How Hold-up Damages Economic Growth
Concerns regarding "hold-up" emerge when owners of patents who made commitments to license those patents essential to voluntary industry standards (SEPs)[1] demand royalties surpassing their inventions' worth or use unfair or coercive tactics to secure such royalties or other unfair considerations. The scenarios discussed here diverge from the legitimate pursuit of fair compensation for patent use and do not apply to non-SEP patents. The issue becomes problematic when patent owners exploit their SEPs to exert excessive pressure on potential licensees. They may resort to inappropriate threats of injunctions or exclude products from the market to force the acceptance of unjustifiably high terms, not reflecting the true worth of the inventions but rather the economic impact of market exclusion.
Such practices risk stifling innovation and undermining the competition by diverting essential resources from other innovators and manufacturers. In extreme situations, threats against one company may pressure other successful businesses, including those not currently embroiled in disputes but apprehensive about the potential consequences of injunctions on their products, to accept inappropriate terms or withdraw from markets, discontinuing their manufacturing and distribution. Furthermore, the escalated expenses stemming from patent hold-up can increase consumer prices.
Recent commentators, including figures like Dirk Weiler of Nokia, tend to minimize the prevalence and impact of patent hold-up, citing a perceived absence of evidence. Contrary to this viewpoint, globally, the outcomes of the considerable volume of legal disputes involving Standard Essential Patent (SEP) injunctions and Fair, Reasonable, and Non-Discriminatory (FRAND) agreements suggests otherwise. It is acknowledged that many licenses are agreed upon without resorting to litigation (even in some cases where the licensee may be skeptical but lacks the resources to pursue litigation). .
Nevertheless, those cases that do reach the courts often result in judgments significantly reducing the initially demanded royalties (discussed below). A comprehensive economic analysis considering all engagements and their retrospective effects on licensing remains impractical, largely due to the confidential nature of most licensing agreements, and is outside this article's scope. The frequency and outcomes of these litigations are a testament to the pervasive and influential role of patent hold-up, particularly highlighting the tactical employment of injunctions within the standardization process.[2]
In this article, we will look at:
About the Author: In 2023, Earl Nied founded Veracity IP Consulting LLC to provide strategic guidance on engaging with Standards Development Organizations (SDOs) and navigating Intellectual Property Rights (IPR) issues. Before this, he played key roles at Intel Corporation, overseeing IP policy and global IPR matters related to standards over a 40-year career. He also held significant positions within the American National Standards Institute (ANSI), and contributed to ICT IPR policies across most major standards bodies and organizations worldwide. His expertise spans engineering, legal, and policy domains, making him a prominent figure in the standards and IPR landscape. Please visit the website www.veracity-ip.com for more information.
1. A classic case of hold-up.
The Microsoft v. Motorola case from 2012 presents a classic hold-up scenario. In this case, Motorola sought to leverage an injunction in Germany as a strategic move to compel Microsoft into accepting its lofty initial royalty demand of 2.25% per unit (roughly $4.50 for each Microsoft product). In response, Microsoft successfully pursued an anti-suit injunction that prevented Motorola from enforcing a German injunction pending the results of the U.S. litigation. Motorola agreed to a bench trial to set the royalty rate. Overseeing the case, Judge James Robart critically evaluated Motorola's royalty proposition. Through rigorous analysis, he established a significantly lower royalty rate of 3.5 cents ($0.035) per unit. This effectively awarded Motorola less than 1% of its original demand (which was (129X) higher).[3] The Ninth Circuit Court of Appeals subsequently affirmed his findings.[4]
The ruling applied to an estimated sales figure of 3 million Xbox units in 2013, safeguarded against a potential siphoning of an unearned $13.395 billion that year alone. 5 flat years would result in $67 billion in diverted funds. This amount could have been inappropriately diverted based on excessive royalty demands. Considering that Motorola's licensing agreements extended beyond Xbox to include even larger entities such as Sony PlayStation and numerous smaller yet significant licensees, the cumulative financial impact of such overcharging becomes even more pronounced. The excessive royalties could be detrimental, siphoning funds away from essential investments in research and development, capital expenditure, and employment—areas critical for sustained corporate growth and innovation.
Examining this unfolding case vividly illustrates how the threat of market exclusion can skew licensing negotiations. Had the court not granted an anti-suit injunction, Microsoft might have been forced to accept a license on Motorola’s elevated terms (rather than the actual value of the patents) to avoid losing access to the German market.
Impact on the German economy.
Despite prevailing, Microsoft deemed it prudent to close its German Distribution Center, directly impacting distribution center jobs, tax revenue, and the associated impact on complementary services and businesses.
2. Data shows that the widespread use of injunction leverage continues today.
In 2023, in the U.K. Optis v Apple case,[6] Justice Marcus Smith rendered a judgment in a FRAND trial. Optis originally asked for $266 million per year.[7] The ultimate award was $5.13 million per year.[8] This effectively awarded Optis less than 2% of its original demand (which was 52X higher).
In this case, the ruling protected against the potential siphoning of an unearned $260.87 million from a single company in a single year. 5 flat years would result in $1.3 billion in diverted funds. Again, the amount could have been inappropriately diverted based on the excessive royalty demands. Considering that Optis also has licensing agreements with other significant licensees, the cumulative financial impact of such overcharging becomes even more pronounced. The excessive royalties could be detrimental, siphoning funds away from essential investments in research and development, capital expenditure, and employment—areas critical for sustained corporate growth and innovation.
Additional cases:
Additional information on cases involving injunction misuse and its consequences can be found in my article "Navigating High Stakes Patent Injunction Abuse " in the IAM Patent Litigation Review 2024. This comprehensive piece delves into numerous cases where the looming threat of injunctions obscured critical issues such as the extent of patent infringement, the legitimacy of the patents in question, and the actual value of the patents at issue. Through detailed analyses, the article sheds light on how deploying injunction threats as a leverage tool in negotiations often distorts the legal and equitable considerations central to patent disputes.
Cases referenced in this article include:
3. Examples where hold-up caused companies to leave or refuse to enter a market.
There are several other cases where granted or threatened injunctions caused companies to sell businesses or withdraw from markets. A representative sample includes:
The IOT industry may be especially impacted by hold-up. Small and medium-sized enterprises with novel business ideas dominate the IOT landscape. These companies need more resources and expertise for complex and nuanced patent licensing issues,[9] especially when facing hold-up tactics such as injunctions. The best solution for patent holders and potential licensees of all sizes and business models is to work toward determining and disseminating the actual value of inventions.
4. Effects of suing in multiple jurisdictions.
To further incentivize a potential licensee to agree to their terms, patent holders sometimes sue in multiple jurisdictions.[10] While litigating in multiple jurisdictions may, at times, be necessary to address infringement, this practice can also be used to overwhelm the potential licensee’s legal and business resources regardless of the case's merits. Depending on the circumstances, seeking an anti-suit injunction may help focus the litigation. Therefore, anti-suit injunctions can be important in combating hold-up through injunction abuse in multiple jurisdictions.
5. SEP database inaccuracy further exacerbates the problem of understanding the patent landscape.
Not all standards-setting organizations record information on individual declared SEPs. ETSI, however, does and is responsible for highly contested cellular communications standards. As of February 17, 2023, the ETSI database showed disclosures for 94,234 patent families. The European Commission reports estimate that some 100,000 patents were declared to 5G alone.[11]
Yet, in the European Commission Impact Assessment, experts, supported by empirical research, estimate that only 25%-40% of the declared SEPs may be essential. Further, “In the case of 5G, the essentiality rate can be as low as 15%.”[12] ETSI has a huge over-disclosure problem that is getting worse.
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And now, we must consider that, at best, statistics show that patents in European jurisdictions will fail validity challenges 50% of the time. [13]
So, for 5G, the potential licensee is asked to wade through 92,500 junk patents[14] that likely do not apply - any number of which could be asserted for an injunction and used to justify a higher royalty rate.
For companies, even those with extensive legal resources, facing injunction threats from such a broad spectrum of patents can be daunting. Further, because only a few of these patents are likely valid and essential, injunction threats significantly burden businesses to sift through and address legitimate legal concerns amidst this congested patent environment.
In response to these challenges, the European Commission drafted a proposal for clarifying the number of essential SEPs. This initiative is a step in the right direction. There is a pressing need to advance and improve these proposed measures, ensuring they are both practical and robust enough to mitigate the complexities and reduce the incidence of unnecessary patent hold-up.
6. Hold-up using minor or questionable patents further complicates the environment.
Even a single, dubious, insignificant patent poses the risk of exclusion or injunction. No matter how minor, a single patent claim can shutter a company's entire product line, impacting suppliers, distributors, and the broader supporting infrastructure for all these businesses. To jeopardize a whole ecosystem due to a minor element is economically illogical.
While it is undeniable that patent holders deserve compensation for genuine innovations, there is a compelling case for policymakers to adopt balanced valuation mechanisms present in specific national patent systems. These systems prioritize proportionality and apportionment to ensure the consideration of the value and effect of the patent in the context of the other inventions within the infringed product. Parties seeking monetary damages can be compensated without creating the havoc of injunctions/exclusion orders. See November 6, 2023, Federal Resister submission by Veracity IP Consulting to the USPTO for additional information.
7. Conclusions and suggestions.
Hold-up is a real and prevalent problem, arising mainly from abuses of the injunction threat. We can lessen the adverse effects of hold-up by:
The European Draft Proposal on SEPs suggests several potentially helpful ways to address these problems and deserves careful consideration.
End notes
[1] In this article, the term "hold-up" specifically refers to "Standard Essential Patent (SEP) hold-up."
[2] In 2008, Tim Frain of Nokia, noted the following as he spoke at the European Commission Workshop on IPR in ICT Standardisation Brussels, 19 November 2008 :
“To be fully effective, a FRAND commitment has to be both meaningful and binding. So, it would not make sense if it was possible for an essential patent owner to obtain an injunction against anyone prepared to take a licence on FRAND terms, or if the FRAND commitment evaporated when ownership of the patent changes.”
In addition, For detailed information on the power of SEP licensing in standards, see Why US Should Help European Efforts to Fix SEP Licensing .
[3] Microsoft v. Motorola, Case No. C10-1823JLR, 2013 WL 6000017 (W.D. Wash. Nov. 12, 2013).
[4] Microsoft v. Motorola, 795 F.3d 1024 (9th Cir. 2015).
[5] See Microsoft Shuts German Distribution Centre in Patent Row, REUTERS (Apr. 2, 2012, 12:00 PM) .
[7] Ibid. ?342 at Page 181.
[8] Ibid. ?494 at Page 265.
[9] See the comprehensive article
[10] See Nokia v. Lenovo (2023) and Interdigital v. Xiaomi (2023).
[11] See Page 165 Impact Assessment Report accompanying the European Commission’s Proposed SEP Regulation .
[12] Ibid. See Page 18.
[13] See How many patents are truly valid? Extent, causes,and remedies for latent patent invalidity.
[14] (100,000 – (100,000 * 7.5%)) = 92,500