Demystifying Patent Holdup

54 Pages Posted: 20 Feb 2019

See all articles by Thomas F. Cotter

Thomas F. Cotter

University of Minnesota Law School

Erik Hovenkamp

Harvard Law School; Yale Law School

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law

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Date Written: February 15, 2019

Abstract

Patent holdup can arise when circumstances enable a patent owner to extract a larger royalty ex post than it could have obtained in an arm's length transaction ex ante. While the concept of patent holdup is familiar to scholars and practitioners—particularly in the context of standard-essential patent (SEP) disputes—the economic details are frequently misunderstood. For example, the popular assumption that switching costs (those required to switch from the infringing technology to an alternative) necessarily contribute to holdup is false in general, and will tend to overstate the potential for extracting excessive royalties. On the other hand, some commentaries mistakenly presume that large fixed costs are an essential ingredient of patent holdup, which understates the scope of the problem.

In this article, we clarify and distinguish the most basic economic factors that contribute to patent holdup. This casts light on various points of confusion arising in many commentaries on the subject. Path dependence—which can act to inflate the value of a technology simply because it was adopted first—is a useful concept for understanding the problem. In particular, patent holdup can be viewed as opportunistic exploitation of path dependence effects serving to inflate the value of a patented technology (relative to the alternatives) after it is adopted. This clarifies that factors contributing to holdup are not static, but rather consist in changes in economic circumstances over time. By breaking down the problem into its most basic parts, our analysis provides a useful blueprint for applying patent holdup theory in complex cases.

Keywords: patents, patent holdup, path dependence, patent licensing, switching costs, lock-in, standards, standard-essential patents, patent injunctions, hold-up, competition policy, opportunism, antitrust

JEL Classification: KOO, K41, O34, O14, K21, L24

Suggested Citation

Cotter, Thomas F. and Hovenkamp, Erik and Siebrasse, Norman, Demystifying Patent Holdup (February 15, 2019). 76 Washington and Lee Law Review, 2019, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3338026

Thomas F. Cotter (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-7527 (Phone)

Erik Hovenkamp

Harvard Law School ( email )

Cambridge, MA
United States

Yale Law School ( email )

New Haven, CT

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law ( email )

P.O. Box 4400
Fredericton, New Brunswick E3B 5A3
Canada
506-453-4725 (Phone)
506-453-4548 (Fax)

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