Book Review: Mechanisms to Enable Follow-On Innovation

This book is a comprehensive monograph, based on Dr. Alina Wernick’s earlier thesis research. Its focus is on how open approaches to innovation may overcome market failures in situations where patent protection blocks subsequent improvements of an existing invention (also called “follow-on innovation”). The subject is addressed in ten chapters.

After a methodological introduction in Chapter 1, Wernick follows in Chapter 2 with a discussion of the economic consequences of over- and underprotection in patent law. Notably, overprotection may lead to a decrease in patent quality (where an existing patent is in fact invalid) or to issues of interoperability between products. This, in turn, brings on such market failures as excessive royalties or unjustified refusal to license a patent.

Chapter 3 covers three open approaches to innovation: the market correction model, the open innovation theory, and the user and open collaborative innovation theory. The three models differ in their understanding of what “openness” is and the role that patents play as an incentive for innovation.

For example, under the “user and open collaborative innovation theory”, contributors both share their work for everyone and do not seek commercial remuneration (think Linux operating system). Their incentives to innovate lie elsewhere, such as in the form of reputational gains.

In the opinion of Wernick, while open approaches to innovation may alleviate overprotection problems, they are insufficient to foster follow-on innovation. This is precisely because the existing incentives are insufficient to make innovators adhere to open approaches to innovation.

Instead, the market failures, which are associated with overprotection and unresolved through open approaches to innovation, are better addressed by compulsory liability rules. Such liability rules include compulsory licences (which act ex ante to head off an eventual infringement) and limitations to injunctive relief (which act ex post).

Chapter 4 reviews the possible negative impact of compulsory liability rules. For instance, they may interfere with the incentive to innovate, as a prospective compulsory license weighing over an invention would discourage potential investors.

However, Wernick concludes that a well-targeted compulsory liability rule does not undermine patent holders’ incentives to innovate. Building on that, Chapter 5 discusses the legal foundations of compulsory liability rules, from their roots in the Paris Convention to their regulation in the TRIPS Agreement.

In Chapter 6, Wernick considers compulsory licenses in patent law, with a focus on their regulation in Art. 31 TRIPS. Compulsory licenses may be divided into those issued in the public interest (e.g., due to public health needs) and compulsory licenses for functional efficiency. The later includes, among others, licenses for dependent patents, licenses against abusive practices, and licenses as a remedy for anti-competitive practice.

Wernick reviews both general and procedural requirements for each category of licenses. She provides a special focus on the “requirement of prior effort to obtain a license”, which may prove impossible for follow-on innovators to show, as they struggle to identify all prior patent rights involved in their follow-on products. She concludes that functional licenses are more appropriate for issues of overprotection and should be used as the primary instrument.

Chapter 7 follows with a discussion of limitations to injunctive relief in patent infringement as another compulsory liability rule to enable follow-on innovation. After reviewing US case law on the subject, Wernick turns to EU norms. She concludes that EU law, including the proportionality requirement under Directive 2004/48/EC on civil enforcement, is too narrow to be relied upon as a defence by follow-on innovators.

Chapter 8 is dedicated to compulsory liability under competition law. Wernick discusses the effectiveness of competition law (notably, Art. 102 of the Treaty on the Functioning of the EU, concerning the abuse of dominant position) as applied to three types of patents: (1) those not standard essential, (2) those that are de jure standard essential (as determined by a standard-setting organisation), (3) those, which are de facto standard essential (as decided by the market).

This chapter covers various types of exclusionary practices (such as refusal to license) and exploitative practices (such as excessive royalties). Overall, Wernick believes that EU competition law is generally more flexible than EU patent law in addressing follow-on innovation, though it also has its weaknesses.

The book concludes with Chapters 9 and 10, where Wernick advances her normative recommendation to enable follow-on innovation.

After concluding that existing instruments are ineffective, she suggests: (1) the creation of a governmental office, which would undertake patent clearance for follow-on innovation; (2) the “reverse license of right”, which would require a follow-on innovator to declare to the governmental office his willingness to take licences from all patent owners and to provide a monetary security for eventual future infringements (this action replacing the requirement of prior effort to obtain a license); and, (3) to issue compulsory licenses to prevent disincentives for follow-on innovation, this without a requirement that there have been prior efforts to obtain a license.

I would recommend this book to scholars and academically engaged practitioners working on open innovation issues, both from the perspective of intellectual property and competition law.

“Mechanisms to Enable Follow-On Innovation: Liability Rules vs. Open Innovation Models” by Alina Wernick (Springer, 2021, 450 pp).

ISBN: 978-3-030-72256-2

Hardback Price: EUR 166.39