Academic journal article Santa Clara High Technology Law Journal

Patent "Trespass" and the Royalty Gap: Exploring the Nature and Impact of Patent Holdout

Academic journal article Santa Clara High Technology Law Journal

Patent "Trespass" and the Royalty Gap: Exploring the Nature and Impact of Patent Holdout

Article excerpt

INTRODUCTION I.   PATENT HOLDOUT THEORY      A. Holdout in Mainstream Economics      B. First-Order Properties of Holdout         1. Ownership, Property, and Private Goods         2. Strangers, Nonmarket Exchange, and Coordination            Problems         3. Distribution vs. Efficiency         4. Self-Interest      C. The Deviation Hypothesis         1. Patent Holdup Theory         2. Patent Holdup vs. Mainstream Economics         3. Impact II.  PATENT "TRESPASS": DEFINITIONAL ISSUES      A. Patent Trespass: A Review      B. Patent Trespass Strategies         1. General Properties of Patent Trespass Strategies         2. Stylized Examples of Patent Trespass Strategies         3. Case Law III. DETERMINANTS OF CIRCUMSTANTIAL, SYSTEMATIC, AND SYSTEMIC PATENT TRESPASS      A. Framework      B. Plus Factors Facilitating Patent Trespass IV.  EMPIRICAL EVIDENCE OF PATENT TRESPASS      A. The Nature of Patent Trespass         1. Plus Factors Facilitating Patent Trespass         2. Patent Trespass Strategies and the Heterogeneity of            SEP Implementers      B. The Size and Impact of Patent Trespass on SEP Holders         1. SEP Licensing Coverage         2. Patent Trespass Decision Model Parameters         3. Strategic Implications of Patent Trespass         4. Policy-Level Events and Recommendations CONCLUSION APPENDIX A A. Industry Survey 

INTRODUCTION

Across the world, a problem known as "patent holdup" has become a central issue of discussion in academic and policy circles. Broadly, patent holdup is said to occur when a patent owner makes licensing or cross-licensing demands that are more onerous than those anticipated by technology implementers when they decided to enter the industry. (1) Patent holdup is often considered more severe in relation to a category of patents that are declared essential to the implementation of an industrial standard, known as standard essential patents ("SEPs"). SEPs are limitedly open to design around. Hence, when technology implementers have made early sunk investments in a standardized technology, they are locked in with no other choice but to acquire a license to practice the standard. With this, patent owners are essentially able to extract ex post royalties in excess of what they anticipated ex ante had the patented technology that they declared essential not been selected for inclusion in the standard.

Concerns of patent holdup have informed much of the debate regarding patent and antitrust reform for the past decade, particularly in industries that produce multi-technology products, such as wireless communications. (2) In those industries, SEPs are pervasive. As the story goes, if patent holdup is systematic, SEP owners unconstrained by each other's licensing policies collectively impose a "royalty stack" on downstream industries, and eventually on consumers. (3) This, in turn, wields a systemic effect on investment incentives and innovation by complementary innovators. (4)

In contrast, patent holdout (also known as "reverse holdup," (5) "licensee holdup," (6) and "efficient infringement" (7)) has featured less prominently on research and policy agendas. (8) Patent holdout is today understood as the conduct of patented-technology implementers who deliberately choose to avoid concluding a licensing agreement, in the hopes of paying either zero or reduced royalties. (9) Admittedly, interest towards patent holdout should increase with the introduction of legal doctrines and regulatory policies that curtail the enforcement of SEPs--including, in some cases, setting aside the availability of injunctive relief as a remedy. (10)

Our study seeks to fill this space. Its primary ambition is to dissipate the definitional uncertainty surrounding patent holdout. To that end, we review the meaning of holdout in mainstream economics. This inquiry leads us to an unexpected discovery: holdout is a term of art that invariably defines the conduct of a property owner--not the conduct of technology implementers. …

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