Author(s)
Richard Epstein and Kayvan Noroozi
Source
Berkeley Technology Law Journal, Vol. 32, No. 4, pp. 1381-1432, 2018
Summary
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.