Holdout in patent negotiations is unfair – and can derail innovation. There’s a better way.?

As the technology we use every day becomes more and more dependent on standardization, intellectual property license negotiations have become a fixture of the tech business landscape. Companies that have contributed to the standards ask for royalties under fair, reasonable, and non-discriminatory (FRAND) terms, and the company taking the license tries to negotiate a lower fee.?

The stakes on both sides are enormous: For patent holders, who invest heavily in upfront R&D costs, licensing fees are critical to recouping investments and keeping the cycle of innovation moving forward. For potential licensees, patent licenses can be large business expenses and therefore they are heavily incentivized to negotiate the fees down to preserve greater profit margins.? These are tough negotiations in the best of circumstances.?

However, one tactic that is becoming too common is “holdout,” where a patent user refuses to enter into meaningful license negotiations believing it is advantageous to delay payment as long possible.? Under the holdout strategy, the potential licensee purposely delays the negotiations until litigation appears to be the only way to resolve the dispute.? And even when litigation is initiated, the delays continue, especially in jurisdictions that do not allow injunctive relief.? The result is that, with the benefit of not having to make any payments until the conclusion of the litigation (or settlement), the potential licensee is incentivized to continue delaying the litigation process.? This tactic can result in further delays of 3-4 years or more.????

Using patented technology while dragging out negotiations for a license is not only unfair to the patent holder, but it is also unfair to the potential licensee’s competitors who are paying fair and reasonable royalties resulting in an unfair competitive advantage for the holdout company.? Of course, there are arguments on the licensee side – when facing a large and well-respected patent portfolio where non-infringement and invalidity arguments on all patents is just not credible, companies may say that the Standard Essential Patent (SEPs) licensing fees being asked for are unreasonable, don’t conform to FRAND principles, or the SEPs aren’t as vital to the standard as the patent holder claims.? However, these arguments only go to the amount that is owed, thereby admitting that a license is needed, and ignore the fact that the holdout company is still using the technology without having a license.?

Finding a way to deal with the perceived uncertainty of the royalty amount while also acknowledging the fact that the technology is being used without a license is needed.? Allowing holdout to continue unfettered clearly provides an unfair advantage to the potential licensee that tips the negotiation scales, unfairly affects competition in the marketplace, and increases profit margins in highly competitive industries. It also threatens to derail the cycle of innovation that depends on licensing fees to drive continuous research into the next generation of technology.?

A fair solution to keep innovation moving.?

Is there a possible solution that would be fair to both sides? Yes, an interim payment structure, determined by the courts, that would be paid throughout the course of the litigation. The parties would use comparable licenses to set a standard rate, either by agreement or by the court if the parties cannot agree. After the matter is resolved, there would be a “true up,” where the party who prevailed in the litigation would be made whole.? In other words, if the interim payment was higher than the final determined rate, the potential licensee would receive credit toward future payments.? If the interim payment was lower than the final determined rate, the patent holder would receive additional payments to make up the difference.? The interim payments would be applied to products/devices sold within the applicable country of the litigation.?

It’s a solution that has been adopted in jurisdictions such as India.? The resulting interim payments have led to settlements based in large part on the equalizing of incentives for the parties.? A similar methodology was also sanctioned by the Brazilian courts as an alternative to preliminary injunctions.? This solution significantly mitigates the use of legal delays as a business tactic – a tactic that essentially breaks the business model of companies and inventors that must continuously invest upfront R&D costs before they can recoup some of the costs through licensing.? Interim payments also secure the patent holder’s financial interest in the royalties owed against unforeseen changes in the potential licensee’s financial circumstances.??

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Interim payments would be a compromise over preliminary injunctions.?

This payment structure ensures the patent holder receives some compensation for their intellectual property while the other party exercises their right to dispute the amount.? The true up process after a court validated/determined royalty rate ensures its overall fairness to both parties.??

This solution also serves as a middle ground for those who feel the preliminary injunction process is too heavy-handed in favor of licensors. If licensees are truly only concerned with the dollar figure of the license, and not simply trying to “holdout,” it’s a compromise that allows both sides to conduct business while the issue is settled in the courts.??

At the end of the day, we cannot allow delaying the payment of fair and reasonable royalties simply to unfairly boost profits of someone perpetually using the technology without a license.? Technology, especially in the realm of connectivity, is accelerating at an exponential pace based on the work of companies like Ericsson that have invested billions in research and development and have shared their ideas with industry peers through the standardization process. When they are not fairly compensated for doing so, innovation slows and ultimately consumers suffer.??