Geradin (2007) - Royalty Stacking In High Tech Industries Separating Myth From Reality

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Reference

  • Geradin, D., Layne-Farrar, A. and Padilla Blanco, A. (2007), "Royalty stacking in high tech industries: separating myth from reality", Working Paper
@article{geradin2007royalty,
  title={Royalty stacking in high tech industries: separating myth from reality},
  author={Geradin, D. and Layne-Farrar, A. and Padilla Blanco, A.},
  year={2007},
  abstract={A few recent contributions to the literature have claimed that in high-tech industries -- where innovation is often cumulative and products include many components protected by patents held by many different patent holders – the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence – including new evidence for 3G telecom – does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Buy royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three conditions are necessary but not sufficient. Moreover, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed.},
  discipline={Econ},
  research_type={Empirical},
  industry={},
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  thicket_stance_extract={},
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  tags={},
  filename={Geradin (2007) - Royalty Stacking In High Tech Industries Separating Myth From Reality.pdf}
}

File(s)

Abstract

A few recent contributions to the literature have claimed that in high-tech industries -- where innovation is often cumulative and products include many components protected by patents held by many different patent holders – the cost of obtaining all necessary licenses is too high. Some have even requested sweeping policy reforms to deal with the so-called royalty stacking problem. In this Essay we find that the empirical evidence – including new evidence for 3G telecom – does not corroborate the gloomy predictions of the proponents of the royalty stacking hypothesis. A careful look at the theoretical underpinnings of this hypothesis explains the lack of empirical support. First, three necessary conditions must be satisfied for a royalty stacking problem to exist: (a) innovation must be cumulative, so that the patents are complementary; (b) there must be many patents for a given product; and (c) the many patents must be held by numerous, distinct rights holders. Buy royalty stacking may not be a problem even if the three necessary conditions are met; i.e., the three conditions are necessary but not sufficient. Moreover, several market mechanisms, such as cross licensing or voluntary patent pools, can be used to mitigate the costs of multiple concurrent patent negotiations. We conclude that the so-called royalty stacking problem is more myth than reality and that there is no reason to adopt the dramatic reforms in antitrust and patent law that have been recently proposed.

Review

Definition of patent thicket

"And thus so have fears of “royalty stacking”, whereby the number of licenses required to bring a product or service to the marketplace stack up, one atop the other, potentially creating an insurmountable barrier to commercialization."

Legal Discussion

  • Literature review and policy discussion of high-tech industries.
  • Patent protection is an important incentive for innovation.
"The first innovators need sufficiently strong rights to create sufficient incentives to induce their pioneering work, but enough profit potential needs to remain for second innovators so that they will invest if it is efficient for them to do so."
  • In high-tech industries, it has been claimed that cumulative innovation and dispersed patent ownership create an environment where licenses are too expensive.
"…market-driven mechanisms, such as cross licensing, patent pools, and reputation effects, are considered insufficient to completely solve royalty stacking, especially in industries such as telecommunications and computing where new technologies frequently develop under the auspices of standard setting organizations."
  • Author finds little evidence that royalty stacking under current law is not solved by cross licensing, patent pools, repeat play reputation, or other mechanisms.
    • While one may argue that evidence of royalty stacking is difficult to find because, if a market collapses, products and services are not produced to determine royalty rates, signs should be observed well before a market collapse occurs.

Social Welfare Consequences

  • Examples of patent holdup are rare and often involve short term players in the market, which calls for caution in broader reforms of the patent system.
"Solid patent reforms are probably among the best ways to alleviate the risk of royalty stacking and other licensing issues, as stemming the patent flood and eliminating weak patents would reduce overall patent counts and limit those remaining to valuable contributions. As with all reforms, patent reform should be done with care to avoid unintended consequences."

Policy Advocated in Paper

  • It is widely recognized that IPR reform is needed.
    • While anecdotal evidence shows that problems exists in the patent system, the issues are not regular enough to justify any currently proposed policy change as the costs will outweigh the benefits.
    • Any reforms should complement existing voluntary market mechanisms.
"In the end, considering both the scant evidence that royalty stacking and other complements issues are widespread and recurring problems, along with the availability of several countervailing market responses, we find that were society to implement several of these policy recommendations it would risk setting a course for Scylla in the absence of any evidence of danger from Charybdis."
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