Patent Hold-Up

Patent holdup describes a situation where a patent remains hidden during the development of a standard and later enforced with a threat of injunction in an effort to extract excessive rents from implementers.

Inefficiency may be injected into the standard-setting process by what is known as patent hold-up. An SDO may complete its lengthy process of evaluating technologies and adopting a new standard, only to discover that certain technologies essential to implementing the standard are patented. When this occurs, the patent holder is in a position to hold up industry participants from implementing the standard.

— Broadcom Corp. v. Qualcomm Inc., 501 F. 3d 297, 310 (3rd Cir. 2008).

Lemley and Shapiro develop an economic model to illustrate their intuition about holdup. Their model makes the following two assumptions: first, negotiations occur after a product is already developed; second, the patent holder threatens an injunction as a negotiation tool.

[A] downstream firm that is approached by a patent holder who alleges that the downstream firm’s product incorporates a feature that infringes its patent. … we ask how the patent holder’s threat to obtain an injunction influences the royalty rate that the two parties are likely to negotiate in this situation.

— Lemley, M. A., & Shapiro, C. (2006). Patent holdup and royalty stacking. Tex. L. Rev., 85, 1991–2049, at 1995.

The term patent holdup sometimes used pejoratively and may not reflect the facts and circumstances underlying a case. Note that the threat of injunction was blunted by the Supreme Court’s decision in eBay Inc. v. Mercexchange, Ll, 547 US 388 (S. Ct. 2006).