Oct. 26, 2002
11th WZB Conference on Industrial Organization
in collaboration with CEPR and sponsored by the Fritz Thyssen Stiftung
the Global Cosmetics Industry
(University of Munich and CEPR)
Wissenschaftszentrum Berlin für Sozialforschung
Telefon +(49) 0(30) 25491-0
Reichpietschufer 50, 10785 Berlin, Germany
Telefax +(49 0(30) 25491-444
Intellectual Property Strategy
in the Global Cosmetics Industry
Dietmar Harhoff 1 and Bronwyn H. Hall 2
1 Ludwig-Maxmilians-Universitaet Muenchen and CEPR
2 UC Berkeley and NBER
Version of July, 2002
Preliminary and Incomplete
(please do not cite without the authors’ permission)
In this paper we analyze aspects of the intellectual property strategies of firms in the global
cosmetics and toilet preparations industry. Using detailed data on all 4,205 EPO patent
grants in the relevant IPC class between 1980 and 2001, we find that about 15 percent of
all patents are challenged in EPO opposition proceedings, a rate about twice as high as in
the overall population of EPO patents. Moreover, opposition in this sector is more
frequent than in chemicals-based high technology industries such as biotechnology and
pharmaceuticals. About one third of the opposition cases involve multiple opponents. We
search for rationales that could explain this surprisingly strong “IP litigation” activity. In a
first step, we use simple probability models to analyze the likelihood of opposition as a
function of characteristics of the attacked patent. We then introduce owner firm variables
and find that major differences across firms in the likelihood of having their patents
opposed prevail even after accounting for other influences. Aggressive opposition in the
past appears to be associated with a reduction of attacks on own patents. In future work
we will look at the determinants of outcomes and duration of these oppositions, in an
attempt to understand the firms’ strategies more fully.
This version of the paper was prepared for presentation at the Productivity Program meetingsof
the NBER Summer Institute. An earlier version of the paper was presented in February 2002 at
the University of Maastricht Workshop on Strategic Management, Innovation and Econometrics,
held at Chateau St. Gerlach, Valkenburg. We would like to thank the participants and in
particular Franz Palm and John Hagedoorn for their helpful comments.
Introduction and Motivation
Intellectual property is rapidly becoming a central element in discussions of business strategy.
This trend may not be surprising – the rising importance of intangible capital in industrialized
economies is apparent in many statistics. In corporations, the value of intellectual property as
a share of total firm value has been increasing. The number of patent applications is growing
at double-digit rates in the major patent offices. Licensing and cross-licensing are being
employed with greater frequency than ever, particularly so in high-technology industries
(Arora 1997). There is also strong evidence that the patent output per R&D dollar has been
increasing in semiconductors (Hall and Ziedonis 2001), and possibly in other industries as
well. Moreover, the realm of intellectual property protection has been enlarged greatly since
the US Patent and Trademark Office, influenced by a series of important court decisions,
began to issue patents on software, business methods, and life forms only to find itself in the
middle of a stormy debate as to how far patent protection should reach.
A key element of corporate intellectual property strategies is the utilization of the patent
system. Patents convey the right to exclude other agents from using the patented technology,
but the patent system typically does much more than that. It opens up avenues for challenging
property rights of other players, for example by allowing firms to challenge a patent right in
court. These validity challenges can be understood as an error-correction mechanism – patent
offices make mistakes, and while some of these mistakes can be harmless, others may have a
considerable effect on the strategic position and profitability of firms or inventors.
In that regard, these error correction devices serve a very useful purpose. In most cases,
informed third parties can bring information and evidence to bear that may have been
unknown to the patent office and its examiners. That is not too surprising: patent examination
is probably one of the most complex tasks available in the modern knowledge economy. But
the existence of correction devices also creates opportunities for their strategic abuse.
Adopting a “deep-purse” view of the world, one could argue that these institutions allow
established and financially well-to-do players to create uncertainty, fear and doubt for new
entrants (“FUD”). While this term has been used to describe the marketing strategy of a
dominant firm in the software industry, the strategy may also be at work in other arenas. To
consider a concrete example: a large incumbent player may simply threaten a small
corporation that has been granted a patent which the incumbent fears will impact its own
profits with a challenge suit.
The theoretical and empirical literature on litigation has long studied cases in which parties
may sue in order to extract settlement offers. In Europe, where there is a well-developed inter
partes patent opposition system, such frivolous suits may also be present in the patent system
itself. Ultimately, a full-fledged welfare analysis of these institutions is necessary,
incorporating elements like the immediate welfare implications of patent rights that are
imperfectly designed; and the indirect implications emerging from the incentive effects of
these institutions, i.e., the extent to which they affect incentives for R&D and innovation.
Naturally, a particularly important aspect is the impact on incentives of new firms who will
hardly have the financial resources to battle incumbents in court. If large firms can
successfully embark on a “bully” strategy, the forces of market entry and competition may
seriously be impeded. This point has found some attention in the antitrust literature, but its
potential impact on the design of intellectual property systems has not been studied. Given the
rising importance of various kinds of intellectual property and related institutions, it is likely
to become an important element in the debate.
In this paper, we study a somewhat unlikely candidate for an analysis of the patent system.
We focus on the cosmetics and toilet preparations industry that is more known for its strong
emphasis on brand names than for its use of the patent system. But surprisingly, the patent
litigation activity in this sector is quite strong, if we consider opposition cases at the European
Patent Office as an indicator of litigation. Opposition is a challenge against the validity of an
EPO patent grant that may be initiated by any third party within the first nine months after the
patent has issued. The incidence of opposition in the cosmetics industry dwarfs the rate of
validity challenges seen in other, technologically more advanced industries such as
biotechnology, pharmaceuticals, software and semiconductors. Moreover, as we describe
below, there is a high incidence of multiple opposition where several opponents file a case
against the validity of a patent. This underlines the tough competition for intellectual property
in this industry. Finally, about one quarter of all opposition cases originates from one player
who is not even a dominant patent applicant. These facts call for a detailed analysis of
opposition behavior and strategies, since our economic assessment of the mechanism itself
will ultimately depend in part on the extent to which it can be usurped by strategically acting
The remainder of the paper contains five sections. We first describe the institutional
framework for opposition challenges at the European Patent Office. We also describe a simple
theoretical model that delineates the parameter space in which we would expect opposition to
occur. We conclude that section with a set of hypotheses that we test later on in the empirical
part. In section 3, we describe the origin of our data and a number of innovations that we
introduce into the measurement of patent characteristics. Most importantly, we use the fact
that the European Patent Office classifies the references to patents and non-patent document
listed as prior art in the research report according to WIPO rules. These classifications can be
used to identify particularly relevant earlier documents as has been done in Harhoff and
Reitzig (2001); but they can also be employed to find out if a particular patent has been a
major stumbling block for subsequent applications.
As background, we describe salient features of EPO patent data in this paper, because these
features deviate considerably from those of US patent data and have received relatively little
attention in the economics literature thus far. We also describe the intellectual property
concentration in the industry studied here, and we compare the patenting activity of firms to
their opposition activity. The most stunning result is the emergence of one firm – Henkel
KGaA headquartered in Düsseldorf – as the main player opposing the patent grants to other
firms. While Henkel holds only about 10 percent of the patents we study, the firm accounts
for about one quarter of all oppositions initiated. The relationship between the number of
patents owned and opposition cases initiated is generally quite noisy, suggesting that there is
room for distinctive IP strategies.
In section 4, we employ multivariate probit models to test our hypotheses and to explore
potential explanations for our surprising findings. We can report a number of results that have
been shown in earlier work for other industries. For example, highly cited patents are more
likely to be attacked under opposition than poorly cited ones; patents which create serious
stumbling blocks for later patents are more prone to validity challenges; and a number of
decisions made by applicants, such as pursuing a PCT application or requesting an accelerated
examination, are associated with higher incidences of opposition. When we introduce
additional measures of opposition activity into the specification we find that firms with high
opposition activity are attacked less often than other firms, holding constant a number of
variables that control for citations, number of countries in which patent protection is sought,
and other determinants of the likelihood of experiencing a validity challenge.
In section 5 of the paper, we look at the outcomes from these opposition filings. Are these
patents more or less likely than patents in other technologies to be upheld or revoked as a
result of opposition? Do some of the oppositions appear “frivolous” in the sense that they are
more likely to fail than others?
We interpret these results in our concluding section and propose avenues for a more structural
econometric approach, which we will pursue in ongoing work on this topic.
Institutional and Theoretical Aspects of Opposition Challenges
Patent challenges can be of interest to a firm for two reasons: firstly, the challenge may
actually lead to a reduction in the scope or breadth of the attacked patent, or to an outright
revocation of the patent right; secondly, aggressive attacks may lead competitors to adopt a
more careful patenting strategy which avoids a direct confrontation of the challenger. The
instrument of attack that we are studying in this paper is the opposition mechanism at the
European Patent Office. We first describe important institutional aspects and then present a
simple model that helps us to derive hypotheses for our empirical analysis. In both regards,
we build on the descriptions developed in earlier work in Harhoff and Reitzig (2001) and
Graham, Hall, Harhoff and Mowery (2002). Since our simple model cannot encompass issues
of repeated interaction, we comment on those separately before we summarize our
The EPO Opposition System
Patent protection for European member states can be obtained by filing several national
applications at the respective national patent offices or by filing one EPO patent application at
the European Patent Office. The EPO application designates the EPC1 member states for
which patent protection is requested. On average, the cost of a European patent amounts to
about 29,800 EURO, roughly three times as much as a typical national application.2 Thus, if
patent protection is sought for more than three designated states, the application for a
European patent is less expensive than independent applications in several jurisdictions. This
cost advantage has made the European filing path particularly attractive for applicants selling
goods and services in multiple European markets. Increases in the number of patent
applications and grants have given the European Patent Office a level of economic importance
that now resembles that of the United States Patent and Trademark Office (USPTO).
The Convention on the Grant of European Patents, also referred to here as the European Patent Convention (EPC) was
enacted in October of 1973. It is the legal foundation for the establishment of the EPO. The full text of the convention
is available at http://www3.european-patent-office.org/dwld/epc/epc_2000.pdf.
As in other patent systems, the official patent office fees are a relatively small part of the costs (in this case 4,300
EURO). Professional representation before the EPO amounts to 5,500 EURO on average, while translation into the
languages of eight contracting states requires 11,500 EURO. Renewal fees for a patent maintained for ten years amount
to roughly 8,500 EURO. See “Cost of an average European patent as at 1.7.99“, http://www.european-patent-
office.org/epo/new/kosten_e.pdf (Jan. 14, 2002).
EPO patent grants are issued for inventions that are novel, mark an inventive step, are
commercially applicable, and are not excluded from patentability for other reasons.3 After the
filing of an EPO application, a search report is made available by the EPO to the applicant.
The search report is generated by EPO’s search office in The Hague and then transferred to
the examining staff in the Munich office. The search report describes the state of prior art
regarded as relevant according to EPO guidelines for the patentability of the invention, i.e., it
contains a list of references to prior patents and/or non-patent sources.4 Within six months
after the announcement of the publication of the search report in the EP Bulletin, applicants
can request the examination of their application. This request is a compulsory prerequisite for
the patent grant. If examination is not requested, the patent application is deemed to be
withdrawn. Eighteen months after the priority date the patent application is published. At this
point, the application is normally under examination; thus, the patent owner is generally
required to reveal some information about his/her invention prior to the grant of the patent
even if no patent is ever issued.
After examination (if requested) has been performed, the EPO presents an examination report.
At this point, the EPO either informs the applicant that the patent will be granted as specified
in the original application or requires the applicant to agree to changes in the application that
are necessary to grant the patent. In the latter case, a negotiation process similar to that in the
US system may ensue. Once the applicant and EPO have agreed concerning the scope of the
allowable subject matter, the patent issues for the designated states and is translated into the
relevant national languages. If the EPO declines to grant a patent, the applicant may file an
appeal.5 On average, the issue of a European patent takes about 4.2 years from the date of
filing the application (Harhoff and Reitzig, 2000). Within nine months after the patent has
been granted, any third party can oppose the European patent centrally at the European Patent
Office by filing an opposition against the granting decision. The outcome of the opposition
procedure is binding for all designated states. If opposition is not filed within nine months
after the grant, the patent’s validity can only be challenged under the legal rules of the
respective designated countries, some of which have their own opposition proceedings.
The EPO opposition procedure thus is the only centralized challenge process for European
patents. An opposition to a European patent is filed with the EPO. The opponent has to
substantiate his opposition by presenting evidence that the prerequisites for patentability were
not fulfilled, e.g., the opponent must show that the invention lacked novelty and/or an
inventive step, or that the disclosure was poor or insufficient. At the EPO, an opposition
division determines the outcome. The examiner who granted the patent is a member of the
three-person opposition chamber, but may not be the chairperson. The opposition procedure
can have one of three outcomes: the patent may be upheld without amendments, it may be
amended,6 or it may be revoked.7 As we pointed out earlier, revocation occurs in about one
third of all opposition cases.8
See Article 52 EPC.
It is important to note that applicants at the EPO are not required to supply a full list of prior art – as it is the case in the
US system. See Michel and Bettels (2001, 191f.).
See Article 106 EPC. Any decisions made by the EPO receiving, examining, opposition sections and legal division can
be appealed and the appeal has suspensive effect.
See Article 99ff EPC. An amendment normally results in a reduction of the “breadth” of the patent by altering the
claims which define the area for which exclusive rights are sought.
Another interesting aspect of the opposition procedure concerns the restrictions imposed by
this process on the opponent’s ability to settle “out of court”. Once an opposition is filed, the
EPO can choose to pursue the case on its own, even if the opposition is withdrawn.9 Thus, the
opponent and patentholder may not be free to settle their case outside of the EPO opposition
process once the opposition is filed. This provision of the opposition proceeding may
discourage its use by opponents seeking to force patentholders to license their patents.
Both the patentholder(s) and the opponent(s) may appeal the outcome of the opposition
procedure.10 The appeal must be filed within two months after receipt of the decision of the
opposition division, and it must be substantiated within an additional two months. The Board
of Appeal affords the final opportunity at the EPO to test the validity of the contested
European patent. Both parties can bring expert witnesses into the proceedings, and there are
various options for having deadlines extended. For the two technical fields considered in this
paper, the median duration of the challenge procedures (opposition and any appeal11) is 3.07
years, although there is considerable variation in the duration of individual cases (the
interquartile range is 2.8 years).
The official fee for filing an opposition is 613 EURO; for filing an appeal against the outcome
of opposition, the fee is 1022 EURO. But the total costs to an opponent or the patentholder are
much higher. Estimates by patent attorneys of the costs of an opposition range between
15,000 and 25,000 EURO for each party. Patent attorneys interviewed by us agreed that there
is not much room for the opponent to drive up the patent owner’s cost of litigation, for two
reasons: 1) Attorney fees are regulated in most European countries, including Germany,
where many patent lawyers who have the required EPO registration reside. 2) Extensive use
of discovery, a main ingredient in the large cost of U.S. litigation. is not allowed in the EPO
opposition system. Nevertheless, opposition by more than one opponent has the potential to
create a substantial burden for the patentholder.
A Simple Theoretical Model
In order to derive our hypotheses in a systematic manner, we briefly introduce a simple
formal model of opposition. To simplify matters, we will consider a world in which subjective
assessments of probabilities and patent values (profits derived from the patent) are possible,
but where no asymmetric information exists. To qualify for opposition, any case must satisfy
the condition that the expected value for the opponent must dominate the expected cost of
opposition. In other words, we rule out that the opponent “bluffs” and threatens to oppose in
circumstances under which the true expected benefit from opposition is lower than the cost.
On average, the opposition procedure takes around 2.2 years if the patent is revoked and about 4 years if the patent is
amended. See Table 2 for similar information on our samples.
See EPO (1999), p. 17 and Merges (1999), pp. 612-614. There are no publicly available data as to the frequency and
extent of amendments, or the frequency of rejected oppositions. For the technical fields considered in this paper, we
compute these figures below.
Rule 60 EPC: “In the event of the death or legal incapacity of an opponent, the opposition proceedings may be
continued by the European Patent Office of its own motion, even without the participation of the heirs or legal
representatives. The same shall apply when the opposition is withdrawn.”
10 Article 99ff. EPC
For the two technical fields studied in this paper, an appeal occurs in about one third of all opposition cases.
Frivolous suits are possible under asymmetric information, which we ruled out (Bebchuck
1984). If the suit is feasible, then the parties may still settle prior to the expiration of the
opposition period, i.e. within nine months after the patent has been granted. We formulate
these two conditions in the context of a simple model and then discuss some of the
comparative statics in a stylized manner.
The model builds on the classical paper by Priest and Klein (1984) and supports us in our
attempt to derive hypotheses on the likelihood of such validity challenges.12 In the case of
opposition proceedings, it is important to recall one distinct institutional feature. Once filed,
the European Patent Office can pursue an opposition case even if the parties involved have
achieved some kind of understanding. Suppose that the case has been filed, but the opponent
has withdrawn after obtaining a license from the patent holder. Such a settlement would be
attractive, since both firms will now enjoy patent protection (even if the patent has been
assigned erroneously or if it grants too much scope to the owner and licensees). The European
Patent Office may nonetheless pursue the case and subsequently revoke the patent. We would
therefore assume that settlement negotiations tend to take place mostly prior to the filing of
the opposition (if at all). Thus the following considerations are based on the assumption that
once an opposition is filed, it is also tried. Settlement may take place, but it would occur prior
to filing the case.13 Thus unlike the case of litigation, where we observe the filing of suits even
if they are settled before trial, in this case we do not observe cases that “settle.”
We consider a world in which parties make imprecise assessments of case quality and
decision standards, but where information is distributed symmetrically.14 Our first case is one
in which successful opposition to a patent grant transforms a monopoly to a duopoly. Suppose
that a patent has been granted to one firm and the patent would allow the firm to earn
monopoly rents M
Π . Another firm considers the benefits and costs from filing an opposition
and letting it go to trial versus settlement of the dispute. The trial can only have two outcomes
– the rejection of the opposition or the revocation of the patent right. Should the opponent
prevail in having the patent revoked, both firms will be able to earn duopoly profits D
Π in the
market.15 If the opposition is rejected, the attacker will receive zero profits. Note first that the
case will only qualify for opposition if
p Π − c > 0
where p is the likelihood of successful opposition as perceived by the opponent, and the
opponent’s total cost of opposition proceedings is given by c which we treat as exogenously
given for now.
12 Lanjouw and Lerner (1998) uses the Priest and Klein model to interpret conditions under which infringement cases will
be brought to trial. See also Somaya (2001).
13 Our interviews with patent attorneys suggest that this is indeed the case - estimates of the settlement frequency range
suggest that between 10 and 25 percent of disputes are not filed, but settled between the parties.
14 In Waldfogel’s terminology, this is the case of divergent expectations (DE) which he carefully distinguishes from the
case of asymmetric information (AI). Since we cannot distinguish among the different theories in our data, we do not
present the arguments in detail. See Waldfogel (2000) for an empirical test the results of which favor the DE
If entry is free, more firms may enter so that profits are driven to zero. Note that in this case the opponent may not wish
to oppose the patent, since the opposing firm creates a public good for every other firm in the industry, but bears the
full cost of trial. In this case the threat point is negative.
For our discussion of a pre-trial settlement solution, the threat point of the opponent is given
p Π − c .
The threat point for the patent holder is then given by its expected value from trial
(1− p Π + p Π −c (3)
where p is the likelihood of successful opposition as subjectively perceived by the patent
holder. The cost of opposition proceedings (including attorneys’ and patent office fees) is
given by c . The differences in the subjective probabilities simply reflect uncertainty – both
parties may assess the quality of their case and the decision standard with some error, but no
party has any privileged information.
The trial value of the game is given by the sum of the threat points. The cooperative value of
the game is the industry profit in case of settlement net of total settlement costs S, i.e., S
Π − S .
We treat the profit level in the case of cooperation separately here, since it may exceed the
industry profits of a duopoly if some collusive elements are present in the licensing or side-
payment setup chosen by the firms. Hence, we assume that M
Π ≥ Π ≥ 2Π . Settlement will
not occur (i.e., opposition will occur) if the trial value exceeds the cooperative value of the
game. This comparison yields the inequality
(1− p Π − Π
+ p − p Π + S − c − c ≥ Π − Π
D ) ( O
The first term captures how attractive the monopoly position is as compared to the duopoly
case from the patent-holder’s perspective. The higher the wedge between monopoly and
industry duopoly profits, the less likely the patent holder is to settle, in particular if he
perceives the likelihood of successful opposition to be low. Ceteris paribus, we would expect
this difference to grow with the level of monopoly or duopoly profits. The second term
captures the effects of diverging expectations of case quality and decision standards. If the
opponent is optimistic (i.e., if his subjective probability of winning is higher than the patent
holder’s assessment), then litigation will again become more likely, especially if the level of
duopoly profits is high. The third term captures the cost disadvantage (or advantage) of the
settlement solution – high trial costs will make settlement more likely, high settlement costs
will drive the parties to a trial solution, ceteris paribus. One would usually assume that
settlement is less costly than a trial. In the case of opposition against patent grants, this
conclusion is not necessarily warranted. First, the costs of conducting the trial are born by the
European Patent Office. The two parties involved have to take into account a fee for filing
opposition and attorney costs. Since the filing fee is minor16 and since settlement negotiations
would also be conducted by attorneys, settlement may actually be more expensive to the
parties than the trial. Finally, the term on the right-hand side of the inequality captures the
effect of a cooperative solution. The higher the settlement profit is in comparison to the
duopoly solution, the more likely settlement will be. This term will be zero if cartel authorities
do not allow firms to enter arrangements that leave them more than the duopoly profits.
Now we consider another case in which successful opposition actually functions to maintain a
monopoly. Suppose that a firm has received a patent that allows it to enter an industry
dominated by an incumbent. The entrant’s patent may, for example, protect a technology that
16 See section 2.4 for details.
neutralizes the former technological lead of the incumbent. In this case the incumbent may
oppose the patent right, since it threatens the existing monopoly. The threat point of the ex
ante monopolist (the opponent) is given by
(1− p Π + p Π −c (5)
while the entrant views
(1− p ) D
Π − c (6)
as her threat point. The condition for an opposition case to be filed and tried is then given by
+ p − p Π + S − c − c ≥ Π − Π
D ) ( O
As a comparison of (4) and (7) show, ex ante asymmetries in the market positions may affect
incentives to file an opposition case. Hence, a structural approach to estimation would also
necessitate a careful operationalization of the market conditions. For our reduced form
estimation, however, the conclusions for the two cases are similar. As the stakes increase and
as the cost advantage of settlement decreases, opposition is more likely to occur.
We can make these points graphically. Consider the first case in which the opponent can gain
a duopoly position if the opposition case is successful. We consider a profit-probability space.
Let us assume that diverging expectations are not present. Hence, in equation (4) the second
term would vanish. We also assume that the settlement solution duplicates the duopoly
solution, i.e., antitrust authorities can prevent firms from engaging in collusive licensing
agreements. Hence, the right-hand side term in equation (4) is zero. To simplify conditions
further, let the monopoly profit M
Π be equivalent to (2 + α) D
Π . Equation (4) implies that
under these conditions opposition will occur if
(1− p) D
α Π ≥ − (S − c − c (8)
Moreover, recall that for opposition to be feasible in a world without bluffs, we have to have
p Π − c > 0.
In Figure 1, we plot parameter combinations of p and D
Π that satisfy these conditions. As can
be seen from this figure, higher settlement costs make opposition more likely, since the locus
of equation (8) shifts downwards. Similarly, higher cost of opposition (to the opponent) make
opposition less likely to occur, and an increase in the level of profitability (as measured by the
duopoly profit) will tend to enlarge the range of p-values for which opposition occurs. Also,
equation (8) demonstrates that larger values of α will also shift the locus of that curve
downwards – the likelihood of opposition (non-settlement) increases as the monopoly position
becomes more attractive.
These simple considerations neglect the possibility of asymmetric information. In the model
developed by Bebchuk (1984), the defendant knows the probability of winning while the
plaintiff only knows the distribution of the probability. The less well-informed plaintiff makes
a take-it or leave-it settlement offer which in some cases turn out to be unacceptable to the
better-informed defendant. These offers will therefore be rejected and a trial ensues. Thus, the
likelihood of trial versu