1. 1 What’s different about patents across industries? —and so what? Wesley M. Cohen Duke University Conference on Patents and Diversity in Innovation University of Michigan Law School Sept. 29-30, 2006

2. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 2 Patent effectiveness ► According to Levin et al. [1987] and Cohen et al. [2000], the effectiveness of patents varies across industries, and is comparable to that of other means of protection (e.g., lead time, secrecy) in only a small number of industries, such as drugs and medical equipment. ► Cohen et al. [2000] also identified differences across industries in the way that patents are used =>

3. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 3 Reasons to patent (aggregate CMS sample) Reasons for applying (nonexclusive) Products Processes Reasons for applying (nonexclusive) Products Processes  Prevent copying 96% 78%  Patent blocking 82 64  Prevent suits 59 47  Use in negotiations 48 37  Enhance reputation 48 34  Licensing revenue 28 23  Measure performance 6 5

4. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 4 A key difference across industries ► When number of patents per commercializable innovation are great, unlikely that any one firm holds all necessary rights, fostering mutual dependence => cross-licensing negotiations and use of patents as “chips” in a bargaining process to access one another’s technology or secure freedom of operation/design ► Suggests different uses of patents across industries that turn on number of patents/product

5. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 5 Distinction between “complex” vs. “discrete” product industries ► Complex product industries:  Where a product protected by numerous (i.e., hundreds or even thousands) patents (e.g., computers, communications equipment) ► Discrete product industries:  Where a product protected by relatively few patents (e.g., drugs, chemicals) ► Oversimplification  Distinction can apply across products even within some industries (e.g., medical devices)

6. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 6 Implies different uses of patents by industry type ► Complex product industries:  Patents used to block rival use of complements and thus assure inclusion or “player” status in cross- licensing negotiations to gain access to rivals’ technologies or gain freedom of operation ► Discrete product industries:  Where substitution difficult, few patents may be necessary to confer protection  When substitution is possible, as is typical, patents are used to block substitutes by creating patent “fences;” not to compel cross-licensing. (Note the different meanings of “block”)

7. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 7 Evidence: Product patent uses across industry types ► Patent Uses Discrete Complex (patent applic. wtd.) (patent applic. wtd.)  Negotiations 33% 81%  “Cross-licensing” 10 55  Player: Block and negs. 29 61  Fences: Block but not 45 11 negs.

8. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 8 Different uses driven by technology alone? Not so fast

9. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 9 Policy plays a role ► Consider Japan where there are fewer claims per patent and claims tend to be interpreted more narrowly, often yielding many more patents per commercializable product.

10. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 10 Strategic uses of patents in Japan Patent Uses Discrete Complex Patent Uses Discrete Complex (patent applic. wtd.) (patent applic. wtd.)  Negotiations 84% 86%  Player: Block and negs. 83 81  Fences: Block but 11 7 not negs.  => All Japanese industries look like U.S. complex product industries

11. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 11 So what? ► Thus, some industries, and even nations, may be more susceptible to mutual dependence across IP holdings and associated behaviors  May spawn patent portfolio races (cf. Hall and Ziedonis [2001] for semiconductors) that: ► May raise the cost of innovation ► May deter entry and associated innovation, though little systematic evidence of such  But may also promote information sharing, and mitigate transactions costs and license stacking ► Does this circumstance require policies tailored to specific industries or technologies?

12. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 12 Returns to patents ► Returns to patents and associated R&D incentive effects also differ across industries (Arora, Ceccagnoli and Cohen [2006])  For example, the unconditional patent premium is in medical devices twice that estimated for semiconductors, but in all cases private returns to patents are positive. ► But these are the private returns ► Policy implication: Notwithstanding positive private returns, where private returns are low, likelihood of negative social returns higher

13. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 13 What else do we want to know to inform policy?

14. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 14 Factors reflecting social costs and benefits and their determinants ► Benefits  R&D incentive effects  Information diffusion via patent disclosures  Gains from trade via associated technology markets  Signaling (as for capital markets) ► Costs  Monopoly distortion ► Also where patents raise barrier to entry  Transaction costs, including litigation  Opportunity costs associated with alternative means of protection foregone  Costs due to noncooperative strategic outcomes

15. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 15 Numerous questions follow ► A more comprehensive characterization of uses of patents ► Comparison of use of patents to use of other means of protection ► % of patentable inventions patented ► % of inventions that are out- and in-licensed and terms ► Improved measures of “strength,” including frequency of infringement ► Propensity to send notification letters (propensity to litigate is better understood)

16. Wesley Cohen, Duke University, Conference on Patents and Diversity in Innovation, Sept. 29-30, 2006 16 What would you like to know (and why)?