Pharma Neg - Georgetown 2024

Pharma Case Neg
Advantage 1
Innovation
Turn--Excessive pharma patent protection crushes innovation
Seokbeom Kwon & Alan C. Marco 21, Kwon is assistant professor/lecturer of the Research Center for Advanced Science and Technology (RCAST) at the University of Tokyo, with a cross appointment to the Department of Technology Management for Innovation (TMI), doctoral degree in Public Policy from Georgia Institute of Technology; Marco is an Associate Professor at the Georgia Tech School of Public Policy, and former Chief Economist at the U.S. Patent and Trademark Office, “Can Antitrust Law Enforcement Spur Innovation? Antitrust Regulation of Patent Consolidation and Its Impact on Follow-on Innovations,” Research Policy, vol. 50, no. 9, 11/01/2021, p. 104295
By empirically examining how antitrust regulation of patent-enabled monopolies affects follow-on innovations, this study advances the broad policy discussion on interactions between antitrust and patent laws in shaping innovation. As intensively discussed by scholars (Katz and Shelanski, 2005; Sidak and Teece, 2009), the necessity of incorporating “technological innovation” into modern antitrust law by accounting for the Schumpeterian perspective has received increasing recognition from the antitrust law community. The Schumpeterian view posits that market competition and technological innovation are mutually and dynamically influenced in the so-called “innovation cycle.” Firms that are not dominant market players may enjoy monopolistic market profits through future innovation. In contrast, a dominant market player may lose its monopolistic market position due to a competitor's innovation. The dynamics therein create incentives for firms to innovate. This scholarship leads to the important question of how antitrust law jointly shapes market competition and innovation. Our study contributes to this discussion by empirically showing that “patent consolidation” by firms is a venue where enforcement of antitrust law promotes market competition and technological innovation.
The remainder of this paper is structured as follows. Section 2 reviews the literature on patent pools and cumulative innovation to derive our main hypothesis. Section 3 describes the data and methods for empirical analysis. Section 4 presents the findings, and Section 5 discusses the implications.
2. Literature review and hypothesis development
2.1. Antitrust law, patent consolidation, and market competition
Patent transfer can be subject to antitrust regulation because it may enable patent consolidation that allows a few firms to control access to key patented technology for products and thereby effectively monopolize the downstream market (Figueroa and Serrano, 2019; Hahn, 1984). In the United States, two legislative acts have enabled the regulation of patent transfers: the Sherman Act and the Clayton Act. The Sherman Antitrust Act (26 Stat. 209, 15 U.S.C. §§1–7) was enacted in 1890 to regulate unlawful market monopolies. This act enables the regulation of business practices that may discourage market competition. Meanwhile, the Clayton Act was enacted in 1914 (38 Stat. 730, 15 U.S.C. §§12–27, 29 U.S.C. §§52–53) to specify which business practices violate the Sherman Act, elaborating on its antitrust law enforcement scheme and legal remedies. Section 7 of the Clayton Act is considered the foundation for the antitrust regulation of patent transfers. The section states that the federal authorities may regulate business practices that may harm market competition or lead to the formation of a market monopoly. Based on this section, patent transfers that could harm market competition or result in a monopoly are thus subject to regulation (Gotts and Sher, 2012; Klitzke, 1980).
Then, under what conditions patent consolidations by a firm may negatively affect the market competition? The scholarly discussion on patent pools and their impact on market competition provides a hint for the answer. Studies have argued that amassing “complementary” patents through patent pooling by a few firms can spur downstream market competition by addressing the so-called patent holdup or patent thicket problem (Ebersole et al., 2005; Merges, 1999; Shapiro, 2000), which enhances market efficiency (Gilbert, 2004). For instance, when each of the two competing firms owns mutually complementary patents for a product, they may experience significant difficulty in bringing the product to the market because one's patent will hold up another's market operation (i.e., patent holdup). In this case, the problem can be solved by pooling the two firms’ patents and agreeing on the free use of pooled patents.
In contrast, firms aggregating “substitute” patents for essential technology for a product may deter market competition if members of the patent pool are not allowed to license their patents to third parties independently (Lerner et al., 2007; Lerner and Tirole, 2004, 2007). In this case, the patent pool induces collusion by members, thereby resulting in an excessive concentration of market power in the patent pool members. However, scholars have also argued that this anticompetitive effect may not be substantial when the independent licensing by patent pool members with third parties is allowed. This is because independent licensing will lead the pool members to compete with one another on “licensing out” of owned patents to third parties; thus, third parties can access the pooled patents at a competitive price.
A firm's patent consolidation via patent transfers can be seen as the special case of patent pooling by a “single” firm without the competition effect of independent licensing. In this case, the discussion briefed above suggests that a firm's patent consolidation by patent transfer brings an anticompetitive effect when the consolidated patents are on substitute technology.
2.2. Patent consolidation and innovation
For innovation, firms’ patent transfers may bring both positive and negative impacts. On the one hand, a patent transfer facilitates the efficient reallocation of patents to those who can use the patents more effectively (Galasso et al., 2013) while promoting innovator's specialization in developing ideas (Lamoreaux and Sokoloff, 1999). For firms, transferring patents can be a useful instrument in terms of managing their intellectual property (IP) assets. For instance, firms liquidate their patents when they reconfigure their business lines (Serrano and Ziedonis, 2019) and finance operations (Hall, 2019; Hochberg et al., 2018) or when they want to acquire patents from outside to capitalize on emerging technological opportunities (Kelley, 2011). Meanwhile, as Kitch (1977) hinted, an upstream firm's consolidation of patents could enable the firm to mitigate downstream patent races, thereby enhancing the upstream firm's innovation appropriability.
On the other hand, patent transfer enables firms to aggregate patents on important technology for product development, which may negatively impact the innovation activities of competitors by equipping the patent-aggregating firm to impose ex-post patent holdup risk to the competitors’ market operations. Indeed, Kwon (2020) showed firms’ incentives to purchase patents to leverage market competitor's ex-post patent holdup risk. Doing so can effectively increase the rivals' operating cost while making them less active in developing the relevant technologies around the transferred patents.
The detrimental impact of a firm's patent transfers on innovation could be acute when innovation is developed in a highly cumulative manner (Rai, 2001; Scotchmer, 1991) and a firm's patent enforcement is effective in deterring its competitors’ R&D activities (Lampe and Moser, 2010). This is because patenting the technological inputs for a product could prevent the diffusion of that technology for follow-on innovation (Galasso and Schankerman, 2015). This is advantageous for firms seeking the monopolistic market profit (Figueroa and Serrano, 2019; Hahn, 1984). Studies attempted to find empirical evidence (Galasso and Schankerman, 2015; Murray et al., 2016; Murray and Stern, 2007; Sampat and Williams, 2019; Walsh et al., 2003, 2007). For instance, by analyzing the data on public Human Genome projects and Celera's gene-level intellectual property rights (IPRs), Williams (2013) showed that the firm's claim on gene-level IPRs significantly hampered subsequent scientific research and product developments for a long time even though the firm owned the IPRs for a short term. By using the patent–paper pair approach, Murray and Stern (2007) showed that granting patent rights on scientific discovery decreases the diffusion of scientific discovery, indicating that the subsequent scientific research is hampered by patenting. Murray et al. (2016) reached a similar conclusion by showing that the event of the National Institute of Health's agreements on reducing costs to access genetically engineered mice in the late 1990s diversified the pathways of subsequent research and innovation. Based on this finding, they argued that limited access to existing knowledge by patents might have limited the subsequent research diversity. Galasso and Schankerman (2015) showed that the invalidation of patents induced more subsequent inventions, and this effect was particular in the complex technology field where innovation is developed in a highly cumulative manner.
The software sector is one of the “complex technology” areas where innovation is created cumulatively and patent enforcement is effective for market competition. A computer program (i.e., software) is often built cumulatively (Bessen and Maskin, 2009; Cohen and Lemley, 2001; Hall and MacGarvie, 2010; Noel and Schankerman, 2013) on previously developed software—the extent to which one can access the source code of the prior version of the software is crucial for the new software development (Ghidini and Arezzo, 2013a). Meanwhile, software patents are important complementary assets for appropriating software innovation (Fosfuri et al., 2008). Accordingly, in the software sector, owning software patents is crucial for market operations and for seeking strategic benefits in market competition. Indeed, Wen et al. (2013) empirically showed the deterrence of the overall OSS development activities due to software patent enforcement by proprietary companies against the Linux community (OSS). Accordingly, in the software sector, a firm's consolidation of software patents may result in deterring the software innovation activities of competitors.
Our discussion above suggests that when the cumulative innovation is crucial for firms' market operation and patent enforcement is effective, a firm's consolidation of patents on key technology for the cumulative innovation process could discourage the follow-on innovation of its competitors.
In sum, our literature review hypothesizes that a firm's consolidation of the substituting patents on key technology for the cumulative innovation process may bring the anticompetitive effect, which then becomes the subject of the antitrust regulation. In this case, antitrust regulation of patent consolidation could positively affect the follow-on innovation of the patent-consolidating firms’ competitors. More formally:
When a firm consolidates patents on substitute technology for what it already owned, the antitrust regulation of such patent consolidation positively affects its market competitors’ follow-on innovation.1
In the next section, we describe our empirical strategy to test the formulated hypothesis.
3. Empirical setting
3.1. Regulation of Novell's software patents transfers
The empirical work of this study is based on the case of the DOJ's intervention into Novell's software patents transfer to CPTN in 2011. Novell's primary business domain was the Linux-based OSS market. It was also a founder of the Open Invention Network (OIN), the largest nonaggressive defensive patent pool for the Linux community. By joining the OIN licensing program, firms could freely use the patents that are shared through OIN. In return, the OIN licensees and member companies (Novell, Red Hat, IBM, Philips, Sony, and NEC) were obliged to share their patents with other OIN licensees.
In 2010, Attachmate Inc. (hereafter, Attachmate) announced its decision to acquire Novell Inc. Before the acquisition, Novell tried selling about 800 Linux-related software patents to CPTN, a consortium of the four large proprietary software companies (MS, Oracle, EMC, and Apple).2 A two-stage patent transfer process was planned. In the first step, CPTN was to acquire all the Novell patents. In the second step, CPTN was to redistribute the acquired patents to its member companies. For this deal, the four companies of CPTN paid $450 million in cash.
Before December 2010, the members of CPTN have not been known except MS.3 In early December 2010, the German Federal Cartel Office (Bundeskartellamt) fully disclosed the members of CPTN. After this information disclosure, the Open Software Initiative (OSI) requested the German authority to investigate if Novell's patent transfer to CPTN members has violated German antitrust law. In late December 2010,4 two OSS advocates, namely, OSI and the Free Software Foundation (FSF), sent a joint letter to the DOJ to express their concern that Novell's patent transfer would destroy the Linux community and consequently deter its innovation. They argued the following:
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Novell was dedicated to promoting the Free/Libre and Open Software while using their patents primarily for defensive purposes.
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Linux software is the major competitor of the products of CPTN member companies.
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CPTN member companies have major market shares in the operating systems, virtualization software, and middleware markets.5
The OSI and FSF were concerned that CPTN members might use Novell patents to prevent further development of OSS. They feared this because the CPTN members were not obliged to share their patents with the Linux community and they have a strong motivation to deter the development of the Linux-based software for market competition.
The DOJ responded to this concern by starting an investigation into whether Section 7 of the Clayton Act was violated by Novell's patent transfer. According to the disclosed information, the DOJ requested detailed information about the patent transfer deal from CPTN in late January 2011.6 The 8-K document filed by Novell reports an additional request by the DOJ for further information about the deal in March 2011.7 On April 20, 2011, the DOJ announced its decision to intervene in the deal to address the immediate antitrust concern. The intervention was a partial prohibition of the patent transfer.
First, MS was not allowed to retain any Novell patents. The regulation required the transfer of patents that MS is planning to acquire to CPTN and then transferred back to Novell. Consequently, neither MS nor the other three CPTN members could acquire titles to these patents. Second, EMC agreed not to acquire 33 virtualization software-related patents (i.e., virtual machine technology) because EMC was considered the dominant player in the virtualization software market.8 Third, all the patents retained by Novell became subject to GPLv2 and OIN licensing. Thus, even though Novell disjoined the OIN, these patents were being shared with the Linux community through the OIN license program.
In testing our hypothesis, the DOJ's partial regulation of Novell's patent transfer is a useful case. The CPTN members were the dominant software market players who already owned many software patents that substitute for the Novell patents. Meanwhile, the member companies of the OIN were the primary entities that led the Linux-based OSS development to compete with the CPTN member companies’ software products. The software patent is the crucial complementary asset for OSS appropriation (Fosfuri et al., 2008), whereas IPR protection on software could be damaging to follow-on software developments by those who have no accessibility to the patents (Ghidini and Arezzo, 2013a). Therefore, the CPTN members’ acquisition of the OSS patents from Novell could hamper the software market competition and the OSS innovation. Accordingly, the case of the DOJ intervention into Novell patent transfer meets the conditions of which our hypothesis is likely to support.
Moreover, the quasi-experimental features of the case allow us to conveniently conduct causal analysis. The DOJ's intervention was a result of the German authorities’ disclosure of the list of CPTN members. Hence, the DOJ's regulation was an exogenous event to the involved parties in the patent transfer deal. More importantly, the DOJ's intervention was not to regulate the transfer of a specific set of patents that were particularly important for Linux software development. Instead, the DOJ prohibited the transfer of patents that MS tried to acquire.
3.2. Overview of empirical analysis
Our econometric strategy consists of two analyses. The first analysis is the patent citation analysis. By considering the patent citations accrued to a patent of interest (i.e., patent forward citation) as the proxy for the number of generated follow-on innovations (e.g., Drivas et al., 2017; Galasso and Schankerman, 2015), we estimate the difference in the forward citation counts accrued to the transfer-regulated patents (hereafter, regulated patents) and the transfer-allowed patents (hereafter, transferred patents) after the DOJ's intervention. To this end, we employ the following three complementary econometric methods: cross-sectional data analysis with selected control variables, panel difference-in-differences (DID) analysis, and the synthetic control (SC) approach. If the DOJ's partial regulation of patent transfer was effective to prevent the damaging impact on the follow-on innovation activities of the OIN member companies (i.e., the competitors of the patent-consolidating firms), we expect that the forward citation count of the regulated patents originated from the member companies of OIN should be greater than the forward citations accrued to the transferred patents, after the DOJ's intervention. We additionally conducted several supplementary analyses to rule out rival explanations.
The second analysis is to complement patent citation analysis. Although the patent citation is useful information for measuring the follow-on innovation, not all innovations are patented nor do patents represent innovation. Furthermore, the patent citation rate is often low; thus, measuring the causal impact solely by using patent citation analysis may suffer from the measurement error. To overcome this limitation, we analyze software trademark and copyright-filing activities of companies as alternative measurements of their software innovation activities. Our analysis examines whether the member companies of the OIN experienced a decline in software trademark and copyright-filing activities after the partial transfer of the Novell patents to the CPTN member companies.
3.3. Data
We start by identifying the US patents that were subject to the patent transfer deal between Novell and CPTN by using USPTO patent assignment data (Graham et al., 2018). Our initial search identifies 866 patents. Among them, 760 are the granted patents, which we include in the sample.
In the empirical analyses, we use a variable that counts the number of patent citations accrued to the patent in question beginning 4 years before the DOJ's intervention date (i.e., April 20, 2011) as a control variable. To avoid the truncation problem in the use of this variable, we exclude the patents that were filed after April 21, 2007, resulting in 432 patents in our final sample.
For each patent in the data, we identify which member company of the CPTN became the new patent owner by searching for the patent ownership change history made by CPTN as the patent assignor after April 2011

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