Royalty Stacking Research Articles

Double marginalization in the pricing of complements: The case of US freight railroads

AbstractMonopolists selling complementary products charge a higher price in a static equilibrium than a single (multiproduct) monopolist would, reducing both the industry profits and consumer surplus. Firms could instead reach a Pareto improvement by lowering prices to the single‐monopolist level. We analyze pricing data of railroad coal shipping in the United States. We compare a coal producer that needs to ship from A to C, with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We do not find that the price in case (2) is higher than the price in case (1), suggesting that the complementary monopolist pricing inefficiency is absent in this market. Our findings are robust to propensity score blocking, causal machine learning algorithms, and difference‐in‐differences analysis. Our results have implications for vertical mergers, tragedy of the anticommons, mergers of firms selling complements, elimination of double marginalization, and royalty stacking and patent thickets.

Classroom experiments on technology licensing: Royalty stacking, cross-licensing, and patent pools

The authors present two classroom experiments on technology licensing. The first classroom experiment introduces the concept of royalty stacking. Students learn that noncooperative pricing of royalties for complementary intellectual property rights leads to a double-marginalization effect. Cooperation solves the problem and is welfare-improving. The second classroom experiment introduces students to cross-licensing. It shows that reciprocal royalty payments dampen competition. The classroom experiments stimulate discussions of technology licensing, intellectual property rights, different royalty structures, patent pools, and technology standards. The authors present the experimental procedures and suggest routes for the discussion.

A Study on Methodology for Calculating the FRAND Royalty (Rate) to Begin with a Starting-Point-Royalty-Rate* ** - by Critical Analysis of the U.S. Methodology for Calculating the Reasonable Royalty (Rate) -

Standard-Essential Patent (SEP) holders make certain commitment, which requires that the holders license their SEP on Fair, Reasonable and Non-Discriminatory (FRAND) terms. In case of SEP patent infringement, thus, the issue is marked by determination of royalties for the SEP. In this regard, this article has thoroughly examined the meaning of the FRAND commitment, and has figured out that a core issue would be to calculate a reasonable royalty (rate) in taking a view of the FRAND commitment in terms of royalty. Furthermore, the FRAND royalty, especially the FRAND royalty rate calculation methodology has been derived by using the reasonable royalty calculation methodology in cases of non-SEP infringements as a link based on understanding of the meaning of the FRAND commitment. Recently, the importance of assessing a royalty base has been particularly emphasized due to application of apportionment ratio when a reasonable royalty is calculated for patent infringement damages, but it is because the main issue is generally to calculate a reasonable royalty rate. Specifically, this article asserts that it is necessary to have a specific formula or algorithm in determining the FRAND royalty rate, and emphasizes an importance on seeking a proper starting-point-royalty-rate. In this regard, this article has examined methodologies that the U.S. courts has considered when setting the starting-point-royalty-rate for calculating a reasonable royalty rate in patent infringement litigations. As a result, the U.S. courts tend to narrowly interpret the scope of a comparable license agreement, and therefore it is practically more difficult to find a sufficiently comparable royalty rate. Given that practical difficulty, this article suggests that Korea courts may find the starting-point-royalty-rate by considering either an average industry royalty rate in the comparable businesses technically relevant to the patents-in-suit or (if necessary) 25% rule of thumb, depending on the specific circumstances of the given cases. Similarly, this article asserts that Korea courts can apply the methodology to find the starting-point-royalty-rate for calculating a reasonable royalty rate for non-SEP infringement damages when calculating the FRAND royalty rate. Specifically, Korea courts may derive a comparable royalty rate by putting different weights on evidence for the comparable license agreements in the following order. 1) existence of an established FRAND royalty rate, 2) a rate received by the patentee for license to the SEPs-in-suit, 3) a rate paid by the licensee for the use of other patents comparable to the SEPs-in-suit. Where there is no any comparable license agreement, however, this article suggests that Korea courts may consider a rate in a patent pool related to the SEPs-in-suit, or top-down approach that is added by 25% rule of thumb, depending on the circumstances of the given cases. On the other hand, the importance of measuring an apportionment ratio cannot be disregarded, which is a different issue apart from the matter of royalty stacking. In the U.S., court’s practice has emphasized the requirement that a royalty base be smallest salable patent-practicing unit (SSPPU), but such practice has been subject to strong criticism by legal scholars. Thus, it is needed to conduct an additional study regarding the measurement of the apportionment ratio, and a follow-up research would be prepared for the future.

Classroom Experiments on Technology Licensing: Royalty Stacking, Cross-Licensing and Patent Pools

We present two classroom experiments on technology licensing. The first classroom experiment introduces the concept of royalty stacking. The students learn that non-cooperative pricing of royalties for complementary intellectual property rights leads to a double-marginalization effect. Cooperation solves the problem and is welfare improving. The second classroom experiment introduces students to cross-licensing. It shows that reciprocal royalty payments dampen competition. The classroom experiments stimulate discussions of technology licensing, intellectual property rights, different royalty structures, patent pools and technology standards. We present the experimental procedures, and suggests routes for the discussion.

Comments on Patent Remedies and Complex Products — A U.S. Litigation Perspective

The book Patent Remedies and Complex Products: Toward a Global Consensus presents a laudable effort to examine the underpinnings of patent remedies and how these remedies should be applied in our world of ever more advanced multi-component products. This Comment provides some reactions to and amplifications of the valuable contributions of the book from the perspective of U.S. patent and antitrust litigation. More specifically, this Comment focuses on several critical aspects of the calculation of reasonable royalties and injunctive relief, particularly as to standard-essential patents (SEPs), including issues surrounding the notion of incremental value in the context of patent infringement damages and patent license royalties, portfolio licensing, holdup, royalty stacking, and holdout.

The Deterioration of Appropriate Remedies in Patent Disputes

The Deterioration of Appropriate Remedies in Patent Disputes

The case of the missing royalty stacking in the world mobile wireless industry

Abstract We build an equilibrium royalty stacking model that links the number of standard-essential patent (SEP) holders with the equilibrium quantity, price and cumulative royalty. We show that all observable implications of the theory are inconsistent with the data from the world mobile wireless industry. In this industry, the number of SEP holders grew from 2 in 1994 to 130 in 2013. Royalty stacking theory predicts falling or stagnant output, rising selling prices, and rising or stagnant quality-adjusted prices. By contrast, between 1994 and 2013 worldwide yearly device sales grew 62-fold, at an average rate of 20.1% per year, and both selling and quality-adjusted prices fell fast over time. Controlling for technological generation, the real average selling price of a device fell between -11.4% and -24.8% per year. Similarly, under conservative parametrizations, royalty stacking theory predicts royalty yields, which are more than an order of magnitude larger than the observed average cumulative royalty yield charged by SEP holders in practice, which hovers between 3% and 3.5%. A theory based on Lerner and Tirole’s (2015, J. Political Econ., 123(3), 547–586) within-functionality competition yields observable implications consistent with the observed facts. If all the technologies protected by SEPs have meaningful substitutes that cap the royalty that any SEP holder can charge, then the cumulative royalty is independent of demand parameters in the downstream market and can be as low as the observed average cumulative royalty yield. Moreover, if the product market is competitive and technological progress is fast, then prices follow costs, quality-adjusted prices protractedly fall, and sales grow fast.

Disentangling the FRAND Conundrum

Courts, antitrust authorities, and policy makers across the world have been over concerned by holdup risks involving the strategic use of standard essential patents (SEPs). In order to avoid or at least mitigate holdup problems, it has been adopted the view that a fair, reasonable, and non-discriminatory (FRAND) commitment implies a waiver of the right to seek injunctions against infringers. However, contrary to the mainstream belief, there is no empirical evidence of structural and systematic problems of holdup and royalty stacking affecting SEPs licensing. Therefore, there is no convincing reason for laying down an exceptional antitrust treatment for FRAND-encumbered patents. Problems afflicting SEP licensing stems from the lack of contractual or organizational solutions provided by standard setting organizations (SSOs) which exacerbates the risk of strategic behaviors. First and foremost, SSOs should require all SEP owners involved in a standardization process to disclose, ahead of the standard adoption, the most restrictive licensing terms. Secondly, since holdup and royalty stacking problems increase proportionally with the number of SEPs and many patents declared essential by SSOs lack this characteristic, essentiality checks carried out by independent third parties should be imposed to mitigate the risk of over-declaration.

SEP Royalties: What Theory of Value and Distribution Should Courts Apply

We argue that in adjudicating SEP royalty rates, courts should do what they do in pricing other assets or the flows of income they produce: rely on information from the market about the value of comparable assets or their rental rates. The comparables method is based on price theory, which explains where value comes from and how it is distributed among factors of production, including intellectual property. Courts should not employ the “bottom up” or “top down” techniques of royalty apportionment. Both are based on the theory of patent holdup and royalty stacking, which assumes that any observed royalty is the result of “excessive royalties” wrought by the additional monopoly power conferred by standardization. This theory has been shown to be logically inconsistent and logically incomplete, and its predictions have been rejected by systematic empirical tests. As a practical matter, the bottom up technique cannot actually be operationalized. Top down techniques can be operationalized, but employing them requires a court to reject the implications of price theory.

Governing the Patent Commons

Thousands of patents underpin the technologies that power the digital economy. Coordination among firms developing and implementing these novel technologies has notably been facilitated in large part by Standards Developing Organizations (SDOs). Despite the evident benefits of standardization in general and SDOs in particular, certain aspects of these processes have come under severe scrutiny from scholars, antitrust authorities and courts. These critics argue that the standardization space suffers from two crippling market failures, namely “patent holdup” and “royalty stacking”. They thus conclude that opportunistic firms will squeeze their rivals’ profits, harming consumers and stifling innovation in the process. However, recent empirical scholarship strongly suggests that patent holdup and royalty stacking rarely, if ever, occur in the standardization space. Against this checkered backdrop, our paper argues that standardization is an emergent phenomenon, where parties have strong incentives to design institutions and contractual relationships that mitigate the scope for opportunistic behavior (including patent holdup and royalty stacking). The paper explores how these incentives have likely enabled firms to avoid severe market failures. We argue that ignoring these complex market dynamics may cause antitrust authorities and courts to do more harm than good (notably by exacerbating patent holdout behavior). The paper then reviews recent regulatory interventions and questions whether this has indeed been the case. Finally, we suggest that antitrust authorities and courts should draw inspiration from acclaimed scholarship regarding both the evolution of cooperation and the management of common-pool resources.

THE ROLE OF PATENTS IN INFORMATION AND COMMUNICATION TECHNOLOGIES: A SURVEY OF THE LITERATURE

AbstractDuring the last few decades, the number of patents in information and communication technologies has increased considerably. An increasing number of patents and the associated fragmentation of IP rights have generated a series of potentially problematic consequences. Patent thickets, royalty stacking, the emergence of patent assertion entities, increased patent litigation – particularly around standard essential patents – and the difficulties with defining fair, reasonable, and nondiscriminatory licensing terms are some of the most debated issues in the literature that we review in this paper. We devote a specific section of our survey to patent quality, currently one of the most debated issues surrounding the patent system. In our analysis, we mix theoretical and empirical arguments with a more policy‐oriented reasoning. This allows us to better position the different issues in the relevant political and economic context.

An estimate of the average cumulative royalty yield in the world mobile phone industry: Theory, measurement and results

An influential literature argues that dispersed patent ownership may lead to royalty stacking and excessive running royalties, thus increasing the long-run marginal cost of manufacturing phones and their prices. One set of estimates claims that the royalty stack is on the order of 20–40 percent of the value of the average phone. In order to assess this claim, we estimate the average cumulative royalty yield—the sum total of patent royalty payments earned by licensors, divided by the total value of mobile phones shipped— in the world mobile phone industry between 2007 and 2016.We “follow the money” and identify, with varying accuracy, 39 potential licensors in the smartphone value chain. We find that, of these, only 29 charged royalties in 2016, running from a low of $1.6 million to a high of $7.7 billion, summing to $14.2 billion in total, which compares with $425.1 billion in mobile phone sales. The average cumulative royalty yield in 2016 was 3.3 percent or $7.20 per phone. If we restrict this only to smartphones, the result would be $9.60 per phone, roughly 3.4 percent of the average selling price. A sensitivity analysis shows that even under a very restrictive set of assumptions, the average cumulative royalty yield on a smartphone would not exceed 5.6 percent.

Standardizing the Smallest-Functional Unit: A Tier-Stacking Approach to Frand Royalty Rates

Apple's recent fight with Qualcomm, alleging that Qualcomm is overcharging apple to license Qualcomm's FRAND-encumbered standard essential patents (SEPs), raises an interesting issue regarding patent hold-up: whether a FRAND royalty rate should limit an SEP holder’s ability to extract larger royalties from end-product manufacturers — resulting from that manufacturer's increased sales prices due to unrelated, end-product advancements. This Paper advocates that uniformly assessing all FRAND-encumbered licenses against the smallest-functional unit would ameliorate this concern, and it further provides two methods for achieving this end while also avoiding issues of excessive royalty stacking.

Pricing of Complements in the U.S. Freight Railroads: Cournot Versus Coase

Monopolists selling complementary products charge a higher price in a static equilibrium than a single multiproduct monopolist would, reducing both the industry profits and consumer surplus. However, firms could instead reach a Pareto improvement by lowering prices to the single monopolist level. We analyze administrative nationally-representative pricing data of railroad coal shipping in the U.S. We compare a coal producer that needs to ship from A to C, with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We do not find that price in case (2) is higher than price in case (1), suggesting that the complementary monopolist pricing inefficiency is absent in this market. For our main analysis, we use a specification consistent with the previous literature; however, our findings are robust to propensity score blocking and machine learning algorithms. Finally, we perform a difference-in-differences analysis to gauge the impact of a merger that made two routes wholly-owned (switched from case 2 to case 1), and these results are also consistent with our main findings. Our results have implications for vertical mergers, tragedy of the anticommons, mergers of firms selling complements, and royalty stacking and patent thickets.

The Role of Patents in Information and Communication Technologies. A Survey of the Literature

During the last few decades, the number of patents in information and communication technologies has increased considerably. An increasing number of patents and the associated fragmentation of IP rights have generated a series of potentially problematic consequences. Patent thickets, royalty stacking, the emergence of patent assertion entities, increased patent litigation – particularly around standard essential patents – and the difficulties with defining fair, reasonable and non-discriminatory (FRAND) licensing terms are some of the most debated issues in the literature that we review in this paper. We devote a specific section of our survey to patent quality, currently one of the most debated issues surrounding the patent system. In our analysis we mix theoretical and empirical arguments with a more policy-oriented reasoning. This allows us to better position the different issues in the relevant political and economic context.

Methodologies for calculating FRAND damages: an economic and comparative analysis of the case law from China, the European Union, India, and the United States

In the last several years, courts around the world, including in China, the European Union, India, and the United States, have ruled on appropriate methodologies for calculating either a reasonable royalty rate or reasonable royalty damages on standard-essential patents (SEPs) upon which a patent holder has made an assurance to license on fair, reasonable and non-discriminatory (FRAND) terms. Included in these decisions are determinations about patent holdup, licensee holdout, the seeking of injunctive relief, royalty stacking, the incremental value rule, reliance on comparable licenses, the appropriate revenue base for royalty calculations, and the use of worldwide portfolio licensing. This article provides an economic and comparative analysis of the case law to date, including the landmark 2013 FRAND-royalty determination issued by the Shenzhen Intermediate People’s Court (and affirmed by the Guangdong Province High People’s Court) in Huawei v. InterDigital; numerous U.S. district court decisions; recent seminal decisions from the United States Court of Appeals for the Federal Circuit in Ericsson v. D-Link and CISCO v. CSIRO; the six recent decisions involving Ericsson issued by the Delhi High Court; the European Court of Justice decision in Huawei v. ZTE; and numerous post-Huawei v. ZTE decisions by European Union member states. While this article focuses on court decisions, discussions of the various agency decisions from around the world are also included throughout.

Patent Pools and Related Technology Sharing

A patent is an arrangement under which patent holders in a common technology commit their patents to a single holder, who then licenses them out to the original patentees and perhaps also to outsiders. The payoffs include both revenue earned as a licensor, and technology acquired by pool members as licensees. Public effects can also be significant. For example, technology sharing of complementary patents can improve product quality and variety. In some information technology markets pools can prevent patents from becoming a costly obstacle to innovation by clearing channels of technology transfer. By contrast, a pool's aggregate output reduction or price fixing in a product market can produce cartel profits. A traditional justification for patent pools is that they facilitate improved products by uniting complements Sharing of complementary patents means that licensees can then employ all the patents in their product, rather than creating silos in which each manufacturer incorporates only its own patented features. Pools created for this purpose can reduce problems of royalty stacking and holdup, as well as problems involving blocking patents. A more robust explanation for pooling in many markets comes out of the economics of transaction costs, which emphasizes the role of limited information and the costs of obtaining it, as well as uncertainty in bargaining and sharing. Pooling is an efficient solution to problems of technology development and transfer when determining patents' validity or identifying their boundaries is costly. In this sense, patent pools function much as traditional common pool resources. An individual patent’s boundaries distinguish its protected technological embodiments from noninfringing technology. But when multiple patents are aggregated what really matters are the outer boundaries that separate the portfolio as a whole from outside patents or the public domain. So long as the relevant rights are somewhere in the portfolio, the parties do not need to delineate the boundaries of individual patents in order to strike a deal. While most patent pools are socially beneficial, certain practices or structures can pose competitive problems. The biggest antitrust risk from pooling is collusion, and its threat depends on two things. First is the market structure and the power of the pool within its market. Second is the nature of pricing and arrangements within the pool. Pool exclusivity can take several forms. First, it can refer to the contract that each licensor has with the pool, asking whether that licensor is free to license to others outside of the pool. Second it can refer to the pool’s willingness as licensee to accept an offered technology from an outsider for inclusion in the pool. Third it can refer to the pool's willingness as licensor to license to outsider manufacturers. Fourth, it can refer to field-of-use or other restrictions given to licensees from the pool. A large but inconclusive literature considers the relationship between pooling and innovation. Conclusions are sensitive to assumptions about patent strength and quality, about the relationship among the patents in a pool and the strength of alternatives outside the pool, about the impact on innovation of insiders vs. outsiders to the pool, and finally, about the strategic responses of participants. Most of the literature concludes that most pools increase innovation rates. A pool should increase the demand for innovation of complements to the pool. First of all, access to the existing technology by pool members should be guaranteed and cheaper. To the extent the pool reduces licensing costs and eliminates royalty stacking the cost of further improvements should decline. When innovation is cumulative the development of new technology may require the licensing of existing technology with multiple patent holders. Pooling can reduce these costs and thus facilitate cumulative innovation.

Methodologies for Calculating Frand Damages: An Economic and Comparative Analysis of the Case Law from China, the European Union, India, and the United States

In the last several years, courts around the world, including in China, the European Union, India, and the United States, have ruled on appropriate methodologies for calculating either a reasonable royalty rate or reasonable royalty damages on standard-essential patents (SEPs) upon which a patent holder has made an assurance to license on fair, reasonable and non-discriminatory (FRAND) terms. Included in these decisions are determinations about patent holdup, licensee holdout, the seeking of injunctive relief, royalty stacking, the incremental value rule, reliance on comparable licenses, the appropriate revenue base for royalty calculations, and the use of worldwide portfolio licensing. This article provides an economic and comparative analysis of the case law to date, including the landmark 2013 FRAND-royalty determination issued by the Shenzhen Intermediate People’s Court (and affirmed by the Guangdong Province High People’s Court) in Huawei v. InterDigital; numerous U.S. district court decisions; recent seminal decisions from the United States Court of Appeals for the Federal Circuit in Ericsson v. D-Link and CISCO v. CSIRO; the six recent decisions involving Ericsson issued by the Delhi High Court; the European Court of Justice decision in Huawei v. ZTE; and numerous post-Huawei v. ZTE decisions by European Union member states. While this article focuses on court decisions, discussions of the various agency decisions from around the world are also included throughout.

Moving Away from High-Level Theories: A Market-Driven Analysis of FRAND

There is a large strand of legal and economic literature suggesting the FRAND regime is broken and that standardization is at risk given “hold-up and “royalty stacking” problems. A variety of proposals have been made to address these alleged problems, most of which seeking to decrease the bargaining power of essential patent holders to the benefit of standard implementers. The hold up and royalty stacking conjectures have been questioned by a number of authors essentially on the ground that these theories contained logical inconsistencies, but also that they were not based on sufficient empirical support to warrant policy reforms. Against this background, this paper explains why hold up and royalty stacking only occur in rare circumstances given the private solutions that are available to standard implementers to avoid paying license fees that are not FRAND or that would aggregate to a level that would render the implementation of the standard more difficult or even impossible. Given the dearth of empirical evidence over hold up and royalty stacking, this paper also looks at the evolution of the mobile communication sector in the past decade to see whether the alleged adverse consequences (in terms of harm to standard implementation, innovation and investment and the continuity of the standardization process) that would be created by hold up and royalty stacking can actually be observed. The available data suggests that the mobile communication device markets are healthy despite the fact that these markets have been said to be harmed by regular SEP-related abuses. Although it could be argued that these markets would be even healthier “but for” SEP abuses, the available data should give pause to those claiming that significant reforms should be made to the FRAND regime. In fact, the high degree of competition in the above markets and the presence of highly successful entrants that do not have a track record in the development of mobile communication technologies strongly suggest that the FRAND regime has largely worked in that it has stimulated the broad licensing of SEPs while maintaining a fair balance between the interests of SEP holders and standard implementers.

Holdup, Holdout and Royalty Stacking: A Review of the Literature

This article provides a critical review of the theoretical and empirical literature on holdup, holdout, and royalty stacking, as they relate to remedies for patent infringement.