How patent holdout is moving up the agenda
There’s no doubt that the problem of patent holdout and the threat that it poses to the innovation economy is becoming a more prominent topic for debate. In several recent European court cases, judges have highlighted the problems of holdout and there is a growing body of academic research that has analyzed this issue.
Holdout will be one of the topics for discussion this month at a Symposium hosted by the Haas School of Business at UC-Berkeley. The Symposium, titled “The Impact of the Patent System on Markets for Technology,” will examine how to promote understanding of, and tackle problems in, technology licensing.
The event comes amid growing concerns about obstacles to the licensing of patents, in particular standard essential patents (SEPs). Patent holdout occurs when implementers launch products and services and then delay or decline to take a license to the patented technologies in their devices. The result is that the innovator cannot capture value from their patented technologies in a timely manner and may not be fairly compensated for their investment in R&D. Additionally, implementers who play by the rules may find themselves disadvantaged compared to competitors that holdout.
Patent holdout has been exacerbated in recent years by a range of factors including a decline in injunctive relief and a general weakening of IP rights in the US, and by attempts to use antitrust laws against SEP owners. Many patent practitioners and IP-owning companies are concerned these initiatives undermine innovation and disrupt the balance of the global IP system.
Holdout is often seen in industries that require interoperability based on technical standards, such as smartphones and the Internet of Things, where patent owners that participate in the development of these standards agree to license their SEPs on fair, reasonable and non-discriminatory (FRAND) terms. These standards are generally accessible by all and, because patents are not self-enforcing rights, implementers can offer products and services that use patented and standardized technologies even if these implementers delay or resist taking a FRAND license. Examples of patent holdout include refusing to negotiate, regularly postponing or canceling meetings, making unreasonable requests regarding license terms and royalties, and obstructing litigation.
The upcoming Symposium reflects the growing global focus on the role that patents play in building a knowledge economy and promoting innovation as a tool for growth. By facilitating the transfer of knowledge and enabling organizations to specialize at different stages of the value chain, a well-functioning patent system provides incentives to invest and contributes to efficient markets. It also helps to level the playing field between small, start-up companies and those that have much bigger resources.
However, when the patent system is weakened, implementers may view it as economically rational to hold out, disrupting the balance within the system. This provides obstacles to technology development, damages the incentive to innovate, and means that important technical contributions are not rewarded.
This issue has become more complex given the globalization of technology markets, and the different approaches taken by policy makers and judges in various jurisdictions in Europe, China, and India, as well as the U.S. One fear is that innovative companies will naturally gravitate to whichever country has the most balanced patent system—and at the moment that does not look like being the U.S.
A transaction-based knowledge economy depends on a robust IP system that encourages the division of labor and makes it rational to negotiate and to promote good faith discussions between parties. This Symposium promises to provide new perspectives on how we can achieve that.