Abstract

http://ssrn.com/abstract=923468
 
 

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Patent Holdup and Royalty Stacking


Mark A. Lemley


Stanford Law School

Carl Shapiro


University of California, Berkeley - Haas School of Business


Texas Law Review, Vol. 85, 2007
Stanford Law and Economics Olin Working Paper No. 324

Abstract:     
We study several interconnected problems that arise under the current U.S. patent system when a patent covers one component or feature of a complex product, This situation is common in the information technology sector of the economy. First, we show using bargaining theory that the threat to obtain a permanent injunction greatly enhances the patent holder's negotiating power, leading to royalty rates that exceed a natural benchmark level based on the value of the patented technology and the strength of the patent. Such royalty overcharges are especially great for weak patents covering a minor feature of a product with a sizable price/cost margin. These royalty overcharges do not disappear even if the allegedly infringing firm is fully aware of the patent when it initially designs its product. However, the holdup problems caused by the threat of injunctions are reduced if courts regularly grant stays to permanent injunctions to give defendants time to redesign their products to avoid infringement when this is possible. Second, we show how holdup problems are magnified in the presence of royalty stacking, i.e., when multiple patents read on a single product. Third, using third-generation cellular telephones and Wi-Fi as leading examples, we illustrate that royalty stacking has become a very serious problem, especially in the standard-setting context where hundreds or even thousands of patents can read on a single product standard. Fourth, we discuss the use of reasonable royalties to award damages in patent infringement cases. We report empirical results regarding the measurement of reasonable royalties by the courts and identify various practical problems that tend to lead courts to over-estimate reasonable royalties in the presence of royalty stacking. Finally, we make suggestions for patent reform based on our theoretical and empirical findings.

Number of Pages in PDF File: 59

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Date posted: August 10, 2006  

Suggested Citation

Lemley, Mark A. and Shapiro, Carl, Patent Holdup and Royalty Stacking. Texas Law Review, Vol. 85, 2007; Stanford Law and Economics Olin Working Paper No. 324. Available at SSRN: http://ssrn.com/abstract=923468

Contact Information

Mark A. Lemley (Contact Author)
Stanford Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
Carl Shapiro
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-5905 (Phone)
HOME PAGE: http://faculty.haas.berkeley.edu
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