Overlapping Patent Exposure can Deter Holdouts

[Benjamin Henrion <bh@udev.org>]

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From: The Progress & Freedom Foundation <mail@pff.org>
Reply-To: notice-reply-iuk5ug34vjn3xjj@ga1.org
To: Benjamin Henrion <bh@udev.org>
Subject: Overlapping Patent Exposure can Deter Holdouts
Date: Wed, 17 May 2006 15:04:04 GMT
Message-ID: <20060517150404.24012.695.qmail@omail4.getactive.com>

The Progress & Freedom Foundation
News Release

FOR IMMEDIATE RELEASE
May 17, 2006 
CONTACT: Amy Smorodin
202-289-8928

OVERLAPPING PATENT EXPOSURE CAN DETER HOLDOUTS
IP Academic Advisory Council Member Proposes New Licensing
Approach 

WASHINGTON D.C. - Firms that hold patents relevant to technical
standards notoriously hide in the shadows, hoping other firms
will implement the relevant standards and then be vulnerable to
suits for patent infringement. In "Patent Holdouts in the
Standard-Setting Process," (http://ga1.org/ct/rdwVDA41FPRT/) a
new paper released today by the Progress & Freedom Foundation?s
Center for the Study of Intellectual Property (IPcentral.info),
University of Chicago law professor Doug Lichtman suggests that
would-be infringers have overlooked a counterintuitive but
effective response: use contract law to ensure that large
numbers of patent holders can credibly make this very holdout
threat. The author is a member of the Center's IP Academic
Advisory Council.

The intuition behind Lichtman's paper
(http://ga1.org/ct/rdwVDA41FPRT/) is straightforward. 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 investment. Importantly, however, the
greater the number of patent holders in this holdout position,
the less each can expect to earn from this tactic. As Lichtman
puts it, "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. Ironically, then, more
patents means less money per patent holder." Of course, less
money also 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 theory, this insight could be harnessed simply by blindly
infringing a large number of patents simultaneously. Lichtman,
however, endorses a more cautious approach. Accordingly to
Lichtman, firms should set this dynamic into motion by using a
licensing term modeled after the more conventional "most favored
nations" clause. "Under this approach," writes Lichtman,
"licensees would commit to pay known patent holders a royalty
that roughly reflects the value of their technologies. Licensees
would further commit, however, that if any later patentee can be
shown to be earning a rate above that reasonable level, existing
patentees would automatically be entitled to a similarly
overstated fee."

Lichtman's paper, "Patent Holdouts in the Standard-Setting
Process," (http://ga1.org/ct/rdwVDA41FPRT/) is one in a series
of papers on intellectual property released by the PFF?s IP
Academic Advisory Council. The Council was launched in November
of 2005 by The Progress & Freedom Foundation's Center for the
Study of Digital Property.

The Progress & Freedom Foundation is a market-oriented think
tank that studies the digital revolution and its implications
for public policy. It is a 501(c)(3) research & educational
organization.
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-- 
Benjamin Henrion <bh@udev.org>
http://bh.udev.org
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