Patent portfolios.

• Author: Parchomovsky, Gideon

This article develops a comprehensive theory of patent value, responding to growing empirical evidence that the traditional appropriability premise of patents is fundamentally incomplete in the modern innovation environment. We find that for patents, the whole is greater than the sum of its parts: the true value of patents lies not in their individual worth, but in their aggregation into a collection of related patents--a patent portfolio.

The patent portfolio theory thus explains what is known as "the patent paradox": in recent years patent intensity--patents obtained per research and development dollar--has risen dramatically even as the expected value of individual patents has diminished. We find the benefits of patent portfolios to be so significant as to suggest that firms' patenting decisions are largely unrelated to the expected value of individual patents; because patent portfolios simultaneously increase both the scale and the diversity of available marketplace protections for innovations, firms will typically seek to obtain a large quantity of related patents, rather than evaluating their actual worth. The result--which we find widely recognized in commercial circles--is that the modern patenting environment exhibits (and requires) a high-volume, portfolio-based approach that is at odds with scholars' traditional assumptions.

The implications of the portfolio theory of patents are important and widespread. First, the explanatory power of the theory allows resolution not only of the patent paradox, but also of many of the otherwise puzzling observable patterns in the modern patenting environment, such as firm-size differences in patent intensity and litigation rates. Second, the patent portfolio theory neatly complements the prior theories that have sought to explain modern patent value, strengthening their relationship with the reality of patenting behavior, and confirming that the value of patents has expanded beyond traditionalist notions. Third, the patent portfolio theory offers a number of important predictive insights into future trends in the patent system, allowing policymakers and scholars to frame their inquiry within a range of likely outcomes. In our analysis, the patent portfolio theory does not suggest a better, brighter future for the patent system, but does build a foundation for the important academic and policy-related work that springs from this initial treatment.

INTRODUCTION I. THE PERSISTENCE OF THE PATENT PARADOX A. The Patent Paradox: A Primer B. The Scholarly Response to Date: Existing Explanations and Their Shortcomings 1. Patent Signals 2. Patents as Internal Metrics 3. The Lottery Theory of Patents 4. Defensive Patenting II. A THEORY OF PATENT PORTFOLIOS A. An Introduction to Patent Portfolios B. Scale and Diversity: The Advantages of Patent Portfolios 1. Super-Patents: The Scale-Features of Patent Portfolios a. Eases Subsequent In-house Innovation b. Attracts Related External Innovations c. Avoids Costly Litigation d. Improves Bargaining Position e. Improves Defensive Positions f. Increases the Voice in the Politics of the Patent System g. Enhances Efforts to Attract Capital 2. The Diversity-Features of Patent Portfolios a. Addresses Ex Ante Uncertainty Related to Technology b. Expands the Freedom of Research Inquiry c. Addresses Uncertainty Related to Future Market Conditions d. Addresses Uncertainty Related to Future Competitors e. Addresses Uncertainty in the Patent Law 3. An Inherent Tension: Scale Versus Diversity C. Paradox, Resolved: The Value of Quantity III. PATENT PORTFOLIOS IN ACTION: CASE STUDIES A. Dominating a Technology via a Patent Portfolio: The Case of Qualcomm B. Building Scale and Diversity: The Case of IBM C. Assembling a Patent Portfolio from Alternative Sources: The Case of Gemstar IV. THE IMPLICATIONS OF PATENT PORTFOLIOS A. The Explanatory Power of the Portfolio Theory 1. The Patent Paradox, Resolved 2. Explaining Patenting Patterns a. Large Firms Patent More, Small Firms Patent More Carefully b. An Increasing Share of Patents for Small Firms c. Patterns of Patent Litigation B. Through the Portfolio Prism: Understanding the Expanding Value of Patents C. Predictive Insights 1. Patent Intensity Will Remain High 2. Pressure on the PTO Will Increase 3. Patent "Thickets" Will Continue to Grow 4. Patent Litigation Will Become More Complex and Costly 5. Mass-Licensing Arrangements Will Proliferate 6. The Patent System Will Increasingly Favor Large, Well-Funded, Incumbent Players 7. The Value of Individual Patents Will Become More Obscure (and Increasingly Irrelevant) V. POLICY OPTIONS FOR THE PATENT PORTFOLIOS ERA A. The Direct Regulation of Patent Portfolios 1. Patent Holding Caps 2. Differential Fees B. Addressing Portfolio Strategies Ex Ante C. Tailoring Antitrust Law D. Letting the Market Sort It Out CONCLUSION INTRODUCTION

What is the value of patents? This deceptively simple question has occupied a generation of patent scholars and policy-makers, because the modern patent system presents a seemingly insoluble puzzle. (1) On the one hand, the amount of patenting activity has dramatically increased in recent years. (2) On the other hand, all available evidence demonstrates that the average expected value of a patent is extremely small (and likely negative when acquisition costs are considered): the overwhelming majority of patents have no value whatsoever, and of those that have value, it is nearly impossible to determine ex ante. (3) These enduring and simultaneous facts fundamentally challenge the conventional understanding of the patent system as a generator of incentives to invent: if patents on inventions have little or no expected economic value, why do individuals and commercial corporations patent so heavily? (4) Or, if patents are valuable after all, where does their value lie? We refer to this puzzle (as do others) as the patent paradox. (5)

In this Article, we develop a comprehensive theory of patent value: the portfolio theory of patents. The portfolio theory both puts to rest the patent paradox and explains the salient characteristics of the modern patent system. At the core of the portfolio theory lies the insight that for patents, the whole is greater than the sum of its parts. The true value of patents inheres not in their individual worth, but in their aggregation into a collection of related patents--a patent portfolio. (6) The benefits of patent portfolios are of such significance, we show, that firms' patenting decisions are largely unrelated to the expected value of individual patents. (7) Rational firms will therefore typically seek to obtain a large quantity of related patents, rather than evaluating their individual worth. (8) The result is that the modern innovation environment exhibits (and requires) a high-volume, portfolio-based approach to the patent system that is at odds with conventional scholarly assumptions.

It is important to note at the outset that we are not the first to identify the existence of patent portfolios, nor are we the first to coin this term. These are not the contributions we claim. Rather, the contribution of this Article is in the molding of the sporadic and disperse discussions of the phenomenon of patent portfolios into a consistent and full-blown theory of patent value, which we then use to explain the modern patent system and predict future trends.

Our patent portfolio theory thus extends well beyond recent efforts by academics to address the patent paradox by positing alternative views of patent value. (9) These approaches either suffer from assumptions that individual patents efficiently convey meaningful information (when in fact the evidence of vanishingly low patent values undermines this premise), or posit a generalized alternative utility for patents that does not fully fit the actual facts of the modern patent system. (10) For example, we note that while suggestions that patents act as "signals" of qualities about the invention or the firm or as useful metrics of internal firm measurement and management have intuitive appeal, they prompt serious questions about what, exactly, is the information conveyed by individual patents. (11) Put another way, if (as all available studies confirm) most individual patents have little or no value, then why is information about individual patents valuable? More generally, why would the market--or anyone else for that matter--care about information pertaining to a relatively valueless commodity? (12)

As we will show, the patent paradox disappears once patents are analyzed at the portfolio level. (13) The holder of a patent portfolio realizes an array of strategic advantages--offensive and defensive--that are simply not otherwise available. (14) We establish a two-category framework for understanding these benefits. First, by combining the "right to exclude" of many closely related patents, a patent portfolio greatly increases the effective scale--the total scope of protection in the marketplace--beyond that of a collection of differentiated patents. (15) That is, a well-conceived patent portfolio operates much like a "super-patent"; its scale-effects mean that a holder wields otherwise-unattainable market power in a particular technological field. This marketplace heft has a number of crucial impacts, including (1) easing subsequent innovation by broadening the scope of effective patent protection; (2) attracting related external innovations by virtue of the enhanced power to exclude others from the marketplace; (3) avoiding costly litigation by greatly increasing the likelihood that alleged infringers and (even more importantly) putative plaintiffs in infringement actions will be forced off the market; (4) improving the holder's bargaining positions with competitors and third-parties alike; (5) enhancing the defensive aspects of patent protection by providing a far more credible threat of counter-infringement litigation; and (6)...