Why Incentives For "Patent Holdout" Threaten to Dismantle FRAND, And Why It Matters

Patents, Intellectual Property and Competition Policy and Antitrust

Article Snapshot


Richard Epstein and Kayvan Noroozi


Berkeley Technology Law Journal, Vol. 32, No. 4, pp. 1381-1432, 2018


Some favor manufacturers over innovators in disputes over licensing terms for standard-essential patents (SEPs). But manufacturers and innovators should receive reciprocal benefits from their commitment to licensing the SEPs. Manufacturers have a duty to negotiate in good faith.

Policy Relevance

Courts should enjoin a manufacturer’s use of technology if the manufacturer refused an offer of a license on fair terms. Patent holdout is now more of a real problem than holdup.

Main Points

  • Some judges, legislators, and scholars express concern with theoretical problems like “patent holdup” and “royalty stacking;” they wrongly imply that an innovator’s promise to license SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms should mainly benefit manufacturers of standardized products (implementers).
  • “Patent holdup” is the claim that innovators will demand large royalties from implementers once the implementers are already committed to using the innovator’s patented technology.
  • “Patent holdout” is an implementer’s refusal to negotiate in good faith with innovators to license SEPs, forcing the innovator to sue for payment; courts and policymakers should be more concerned with patent holdout than with patent holdup.
  • FRAND agreements’ main purpose is to solve coordination problems in technology licensing arising from high transaction costs.
  • FRAND agreements are contracts voluntarily negotiated by highly competent parties, conferring reciprocal benefits.
    • Innovators agree to disclose their technologies and waive their right to categorically refuse a license, reducing the risk of patent holdup.
    • Implementers agree to pay reasonable royalties set in good faith negotiations, controlling the problem of patent holdout.
  • When implementer and innovator fail to agree on license terms, courts may enjoin the implementer's use of the technology or may award only monetary damages; only the threat of an injunction prevents patent holdout and encourages implementers to negotiate.
  • Even when Apple infringed Motorola’s patents and refused Motorola’s offer of FRAND terms in negotiations, a court refused to enjoin Apple's use of Motorola's technology; this case wrongly suggests that implementers act in good faith just by maintaining a pretense of negotiation.
  • Courts should issue an injunction when a technology implementer infringes a FRAND patent, unless the implementer tried to license the technology in good faith;
    • In Unwired Planet v. Huawei, decided in the United Kingdom, the court recognized that FRAND agreements are intended to control holdout as well as holdup.
    • The court ruled that an implementer's use of technology should be enjoined if the implementer has refused to accept an offer of FRAND license terms.
  • A significant share of profits should go to innovators who come up with new ideas, rather than to manufacturing firms that turn innovations into tangible objects.
    • Globalization and robotics are driving down the cost of manufacturing.
    • In future, ideas, not the implementation of ideas, will be of the greatest value.
    • Observers should not be alarmed that patents have emerged as a separate class of assets.


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