Tacit Patent Pooling

Erik N. Hovenkamp, Northwestern University Department of Economics

4/30/2014
(Original Publish Date: 5/3/2013)

We define tacit patent pooling as a non-contractual arrangement in which producers freely utilize one another's patented technologies without charging license fees or filing infringement claims. This differs greatly from the standard notion of (explicit) patent pooling considered in the literature, which typically involves patent holders who set license fees collectively in order to profit from the elimination of double marginalization. In particular, explicit pooling is intended to increase licensing revenues, while tacit pooling is intended to avoid licensing altogether. Tacit pooling is commonly profitable for small firms in innovative industries plagued by patent thicket problems, such as small software publishers. We show that tacit pooling may be a profitable cooperation strategy in a prisoner's dilemma game whose equilibrium involves aggressive cross-licensing in the shadow of litigation, as well as costly "disguising" of potential infringements. This practice is always socially desirable, as it reduces transaction and litigation costs, and it promotes idea sharing among inventors. We analyze how various phenomena may affect the scope and stability of tacit pooling. Large patent acquisitions may in principle be welfare enhancing if they serve to facilitate tacit pooling, but these efficiencies can be offset if firms regularly invest heavily in secondhand patents. The availability of injunctive relief as an infringement remedy will tend to forestall tacit pooling arrangements in concentrated markets, as its value as an exclusionary device will commonly outweigh the gains from tacit pooling, leading firms to prefer aggressive litigation strategies. The desire to facilitate tacit pooling may incentivize acquisition of patents that are ultimately never asserted, helping to explain the "patent paradox," which questions why many firms invest heavily in patents that ostensibly yield negative returns.