Patent Aggregation and its Effects on Innovation and Competition
October 15, 2015
In this article we focus on what patent aggregation is and how it has emerged. We will be exploring the European Patent Office’s Economic and Scientific Advisory Board (ESAB) report regarding patent aggregation and its impact on competition and innovation in business
What is patent aggregation?
Patent aggregation as defined by ESAB as the process of obtaining patents from multiple parties and bringing them under the control of one party. Patent aggregators often focus on obtaining portfolios of patents for certain industries. ESAB identified several types of patent aggregation:
Patent pools: companies that group their patents together to license a particular technology.
Patent brokers: these facilitate patent transactions. They often offer financial services related to intellectual property, such as patent portfolio auctions, and patent portfolio ratings and valuations.
Practicing entities: these companies are active in the product and technology markets as well as building their own patent portfolios.
Non-practicing entities: Entities that are dedicated to monetising patents. These companies license patents and/or enforce them through litigation.
ESAB’s report noted that it is often difficult to assign companies into these different categories as they often do a mixture of the above and sometimes change their business strategy over time.
Why has patent aggregation emerged?
According to ESAB, patent aggregation has emerged due to an increase in ‘patent markets’, i.e. where there are exchanges of patents and/or licenses on patents between parties. ESAB believes that this has happened because of the convergence of technology; more and more technologies are being brought together to make complex products, and sometimes separate technologies evolve to perform similar tasks to one another. This also results in an increased level of sharing knowledge between companies. As a result ESAB alleges that aggregation has emerged to try and solve and/or exploit the slowness and increasing costs involved with these markets.
ESAB’s report identified issues with patent markets, and provided reasons as to why patent aggregators can help to resolve some of these issues, but also identified how they could have negative implications for the markets. ESAB then discussed how competition and innovation are affected due to this.
Patent market issues identified by ESAB
Difficulty in valuing patents both monetarily and in quality, as theoretically each patent is unique and has no other directly comparable asset. This can lead to disputes between parties that may result in litigation.
The increasing trend of combining previous inventions to make a new product. This may lead to a complex web of patent rights, and a company may have to pay license fees for all patents that their new products infringe. This may result in other issues listed below:
For example, companies may be charged excessive amounts by having to pay multiple parties compared to if the patents were only owned by one party.
They may also have to deal with parties charging higher than their patents are actually worth because they know that if the company has already invested a lot of money into using a technology, such as paying for research and licenses for other patents, they are unlikely to not pay for the patent rights, due to the cost of abandoning the use of that technology and switching to another technology.
The complexity of this process can also hurt licensees when companies do not pay license fees for all the patents that they should do, because of a perception that they don’t need to pay for all of the patents related to their new products. This is perhaps due the similarity and large number of patents their product potentially relates to and the cost they would have to pay for searching for all the relevant patents.
What benefits to the patent markets do aggregators provide according to ESAB?
By combining patents relating to certain technologies, aggregators can become a one-stop shop for companies wanting to pay licenses for a new product and at prices lower than they would have been if the patents were owned by separate parties.
Aggregators can move the process of litigation and licensing away from inventors and companies, whilst reimbursing them for their inventions, which can provide financial benefits for SMEs and start-ups.
By obtaining portfolios of patents, some types of aggregators, such as patent brokers may be able to provide more information and better valuation on patents.
ESAB therefore argued that patent aggregators may be able to enable patent markets to flourish, which can have positive effects on innovation. Firstly, it may help to reward inventors and create an incentive for innovation, and it may make access to patented technology easier, which would encourage innovation following on from that technology.
What are the negatives could patent aggregators bring to the markets according to ESAB?
If an aggregator dominates a market area, they may force high charges on patent licensees and may buy patents for a low price from patent owners.
Some aggregators might hide low-quality patents in a bundle of similar patents and may effectively increase the scope of protection provided by that patent so that companies pay more than they should be for low-quality patents.
Aggregators may become aggressive with litigation when enforcing their patents, as their core business is often only involved in aggregation, and therefore do not have to stake as much as companies whose prime focus is producing and selling products.
Aggregators may cause companies to opt for using inferior technologies owned by aggregators as opposed to using high-end technology owned by multiple parties due to lower costs, which would slow down progress.
ESAB’s conclusion in the report is that patent aggregation should be viewed as a practice that can be used in two ways; in a way that is beneficial to society and one that is costly to society. As a result, ESAB’s view is that in general to avoid undermining the beneficial effects of patent aggregation, no form of aggregation should be considered anti-competitive immediately, rather misconduct should be evaluated on a case-by-case basis. They highlighted that relevant questions to consider for each case are how aggregators build their portfolios and set their license terms, and whether they use any market power to impose restrictions and reduce competition on the technology market.
In the report ESAB acknowledges that enforcement of anticompetitive behavior in Europe is already in place, but suggests that patent offices could use their expertise to inform the authorities on specific matters relating to technical aspects of patents and technology.
ESAB also noted that increased transparency on patent ownership, so that users of the patents system can clearly find out who owns a particular patent and what patent transactions have taken place would restrict abusive practice.
The conclusion of the work carried out by ESAB also raised some open questions for further research. In particular, they noted that it is important to determine if the aggregation of patents can increase the value and/or strength of individual patents, so that the anti-competitive effects of aggregation, such as market dominance, can be truly assessed. They also reported that despite many examples, there are no accurate or reliable statistics that represent the whole of patent aggregation activity in Europe, possibly due to the lack of transparency of patent ownership.
The report by ESAB can be found here. If you have any questions about patent aggregators or the report by ESAB, please don’t hesitate to get in touch with your usual contact at Swindell & Pearson or with Joe Baumber at [email protected]. Joe is a patent advisor and is based at our Derby office.