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April 30, 2008
Every Patent Affects Two Different Markets
There are two different markets relevant to every valuable patent. First, there is the market for the R&D work that results in the patent. Prices in this market are set by the opportunity costs for the time of scientists and engineers who are capable of theorizing about and experimenting with the technology. Second, there is the market for the claimed products or services that the R&D work opened up. The second market is the one that everyone naturally thinks about. In fact, our whole nation has had a blind spot for the first market for a long time because corporate R&D divisions were serving that market very well until the Bayh-Dole Act was passed in 1980. But most universities have not been able to consistently match pre-product funding with the flow of R&D produced by their faculty. One former R&D employee from Apple and Microsoft blames Silicon Valley, saying "Silicon Valley forgot how to do R&D."
Within the law of antitrust, one can observe how this blind spot is affecting the outcome of litigation. The essential facilities doctrine of antitrust law has been applied in an inconsistent way because most judges don't see that there are two different markets. R&D work almost always has natural monopoly characteristics. But patents covering valuable R&D should not therefore trigger the essential facilities doctrine. Lots of R&D work needs the barrier to entry that only legal exclusivity can provide in order to recover even a reasonable profit. Yet if the same patented R&D is valuable because the claims cover a product, the production and distribution of which have natural monopoly characteristics, then applying the essential facilities doctrine to require the patent owner to make licenses available on a non-exclusive basis might make sense.
Consider two concrete examples. Example 1: I patent R&D claiming a new type of telephone. The essential facilities doctrine should not be invoked to require me to license others to sell the patented telephone. Producing telephones is not a natural monopoly because the total average costs are not always declining. Note that this is true even though the telephone demonstrates network effects. Example 2: I patent R&D claiming a new type of telephone network. The essential facilities doctrine probably should be invoked to require me to license others on a non-exclusive basis who need to use the telephone network for their own products or services to be valuable. Building telephone networks is a natural monopoly because the total average costs are always declining. In both cases, the crucial question is whether the second market has natural monopoly characteristics. The first market almost always will.
In some cases in the past, when the essential facilities doctrine has been invoked against patent owners, judges have decided either to let the patent owner maintain full exclusivity or to deny any compensation. Better would be for judges to let most patent owners do whatever they want, but require compulsory licenses in the subset of cases in which the actual product or service sold has natural monopoly characteristics.
Those with an extraordinary interest in reading more can wade through this paper. But know that I am no longer enthralled with the idea of applying the reverse doctrine of equivalents in patent law or the Feist originality doctrine from copyright law to the same effect. Too much potential for mischief.
Posted by Michael Martin at April 30, 2008 3:37 PM | Patents In Business