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

• Authors: Fabian Gaessler.
• Management Science
• International Economics
• Business Economics
• Innovation Economics

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.