Geradin LayneFarrar PadillaBlanco (2008) - The Complements Problem Within Standard Setting

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Reference

• Geradin, D., Layne-Farrar, A. and Padilla Blanco, A. (2008), "The complements problem within standard setting: assessing the evidence on royalty stacking", Boston University Journal of Science and Technology Law, Vol. 14, No. 2, 2008

@article{geradin2008complements,
  title={The complements problem within standard setting: assessing the evidence on royalty stacking},
  author={Geradin, D. and Layne-Farrar, A. and Padilla Blanco, A.},
  journal={Boston University Journal of Science and Technology Law, Vol. 14, No. 2, 2008},
  year={2008},
  abstract={Royalty stacking, the most recent incarnation of the complements problem identified in the early 1800s by French engineer Augustine Cournot, has received considerable attention. The potential for royalty stacking within standard setting efforts arises from the fact that downstream manufacturing companies can face multiple upstream gatekeepers, each of whom must grant a license to their “essential” patents before the downstream firms can legally commercialize the standard. Some authors have claimed that in high-tech industries—which are frequently characterized by cumulative innovation, dispersed ownership of patents, and cooperative standard setting efforts—the cost of obtaining all necessary licenses is too high, such that innovation has been thwarted and consumers have been harmed. In this paper, we assess the case for royalty stacking within standards and find the evidentiary support weak at best. We note that the relevant question is not whether royalty stacking is possible, as the theoretical arguments behind it have withstood the test of time, but whether it is common enough and costly enough in actuality to warrant policy changes. The available evidence suggests not, implying that any policy changes aimed at solving royalty stacking are likely to cause more (unintended) harm than they cure.},
  discipline={Econ, Law},
  research_type={Discussion},
  industry={},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Geradin LayneFarrar PadillaBlanco (2008) - The Complements Problem Within Standard Setting.pdf}
}

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Abstract

Royalty stacking, the most recent incarnation of the complements problem identified in the early 1800s by French engineer Augustine Cournot, has received considerable attention. The potential for royalty stacking within standard setting efforts arises from the fact that downstream manufacturing companies can face multiple upstream gatekeepers, each of whom must grant a license to their “essential” patents before the downstream firms can legally commercialize the standard. Some authors have claimed that in high-tech industries—which are frequently characterized by cumulative innovation, dispersed ownership of patents, and cooperative standard setting efforts—the cost of obtaining all necessary licenses is too high, such that innovation has been thwarted and consumers have been harmed. In this paper, we assess the case for royalty stacking within standards and find the evidentiary support weak at best. We note that the relevant question is not whether royalty stacking is possible, as the theoretical arguments behind it have withstood the test of time, but whether it is common enough and costly enough in actuality to warrant policy changes. The available evidence suggests not, implying that any policy changes aimed at solving royalty stacking are likely to cause more (unintended) harm than they cure.

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, focusing on U.S. patent policy, but some discussion of European policy.

• 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."