1. Patents and Downstream Innovation Suppression – Facts or Fiction? John Howells Associate Professor Management of Innovation University of Aarhus, Denmark Presented at the Southern California Law Associations Intellectual Property Spring Seminar, June 8–10, 2007, Laguna Niguel, CA

2. 2 Merges R and Nelson R (1990) ‘On the Complex Economics of Patent Scope ‘ Columbia Law Review, 90, (4): 839-916. Merges and Nelson have strong conclusions ‘In many industries the efficiency gains from the pioneer’s ability to coordinate are likely to be outweighed by the loss of competition for improvements to the basic invention.’ at (1990) 843- 844. '…we come out with the belief that the granting and enforcing of broad pioneer patents is dangerous social policy. It can, and has, hurt in a number of ways….And there are many cases where technical advance has been very rapid under a regime where intellectual property rights were weak or not stringently enforced. We think the latter regime is the better social bet.’ At (1994) 16

3. 3 Nine significant empirical cases 1.Edison’s carbon filament light bulb 2.Radio patents ‘deadlock’ post WW1 3.Radio infringement case between diode and triode 4.Selden patent on automobile 5.Wright brothers’ warped wing patent and Curtiss’ infringing aileron 6.AT&T and the transistor – antitrust consent decree 7.IC/Planar process – DoD requires diffusion 8.Polyethylene – Ziegler licenses widely 9.Polypropylene – USPTO takes 25 years to decide interference proceedings

4. 4 Edison’s carbon filament light bulb M&N CLAIM ‘the validation of Edison’s broad patent slowed the pace of improvements considerably.’ at 886 1They cite view of Edison’s Gen. Elec. Co. in 1891 that its own rate of technical advance had been slowing. 2In Britain, ‘Given the lack of competition, it is perhaps not surprising that the pace of technical advance slowed’ WHAT HAPPENED? Sawyer-Man patent applied for one month after Edison’s, in interference proceedings including with Edison patent until issued 1885; Sawyer-Man infringement proceedings against Edison 1887, lose 1889, confirmed Supreme Court 1895. Edison Company patent granted 1880, sought to validate from 1885, came to hearing 1889, won 1891, won appeal 1892 – it took 12 years from grant to validation. Edison patent owners sought to close down imitators from 1892 The procedural delays had effectively compromised the development prospect

5. 5 Selden patent M&N CLAIM: ‘thus while it was available, Kitch’s proposed strategy of orderly development of the ‘prospect’ was not even tried’ M&N 1994 at 14. M&N claim litigation with Ford ‘slowed Ford down’ M&N 1994, at 14. WHAT HAPPENED? Absent from M&N analysis the 16 years procedural delay by Selden (a patent attorney) between filing (1879) and grant of patent 1895 Selden patent a classic instance of the ‘submarine’ patent

6. 6 Wright Brothers’ Warped Wing Patent, granted 1906, validated 1914 1M&N CLAIM litigation ‘significantly held back the pace of aircraft development in the US by absorbing the energies and diverting the efforts of people like Curtiss’ (M&N 1994 at 15). WHAT HAPPENED? Wrights’ patent validated 1914 against Curtiss’ company’s use of aileron This is M&N’s only case of a patent of broad scope, validated, and with the potential to block an existing, superior downstream innovation The Wright brothers were never free of litigation long enough to effectively use injunctions. by 1915, most aircraft used the aileron (Bittlingmayer at 231) Orville Wright declared only that he wanted royalties Litigation continued until US entry into WW1 threatened, when Congress and President threatened compulsory purchase of Wright and Curtiss patents to compel owners to join a patent pool – created 1917. There is no evidence of technical hold-up, but the validation decision was controversial

7. 7 Radio M&N’s GENERAL CLAIM ‘radio is thus a canonical instance where the presence of a number of broad patents, which were held by different parties and were difficult to invent around, interfered with the development of the technology’ at 893. 1M&N refer to the formation of RCA to break a patent ‘deadlock’, at 893. 2‘ a classic instance of blocking patents’ at 892 to be the interference between the US Marconi diode and De Forest triode interests. WHAT HAPPENED? No mention of extraordinary circumstance that Congress suspended the enforceability of radio patents during WW1 The ‘deadlock’ was a 2 year period of negotiation, not a period of hold-up A jury trial on the suit and counter-suit for infringement of the diode and triode resulted in what may be called a verdict of ‘mutual infringement’ in 1916.

8. 8 The real pattern is of compromised development prospects 1.Edison – Sawyer-Man patent interference proceedings and 12 year delay of validation 2.Selden ‘submarine’ patent - 16 years delay between file and grant 3.Wright brothers broad scope patent; never able to be enforced effectively; contemporaries doubted the wisdom of the appeal court validation 4Radio - a) patent ‘deadlock’ was really a 2 year period of negotiation that resulted in the creation of RCA 5Radio - b) diode-triode infringement case a ‘classic’ case of blocking patents, but block never happened 6Polyethylene: excessive licensing by Ziegler helps destroy profitability 7Polypropylene – USPTO takes 25 years to resolve interference proceedings 8AT&T/transistor - antitrust consent decree forced diffusion 9IC/planar process – DoD required widespread licensing

9. 9 Conclusions 1Merges and Nelson present no evidence of pioneer patents being used to hinder or block downstream innovation or research 2Their claim to have faulted Kitch’s prospect theory on this selection of the empirical evidence must be rejected. 3The better pattern in these cases is that the development prospect was compromised for highly idiosyncratic reasons 4If we must have a policy recommendation, it might be that the patent system should normally be explicitly administered to support the prospect function.