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

Author

Listed:
  • Fabian Gaessler

    (Department of Economics and Business, Universitat Pompeu Fabra, 08002 Barcelona, Spain; and UPF Barcelona School of Management, 08008 Barcelona, Spain; and Barcelona School of Economics, 08005 Barcelona, Spain; and Max Planck Institute for Innovation and Competition, 80539 Munich, Germany)

  • Dietmar Harhoff

    (Max Planck Institute for Innovation and Competition, 80539 Munich, Germany; and Munich School of Management, Ludwig-Maximilians-University, 80539 Munich, Germany; and Centre for Economic Policy Research (CEPR), London EC1V 0DX, United Kingdom)

  • Stefan Sorg

    (Max Planck Institute for Innovation and Competition, 80539 Munich, Germany)

  • Georg von Graevenitz

    (School of Business and Management, Queen Mary University of London, London E1 4NS, United Kingdom)

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.

Suggested Citation

  • Fabian Gaessler & Dietmar Harhoff & Stefan Sorg & Georg von Graevenitz, 2025. "Patents, Freedom to Operate, and Follow-on Innovation: Evidence from Post-Grant Opposition," Management Science, INFORMS, vol. 71(2), pages 1315-1334, February.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:2:p:1315-1334
    DOI: 10.1287/mnsc.2019.02294
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    Cited by:

    1. Alberto Galasso & El Hadi Caoui, 2025. "Fractional Ownership and Copyright Licensing: Evidence from the Music Industry," NBER Working Papers 34336, National Bureau of Economic Research, Inc.
    2. Martinelli, Arianna & Mazzei, Julia, 2025. "Death squad or quality improvement? The impact of introducing post-grant review on U.S. patent legal quality," Research Policy, Elsevier, vol. 54(5).
    3. Wang, Z., 2025. "Patent Pledge and Technological Innovation: The "Good Faith" of Tesla," Cambridge Working Papers in Economics 2532, Faculty of Economics, University of Cambridge.
    4. Byrski, Dennis & Wang, Lucy Xiaolu, 2025. "Marketing authorization and strategic patenting: Evidence from pharmaceuticals," Journal of Public Economics, Elsevier, vol. 247(C).
    5. Shumei Han & Di Zhang & Hongfeng Zhang & Shuaijun Lin, 2025. "Artificial Intelligence Technology, Organizational Learning Capability, and Corporate Innovation Performance: Evidence from Chinese Specialized, Refined, Unique, and Innovative Enterprises," Sustainability, MDPI, vol. 17(6), pages 1-26, March.
    6. Ziming Wang, 2025. "Patent pledge and technological innovation: the "good faith" of Tesla," Working Papers EPRG2510, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

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    Keywords

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    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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