Liu on the Last-Patent Problem

S. Frederick Liu has published The “Last-Patent Problem” in Patent Portfolio Licensing, 106 J. Pat. & Trademark Off. Soc’y 107 (2026) (available on Westlaw).  Here is the abstract:

Companies often license patents in portfolios because doing so can reduce transaction costs and infringement uncertainty. However, some companies include static royalty rates in their patent portfolio licenses, requiring licensees to pay the same royalty rate until the last patent in the portfolio expires or is invalidated. Such a practice turns the last remaining patent in the portfolio into a lever and imposes a “public-domain tax” that inflates prices, depresses output, and stifles innovation. This Article introduces and analyzes the problem created by such a practice as the “last-patent problem.” Part I explains why companies transact in patent portfolios and how patent portfolio licenses with static, non-diminishing royalty rates, though often efficient ex ante, become distortionary as the patents in the portfolio expire or are invalidated. Part II formalizes the last-patent problem with several simple economic models showing that a static portfolio royalty rate magnifies price-cost wedges over time relative to a proportional step-down rate tied to the share of remaining value-bearing patents. Part III situates the analysis in the history of the U.S. patent system. Part IV shows that the patent-misuse doctrine, narrowed by statute and case law, does not reach the last-patent problem, and that because relief under antitrust’s rule of reason is costly, under-deterrence follows. Part V proposes structural and behavioral remedies that administrative agencies, legislatures, and courts can adopt or mandate to alleviate the last-patent problem. The goal of the remedies offered in this Article is to preserve the efficiencies of patent portfolio licensing while restoring fidelity to the mandate of the Constitution's Intellectual Property Clause to “promote the Progress of Science and useful Arts.”

This is an interesting paper.  One question I have, however, is whether patent owners with sufficient market power to impose portfolio licensing contracts of the type the author objects to would respond to his policy recommendations by charging higher (albeit diminishing over time) licensing rates during the earlier years of the portfolio license’s term (as suggested by Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir. 2002), cited at p.145 n.233).  I tend to agree with the author’s proposal for greater transparency in licensing (e.g., restricting the use of “Black Box” licensing, see p.143).