Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?

Abstract

Some recent literature has concluded that patent remedies result in systematically excessive royalties because of holdup and stacking problems. This article shows this literature is mistaken. The royalty rates predicted by the holdup models are often (plausibly most of the time) below the true optimal rate. Further, those predicted royalty rates are overstated because of incorrect assumptions about constant demand, one-shot bargaining, and informational symmetry. Although this literature concludes that overcompensation problems are exacerbated by doctrines measuring damages using past negotiated royalties, in fact such doctrines exacerbate undercompensation problems. Undercompensation problems are further increased to the extent that juries cannot measure damages with perfect accuracy, a problem that persists even if damages are just as likely to be overestimated as underestimated. Nor do the royalty rates predicted by the holdup model apply if there is competition in the downstream product market or upstream market for inventions. Royalty stacking does not lead to royalties that exceed the optimal rate, contrary to this literature, but in fact tends to produce royalties that are at or below the optimal rate.