Thomas F. Cotter, Erik Hovenkamp and Norman Siebrasse on ‘Switching Costs, Path Dependence and Patent Holdup’

Patent holdup occurs when a patent holder extracts higher royalties ex post than it could have negotiated ex ante, where the difference is not explained by an increase in the technology’s value. To date, the literature principally has focused on—indeed, sometimes conflated—two potential sources of holdup: the sunk costs the user has incurred ex ante to adopt the technology, and the “switching costs” of adopting an alternative ex post. This paper holds that the common source of holdup is neither sunk nor switching costs as such, but rather path dependence – and in particular the opportunistic exploitation of path dependence effects that magnify the value of the patented invention relative to the best available alternative. The paper, which can be found here, is structured as follows: Part II discusses the prior literature on patent holdup, along with the early literature on path dependence. Many commentaries on patent holdup confuse two important concepts – sunk and switching costs. A reader may reasonably…

Gregory J. Werden and Luke M. Froeb ‘Why Patent Hold-Up Does Not Violate Antitrust Law’ (forthcoming, Texas Intellectual Property Law Journal)

As the title indicates, this paper argues that patent hold-up, as courts and commentators define the term, does not undermine the competitive process and thus cannot give rise to a valid antitrust claim, at least in the US. The paper is available here and is structured as follows: Part II describes patent hold-up and sets out the economic framework employed by many antitrust intervention advocates. A relatively recent phenomenon is that important standards are encumbered by many—perhaps thousands—of Standard Essential Patents (SEPs). “Inventors” own SEPs and grant licences to them, while “implementers” manufacture or sell standard-compliant components or devices. Antitrust intervention advocates argue that these sunk costs permit inventors to engage in “opportunism” by demanding royalties that could “capture part of the fruits of another’s investment,” i.e., part of the sunk investment of implementers. This “opportunistic” behaviour by inventors is what generally is meant by the term “patent hold-up.” Out of a conviction that inventor opportunism is a serious problem, advocates of…

Jorge Contreras ‘Much Ado about Hold-Up’

This paper criticises the longstanding debate about patent holdup – and particularly about whether it is a systemic issue. In short, the paper argues that the ongoing hunt for empirical evidence of systemic patent hold-up in standardised product markets, or lack thereof, is a fruitless academic exercise. The paper can be found here and is structured as follows: Part I offers some essential background on standard setting and standards-essential patents. As I am sure we are now all fed up with this, I will skip it. Part II explores the interrelated questions that form the core of the current hold-up debate: how is hold-up defined, and what can empirical evidence tell us about hold-up in today’s technology-driven markets? The notion of economic hold-up originated with Oliver Williamson’s leading work on transaction costs and information asymmetry in the 1980s. The owners of specific assets are vulnerable to opportunistic behaviour by potential transaction partners who act dishonestly (e.g., by using deceptive means to…