Patent holdups

INTRODUCTION This chapter explores holdups in the standard setting organization (SSO) and non-SSO setting. It observes that patentees are not always the aggressors. On the other hand, holdups are harmful and need to be deterred before they occur and decisively quashed when they do. Much progress has been made, but the results of those efforts, particularly with patent assertion entities (PAEs) remains to be seen. Patent holdups happen when patentees demand more than they deserve from implementers who made technology-specific investments. In a world still reeling from the aftershocks of the greatest economic crisis since the Great Depression, greed ranks high in the order of cardinal sins. While extortionists have swiftly found themselves vilified, some patentees may simply be ferreting out uncooperative infringers attempting a holdout (reverse holdup) aimed at depressing royalties owed to patentees below what the technology is worth. Holdups have become more prominent due to a convergence of technologies and a divergence of interests. Companies like Motorola, Nokia, and Ericsson once shared a common interest in promoting open or free access to each other's technology as rivals and partners with a shared business model and corporate culture. Today, consumer electronics devices are a mere portal to an “Internet of Things,” shattering traditional boundaries between industries such as software and wireless telecommunications, drawing unlikely rivals such as Apple, Google, Huawei, Microsoft, Qualcomm, Samsung, and ZTE into a collision course. They exist at different points on the value chain, and have different incentives. For instance, a handset maker views patent royalties as a cost, while the owner of an operating system would view it as a source of revenue. Systems prone to holdups consist of complementary hardware and software components spanning different industries. Each smartphone embodies about 250,000 patents covering thirty different standards for wireless communications, video display, Internet access and other services. With each new patentee, the holdup risk rises. Just like land owned by many different people, it becomes costly to identify and negotiate for rights to use the technology. The sheer number of patents of indeterminate scope and validity cause the transaction costs to preclude bargaining. It would take 2 million attorneys working full time to compare every software patent issued each year to a firm's products, and cost $400 billion, twice the value of the software industry.