Equilibrium Effects of the Availability of Injunctions in Standard-Essential Patent Licensing

Abstract

We present a simple patent licensing-litigation game to study how a patent holder's access to injunctions against an alleged infringer of a standard essential patent affects equilibrium royalty rates and litigation outcomes. In the European Court of Justice's Huawei v. ZTE judgment, the Court stipulates that injunctions are granted only if the patent holder's royalty rate offer is fair, reasonable, and non-discriminatory (FRAND) while the implementer's counteroffer is not. In recent decisions, German courts have deviated from this ruling by granting injunctions regardless of the nature of the patent holder's offer, only requiring a non-FRAND counteroffer by the implementer. Expanding the access to injunctions in this way introduces the possibility of injunctions being granted even if the original offer is non-FRAND. We find that when the court's assessment of FRAND is sufficiently noisy, this can lead to higher equilibrium royalties and an increased risk of patent hold-up. Increased royalties are driven by the patent holder making more aggressive offers and the implementer responding with more cautious counteroffers to avoid triggering an injunction. Because in the amended framework, the patent holder's offer is immaterial for the court's injunction decision, a more cautious counteroffer can eventually decrease the court's use of injunctions and lower injunction rates, particularly for intermediate levels of court noise.

Keywords: litigation, injunction, FRAND, royalties, Huawei v. ZTE, license negotiations, legal uncertainty, standard-essential patents

JEL Classification: K21, K41, L24, L4, O34