Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?

43 Pages Posted: 30 May 2008 Last revised: 4 Nov 2008

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2008

Abstract

Some recent literature has concluded that patent remedies result in systematically excessive royalties because of holdup and stacking problems. This article shows this literature is mistaken. The royalty rates predicted by the holdup models are often (plausibly most of the time) below the true optimal rate. Further, those predicted royalty rates are overstated because of incorrect assumptions about constant demand, one-shot bargaining, and informational symmetry. Although this literature concludes that overcompensation problems are exacerbated by doctrines measuring damages using past negotiated royalties, in fact such doctrines exacerbate undercompensation problems. Undercompensation problems are further increased to the extent that juries cannot measure damages with perfect accuracy, a problem that persists even if damages are just as likely to be overestimated as underestimated. Nor do the royalty rates predicted by the holdup model apply if there is competition in the downstream product market or upstream market for inventions. Royalty stacking does not lead to royalties that exceed the optimal rate, contrary to this literature, but in fact tends to produce royalties that are at or below the optimal rate.

Keywords: patent, patent remedies, patent injunction, patent damages, patent holdup, holdup, up, royalty stacking, patent royalties, patent economics, eBay, patent bargaining, royalty benchmark, optimal patent rate, excessive royalties, patent overcompensation, patent undercompensation, patent licensing

JEL Classification: K00, K10, K11, K20, K21, K29, K30, K39, K40, K41, K49, L40, L49, L50, L51, L59

Suggested Citation

Elhauge, Einer R., Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties? (July 22, 2008). Harvard Law and Economics Discussion Paper No. 614, Available at SSRN: https://ssrn.com/abstract=1139133 or http://dx.doi.org/10.2139/ssrn.1139133

Einer R. Elhauge (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

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