Shared Ownership of Intangible Property Rights: The Case of Patent Co-Assignments † ‡ Andrea Fosfuri∗ Christian Helmers Catherine Roux March 10, 2016 Abstract We show that the legal rules regarding the ability of co-owners of patents to license the patented technology to third parties have important implications not only for licensing, the diffusion of the patented technol- ogy, and hence downstream competition, but also the decision to share ownership in the first place. The legal rules that regulate shared own- ership also affect efforts provided by the parties at the invention stage and hence impact the quality of the patented technology. Furthermore, we also show that legal rules for shared ownership of intangible assets can affect firms’ incentives to collude in the product market. We rely on exogenous legal differences between the U.S. and Europe concerning the ability of co-owners of patents to license the patented technology to third parties to show that the data are consistent with our theoretical predic- tions. JEL Classification: K11; O31; O34 Keywords: Property rights; co-ownership; joint patents; R&D coopera- tion; licensing ∗Bocconi University & CRIOS. Corresponding author. E-mail: [email protected] †Santa Clara University. E-mail: [email protected] ‡University of Basel. E-mail: [email protected]. 1 1 Introduction Shared ownership of property rights is ubiquitous – both among private indi- viduals and legal entities. In the U.S., the law puts few restrictions on indi- vidual owners of shared property rights. Joint owners have equal rights to use their jointly owned assets and to unilaterally sell their share. In the case of tan- gible assets, the right to use a co-owned property right usually does not pose any problems – tangible assets are rivalrous, if one party uses the asset, the other party cannot use it. Intangible assets, however, are non-rivalrous, which means in principle there are no obstacles to multiple parties using the same asset multiple times (Romer, 1990). We show in this article that this can have important implications for the use of a co-owned intangible asset and in fact lead to a tragedy of the commons situation (Hardin, 1968). This in turn has implications for the willingness of parties to engage in the sharing of intangi- ble property rights in the first place. It creates a trade-off between any benefits that arise from sharing property rights, most importantly due to increased joint efforts in the creation of the underlying intangible assets, and the costs in form of lack of control over the co-owner’s use of the shared property right. We analyze this tradeoff in the context of patents co-assigned to legally independent companies.1 Jointly owned patents allow us to study the impli- cations of shared ownership rights because there are important differences in the rights allocated to co-owners in different jurisdictions. In the case of the U.S., co-owners of a patent do not need each other’s permission to license the jointly owned property right. This implies, that co-owners can freely license a patent even if this harms directly the other co-owners in the product market (no veto power regime).2 In Europe, in contrast, co-owners can veto unilat- eral licensing decisions (veto power regime). Since this difference in property right regimes concerns precisely the aspect in which tangible and intangible assets differ, our setting allows us to study the impact of different legal rules concerning the shared ownership of intangible assets. 1We are interested exclusively in patents held jointly by legally independent private compa- nies; we are not concerned with joint patenting by private firms with, for example, universities, other public research institutions, or government agencies. In our empirical analysis, we take account of companies’ ownership structure to ensure patents owned by companies within the same business group are not considered as co-owned patents. Note also that our focus is on co-ownership of the property right a patent represents which is distinct from joint inventorship which defines the intellectual right to the invention. 2Also, enforcement of a jointly owned patent is difficult because all co-owners have to appear as plaintiffs. In addition, a co-owner can deprive another co-owner of the ability to sue for infringement by granting a license to the alleged infringer. For relevant case-law in the U.S. see Ethicon v.United States Surgical Corporation. 2 We show that the legal rules regarding the ability of co-owners of patents to license the patented technology to third parties have important implica- tions not only for licensing, the diffusion of the patented technology, and hence downstream competition, but also the decision to share ownership in the first place. This in turn means that shared ownership can also affect the efforts provided by the parties at the invention stage and hence impact the quality or value of the patented technology. As we show below, an interesting implication of our analysis is that legal rules for shared ownership of intangible assets can also affect firms’ ability to sustain collusion in the product market. Our theoretical discussion generates a number of empirical predictions. We predict that other things equal, firms are more likely to share ownership of a patent in a regime with veto power; yet, provided joint patents are chosen, they are more valuable in a regime without veto power. Finally, joint patents can help sustain collusion in the product market between co-owners in a regime with no veto power. All these differences between the two legal regimes for shared ownership are strengthened when co-owners are close product market competitors. We use the population of patents that are filed at both the U.S. (USPTO) and the European (EPO) patent offices and co-assigned in at least one of the two jurisdictions to show that the data are consistent with our theoretical predic- tions.3 Our data indicates that co-ownership of patents is less likely in the U.S. even conditional on the parties having decided to share the ownership of their patent (i.e., ownership of the same patent is shared in Europe). This effect is indeed stronger, the closer the co-owners compete in the product market. The data also support the trade-off between the benefits of sharing ownership and the tragedy of the commons, i.e., we find that patents whose ownership is only shared in Europe receive significantly fewer forward citations than patents that are co-owned in the U.S. but single-owned in Europe. This effect is stronger the closer co-owners compete in the product market. Finally, we also find some evidence that supports the notion that shared ownership of patents can help sustain collusion in the product market. Using data on detected cartels, we show that cartels among close product market competitors are more likely to share ownership of patents in the U.S. and not in Europe, which is in line with our theoretical prediction. Our results highlight the importance of differences between tangible and intangible assets for lawmakers. Property rights represent a bundle of rights; we show that one aspect of this bundle, the rules that govern the individual 3Patents are national rights. If a company seeks patent protection in the U.S. and a given European country, the company has to obtain separate rights in each jurisdiction. Such patents on the same invention in multiple jurisdictions are referred to as equivalents. 3 exploitation of jointly owned property rights, can have large effects on parties’ behavior. This effect is, however, specific to intangible assets that are nonrival- rous. Hence, tangible and intangible assets may require different rules. In line with Posner’s argument (Posner, 1973) that common law jurisdictions move toward economic efficiency through case law, one would expect legal systems to create such a distinction between property rights of tangible and intangible assets through case law over time. In civil law jurisdictions, in contrast, these differences could have more persistent effects as they are harder to address through case law. While the extant legal literature has examined the legal complications that arise from the shared ownership of patent rights (Dreyfuss, 2000), little attention has been placed on how joint patents change ex-ante incentives to allocate ownership rights and collaborate in R&D upstream, how they affect competition downstream, and how the corresponding case law has evolved over time (Merges and Locke, 1990; Matt, 2002; Landes and Posner, 2003). Theoretically, the allocation of ownership rights among collaborating par- ties has been studied within the property rights theory of the firm approach (Grossman and Hart, 1986; Hart and Moore, 1990). The key intuition is that the allocation of patent rights affects each party’s bargaining power when split- ting the surplus generated by their relation-specific investments. Within this tradition, Rosenkranz and Schmitz (1999) show that when two parties invest in human capital and decide on know-how disclosure, joint ownership with bi- lateral veto power can be optimal. Rosenkranz and Schmitz (2003) argue that the optimal ownership structure can change over time, while Schmitz (2008) shows that joint ownership can be optimal if parties have private information about the payoffs they can earn on their own. None of these studies explicitly considers the possibility to exploit the patented innovation through licensing, which is the key mechanism in our paper and a specific consequence of intan- gible assets being nonrivalrous. Indeed, in our model, licensing directly affects the value (expected profits) each party can extract from the joint research. We also contribute to the substantial body of empirical research on a range of mechanisms employed by firms to share and exchange intellectual property including cross-licensing agreements (Giuri and Torrisi, 2010), patent pools (Layne-Farrar and Lerner, 2011; Lampe and Moser, 2014), and patent com- mons (Hall and Helmers, 2013), by shedding light on the role played by shared ownership of patents.