Kieff & Layne-Farrar on Holdup Mitigation

F. Scott Kieff (recently sworn in as a Commissioner of the International Trade Commission) & Anne-Layne Farrar (Charles River Associates) have a new paper on ssrn, titled Incentive Effects from Different Approaches to Holdup Mitigation Surrounding Patent Remedies and Standard-Setting Organizations, which is forthcoming in the Journal of Competition Law & Economics.  Here is the abstract:

Debates about patent policy often focus on the potential for the threat of a court-imposed remedy for patent infringement to cause manufacturing entities and others to suffer patent holdup, especially when standardized industries are involved. This article uses lessons from the broader economics and political science literatures on holdup to explore various approaches to setting remedies for patent infringement — namely injunctions and money damages in the form of lost profits or reasonable royalties — with an eye towards the nature and extent of various forms of holdup they each might generate. In so doing, the article contrasts various narrower sub-categories of the broad holdup problem, including patent holdup, reverse patent holdup, and government holdup. The article elucidates a number of existing legal institutions and organizations that significantly mitigate the threat of patent holdup, including particular doctrines in the law of patent remedies and particular private ordering arrangements such as Standard Setting Organizations (SSOs). It also highlights some of the unfortunate unintended consequences of currently popular suggestions for mitigating patent holdup. It then explores the economic incentives driving the actions by both patent holder and licensee to show different categories of holdup risk they create. It closes by introducing a suggested framework for courts and administrative agencies to use to directly target the identified categories of holdup risk, and thereby limit harmful side effects.

Readers familiar with my work will not be surprised to learn that I disagree with much of the authors' analysis, except for some of the authors' comments on the entire market value rule (p.21) and their statement that trying to prove patent damages with "scientific certainty" is often too costly (p.20).  Among other things, I wish that papers like this one that focus on the risk that eliminating the possibility of injunctive relief for the infringement of FRAND-encumbered SEPs will diminish the incentive to invent would cite any empirical evidence that backs up that claim.  The authors also assert at page 18 that "the irreparable harm that would be created by following the FTC recommendations for no injunctions on SEPs would derive from encouraging standards implementers to wait-and-see rather than entering into licensing arrangements earlier.  That would deprive everyone in the patent marketplace of vital streams of both revenues and technologies.  The promise of some money remedy later is cold comfort to all those who suffer the harm caused by preventing such important markets from even coming into existence."  If I'm understanding this correctly, the authors are worried that someone may decide to use an SEP without authorization and, if they get caught, they'll be no worse off because all they have to pay is the royalty they would have paid if they had negotiated before beginning to use.  (The reference to wait-and-see might be an allusion to J. Gregory Sidak, Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro, 92 Minn. L. Rev. 714 (2008).)  This seems to assume that (1) the infringement is intentional, which it may or may not be, and (2) if it is, that there will be no risk of a penalty for willful infringement, and (3) infringers don't worry about incurring attorneys' fees.  Perhaps there is also some connection here to the "reverse holdup" phenomenon--the idea that licensees will act abusively by holding out for a deal that undervalues the technology--but as I've stated elsewhere I don't find that line of argument very convincing.  And how exactly does the wait-and-see approach, whatever the authors mean by it in the context of SEPs, prevent markets from "even coming into existence"?  Are they assuming that court-ordered royalties, if it comes to that, will necessarily undercompensate?   


I also think the authors do not adequately emphasize the problems with patent notice:  it's not simply a matter of the sheer number of patents out there, but the lack of clarity with which they define the boundary of the patent owner's rights.  And I don't find much to say in favor of the authors' emphasis on "government holdup," where parties seek help from the courts and regulatory agencies "to re-write deals that have already been cut and on which reliance has already been made" (p.16).  (Examples, please?)  The authors also refer to government holdup as "tending to decrease market competition" (p.6), as if patents themselves weren't a governmentally-conferred right that itself enables competition to decrease (though sometimes for good reason).  Additionally, the authors simultaneously seem to be decrying giving courts too much discretion when it comes to remedies and making it too difficult for plaintiffs to present evidence of patent value, while at the same time proposing a solution to what they view as the countervailing risk of reverse patent holdup that would seem to require rather finely-grained inquiries into the infringer's search efforts and design-around options.  Finally, the authors' condemnation of looking to the next-best available noninfringing alternative as evidence of the value of a patented technology is at odds with what I view as the standard economic model of valuation, and the authors' example intended to undermine the utility of this incremental value approach (p.22) is one that I have debunked in earlier work.  See Thomas F. Cotter, Patent Holdup, Patent Remedies, and Antitrust Responses, 34 J. Corp. L. 1151, 1183 n.157 (2009). 

Aside from all that, it's an interesting paper.