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

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 follow-on 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. This paper was accepted by Ashish Arora, entrepreneurship and innovation. Funding: This work was supported by the Deutsche Forschungsgemeinschaft [Collaborative Research Center TRR 190]. F. Gaessler acknowledges financial support from the Spanish Agencia Estatal de Investigación through the Severo Ochoa Programme for Centres of Excellence in R&D [Barcelona School of Economics CEX2019-000915-S]. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2019.02294 .