The Economic Impact of Patent Holdout

Abstract

This paper has attempted a comprehensive investigation of the economic impact of patent holdout by (1) providing a theoretical foundation of patent holdout and its economic implications, (2) operationalizing this theory into several testable economic models, and (3) testing the models with empirical data.

As a starting point, we define patent holdout as a transactional phenomenon linked to the rational behavior of firms to willfully infringe rather than seek to obtain a license, based on the risks and rewards of the given patent regime. Identifying patent holdout requires a frame of reference that assesses the reasonableness of the infringer’s behavior in light of industry context and prevailing norms.

Following our definition, patent holdout only arises in situations where the patent owner is prepared to make licenses available on reasonable terms. Patent owners that commonly offer their patents for license, such as universities and other innovation specialists, and owners of patents subject to licensing commitments, such as declared Standard-Essential Patents, are at higher risk of holdout than companies relying on their patents to protect their own exclusive use of their patented technology. Thus, patent holdout can impact Hybrid Operating Companies (HOPCOs), Non-Practicing Entities (NPEs), and Patent Assertion Entities (PAEs), leading to different business responses, including litigation, licensing or settling on inadequate terms, and abstaining from licensing. Thus, much of the impact of patent holdout is not easy to observe directly.

We operationalize and test for evidence of the impact of systematic patent holdout through several methods, including (1) evidence of a royalty gap in cellular standards, (2) evidence from previous PAE studies, and (3) evidence from indicators of patent value. These investigations produced the following results:

• The royalty gap analysis in cellular licensing produced a patent holdout range of $7-28 billion per year in 2021.

• An analysis of the institutionalization of patent holdout in the aggregate royalty base resulted in a total revenue base of $1,603 per year in comparison to the average smartphone cost of $392 per phone, suggesting a 4x higher royalty base in 2017.

• An analysis of the missing SEP market segments (i.e. the indemnification effect) whereby small implementers go unlicensed and small SEP holders are unable to collect royalties. The former effect was estimated between $600-1200 million per year in 2015.

• The evidence of patent holdout based on previous PAE studies was estimated at approximately $500 billion over the timeframe of 1990-2010.

• The analysis of systemic patent holdout from patent renewal data showed that while declared SEPs have historically been more valuable to their owners than other patents, more than half of this historical advantage has dissipated between 2006 and 2022. Over the same time period, patents first assigned to universities have similarly lost value compared to patents assigned to other organizations.

To the authors’ knowledge, this is the first study of the economic impact of patent holdout, which is crucial to understanding the empirical reality, not only the theoretical potentiality. Continued research in this field will be helpful to provide companies and policymakers with better information on the direction and extent of patent holdout and holdup in support of policies that create more efficient markets for technology and greater social welfare from innovation.

Keywords: patent, holdout, holdup, standards, SEP, royalty gap, economic impact, systematic, markets, technology, intellectual property, licensing

JEL Classification: K00, K12, K21, L15, L24, L41, L63, L96, O31, O34