Patent Holdouts and the Standard-Setting Process

Abstract

A patent holder whose patent is made public only after the relevant technology has been widely adopted can demand not only a royalty that reflects the intrinsic value of that technology but also a royalty that reflects the value of each infringing firm's technology-specific investments. This is the familiar patent holdout problem, and it particularly plagues the standard-setting process. Importantly, and the insight missed both in practice and in the literature today, the greater the number of patent holders in this holdout position, the less each can expect to earn from this tactic. That is, if fifteen patent holders can credibly threaten to shut an infringer for six months while that firm redesigns its products and services, the value associated with avoiding six months of disruption must be split fifteen ways. If three hundred patent holders can credibly make that threat, the pro rata share drops by a factor of twenty. More patents means less money per patent holder. Less money, in turn, means less of an incentive for a firm to strategically delay in the hopes of being a patent holdout, and less of an incentive for an accidental patent holdout to actually bring suit. In this eight-page magazine-style piece, I examine this dynamic and argue that firms can harness it as a way of protecting themselves from patent holdouts. If I am right here, my analysis has not only a practical payoff for firms hoping to implement patented technologies, but also some theoretical punch. After all, the conventional literature on the tragedy of the anti-commons asserts that resources will be inefficiently under-used in the face of too many overlapping patent rights. My point here is that some resources actually come into efficient use precisely because there are so many patent holders who each can plausibly veto a particular party's use.