Royalty Stacking

As an economic term, royalty stacking describes a situation where multiple patentees, licensing independently, choose royalty rates that are inefficiently high. The rates are inefficient compared with what licensees could achieve by coordinating their licensing efforts.

[T]he composite commodity will always be made more expensive, by reason of separation of interests than by reason of the fusion of monopolies.

— Cournot, A.A., Bacon, N.T. & Fisher, I. (1897). Researches Into the Mathematical Principles of the Theory of Wealth. Macmillan, at 103.

This inefficiency negatively impacts both patentees and consumers.

An association of monopolists, working for their own interest, in this instance will also work for the interest of consumers, which is exactly the opposite of what happens with competing producers.

— Cournot, A.A., Bacon, N.T. & Fisher, I. (1897). Researches Into the Mathematical Principles of the Theory of Wealth. Macmillan, at 103.

The inefficiency occurs because individual patentees do not internalize the effect of their licensing efforts on other patentees. The situation is similar to the tragedy of the commons.

Patent pools may help to mitigate potential inefficiencies due to royalty stacking. Patent pools are are collections of patent owners that package and coordinate their licensing efforts.

Patent pools are collections of two or more SEP owners that package and license their SEPs collectively. Royalties are distributed amongst the contributors to the patent pool on a per-patent basis, generally by valuing each patent in the pool equally. Typically, pool members contributing their patents to the pool also become licensees of the pool's patent package.

— Microsoft Corp. v. Motorola, Inc., 795 F. 3d 1024, 1043 (9th Cir. 2015).

The term royalty stacking is sometimes used pejoratively, especially in the context of SSOs, to describe the royalty obligations standard implementers may face.

Royalty stacking can arise when a standard implicates numerous patents, perhaps hundreds, if not thousands. If companies are forced to pay royalties to all SEP holders, the royalties will stack on top of each other and may become excessive in the aggregate.

— Ericsson, Inc. v. D-Link Systems, Inc., 773 F. 3d 1201, 1209 (Fed. Cir. 2014).