Patent 'Hold-Up,' Infringement Remedies, and the Operation of Standards-Setting Organizations:  How the FTC’s Ill-Advised Campaign Against Innovators Threatens Incentives

43 Pages Posted: 7 Sep 2011 Last revised: 8 Jun 2014

Date Written: September 7, 2011

Abstract

In March 2011 the FTC issued a report entitled “The Evolving IP Marketplace” (the “Report”). In this Report, the FTC assumes as fact that the IP marketplace suffers a pervasive problem of “patent hold-up” in which patentees take advantage of the “sunk costs” of infringers to extract excessive royalties from licensees, and proposes to “fix” that supposed problem by weakening the remedies available against an infringer that does not voluntarily take a license. Instead, the FTC’s recommendations would disrupt and discourage voluntary licensing, discourage investment in innovation, and damage both industry participants and consumers.

The FTC proposes that damages for patent infringement be limited to the “incremental value” provided by the patent over the “next best alternative,” and that courts calculating damages should fix the “hypothetical negotiation” at a time before the infringer has made any investments specific to the infringement, rather than at the time of first infringement (as under current law). In the case of standardized technologies, the FTC contends that the “hypothetical negotiation” should always be fixed prior to the adoption of the relevant standard. The Report also recommends further narrowing the cases in which an injunction could be obtained against an infringer.

Following issuance of the Report, the FTC conducted a public workshop concerning patents and standards in June of 2011, and solicited public comment, receiving comment from a large number of industry participants of varying interests, as well as standards-setting organizations (“SSOs”), academics, industry analysts, and others.

Issues of patent remedies and incentives for innovation are often dealt with in the academic literature as a matter of pure economic theory, using radically simplified economic models in a vacuum of empirical information. For this paper, in sharp contrast, we reviewed the entire record from the FTC workshop and public comment, and analyze the FTC’s recommendations in light of the real-world facts and perspectives provided by the commentators.

We conclude that the FTC’s starting assumption that there is a systemic “patent hold-up” problem is empirically unfounded, and that indeed the great weight of industry comment says that there is not. In standardized industries in particular, SSOs uniformly report that their existing licensing policies have avoided any hold-up problems. We further conclude that the recommendation to cap patent damages by an “incremental value” measure is both theoretically incorrect and impossible for courts to apply, and that any attempt to do so would severely discourage investment in innovation. We also find that the proposal to move the time of a “hypothetical negotiation” analysis is misguided, and would encourage infringement at the expense of the voluntary negotiation of licenses - a value-destroying shift that again would discourage investment and damage consumers as well as industry participants. Finally, we find no justification for any further restriction of the patentee’s right to injunctive relief beyond the limitations imposed by the Supreme Court’s decision in eBay.

Suggested Citation

Brooks, Roger G., Patent 'Hold-Up,' Infringement Remedies, and the Operation of Standards-Setting Organizations:  How the FTC’s Ill-Advised Campaign Against Innovators Threatens Incentives (September 7, 2011). Available at SSRN: https://ssrn.com/abstract=1923735 or http://dx.doi.org/10.2139/ssrn.1923735

Roger G. Brooks (Contact Author)

Cravath, Swaine & Moore LLP ( email )

825 8th Avenue
New York, NY 10019
United States
212-474-1072 (Phone)

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