Discouraging Patent Holdouts through Reciprocal Commitment

Intellectual Property and Patents

Article Snapshot


Scott A. Baker and Doug Lichtman


unpublished manuscript


This paper explains how firms could use contracts to avoid complicated patent disputes.

Policy Relevance

Patent law tends to encourage patent owners to try to use their patents to extort “ransom” from technology firms, but firms can cooperate to solve this problem.

Main Points

  • Many technology products, like RFID chips, incorporate hundreds or thousands of patented ideas. Intermediaries like standard-setting bodies help the different patent owners cooperate to produce the product.

  • But sometimes a key patent is left out, because the patent owner either strategically or accidentally “holds out.” Firms that need permission from a “hold-out” to proceed with their plans are vulnerable to extortion to avoid paying exaggerated damages for patent infringement.
    • Because there are so many complex patents, it can be hard to identify every necessary patent at the start.

  • Several schemes to discourage holdouts require the vulnerable firm to agree to pay a third party if it ever pays a hold-out. But these schemes do not work well to discourage hold-outs because the third party can be manipulated.

  • When all the firms are working together to pool or cross-license their patents, they can use complicated legal agreements to avoid problems like holdouts.

  • Suppose the vulnerable firms A & B each agree that in the event that one of them cooperates by paying off a holdout, it will pay double that amount to the other vulnerable firm.
    • Promising to pay B means that A will have less money available to pay to the holdout.
    • In the event that money is paid to the holdout, the vulnerable firms are also paid.
    • Each vulnerable firm does better if its peers do worse.
    • Holdouts cannot demand as much money with this agreement in place.

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