13. What is hold-up?
A hold-up results from the patent holder exercising their right
to injuction
The period of infringing party not being able to sell and having
to redesign the infringing product
Two strategies for the infringing party:
Redesign product
Do Not Redesign
Relative payoff to the patent holder from a hold-up
Weak patent (Do Not Redesign)
π ∗ −π̄
π̄
=
m−v
v
L+
F
vX
Strong patent (Redesign)
π ∗ −π̄
π̄
=
F 1
vX θ
(Possible) costs to the infringing party depend on whether the
patent is strong or not
Redesign costs
Costs from lost value of the patented feature
Ville Potka
Injunctions, Hold-Up, and Patent Royalties
William Speirs
2. What are the mechanisms in the model that cause
hold-up
Probabalistic Patents
Patent on minor features
- Laws (including Patents) are only as good as
the willingness to enforce them
- Only a small part of a product needs to be
infringing
- Patent strength, litigation time, bargaining
power, patent value
- Patent holder can leverage off firm’s sunk
R&D on other features
Injunction threat
- Consequence of not achieving a royalty
agreement for a valid patent
- Patent holder leverage
Patent Surprise
- Patent granted after a firm has already
accrued sunk costs
Redesign time and expense
- Cost of avoiding patent infringement
- Cost of avoiding a royalty agreement
Reasonable Royalties
- ‘reasonableness’ based on precedent
- Circular relationship
3.
WHAT IS AN INJUNCTION?
A court-ordered requirement to cease selling the infringing product, a form of punishment for infringing patent
law
WHY IS IT USED?
Provides commercial force for the patent holder’s property right by forming a threat for competitors
Purpose is to prevent further infringement of the patent law
WHY IS IT PROBLEMATIC?
During royalty negotiations: threat of injunction in litigation drives royalty rates up
In litigation / settlement negotiations: the patent holder gets considerable, unproportioned negotiation
leverage over the infringing company. Huge settlements do not reflect the value of the patented technology,
but the threat of shutting down business.
–
Leads to even weak patents concerning minor parts of infringing product being powerful negotiations points
Emma Mieskonen & Saara Koskinen
3. What is an injunction and why is it used as a response to patent infringement and why it is
problematic?
• Injunction is court ordered measure to stop sales of a product that has infringed a patent.
• Injunctions are used to incentive the patent infringer to agree on royalties for the patent
holder.
• Injuctions are problematic because they give the patent holder often too much leverage in
the royalty negotiations, specially in products where the infringed patent has only small
contribution to the overall value.
4. How is the share of royalties due to hold-up defined?
• The royalties are diveded in two components: the ”benchmark royalties” and the ”hold-up
component”.
• The hold-up component refers to the possibility (expected value) of redesigning costs and
possible injunction costs to the downstream producer.
• The hold up component can also be defined as extra royalties a patent holder can receive
because of existing patent laws and judical practise rather than value of the patent.
5. What affects the share of royalties due to hold-up for relatively weak patents?
•
•
•
•
Compare royalties relative to benchmark rate: π = βθvX, which applies without redesign costs or lags
For relatively weak patents when , θ < θ*
Additional payoff due to hold-up is π* − π = βθ[(m − v)LX + F].
relative to the benchmark payoff, the hold-up term equals:
• v- value of patented feature, m- total value of product
• L- the percentage of the patent lifetime that is required for redesign – it reflects the patent holder’s
power based on the threat that an injunction will force the downstream firm’s product from the market
during redesign.
• The second term is the ratio of the redesign costs to the total value of the patented improvement.
•
•
•
•
the payoff to the patent holder due to hold-up relative to its payoff without hold-up is larger,
1. the larger the margin on a non-infringing product relative to the per-unit value of the patented feature
2. the larger the time required to redesign the product to avoid infringement
3. and the larger the ratio of the redesign costs to the total value of the patented feature
Janna Öberg
6. WHAT IS A STAY ON INJUNCTION AND HOW DOES IT AFFECT
ROYALTIES?– JOONAS MUSSALO
Stay allows the downstream
firm to continue selling the
product until the outcome of
the patent litigation is clear:
- 
Gives the firm more time
to redesign and introduce
a non-infringing version
- 
- 
- 
But the downstream
firm has no incentive to
redesign before the
outcome is known
Causes the hold-up component of the patent holder’s payoff to fall
closer to the benchmark level
-  Does not however eliminate the hold-up component entirely
Patent holder earns lower profits in all cases compared to a usual
case
- 
- 
Except when patent strength θ à θ=0 and θ=1
(No information to be learned from the ltitigation)
7.+What+is+the+effect+of+early+negotiations+on+royalties+of+very+weak+patent?
• Early+negotiations=+negotiations+between+P+and+D+before D’s+product+design+
process.+D+can+decide+to+include+or+exclude+the+patent+feature.
• Patent+strength+(!)=+the+probability+that+P’s+patent+is+held+valid+after+litigation,+
0<!<1.+For+very+weak+patents,+! near+0.
In+case+of+very+weak+patents,+the+downstream+firm+does+not+benefit+from+early+
negotiations!
•
By+designing+around,+D+admits+the+patent+is+valid→+payoff+to+P="#
•
By+proceeding+with+product+with+no+negotiation→+payoff+to+P=!"#
•
Royalty+rate+of+"# >+Royalty+rate+of+!"#
Anna+Talvela+&+Tea+Lönnroth
WANG Yue
8. What affects the share of royalties due to hold-up in early
negotiations for very strong patents?
Strong patents: > *,
D’s threat point is “Redesign”
• The patent holder(P)’s payoff
• The hold-up term
two ratios:
•
ratio of the redesign costs
to the total value of the
patented invention to the
downstream firm
•
inverse of the patent
strength
D’s payoff from
“Design Around” is higher
• Patent holder’s payoff is vX
• The gap between the patent
holder’s payoff and the
benchmark payoff
• The proportional impact of
the prospect of hold-up
depends on the patent
strength.
WHO BENEFITS MOST FROM HOLD-UP?
„
The owners of weak patents benefit the most from hold-up, which is the reason because of following arguments:
„
The model developed here shows that patent holders gain a negotiating advantage based on hold-up when
downstream firms must make investments specific to the use of the patented technology prior to the resolution of
uncertainty about patent validity and infringement.
„
Since the gap between the benchmark royalties without hold-up and the negotiated royalties with hold-up is largest
for weak patents covering a minor feature of a high-margin product, the model further suggests that those are the
cases where denying or staying permanent injunctions will have the greatest impact.
„
Royalties based on hold-up are especially poorly targeted because the owners of weaker patents, i.e., the ones
least likely to represent genuine innovation, benefit disproportionately from hold-up.
„
Furthermore, the trial court typically will already be determining reasonable royalties for the purpose of awarding
retrospective damages.
„
While we strongly believe that the threat of holdup gives excessive reward to patent holders, especially in
component industries, we consider the presumptive right to injunctive relief to be an important part of the patent
law. In most cases, there will be no question as to the patentee’s entitlement to an injunction.
„
For weak patents covering a minor feature of a high-margin product that takes time to redesign, a large fraction of
negotiated royalties can be attributable to hold-up, not to the value of the patented technology.
„
The model predicts that hold-up problems are greatest for patents covering a minor feature of a high-margin
product.
Ville Virtanen 31E2100 Microeconomics: Policy -Reading Assignment III
10. What is the problem in the courts awarding
damages based on precident?
• Βv difficult to estimate accurately
judges use pre-existing negotiation results as proxy for s
fulfilled-expectations equilibrium (endogenous rate)
• This reasonable royalty rate higher than Bv:
Hold-up component ensures that s>Bv
The Hold-up component larger by 1(1-T) where T is the litigation duration  greater T, greater the hold-up
Saara Kuhalainen
11. What is left out of the model that might
affect the conclusions?
• The model is confined to situations in which the patent holder does not
compete against the downstream firm and its damages claims are based
on reasonable royalties, not lost profits
• Does not suite well in all business sectors
• Denying injunctions to non-practicing patent holders is a form of discrimination
against patent holders who adopt a particular business model.
• It ignores asymmetric information and
• has only one patent
• and one downstream firm.
• it does not include legal errors in the determination of reasonable
royalties.
CARL SAUREN
12. Do the results have relevance for other
features of the patent system apart from
injunctions?
• The model does showcase the possible adverse effects of issuing weak
patents
• It is advantegous to define patents clearly, as early as possible
• Weak patents are the prime source of patent disagreements
• This reduces the probability that downstream firms design patent-infringing
products to begin with à less redesigns and uncertainty, more efficiency
• (However, this is rather strong assumption: what if the patent is strong from
the legal perspective, but the downstream firm interprets it falsely?)
• Therefore, model supports the claim that patent examinations should
be allocated more resources
• More resources should speed up the time it takes to handle a patent
application (main problem of the current system: bottle-neck problem)
Teemu Riipi 289180