Shapiro (2001) - Navigating The Patent Thicket

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  • Shapiro, C. (2001), "Navigating the patent thicket: Cross licenses, patent pools, and standard setting", , pp.119--150
  title={Navigating the patent thicket: Cross licenses, patent pools, and standard setting},
  author={Shapiro, C.},
  booktitle={Innovation Policy and the Economy, Volume 1},
  research_type={Discussion, Theory},
  filename={Shapiro (2001) - Navigating The Patent Thicket.pdf}



In several key industries, including semiconductors, biotechnology, computer software, and the Internet, our patent system is creating a patent thicket: an overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees. The patent thicket is especially thorny when combined with the risk of holdup, namely the danger that new products will inadvertently infringe on patents issued after these products were designed. The need to navigate the patent thicket and holdup is especially pronounced in industries such as telecommunications and computing in which formal standard setting is a core part of bringing new technologies to market. Cross licenses and patent pools are two natural and effective methods used by market participants to cut through the patent thicket, but each involves some transaction costs. Antitrust law and enforcement, with its historical hostility to cooperation among horizontal rivals, can easily add to these transaction costs. Yet a few relatively simple principles, such as the desirability package licensing for complementary patents but not for substitute patents, can go a long way toward insuring that antitrust will help solve the problems caused by the patent thicket and by holdup rather than exacerbating them.


Patent Thickets

In the abstract the paper defines a patent thicket as:

"an overlapping set of patent rights requiring that those seeking to commercialize new technology obtain licenses from multiple patentees."

It also makes it clear that hold-up is not part of the thicket problem in and of itself:

"The patent thicket is especially thorny when combined with the risk of holdup, namely the danger that new products will inadvertently infringe on patents issued after these products were designed."

The paper claims "our patent system is creating a patent thicket" in the following key industries:

  • Semiconductors
  • Biotechnology
  • Computer Software
  • The Internet (specifically e-commerce and business method patents)

The main text explicitly invokes two concepts:

  • Cummulative innovation
  • Blocking patents

Before providing the following definition of a patent thicket as:

"a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology. With cumulative innovation and multiple blocking patents, stronger patent rights can have the perverse effect of stifling, not encouraging, innovation."

The paper then discusses excessively loose standards in the context of both e-commerce and business method patents seperate from the issue of thickets:

"But concerns about a patent thicket, and excessively loose standards at the PTO, are hardly confined to e-commerce and business method patents."

It then introduces submarine patents as a later prerequisite for hold-up:

"So-called submarine patents, that take years if not decades to work their way through the Patent and Trademark Office, are another great source of anxiety especially for large manufacturing firms."

The main text of the paper appears to conflate two concepts:

  1. The requirement for a patented complementary input during commercialization
  2. (Presumably) inadvertant infringement of patented prior art leading to hold-up


"The vast number of patents currently being issued creates a very real danger that a single product or service will infringe on many patents. Worse yet, many patents cover products or processes already being widely used when the patent is issued, making it harder for the companies actually building businesses and manufacturing products to invent around these patents. Add in the fact that a patent holder can seek injunctive relief, that is, can threaten to shut down the operations of the infringing company, and the possibility for holdup becomes all too real."

And redefines patent thickets in terms of infringement:

"This paper takes as given the flood of patents currently being issued by the PTO, and assumes that these patents are indeed creating a patent thicket in the sense that many new products would likely infringe on multiple patents."

However, particularly given the clean cut seperation of patent thickets and hold-up in the abstract, this redefinition may not have been intentional.

"The generic problem inherent in the patent thicket is well understood as a matter of economic theory, at least in its static version. Consider, for example, a company seeking to manufacture a new graphics chip... Suppose that the company's preferred design for this chip is likely to infringe on a number of patents; the process manufacturing methods used to actually produce the chip infringe on a number of additional patents. In order to produce the chip as designed, the company needs to obtain licenses from a number, call it N, of separate rights holders."

Thus, no actual infrigement takes place. Rather the product at issue (which itself may be patented) requires a large number of patented complementary inputs, which are diversely-held by N rights holders, in order to be commercialized. With out the necessary licenses, commercialization (and so infringement) can not take place, and with the necessary licenses there is no infrigement.

Thickets do not involve hold-up, but rather embody a Cournot complements problem. This leads to three potential welfare losses:

  1. 'Double marginalization' on input costs leading to deadweight-loss and inefficiently low use
  2. The possibility of a loss of welfare from the failure to introduce new products: ...these burdens may cause certain products not to be produced at all, if that production is subject to economies of scale.
  3. A reduction in the likelihood of future innovation: new product design and development, and thus can easily be a drag on innovation and commercialization of new technologies.

However, the paper implicitly also mentions the gains from the increased return to each patent-holder, which can compensate for the cost of R&D for the patent and other failed research projects:

"So, unless the patent in question is quite broad, one might think that any burden on the manufacturer would be modest, and arguably the very return we wish to provide to the patentee as a reward for innovation."

The following welfare consequences are not discussed:

  1. The gains from return to specialization in the economy
  2. The welfare effect of any race for the patents
  3. The possible increase in the likelihood of future innovation arising from the 'size of the prize' for creating a complementary input

The paper notes that there are private mechnanisms in place to mitigate the problems associated with patent thickets based upon cooperation, including:

  1. Cross-licensing
  2. Patent Pools and Package Licenses
  3. Cooperative Standard Setting
  4. Settlements of Patent Disputes
    1. Acquisitions
    2. Cash payments for exit

Each of these is discussed in turn.


[math]N\;[/math] firms own patents on complementary inputs, with costs of producing a unit of [math]c_i\;[/math], charging a price [math]p_i\;[/math]. The price of the product itself will be [math]p\;[/math], and assembling a unit will cost [math]\alpha\;[/math].

Competition at the assembly level ensures that:

[math]p=\alpha + \sum_i p_i\;[/math]

Demand for the product is [math]D(p)\;[/math], and the price elasticity of demand is therefore:

[math]\epsilon = - \frac{D'(p)\cdot p}{ D(p)}\;[/math]

The [math]N\;[/math] firms set their component prices independently and non-cooperatively. That is the model assumes that each firm is a monopolist so it sets price (quantity) to maximize profits.

[math]\pi_i = D(p)(p_i-c)\;[/math]

Therefore the FOC is:

[math]\frac{d \pi_i}{d p_i} = D(p) + D'(p)(p_i - c_i) = 0\;[/math]

Summing across all [math]i\;[/math]:

[math]D(p)N + D'(p)\sum_i(p_i - c_i) = 0\;[/math]
[math]\therefore \frac{\sum_i(p_i - c_i)}{p} = \frac{D(p) N}{p D'(p)}\;[/math]

Subbing in [math]\sum_i p_i = p - \alpha\;[/math]:

[math]\frac{p - \overbrace{\alpha - \sum_i c_i}^{c}}{p} = \frac{N}{\epsilon}\;[/math]

With a single firm, [math]N=1\;[/math], the Lerner index is [math]\frac{1}{\epsilon}\;[/math], so with [math]N\;[/math] firms the mark-up is [math]N\;[/math] times the standard monopoly mark-up.


Aside from the complements problem, the paper also explicitly addresses a hold-up problem. A careful read of the paper suggests that this should not be included in the problem of patent thickets, but instead that is a seperate, albeit related, issue.

In the context of the how patents generally might stiffle innovation (outside of the "romantic view" that patent provide rewards for innovation to patentees), the paper focuses on three core issues:

  1. Patents that are too broad or improperly granted
  2. The cummulative effect of small taxes
  3. Timing issues: no possibility of invent around with submarine patents, and thus hold-up


"In short, with multiple overlapping patents, and under a system in which patent applications are secret and patents slow to issue (relative to the speed of new product introduction), we have a volatile mix of two powerful types of transaction costs that can burden innovation: (1) the complements problem, the solution of which requires coordination, perhaps large scale coordination; and (2) the holdup problem, which is quite resistant to solution in the absence of either (a) better information at an earlier stage about patents likely to issue, and/or (b) the ability of interested parties to challenge patents at the PTO before they have issued and are given some presumption of validity by the Courts."

Anti-trust Responses

The core of the paper considers anti-trust's responses to the mechanisms used to address thickets and hold-up:

...I consider whether antitrust limits are contributing to the problems caused by the patent system. Unfortunately, antitrust enforcement and antitrust law have a deep rooted suspicion of cooperative activities involving direct competitors. But such cooperation1 in one form or another, may be precisely what is required to navigate the patent thicket. As a result, unless antitrust law and enforcement are quite sensitive to the problems posed by the patent thicket, they can have the perverse effect of slowing down the commercialization of new discoveries and ultimately retarding innovation, precisely the opposite of the intent of both the patent laws and the antitrust laws."

The paper suggests that there are two possible anti-trust approaches:

  1. "...ask whether the agreement in question leads to more competition than would occur without that agreement." (Adopted in Antitrust Guidelines for the Licensing of Intellectual Property, §3.1)
  2. "...ask whether the agreement in question is the most competitive agreement possible. Put differently, one could ask whether a given agreement is the least restrictive alternative that is workable in the sense of solving the legitimate business problem faced, such as unbiocking patent positions."

The paper then considers, and provides examples, of the role of anti-trust in:

  • Cross Licensing
    • Intel's Policy of "IP for IP"
  • Patent Pools
    • MPEG case
    • DVD case
    • Summit Technology, Inc. and VisX, Inc.
  • Cooperative Standard Setting
    • Addamax Corporation v. Open Software Foundation, Inc.
    • Dell Computer and the VESA VL-Bus Standard
    • Motorola and the IT1I V34 Modem Standard
  • Settlements of Patent Disputes
    • Pillar Point Partners (Summit Technology, Inc. and VisX, Inc.)
    • Boston Scientific and CVIS


Patent thickets and Hold-up

In the conclusion the paper identifies "significant transaction costs for those seeking to commercialize new technology" based on three things as problematic:

  1. Multiple patents
  2. Overlapping rights
  3. Holdup problems


"Our current patent system is causing a potentially dangerous situation in several fields, including biotechnology, semiconductors, computer software, and e-commerce, in which a would-be entrepreneur or innovator may face a barrage of infringement actions that it must overcome to bring its product or service to market. In other words, we are in danger of creating significant transaction costs for those seeking to commercialize new technology based on multiple patents, overlapping rights, and holdup problems. Under these circumstances, it is fair to ask whether the pendulum has swung too far in the direction of strong patent rights, ranging from the standards used at the Patent and Trademark Office for approving patent applications, to the secrecy of such app1ication, to the presumption afforded by the courts to patent validity to the right of patent holders to seek injunctive relief by insisting that infringing firms cease production of the offending products."

However, the word 'overlapping' (as in overlapping patents) is only used 4 times in the text (outside of 2 uses in section headers). Two of these uses are in the thicket definitions from the abstract and the main text. Another is in when distinguishing thickets from hold-up ("with multiple overlapping patents, and under a system in which patent applications are secret and patents slow to issue..., we have a volatile mix of two powerful types of transaction costs that can burden innovation"), and the last in the conclusion quote above ("we are in danger of creating significant transaction costs for those seeking to commercialize new technology based on multiple patents, overlapping rights, and holdup problems."). Thus we should probably conclude that Shapiro meant no distinction between overlapping patents and patented products that themselves required many patented complementary inputs.


With regards to anti-trust, the paper concludes by suggesting that the FTC exhibit more restraint and allow more cooperation:

"So far, the Department of Justice has displayed a keen understanding of the need for those holding complementary rights to coordinate in the licensing of those rights, but the Federal Trade Commission has exhibited less restraint, and arguably is making it more difficult for firms to engage in cross licenses, to offer package licenses, or to form procompetitive patent pools."