Licensing standard‐essential patents with costly enforcement

Abstract

We study the interaction between the holder of a standard‐essential patent (SEP) and two downstream firms using the patented technology to design standard‐compliant products. The SEP holder approaches the downstream firms simultaneously in the shadow of patent litigation and is subject to fair, reasonable, and non‐discriminatory licensing requirements. We show that the patent holder faces a litigation credibility constraint and a license acceptability constraint when setting its licensing terms. For patents of intermediate strength, there is no royalty that allows the patent holder to reconcile these constraints. Consequently, it cannot license its technology and must go to court against infringers. We show that the availability of an injunction improves the patent holder's ability to license its technology, but it tends to inflate the royalty rate for implementers.

Royalty Stacking and Validity Challenges: The Inverse Cournot Effect*

“…This effect does not arise in our model, since the Inverse Cournot effect occurs even when one of the patentees has ironclad patents so that its decision to lower its royalty rate is not driven by the need to avoid going to court. Bourreau et al [2015] consider a setup similar to ours to study licensing and litigation in Standard Setting Organizations. The main difference with our paper is that in their setup litigation occurs after production has taken place.…”

“…Bourreau et al . [2015] consider a setup similar to ours to study licensing and litigation in Standard Setting Organizations. The main difference with our paper is that in their setup litigation occurs after production has taken place.…”

A theory of socially inefficient patent holdout

“…7 Our model also assumes that court trials reveal the information, but our focus is on the repeated interaction between a patent holder and a licensee and abstracts from asymmetric information and entry-deterrence motivations. Bourreau et al (2016) study the licensing and sequential litigation of two downstream competitors and analyze the interaction with final market outcomes.…”