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December 6, 2008

In the Pool

Stanford University academics Ryan Lampe and Petra Moser, in "Do Patent Pools Encourage Innovation?":

Regulators favor patent pools to encourage innovation in industries where overlapping patents and excessive litigation suppress innovation. With patent pools, member firms share patents freely with each other and offer one-stop licenses to outside firms. Thus patent pools are expected to promote innovation by reducing litigation risks for pool members and lowering transaction costs for outside firms. Our data confirm that pools reduce litigation risks for members and that pool members patent more in the years leading up to the pool. Pool members, however, patent less as soon as the pool is established and only resume patenting after the pool dissolves. Performance data suggest that innovation slowed as soon as the pool had been established and resumed only after the pool had been dissolved.

Lampe and Moser have "the first patent pool in U.S. history, the Sewing Machine Combination (1856-1877)" as their study centerpiece.

They describe an aircraft patent pool, formed upon Congressional "recommendation", where the U.S. entered World War One three weeks after the pool was formed. U.S. aircraft production soared from 83 in 1916 to 1,807 in 1917, and 11,950 in 1918. One would not logically attribute that to the patent pool as much as historical circumstance.

Recently, patent pools for the SARS vaccines and HIV/AIDS drugs have arisen.

Antitrust authorities in the United States favor pools because they "provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation" (U.S. Federal Trade Commission and Department of Justice, 1995).

The authors rub at the difference between theory and reality.

Theoretical models of patent pools predict that pools encourage innovation. Specifically, the prospect of a patent pool increases firms' incentives to invest in R&D because lower risks of litigation and improved licensing schemes increase expected profits for participating firms. The prospect of a patent pool may also increase the speed of innovation: If a limited number of patents are needed to form the pool is limited, firms may race to develop the technologies that are included.

A lack of contemporary data, however, has made it difficult to establish these effects empirically.

So they look at the first U.S. patent pool, for sewing machines, in the mid-1800s.

The case of the sewing machine industry suggests two ways in which pools may discourage innovation, in the absence of regulation. First, by creating a more formidable opponent in a court of laws, pools intensify the threat of litigation for outside firms. Thus, 19th century litigation data show that outside firms were more likely to act as a defendant in a court of law after the pool had been established, and that pool members acted as plaintiffs in most of these cases. Second, the existence of the pool appears to have shifted the direction of innovation to an inferior technology, the chain-stitch, which was known to be significantly less robust, and unsuitable for mass production.

Though they focused on a single example, they were careful in their analysis, attempting to account for anomalies, such as the Civil War during the time of the sewing machine patent pool. Their solitary example well supports their conclusions, which are logical, and thus convincing.

Our data confirm the predictions of previous literature that patent pools lower the risks of litigation for member firms and that the prospect of a pool encourages firms to enter and patent more.

Our data, however, challenge the expectation of regulators that pools encourage innovation. Specifically, we find that pool members patent less while the pool is active. This result may reflect a benefit of pooling: To the extent that a pool reduces the risk of litigation it also eases the need for strategic patents.

The overall speed of innovation in the sewing machine industry slowed while the pool was active and only increased again after the pool dissolved. While the pool was active, member firms failed to develop machines that sewed at higher speeds, even though the demand for machine-sewn clothing, including large numbers of Civil War uniforms, had seen a healthy increase. Outside firms also failed to improve the performance of sewing machines during the pool years.

Outside firms, in fact, did not benefit from the existence of a pool, regardless of whether they licensed pool technologies or not. Historical data on infringement suits suggest that the sewing machine pool increased litigation risks for outside firms. By reducing expected profits, higher litigation risks lowered incentives to invest in sewing machine improvements. The threat of litigation also appears to have diverted the research of outside firms toward inferior technologies that were not covered by the pool. Outside firms, that committed their research to these inferior technologies, faced higher likelihoods of exit (Lampe and Moser, 2008). These results imply that patent pools may slow innovation if innovative firms are excluded from the pool.

Lampe and Moser have produced an exemplary paper of careful research and analysis in an important area. In doing so, they have raised serious questions about patent public policy with regard to patent pools.

Posted by Patent Hawk at December 6, 2008 2:03 PM | Antitrust

Comments

The patent pool agreement concerning aircraft in World War I was written by Benton Crisp, Curtiss's lawyer, and produced no US-built fighters actually USED in World War I. It did freeze out smaller competitors, though.

Was there any credible research that patent pools increased innovation? This seems like flogging a strawman.

Posted by: Lawrence B. Ebert at December 6, 2008 4:13 PM

Lawrence,

I'm not sure flogging a strawman is an on point comparsion.

Patent pools are receiving a fair amount of press and their claims should be reviewed. Historical findings are hardly strawmen.

1856-1877, World War I,...I'd be interested in more recent historical results.

Posted by: Noise above Law at December 7, 2008 8:42 AM

The World War I patent pool in aviation produced a lot of airplanes that weren't used in World War I, and profits for the pool members, at the expense of innovation. Content with the results of the pool, Curtiss went into the Florida real estate business. Separately, the Stanford economists seem to equate "number of patents" with innovation, which is hardly reasonable, especially when a pool exists. For a different problem with a different Stanford economist, see 8 JMRIPL 80 (2008).

Posted by: Lawrence B. Ebert at December 8, 2008 12:30 AM