Author: Joseph Farrell, John Hayes, Carl Shapiro, and Theresa Sullivan
Published: December 19, 2013
Publication: Antitrust Law Journal
This article discusses the problem of patent hold-up, which arises because the adoption of standards increase the value of patents once they are incorporated into standards. Those “standard essential patents” must now be licensed based on their ex ante value, when alternative technologies could have been used before the standard was finalized. The article explores a number of facets to the problem of patent hold-up in the standards context, including the fact that (i) it is “not merely a private contracting problem, but an antitrust problem” due to the “inefficient acquisition of market power that harms consumers;” (ii) “it is difficult for an SSO [standard setting organization] to craft and enforce fully effective rules,” and thus competition policy should not “completely defer to those rules”; and (iii) allowing patentees to extract gains from hold-up undermines the patent system’s objective of aligning innovation incentives with innovators’ contributions. The article explains that the appropriate royalty level for a standard-essential patent (“SEP”) is the royalty that the SEP holder could have negotiated ex ante, before the adoption of the standard, which reflects the value of the patented technology and not the additional value created by its incorporation into an industry standard. The authors explain that this ex ante royalty level is equal to the incremental value of the technology claimed by a SEP over the next best technology that was available before the standard’s adoption.