There is no anticommons effect – patent pools and FRAND eliminate fragmentation of licensing

SEP = Standard Essential Patents –they govern a wide range of technology (like USB ports, for example). FRAND = Fair, Reasonable And Non Discriminatory. It’s a licensing principle applied to SEPs – if a company commits to developing a standard for particular tech, they can also commit to licensing the patent under FRAND

Both the biotechnology and mobile phone industries are commonly held up as paradigm–examples of anticommons that produce underuse. Heller and Eisenberg’s original article, for example, took biotechnology as its case study.83 Similarly, “[a]n influential literature claims that standard setting in the smartphone industry creates monopoly power” that produces underuse.84 This Section addresses both examples directly and shows that they do not support Heller and Eisenberg’s anticommons thesis.

1. Biotechnology

As noted earlier, one can seriously question the conclusion by Heller and Eisenberg that there is a substantial amount of “underuse” of patented technology even in the biomedical research field. In many fields, firms are intentionally deciding not to conduct inquiries into patents potentially relevant to what they intend to do, for fear that, if they discover relevant patents but choose not to take licenses, they may be found liable for up–to-trebled damages for “willful infringement.”85 Many researchers can and do use technology without securing the potentially necessary licenses beforehand, often taking the position that they will deal with potential infringement lawsuits if and when they are sued, gambling that (1) the patent holder may not detect the claimed infringement, (2) the patent holder will not sue unless the researcher is successful in developing and marketing

a product, (3) patent holders will not incur the (substantial) cost and risk of litigation unless they believe that the expected damages award will exceed the cost of litigation, and (4) the asserted patents may be found invalid and/or not infringed.86

Empirical scholarship since the publication of Heller and Eisenberg’s article challenges the notion of a pervasive “underuse” in biotech. For example, in a 2005 article in Nature Biotechnology, Ebersole, Guthrie, and Goldstein examine standards and patent pools in the field of “diagnostic genetics” and find that patent pools can significantly mitigate the risk of underuse while spurring innovation.87 Similarly, in a chapter in a 2008 handbook on “Patent Law and Theory,” Goldstein discusses how the patent pools and standards setting in the biotechnology field has enabled broad industry access to patented technologies. 88 Thus, at a minimum, the HellerEisenberg hypothesis of “underuse” arising from fragmented ownership of patent rights in the biotechnology field needs to be reconsidered in the light of this evidence, the Walsh et al. evidence cited earlier,89 as well as evidence of the formation of functioning patent pools and other potential patent pools, in at least one major biotechnology field.

The strongest possible case for underuse is that the small size of many startup biotech firms, plus the importance of intellectual property rights in the biotech field and risk aversion by venture capitalists, may potentially lead to a situation in which venture capitalists are unwilling to invest money in a new firm. However, this reluctance to invest can be overcome if the startup can demonstrate (a) a reasonable likelihood of success, (b) a

thought–out plan to protect the firm’s output from competition by patent protection or otherwise, and (c) a low likelihood of credible threats that the firm will be sued (successfully or not) by others for patent infringement and have to incur the cost and distraction of defending itself against such threats.

2. Mobile Phones

Similar evidence exists with respect to mobile phones, and electronics more generally. Despite the fact that implementers need access to all valid-and–infringed SEPs90 in order to make and sell standards–compliant products, it is widely recognized that implementers benefit when SEP holders have made FRAND commitments. In the digital electronics industry, this requirement is common among standards setting and standards development organizations. Partly as a result, there is no obvious problem of impaired innovation. Indeed, studies by Keith Mallinson91 and Galetovic, Haber, and Levine92 speak to rapid innovation. FRAND commitments reduce if not eliminate the prospect that implementers will not be able to obtain the necessary licenses, at least as long as they are willing to pay the FRAND royalties.

That is, the “tragedy of the anticommons”—underuse of potentially relevant IP—is virtually eliminated with respect to SEPs by the presence of FRAND commitments. As noted in Section II.E, there are still sometimes disagreements between parties as to whether particular royalty rates are or are not “reasonable.” The courts have to resolve such disputes, and in a manner that helps sustain innovation and prosperity.

The mobile telecommunications sector of the economy is heavily dependent on standards. The thesis of “underuse” of patented technology due to fragmented ownership of patents is difficult to credit in this sector, given its explosive growth and the entry of scores of newcomers. If anything, the problem is that widespread infringement is common, and innovators are not being adequately compensated for the use by others of their patented technology.