Anticompetitive patents: An incorporation solution

Patent protection is both a blessing and a curse. Allowing for investment and innovation, patents also allow anti-competitive exclusion, as well as exploitation of those unwittingly infringing upon them-only to find themselves held up by ex post litigation. Taking in mind both the benefits and the costs of patents, this article offers a novel solution-that patents be regulated within an incorporation protocol. Under the protocol, the patent is transferred to a special-purpose corporate vehicle, which would then issue tailor-made securities to the inventor of the patent and to potential users. In this manner, the patent is split along the contours of three basic corporate instruments-heterogeneous capital structure, separation of ownership and control, and an independent legal personality. We show how incorporation can be used to restrain anti-competitive behaviour. Incorporation facilitates ex ante planning while reducing transaction costs and ex post holdup. In this way, later users (as well as unwitting infringers) are accommodated, while respecting the rights and preferences of inventors and entrepreneurs who invest in research and development. Anti-competitive use of patents is an exploitation of state-made law, and the contours of patent law are flexible enough to prevent it. We suggest a method of incorporating the limitations of antitrust law within the initial patent grant, in a manner which constrains anti-competitive behaviour ex ante, rather than (or as a complement to) ex post enforcement. Our incorporation mechanism may be used voluntarily by private parties and may be enforced by patent registrars and antitrust agencies. This article outlines the mechanism and the different ways it may be implemented to accommodate the differing circumstances.