Holding Up and Holding Out

Abstract

Patent “hold-up” and patent “hold-out” present important, alternative theories for what ails the patent system. Patent “hold-up” occurs when a patent owner sues a company when it’s most vulnerable – after it has implemented a technology – and is able wrest a settlement because it’s too late for the company to change course. Patent “hold-out” is a term I use to describe the practice of companies routinely ignoring patents and resisting patent owner demands, because the odds of getting caught are small. Hold-up has arguably predicted the current patent crises – the smartphone wars, standards patents, or trolls all involve the ex-post assertion of technology patents. Hold-up theory has been embraced by thought leaders and fueled the current drive by Congress and President Obama to reform the patent system. In this essay, I make the counterintuitive case that hold-up theory is wrong – or at least incomplete – and further, that what it is missing is full consideration of the other side – the side of hold-out. When large companies systematically “hold out” on patentees, they have no choice but to work with efficient patent enforcers or “trolls.” When small inventors can’t get their due in the marketplace due to unfair disadvantages, jurors just may give it to them in court. I argue that considering “hold-out” and “hold-up” together provide a more complete picture than focus on either story alone, and that doing so reveals surprising pathways to a better patent system – focused on the design, rather than the doctrine of patent law. Instead of trying to eliminate all technology patents, or to enforce all of them, we should try to price them appropriately and reduce the distortions they produce. Instead of trying to make patent law perfect, we should make it cheaper, more streamlined, and more equitable. To do so, lawmakers should prioritize: 1) getting patentees and targets on the same page as early as possible, through early dispositive and damages disclosures, 2) tightening the interfaces between the various patent agencies, and 3) making it cheaper to resolve low-value disputes, as capped for example by the defendant’s revenue exposure. Each of these steps would go a long way to curbing both hold-up and hold-out.

Keywords: patents, litigation