George (2006) - What Is Hiding In The Bushes Ebays Effect On Holdout Behavior In Patent Thickets

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Reference

  • George, G.D. (2006), "What Is Hiding in the Bushes-Ebay's Effect on Holdout Behavior in Patent Thickets", Mich. Telecomm. & Tech. L. Rev., Vol.13, pp.557
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  title={What Is Hiding in the Bushes-Ebay's Effect on Holdout Behavior in Patent Thickets},
  author={George, G.D.},
  journal={Mich. Telecomm. \& Tech. L. Rev.},
  volume={13},
  pages={557},
  year={2006},
  abstract={},
  discipline={Law},
  research_type={Discussion},
  industry={},
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  filename={George (2006) - What Is Hiding In The Bushes Ebays Effect On Holdout Behavior In Patent Thickets.pdf}
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Abstract

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Review

Definition of patent thicket

"A patent thicket exists where there are numerous different firms holding patents that are legally and technologically distinct, but overlap to cover a much smaller number of actual or

potential commercial products."

Legal Discussion

Case considered:

  • eBay Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006)

Background:

  • Since Patent thickets make it difficult to secure all licenses necessary to use a technology (due to larger number of parties from whom licenses must be obtained) a number of arrangements (standard setting organizations, patent pools) have developed to facilitate licensing in patent thickets.
  • "Holdout" firms can exploit patent thickets by demanding very high royalties for their patents through demand letters or infringement suits, but denser patent thickets tend to reduce incentives for holdouts to sue for royalties because must share with other potential holdouts.

Impact of Case:

  • Ebay decision eliminates automatic injunctions against patent infringers found by a successful lawsuit, which reduces "holdouts" bargaining position.
    • This may eliminate value to "holdouts" because courts can only assign reasonable royalties that cover switching costs from infringed technology.

Policy Advocated in Paper:

  • It is unclear that eBay decision improves outcomes.
Inside patent thickets, eBay’s tendency to create either a de facto public domain or patent-collecting organizations with strong market power offers two potential solutions to the “anticommons” problem. However, these solutions are not without their own drawbacks...Even though eBay mitigates the costs associated with a failure to license, it also exposes the weakness of a patent system un-enforced by automatic injunctions or prone to abuse by patent cartels.

Social Welfare Consequences

  • "An overall decrease in patent litigation [as a result of eBay decision]...certain areas of technology currently covered by dense patent thickets might be converted into a de facto public domain, without even token licensing agreements between patent rights holders."
  • Given lower costs of patent litigation as a result of the eBay decision:
"opportunistic standard-setting organizations in patent thickets might attempt to take advantage of smaller patent holders when considering adoption of an improvement to an existing standard. The larger organization might purposely offer unfavorable royalty-free terms to any smaller patent holder wishing to join the patent collection, causing many of them to holdout. The organization could then expropriate the holdouts’ innovative improvements without risking an injunction, because the smaller holdouts would have difficulty showing an irreparable injury."