Questioning the FTC's Incremental Value Test and Claims of Widespread Hold-up in Technology Standards

Abstract

Many authors suggest that hold-up is a widespread problem in technology standard setting. The FTC appears to accept that view in its 2011 IP Report, and its incremental value test would attempt to mitigate such hold-up. We question the factual and logical foundations of the FTC's approach. By expanding the definition of hold-up beyond the context of deception, breach of FRAND commitments, or other patentee misconduct—for which remedies already exist—and by tying the incremental value test to an ex ante point that occurs after patent holders' investments have been sunk, the FTC risks tipping the balance too far in the direction of infringer-licensees, potentially damaging innovation incentives. The FTC's recommendations, which would effect a radical change in patent law and the incentives underlying it, may be subject to question, especially given that we are aware of no empirical study suggesting that hold-up is a serious impediment to standard setting, much less that it warrants fundamental changes to the patent laws.