Early Clarification of Patent Rights and Innovation:
An Empirical Study of Information Provisions andPost-Grant Oppositions (*)
Overseas Researcher: Kenta NAKAMURA (**)
A probabilistic patent, namely a patent with a significant possibility of invalidation, can hamper theinnovation-enhancing role of the patent system. For example, it may allow a patentee-licensor to command adisproportionately strong power over licensees. A probabilistic patent may also fail to effectively promote the investment
by a patentee-manufacturer for developing the invention. A third party may be able to reduce the problems ofprobabilistic patents substantially through post-grant oppositions and thereby promote innovation. This study examinessuch possibilities, based on the experiences of the post-grant opposition system in Japan from 1996 to 2003. We find thatpatents subject to post-grant oppositions are less likely to be denied validity later in infringement-related cases, meaningthat third party contributions in the early stage help grant stable patent rights. Moreover, the early clarification of patentrights through post-grant oppositions promotes innovation by the patentee (as well as third parties) when the patent
survives as well as by third parties when the patent is overturned.

IIntroduction

There is growing concern over the deterioration ofpatent examination quality in major patent offices globally.
The rapid expansion of patent applications as well as
efforts to issue patents early have increased the burden on
patent offices in the search of relevant prior art and in theevaluation of its application. This in turn has madeensuring the quality of patent examinations an increasingly
challenging task. In this context, third party contributions topatent offices have increased in importance. Third parties
can supply information that helps identify prior art forpatent examinations and can correct wrong decisions by
the patent office early in the process.
Patent examiners can make two types of errors: wrong
rejections and wrong grants. The first type is likely to becorrected early since the applicant will have a strong
incentive to seek a reassessment of the evidence if thejudgment is based on wrong grounds. The second type ismore difficult to correct since a third party has to takeactions and they may not always have a strong incentive to
do so. In particular, challenging the patent may put thechallenger in a disadvantageous position if it happens to bevalid, while invalidity may help all potential users of thetechnology equally (Farrell and Shapiro, 2008). In thiscontext, the system of post-grant oppositions as well as
third party observations, which do not require thedisclosure of the identity of a challenger, may help avoid
the error of wrong grants. Moreover, the post-grant

opposition system may contribute to innovation bypromoting the early clarification of patent rights. This study
examines the latter point, based on the experience in Japan.

II Probabilistic Patents and Their
Consequences
A probabilistic patent (Lemley and Shapiro, 2005),
namely a patent with a significant possibility ofinvalidation, can hamper the role of a patent system inenhancing innovation. As argued by Lemley (2001),
however, uniformly improving the quality of patentexaminations could simply be a matter of increasingsocial costs because many granted patents have no value.
Further, probabilistic patents may be inconsequential
when there is no free rider problem in challenging thevalidity, no “collusive settlement” between the owner of apatent and the current (or potential) imitator, and no
significant cost for developing and/or protecting thepatent. In such circumstances, economically valuable
invalid patents are weeded out in patent oppositions aswell as in patent litigation proceedings and the royalty
rate is determined in accordance with the probability ofinvalidation. Thus, the expected revenue for the patentee
does not change even if the validity is clarified
beforehand. The licensee is also not significantly affected
since it faces the same expected royalty.
However, as clarified by Farrell and Shapiro (2008),
weak patents (patents with a high probability of(*) This is a summary of the report published under the 2014FY Industrial Property Research Promotion Project (2014FY-2016FY) Entrusted
by the Japan Patent Office.
(**) Associate Professor, Graduate School of Economics, Kobe University, over a period of approximately 11 months from April 6, 2015
through March 18, 2016, as Overseas Researcher under the Program for the Fiscal Year 2015.
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1 ●invalidity) can command relatively high royalties incomparison with strong patents when there exists
significant free riding in the invalidation. In this case, aprobabilistic patent hampers innovation by discouraging
the use of technologies in the public domain and leading
to a distortion of the innovation incentive.
Farrell and Shapiro (2008) focused on the case of no
significant sunk cost for developing the invention andwhere the patentee is specialized in licensing. However,in reality, most inventions are created and developed byvertically integrated firms. In this context, a probabilistic
patent can hamper innovation by the patentee by reducing
the incentive for incurring the sunk cost necessary todevelop the invention. If the status of invalidity isclarified beforehand, the patentee-developer can choose
to incur the sunk cost of developing the invention only if
the patent protection is valid. If, however, there remains aconsiderable probability of invalidation, the firm cannot
selectively invest.
Therefore, overcoming the problem of probabilisticpatents remains high on the policy agenda and a third
party is expected to contribute substantially to reducing
these problems and promoting innovation.

III Post-Grant Oppositions and Third
Party Observations in Japan
We focus on two types of third party contributions inJapan: the third party observation system and thepost-grant opposition system. The third party observation
system for pre-grant applications was introduced in 1970
when the system of the automatic disclosure of patentapplications within 18 months was introduced. Anyperson (including anonymous applicants) can submit thedocuments covering the publications relevant to thepatentability of the pending patent application for free.
The submitted information is conveyed to the applicant
and made publicly available. Third parties can receive
feedback on whether this information was used in thenotice of reasons for refusal if they so desire. Following
the abolition of the post-grant opposition system in 1996,
the third party observation system has been expanded tocover all patents throughout their lifespan; that is,post-grant third party observations were newly instituted.
However, the post-grant third party observation system is
not particularly popular since re-examination will not be
conducted on an ex-officio basis, unlike under the
post-grant opposition system. Thus, this should allow us
to exclude the presence of post-grant third party
observations from our research; pre-grant third party
observations are hereafter called third party observations.
We also focus on the post-grant opposition system
introduced in 1996 and used until 2003. In Japan, theoriginal opposition system was provided as pre-grant
procedures that would allow any party to challenge a●patent within three months of the date of the publicationof the examined and approved application. Parallel withthe abolition of the Kokoku system, namely the system ofpublishing oppositions, the Japan Patent Office changed
its opposition regime from pre-grant to post-grant. In thepost-grant opposition system, any person can challenge a
grant decision of the patent office within six months ofthe registration for a small procedural fee. This challenge
prompts the patent office to re-examine its decision. In
2004, post-grant opposition was abolished when theinvalidation trials system was opened to any person inorder to unify the invalidation system in Japan.
In 1995, the number of information submissions wasaround 1,000; however, owing to the revisions to theopposition system mentioned above, this figure increased
sharply in 1996 and 2004 to reach over 7,000 by 2005.
The rapid growth in third party observations in 1996 wasdriven by their becoming the only option available forthose who want to challenge a target patent application
before it is granted. Further, the abolition of post-grant
oppositions in 2004 enhanced the incentive for thesubmission of observations since invalidation trials often
take a long time and cost more, while personal
appearance is also required.
The annual number of information submissions
amounts to around 2% of those applications requested for
examination (around 5,000 in 2003 with 240,000
examination requests, around 7,000 in 2005 with 400,000
examination requests). The patent applications that receive
information submissions have significantly higher rejection
rates (57% vs. 42%), while around 2% to 3% of the grants
are subject to post-grant oppositions with significant
proportions nullified (22% in 1996 to 35% in 2003).

IV How Post-Grant Oppositions andThird Party Observations Work
There are three important related questions inanalyzing a probabilistic patent: (1) which patent(application) is more likely to be challenged byinformation provisions, post-grant oppositions, orinvalidation trials; (2) how effective is such a challenge
and which patent (application) is more likely to not
qualify as a patent; and (3) how do third party
contributions toward the early clarification of the patentright promote innovation? As far as the author isconcerned, extant research focuses on the first issue (orboth the first and the second issues), with the exception ofGalasso and Schankerman’s (2015) research.
Harhoff and Reitzig (2004) focused on thedeterminants of post-grant oppositions in Europe in thefields of biotechnology and pharmaceuticals. Lanjouw
and Schankerman (2001, 2004) focused on the first issue
in the context of invalidation suits in the United States. InJapan, Nakamura, Shinbo and Nagaoka (2011) found that
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while the share of the patent grants subject to opposition
is relatively small, patents with high technical qualitiesand high patenting value are targeted, as these would
develop strong exclusionary powers once granted. Further,
Nakamura (2010) reported that a similar tendency isobserved as for third party observations in Japan.
A patent grant is also less likely to be reversed when
the technical quality of the underlying invention is high,when there are more oppositions, and when more third
party observations are made. Further, Nakamura (2013)
found that patents that are not nullified by oppositions arelikely to survive if invalidation trials are filed after theopposition takes place, suggesting that the opposition
system contributes toward ensuring the stability andreliability of patent rights.
With regard to the third issue, Galasso andSchankerman (2015) analyzed the effect of patent rights
on cumulative innovations, exploiting invalidation data.
Their focus was on the blocking effect of the patent right.
Thus, the impact on cumulative and/or complementary
inventions by the patentee when the patent survives
oppositions and strengthens the stability of the patentright is not taken into account. The novelty of ourresearch is that we examine the extent to which such achallenge early in the patent grant process contributes tothe stability of the patent right and to innovation by boththe patentee and the outsider.

V Effects of the Early Clarification ofPatent Rights: Evidence from
Post-Grant Oppositions in Japan1

Estimation Model
The early clarification of patent rights may promote
innovation both by (i) enhancing follow-up and/or
complementary inventions by the patentee if the patent
survives despite oppositions and (ii) enhancing follow-up
competitive investments by third parties if the patent isoverturned early. To verify this hypothesis, we use
inventor citation data, which cover not only prior art asrecognized by the inventor but also those embodied in thedescriptions for a patent application.
In econometric testing, we need to address thesample selection problem of opposed patents and theendogeneity of the outcome of the oppositions, both ofwhich depend on the unobserved quality of the opposedpatents. We adopt the difference-in-differences approachfor this purpose. Then, we assess whether an opposition
will be followed by an increase in citations by thirdparties (PostOtherCites) or by patentees (PostSelfCites).
We compare the citation levels predicted frompre-opposition citation levels and the grant lag (definedby the difference between the reference date and theapplication date) with the time profile of the citation
patterns for unopposed patents. Note that we calculate the●IIP Bulletin 2016 Vol.25

reference date as the date of the final decision regarding
the opposition or grant date + approximately 1.6 years
and that we randomly select unopposed patents from thepopulation that were not subject to oppositions.
Furthermore, the endogeneity may result from market ortechnological shock. For example, more market
opportunities may result in more follow-on inventions
and, simultaneously, more effort for the applicant to avoid
invalidation. We employ two econometric approaches tocontrol for such endogeneity: (1) introducing cross terms
between very detailed technology sector dummies(approximately 400 IPC subclasses) and grant year
dummies and (2) using across-examiner heterogeneity(the “leniency” and/or “work load” of the assignedexaminer) to identify the causal effect of patent rights onfollow-on inventions.
The sample was constructed as follows. First, wecollected patents with post-grant oppositions. Second,matched controls corresponding to the opposed patents
were drawn by quota random sampling from non-opposed
patents after controlling for the technology field,
application year and grant year.
As a dependent variable, we use the number offorward citations by inventors received within thefive-year period after the final decision of a post-grant
opposition since we believe that this index reflects thenumber of subsequent inventions by the same patentee
and/or by third parties. In the case of non-opposed patents,
the five-year window starts from the year after the patent
was granted because of the unavailability of the reference
date (i.e., the date of the final decision of the opposition).
The two dummy variables indicating the outcome ofthe opposition procedure are introduced as the main
independent variables: the opposition upheld dummy (taking
on the value of unity if the patent was nullified byoppositions and zero otherwise) and patent survived dummy(taking on the value of unity if the patent survived afteroppositions and zero otherwise). The baseline reference of
these dummies comprises non-opposed patents.
2Estimation Results
The estimation results by OLS are summarized inTable 5-2 in the main body of the paper1. The equations
include the grant year and IPC subclass dummies as wellas the listed firm dummy taking on the value of unity if
the patentee is a listed company. All the variables except
the dummies are in logarithmic values (1 is added if thevalue is 0).
PreOtherCites, PreSelfCites and Grant lag havestrongly significant coefficients as expected, indicatingthat they work as control variables for the unobserved
heterogeneity in patent quality. According to equation (2)for self-citations, the estimated coefficient of the Patent
survived dummy is significantly positive, consistent with
our hypothesis that the early clarification of patent rights
3 ●enhances follow-up and/or complementary inventions by
the patentee for patents that survived. Interestingly,
according to equation (1), for citations from third parties,
the estimated coefficient of the Patent survived dummy isalso significantly positive, suggesting that the earlyclarification of patent rights enhances inventions by thirdparties, too. Third parties may engage in more R&D toinvent around the patent right affirmed because of
strategic complementarities. Note that there is atheoretical possibility that the survival of the patent may
discourage competing R&D because the existence of thepatent right restricts the freedom of R&D and increases
the risk of infringement.
The Opposition upheld dummy has a significantly
positive impact on citations by third parties, suggestingthat a nullification of the patent spurs them to invest ininventions complementary to the invalidated patents, asexpected. As shown in equation (2), it is not significantly
negative for the patentee. On the one hand, following theinvalidation, the patentee might be forced to cut R&D
that is complementary to the invalidated patent. On theother hand, the invalidation may also push the patentee toobtain patents closely related to the invalidated patent inorder to make up for the loss of the patent.
To summarize, the survival of the patent affects thepatentee and outsiders symmetrically, while theinvalidation of the patent affects the patentee andoutsiders asymmetrically. The early clarification of patentrights through third party contributions promotes
innovation by the patentee (as well as third parties) when
the patent survives and promotes innovation by thirdparties when the patent is overturned.

VI Conclusions
Although a probabilistic patent can hamper the roleof a patent system in enhancing innovation, uniformly
improving the quality of patent examinations could
simply be a matter of increasing social costs (Lemley,2001). Therefore, third party contributions to patentoffices have increased in importance, as is evident in the
re-introduction of the post-grant opposition system inJapan in 2014. To add systematic evidence on the role ofthird party contributions in the patent system, we
examined how such contributions are used and analyzed
whether the early clarification of patent rights bypost-grant oppositions promotes innovation.
By using Japanese patent data, we found that
post-grant oppositions can help the patent office avoid theerror of the wrong grants of patents. Further, the earlyclarification of patent rights through post-grant
oppositions promotes innovation not only by outsiders,
but also by patentees themselves. Our analysis thus
supports the re-introduction of an opposition procedureagainst patents in Japan. To effectively use third party●

contributions, incentive schemes for the early submissionof information (e.g., under anonymity) would be importantsince a firm may wish to withhold information until future
litigation, while ignoring the invalid patent itself.

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1

The Hausman pretest does not reject the null hypothesis ofexogeneity.

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