New Study: Non-Practicing Patent Holders are Not Overcompensated

A new study was published last month, titled "Revisiting Injubctive Relief in High Tech Industries With Non-Practicing Patent Holders," which looked at alleged market power abuses of non-practicing entities. The paper, authored by Vincenzo Denicolo, Damien Geradin, Anne Layne-Farrar, and Jorge Padilla analyzes various assertions about patent hold-ups, injunctions, and royalty stacking, and concludes that there is no reliable evidence that shows that they are being rewarded "unjustly":

Injunctive relief is at the center of the intellectual property debate over market power abuse. Some scholars, with fears of patent holdup and royalty stacking in mind, have advocated limiting the right to obtain an injunction. In particular, some have called for categorical denials of injunctions for any “non-practicing” patent holder or whenever the patent in question is but one component of a larger, complex product incorporating multiple patented technologies. In this paper we examine the injunctive relief policy proposals using an error cost framework. We find the theory these proposals rest upon to be overly restrictive and therefore likely to result in substantial “false positives”, where patent holders with no designs of patent holdup are nonetheless denied injunctive relief. Moreover, the available empirical evidence does not support the position that patent holdup and royalty stacking are pervasive enough problems to warrant significant policy reform. Instead, we argue that the recent Supreme Court eBay decision can and should be read as a return to a balancing test, where costs and benefits are weighed carefully before granting or denying a patent injunction.

It's a very interesting study, that highlights some policy implications:

[A]ny delay in payment [for infringement] benefits the infringer and harms the patent holder since a dollar today is always worth more than a dollar tomorrow. This is doubly true for R&D focused firms who rely on licensing for their revenues. Nor is there any guarantee that the courts will apply an appropriate interest rate to account for the lost time. Thus, infringers have strong incentives to drag out proceedings while patent holders have incentives to settle.

Furthermore, when courts finally do force payment, patent holders face considerable dangers in a court setting its royalty rates. Specifically, in the absence of ex post holdup a court-set royalty rate acts as a "cap", not a floor, on licensing terms . . . Furthermore, if a court sets a rate too low, it will not only cost the firm in that one transaction but will hinder the firm’s future negotiations, as no other party will pay more than the publicly noted court rate. This dynamic reinforces patent holders incentives to settle on a license, even when it appears that they will win a court case, just to avoid court set rates.

It is therefore easy to imagine circumstances where hardship arguments could favor either side in a patent dispute. Patent holders face substantial delays in receiving payment, delays that might jeopardize their operations; they also face the risk of inadequate royalty rates set by a court, and the long term repercussions that entails. On the other side are the potential losses to a manufacturer from shutting down its plant and the impact this might have on customers or the industry. It is the case particulars under the test that should decide this question, and not the business model of the patent holder.

Download a copy of the paper here (link)

See also Lemley, Shapiro, "Patent Holdup and Royalty Stacking" (link)