Lichtman on Patent Holdouts and Safety in Numbers

Chicago law professor Doug Lichtman has a great new paper about the patent holdout problem:

A patent holder whose patent is made public only after the relevant technology has been widely adopted can demand not only a royalty that reflects the intrinsic value of that technology but also a royalty that reflects the value of each infringing firm’s technology-specific investments. This is the familiar patent holdout problem, and it particularly plagues the standard-setting process. Importantly, and the insight missed both in practice and in the literature today, the greater the number of patent holders in this holdout position, the less each can expect to earn from this tactic. That is, if fifteen patent holders can credibly threaten to shut an infringer for six months while that firm redesigns its products and services, the value associated with avoiding six months of disruption must be split fifteen ways. If three hundred patent holders can credibly make that threat, the pro rata share drops by a factor of twenty. More patents means less money per patent holder. Less money, in turn, means less of an incentive for a firm to strategically delay in the hopes of being a patent holdout, and less of an incentive for an accidental patent holdout to actually bring suit.

This might explain why standards like MPEG, which are buried in dozens of overlapping patents, haven’t been brought to their knees by litigation. There are probably a number of patent holders who could credibly threaten to shut down the world’s DVD players. However, the MPEG-LA can credibly refuse such extortionary demands, because they know that the moment they allow one patent holder to extort more than their fair share, the floodgates would be opened to continued extortion.

But I also expect there’s some legal realism at work here. No judge is crazy enough to order the sale of all DVD devices be halted. Even if a particular patent holder theoretically has the right to obtain an injunction, in practice they are constrained by the fact that if they behave too outrageously, the judge in charge of the case will begin to rule against them. This further strengthens the hand of standards-setters in negotiations with would-be patent trolls.

What I found most interesting about the paper, though, is how frankly Lichtman–who I don’t think is a critic of patents generally or software patents in particular–lays out the flaws in the current patent system, especially as it relates to high-tech inventions with hundreds of components. He explains how difficult it is for honest technology creators to discover patents that might be relevant to the technology in development, how the system gives inventors the perverse incentive not to search for relevant patents to avoid treble damages, and how the holder of an undiscovered patent can lie in wait until other companies make significant investments based on their patents and then exort large sums of money from the hapless inventor.

Lichtman offers a creative explanation as to why this screwy system hasn’t done more damage than it has, but the broader question is: what can we do to fix the system so it’s not so broken in the first place?

His paper is (as he puts it) mercifully short, so I encourage you to check it out. He has invited comments over at the Chicago law blog.

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