Patent pools, litigation, and innovation

This article analyzes patent pools and their effects on litigation incentives, overall royalty rates, and social welfare when patent rights are probabilistic and can be invalidated in court. With probabilistic patents, the license fees reflect the strength of the patents. We show that patent pools of complementary patents can be used to discourage infringement by depriving potential licensees of the ability to selectively challenge patents and making them committed to a proposition of all-or-nothing in patent litigation. If patents are sufficiently weak, patent pools with complementary patents reduce social welfare as they charge higher licensing fees and chill subsequent innovation incentives.