Weaponizing Patent Law


Weaponizing Patent Law[10]

Patent law can be used to hold up inventors. Imagine that your company has decided to develop a new product called a gaunkulater. Once you have designed a gaunkulater, it will cost you a few hundred dollars to make each one. You will incur a substantial research and development cost, however, before you can produce even your first gaunkulater.

Your engineers have determined that there are three substantially different methods of researching and developing a gaunkulater: Path A, Path B, and Path C. You estimate the following:

Table 6: Research Paths

Path Followed

Research and Development Costs

A

$50 million

B

$52 million

C

$53 million

Since Path A is the cheapest, you provisionally decide to follow it. Your lawyers, however, warn you that following Path A would necessitate using a patent owned by Hogan Inc. Hogan Inc. doesn’t have a patent on a gaunkulater; rather, one of the products it has a patent on would be a critical subcomponent of a gaunkulater if you use Path A. Consequently, without Hogan Inc.’s permission, you could not produce the gaunkulater if you used Path A.

Because of holdup problems, if you use Path A, it’s vital that you get Hogan Inc.’s permission before you start to build the gaunkulater. It would cost you an extra $2 million to follow Path B rather than Path A. Consequently, before you start researching the gaunkulater, $2 million is the most that Hogan Inc. would assume you would pay for their patent rights. Imagine, however, that you stupidly spend $50 million for research and development on Path A before getting Hogan Inc.’s permission. Now, if it doesn’t give you its patent rights, you will have to spend $52 million more to develop the gaunkulater using alternative means; $52 million is now the maximum amount that Hogan Inc. expects you would be willing to pay if you have already spent $50 million developing the gaunkulater using Path A.

Let’s imagine that you tried to get Hogan Inc.’s permission before you started research and development, but it demanded $3 million for its patent rights. Consequently, you decided to abandon Path A and worked on Path B.

Unfortunately, just after you have spent $52 million on Path B, Hogan Inc. is granted a new patent. This patent is on a critical subcomponent of a gaunkulater that is built using Path B. Hogan Inc. had been working on this Path B component for some time. When you came to it asking about patent rights, it was within weeks of getting a patent on this subcomponent. The clever lawyers at Hogan Inc., however, decided to slow down their patent request. When your attorneys did a search to see if using Path B would violate any patent rights, they didn’t find out about Hogan Inc.’s patent, since it had not yet been granted. Hogan Inc. decided to wait until just before you started selling your product to get its patent finalized. Now, without Hogan Inc.’s patent, it would cost you an additional $53 million to develop the gaunkulater using Path C. Consequently, it would be worth it for your company to pay Hogan Inc., say, $40 million for its patent rights, bringing your total cost of development to a total of $92 million ($40 million + $52 million). If you had known that Hogan Inc. could block the production of a gaunkulater by Paths A and B, you would have used Path C and paid only $53 million.

Companies developing patents often have incentives to keep their patent rights submerged by not getting the official patent until they have trapped some other inventors. Because of holdup problems, patent holders can get far more money for their patent rights if negotiations begin after the company that needs its patent has developed its product.

[10]See Lessig (2001), 214 for a brief discussion of this issue.




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

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