Hybrid Licensing of Product Innovations

This paper shows that when a product innovation is protected by both patents and trade secrets, under U.S. law the innovator can be induced to license a rival even if patent protection is very broad and there are no partially competitive older products. This opportunity may benefit society. Nevertheless, some legal restrictions in force at the moment do not permit society to reap all potential gains. Since incentive and efficiency considerations suggest that a socially optimal contract should provide for both a negative fixed fee and post-patent royalties at the same unit level as before a patent’s expiration, we conclude that per se prohibitions of these practices are unjustified.