Patents, Freedom to Operate, and Follow-on Innovation: Evidence from Post-Grant Opposition

Fabian Gaessler, Dietmar Harhoff, Stefan Sorg and Georg von Graevenitz
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Fabian Gaessler: University Pompeu Fabra , Barcelona School of Management, Barcelona School of Economics, MPI-IC
Dietmar Harhoff: MPI-IC, LMU Munich, CEPR
Stefan Sorg: MPI-IC

No 494, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study the blocking effect of patents on follow-on innovation by others. We posit that follow-on innovation requires freedom to operate (FTO), which firms typically obtain through a license from the patentee holding the original innovation. Where licensing fails, follow-on innovation is blocked unless firms gain FTO through patent invalidation. Using large-scale data from post-grant oppositions at the European Patent Office, we find that patent invalidation increases follow-on innovation, measured in citations, by 16% on average. This effect exhibits a U-shape in the value of the original innovation. For patents on low-value original innovations, invalidation predominantly increases low-value followon innovation outside the patentee’s product market. Here, transaction costs likely exceed the joint surplus of licensing, causing licensing failure. In contrast, for patents on high-value original innovations, invalidation mainly increases high-value follow-on innovation in the patentee’s product market. We attribute this latter result to rent dissipation, which renders patentees unwilling to license out valuable technologies to (potential) competitors.

Keywords: follow-on innovation; freedom to operate; licensing; patents; opposition (search for similar items in EconPapers)
JEL-codes: O31 O32 O33 O34 (search for similar items in EconPapers)
Date: 2024-02-13
New Economics Papers: this item is included in nep-com, nep-ino, nep-inv, nep-ipr, nep-sbm and nep-tid
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