Patent Cross-Licensing Creates Barriers to Entry

by Stephan Kinsella on June 14, 2011

I’ve explained before that one negative effect of the patent system is that larger companies amass large patent arsenals, enabling them to engage in cross-licensing agreements. Smaller firms are ignored because they don’t have enough patents to be a threat. The mass of patents owned by the members of this quasi-oligopoly serve as a threat to smaller firms, who are thus dissuaded from even trying to complete. Thus, the patent system helps to erect barriers to entry, and to reduce competition.¹

A recent illustration of a somewhat similar phenomenon is the recent settlement between Apple and Nokia, as noted in the MacRumours post Apple Licenses Nokia Patents, Ending Lawsuits. As the Nokia press release indicates:

Nokia announced that it has signed a patent license agreement with Apple. The agreement will result in settlement of all patent litigation between the companies, including the withdrawal by Nokia and Apple of their respective complaints to the US International Trade Commission.

(Update: MacRumours now says the settlement is estimated at being $608M plus $138M a quarter.) As MacRumours observes:

While FOSS Patents sees this as a clear win for Nokia, they also suggest it may help Apple a bit as Android manufacturers are likely to also be affected.

Nokia emerges victorious, but this is a sweet defeat for Apple because its competitors — especially those building Android-based devices — will also have to pay Nokia, and most if not all of them will likely have to pay more on a per-unit basis because they don’t bring as much intellectual property to the table as Apple definitely did.