Draining the Moat: Considerations for the Regulation of Defensive Patent Pools
Abstract: Given the rising importance of intellectual property—and patents in particular—in the modern economy, it is no surprise that intellectual property litigation activity has been increasing steadily for quite some time. With increased litigation activity, however, come increased litigation costs. Large firms are prime targets for plaintiffs seeking to earn money through strike lawsuits followed by quick settlements. Companies active in markets where the products sold are based entirely on some form of intellectual property have looked for ways to combat rising litigation costs. One strategy employed by several firms in recent years is the formation of a defensive patent pool. Defensive patent pools are meant to insure against losses due to patent litigation by taking possible problem patents off the market before they can be used to sue pool members. This paper will argue that defensive patent pools can have significant anticompetitive effects. However, those effects depend on the structure of the pool. Defensive patent pools that use a “catch and release” (CAR) strategy mitigate the anticompetitive effects of their behavior by re-licensing or selling patents purchased by pool members. Conversely, “catch and hold” (CAH) pools—which buy patents without re-licensing or selling them—are likely to impose significant barriers to entry in the markets in which they operate. Because there is no legitimate justification for “holding” rather than “releasing”, regulators and courts considering the impact of CAH behavior should view such pools with suspicion. Nevertheless, they should not be banned: the competitive restraints imposed by CAH pools do not result from the type of conduct typically categorized as illegal per se, and their anticompetitive effects depend heavily on pool structure and membership. Thus, CAH pools should be subject to evaluation under the Rule of Reason.
