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…

Mark A. Lemley and Timothy Simcoe ‘How Essential Are Standard-Essential Patents?

This working paper, which can be found here, seeks to understand what happens when standard essential patents (SEPs) are litigated in court. The authors find that, contrary to expectations, courts are more likely to find that SEPs are valid patents than a matched set of litigated non-SEP patents. However, courts are also significantly less likely to find that SEPs were infringed. One of the reason for this seems to be that many SEPs are asserted in court by non-practicing entities (NPEs), and NPEs do much worse in court than other patent holders. This has interesting implications for policy debates about both SEPs and NPEs. Standard-essential patents may not be so essential after all, perhaps because companies tend to err on the size of over-disclosing patents to standard-setting organisations. On the other hand, the failure of NPEs to win cases concerning the validity of what are, prima facie, a strong set of patents raises interesting questions about the role that NPEs play…

Jorge Padilla, Douglas H. Ginsburg and Koren W. Wong-Ervin ‘Antitrust Analysis Involving Intellectual Property and Standards: Implications from Economics’ (forthcoming, George Mason Law Review)

The paper, which can be found here, provides an overview of the economics of innovation and IP protection, licensing, and compulsory licensing, with specific applications to standards development and standard-essential patents. The authors also propose principles based on their economic analysis that courts and antitrust agencies can apply at each stage of an antitrust inquiry. The paper concludes with a summary of the approach to IP applied in China, the European Union, India, Japan, Korea, and the United States. The paper covers a lot of ground (and is quite long). I will try to summarise the argument as much as possible, but, to make it easier to read, I will also attempt to flag the specific topics addressed at each point, so that you may focus on those matters of greater interest to you. The paper is structured as follows: Section II summarises the relevant economic literature. While consumers gain from increases in static efficiency in the short run, economics teaches us…

Ariel Ezrachi on ‘EU Competition Law Goals and The Digital Economy’ (2018) Report for BEUC – The European Consumer Organisation

This paper  can be found here. I have already reviewed it in an earlier post. At the time, I focused on the article’s overview of the goals of EU competition law. However, the article also contained a detailed discussion of the impact that the digital economy may have on these goals. I was unable to review this discussion then, so I propose to do it here. Competition policy is one of several instruments used to advance the goals of the European Treaties. According to the European Commission, competition on the market is protected as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. This notwithstanding, EU competition law has also consistently been held to protect ‘not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such.’ Moreover, a genuinely indigenous objective is worthy of note, namely that of promoting European market integration. In addition…

Is there a duty to license Standard Essential Patents to competitors? FTC v Qualcomm Case 5:17-cv-00220-LHK C. Nor

This post will discuss a summary judgment by a district court in California – the one responsible for most cases in Silicon Valley – on whether Qualcomm’s refusal to license its Standard Essential Patents (SEPs) to competitors infringed the non-discrimination limb of RAND commitments and, by extension, s. 5 of the FTC Act. The decision is available here. Background Cellular communications depend on widely distributed networks that implement cellular communications standards. These standards promote availability and interoperability of standardized products regardless of geographic boundaries. Standard-setting organizations (“SSOs”) – such as the Telecommunications Industry Association (“TIA”) and the Alliance for Telecommunications Industry Solutions (“ATIS”) in the United States, and the European Telecommunications Standards Institute (“ETSI”) in Europe – have emerged to develop and manage the relevant cellular standards. The cellular communications standards that SSOs develop and adopt may incorporate patented technology. In order to prevent the owner of a patent essential to complying with the standard—the “SEP holder”—from blocking implementation of…

When is a licence FRAND? The Court of Appeal judgment in Unwired Planet v Huawei

This judgment – which can be found here – is on appeal from Unwired Planet v Huawei judgment on the licensing of Standard Essential Patents (SEP) that I reviewed here. The Court of Appeal begins by explaining the link between the potential for anticompetitive abuse of SEPs and the imposition of FRAND licensing terms. After all: ‘the potential for anti-competitive behaviour is obvious. The owner of a SEP has the potential ability to “hold-up” users after the adoption and publication of the standard either by refusing to license the SEP or by extracting excessive royalty fees for its use, and in that way to prevent competitors from gaining effective access to the standard and the part of the telecommunications market to which it relates.’ It then moves on to review the factual background of the case and the High Court’s decision. In short, Unwired Planet acquired patents from Ericson that cover many of the foundational technologies that allow mobile devices…

Jorge Padilla, John Davies and Aleksandra Boutin ‘The Economic Impact of Technology Standards‘

This Compass Lexecon report – which can be found here – argues that standards can lead to significant efficiencies: they not only solve coordination problems, they also seem to promote more rapid innovation than would otherwise be the case. Whether standards accelerate innovation depends greatly on who the ‘gatekeeper’ to the technology is. Among possible ‘gatekeepers’, the most pro-competitive one are voluntary standard setting organisations (SSOs). SSOs and the licensing arrangements they support enable a “market for technology,” in which smaller and specialized technology providers can thrive. As a result, competition authorities should be loath to interfere with the contractual arrangements that underpin the functioning of SSOs, should as clauses regarding FRAND terms. In more detail, the paper is structured as follows: The paper begins with an overview of why standards are valuable. Standards help certain industries achieve scale, giving users and suppliers the confidence to buy or make compatible products. While not exclusive to the IT sector, the ‘economics of…

Herbert Hovenkamp ‘Antitrust and Information Technologies’ 2017 Fla. L. Rev. 68 419

This is a polished version of a lecture given by Hovenkamp last year, and it can be found here.  As the name indicates it provides an overview of “the relationship between competition policy and the technologies of information.” A first section looks at the relationship between digital technology and market power. In particular, digital technology affects the way firms exercise market power and also creates serious measurement difficulties. A pervasive problem in analysing power in digital markets is that sellers typically have a very high ratio of fixed to variable costs. This entails that prices must be considerably above short-run marginal cost to be profitable. As a result of this, many traditional measures of market power produce unacceptable false positives. These measures include the Lerner Index and other tools derived from it, but are not limited to them: “None of the antitrust tools for assessing power is particularly sensitive to the presence of fixed costs”. He thus concludes that antitrust…