Patents in the Knowledge-Based Economy (2003) / Chapter Skim
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Benefits and Costs of an Opposition Process
Benefits and Costs of an Opposition Process
Pages 120-142
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From page 120... ...
In many cases, such a system would avoid costly litigation at a later date. In other cases, the opposition process would increase the cost of conk lict resolution but would also reward holders of valid patents and limit the rewards for invalid patents.
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From page 121... ...
Although similar examples could be drawn from the early years of biotechnology and software patenting, economists in particular will appreciate that many recently granted patents on business methods fail to meet a commonsense test for novelty and nonobviousness. Presumably, this occurs because the relevant prior art is unfamiliar to patent examiners trained in science and engineering.
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From page 122... ...
In sum, one suspects a timelier and more efficient method of establishing ground rules for patent validity could benefit innovators, followers, and consumers alike. One recently suggested remedy is to expand the rights of third parties to challenge the validity of a patent in a low-cost administrative procedure before sinking costly investments in the development of a potentially infringing product, process, or service (see Merges, 1999 and Levin, 2002~.
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From page 123... ...
They can prevent unwarranted patents from resulting in monopoly profits, and, more broadly, if decisions under the opposition process are more informed than those made directly by the patent examiners, the rewards to patentholders end up more closely aligned with the true novelty and non5See Graham, Hall, Harhoff, and Mowery, this volume, for this and other details of the European Patent Of fice's opposition procedure. 60f course, an alternative way to reduce uncertainty about patent validity would be to intensify the U.S.
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From page 124... ...
The model suggests that in some cases, introducing an opposition process will have an unambiguous welfare benefit, whereas in other cases there will be a trade-off between static welfare costs and static and dynamic welfare benefits. In the fourth section of this chapter, we use available information on the cost of litigation and plausible parameters for market size and the cost of development to provide a rough quantitative sense of the welfare effects.
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From page 125... ...
In making decisions, the firms must factor in these eventual profits as well as development costs, litigation costs, and licensing fees in the event of a licensing agreement. We model licensing negotiations, both before and after litigation, by using the Nash bargaining solution.
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From page 127... ...
Nonrivalrous Innovation We start by considering nonrivalrous innovation. To focus attention on this case, we make the following parametric assumption, which is sufficient to ensure that introducing Firm B's product generates a joint gain for the two firms.
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From page 128... ...
(A) If this inequality fails, Firm A has a weak patent the benefit of enforcing it is smaller than the litigation costs.
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From page 129... ...
If (B) fails, Firm B does not have a credible threat to litigate so Nash bargaining results in a licensing fee Fv—in essence, the parties treat the patent as if it were valid.
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From page 130... ...
Nevertheless, it can be worked out, and in such a circumstance the effect of an opposition process corresponds closely to the nonrivalrous environment described above.~° To analyze the possible outcomes, we again work backward. We first consider what would happen in the event of litigation, then ask whether litigation will occur if B develops, and finally consider the incentive to develop.
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From page 131... ...
the sum of the perceived gains from litigation necessarily outweigh the litigation costs so long as (B) is satisfied.
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From page 132... ...
We model the opposition proceeding essentially as a less expensive way of verifying patent validity than litigation. In an opposition proceeding, each firm incurs a cost C < L to prepare its case.
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From page 133... ...
If Firm B has a credible threat to use the opposition process, an opposition proceeding will still only occur if the parties do not have a joint gain from negotiating a settlement. The sum of their subjective expected payoffs from an opposition hearing exceeds their joint payoff from licensing if and only if: PA PB)
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From page 134... ...
The case in which an opposition proceeding replaces licensing certainly hurts A if the earlier licensing fee would have been FV but could potentially benefit A if the licensing fee would have been Fu. In the simple static model we are looking at, the direct welfare effects are limited to the cost of conflict resolution and the change in licensing fees.
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From page 135... ...
If it previously would have had to litigate, it benefits from the cheaper opposition process. If it previously would have been able to deter entry without litigation, it loses from having to pay the opposition costs and loses substantially if its patent, which would not have been litigated, is held invalid and its monopoly profits disappear.
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From page 136... ...
As in the nonrivalrous case, there is a potential dynamic welfare effect in addition to the static effects. The static welfare effects are limited to the cost of conflict resolution, the possible reduction in monopoly power, and the potential savings on wasted development.
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From page 137... ...
We also assume that patent litigation costs each party $2.5 million, which, given the size of the market, is consistent with the estimates reported by the American Intellectual Property Law Association. We assume, given the U.S.
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From page 138... ...
There is a net static welfare loss equal to the total cost of an opposition proceeding, or $1 million. Still, the opposition process has advantages because it sorts out valid from invalid patents.
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From page 139... ...
In all, it would appear that the cost of introducing an opposition procedure is quite small relative to the potential static welfare gains and dynamic incentive effects. A static welfare loss arises only when a challenge is lodged under circumstances that would not have given rise to litigation, such as when the parties do not differ greatly in their subjective expectations of the patent's validity.
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From page 140... ...
Patent and Trademark Office. A1lowing the testimony of outside experts to inform the opposition proceedings should have substantial spillovers in pointing patent examiners to relevant bodies of prior art, thus making them more likely to recognize non-novel or obvious inventions when they first encounter them.
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From page 141... ...
. "Empirical Evidence on the Validity of Litigated Patents." American Intellectual Property Law Association Quarterly Journal 26: 185-277.
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