Reply: Patent Holdup and Royalty Stacking
12 Pages Posted: 14 Aug 2007
We argued in our paper, "Patent Hold-Up and Royalty Stacking," that the threat to obtain a permanent injunction greatly enhances the patent holder's negotiating power, leading to royalty rates that exceed a benchmark level based on the value of the patented technology and the strength of the patent. John Golden, in his extensive comment on our paper, claims: "Lemley and Shapiro err when they claim to have proven that 'patentees whose inventions are only one component of a larger product are systematically overcompensated.'" However, the error is Golden's not ours. When patentees systematically capture value they did not create from others who did create it, they are being overcompensated by any reasonable measure, including the standard economic models on which we relied. In Part II, we briefly respond to his criticism of our empirical study of court-awarded reasonable royalties. Finally, Golden also claims that our recommendation to reduce the availability of permanent injunctions to patent holders who have claims to reasonable royalties but not lost profits remedy "threatens to distort markets for innovation." We strongly disagree. It is patent holdup, which skews damages in ways more favorable to reasonable royalties, that distorts markets for innovation. A rule such as the one we propose, in which damages are calibrated to compensate patentees for their loss, is sensible public policy.
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