from the various district courts. The Federal Circuit’s early decisions reversed a period of weak patent rights, for example, by affirming preliminary injunctions against infringers, finding more patents valid and more patents infringed in close-call situations, and increasing damages awards. Patent rights remained relatively strong under the stewardship of the Federal Circuit until the Supreme Court began reducing the strength of rights in 2005. In a series of decisions, the court cut back on the applicability of injunctions, made it easier to find inventions obvious, and added to the types of inventions deemed ineligible for patenting, among other changes. These decisions, coupled with legislation aimed at addressing abuses attributed to non-practicing entities (NPEs), have resulted in significant weakening of patent rights over the last 10 years. In aggregate, we have experienced approximately 20 years of strengthening patent rights followed by 10 years of weakening them. In describing the evolution of U.S. patent rights, commentators often use the analogy of a pendulum by which patent rights have swung from weak to strong and back again.

This tale of two patent regimes provides a unique opportunity to examine how firms act under stronger and weaker patent rules, and to consider the economics and policy implications of both approaches. In our prior article, we examined behaviors during the period of strong patent protection in the 1990s.¹ During this period, information technology (IT) firms adopted a practice of engaging in full patent portfolio cross-licensing, using balancing payments to compensate the party with the stronger portfolio. We noted that, as a means to value each patent in each party’s portfolio, such cross-licenses lacked precision—but firms valued the freedom-of-action provided by these portfolio licenses over the potential value lost by declining to examine the value of each individual patent covered by the license. We described this behavior as “Rational Ignorance” since the actors made the rational decision to remain ignorant of individual patent valuations in favor of the freedom provided by the cross-license. It is perhaps more accurate to say that during the years of strong patent rights, parties favored portfolio licensing over individual patent licensing based on a calculus that can be termed “Efficient Licensing.”