Revisiting injunctive relief: Interpreting eBAY in high-tech industries with non-practicing patent holders

Journal of Competition Law and Economics

Volumn 4, Issue 3, 2008, Pages 571-608

  Denicolò, Vincenzo ^a   Geradin, Damien ^b,c   Layne Farrar, Anne ^d   Padilla, A Jorge ^d,e,f  

^a UNIVERSITY OF BOLOGNA   (Italy)

^b Tilburg Law and Economics Center (TILEC)   (Netherlands)

^c Howrey LLP ^*

^d Law and Economics Consulting Group   (United States)

^e CEMFI   (Spain)

^f CEPR   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 54049128155     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhn028     Document Type: Article

References (174)

1. William J. Baumol, Robert E. Litan & Carl J. Schramm, GOOD CAPITALISM, BAD CAPITALISM, AND THE ECONOMICS OF GROWTH AND PROSPERITY (2007).
2. The seminal work is Kenneth Arrow, Economic Welfare and the Allocation of Resources for Inventions, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY: ECONOMIC AND SOCIAL FACTORS 619 (Richard Nelson ed., Princeton: Princeton University Press 1962). For a survey of the more recent literature, see Adam Jaffe, The U.S. Patent System in Transition: Policy Innovation and the Innovation Process, 29 RES. POL'Y 531 (2000).
3. See, e.g., Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29 (1991)
4. Mark A. Lemley, Ten Things to Do About Patent Holdup of Standards (And One Not to), 48 B.C. L. REV. 149 (2007)
5. Carl Shapiro, Patent Reform: Aligning Reward and Contribution, (Nat'l Bureau Econ. Res. Working Paper No. 13141), (2007), http://faculty.haas.berkeley.edu/shapiro/royalties.pdf
6. SUZANNE SCOTCHMER, INNOVATIONS AND INCENTIVES (The MIT Press 2006).
7. eBay Inc. v. MercExchange, L.L.C., 126 S.Ct. 1837 (2006).
8. See John L. Dauer, Jr. & Sarah Elizabeth Cleffi, Trends in Injunctive Relief in Patent Cases Post-eBay, THE METROPOLITAN CORPORATE COUNSEL, Feb. 2007, at 16
9. Kimberley A. Moore, Judges, Juries and Patent Cases: An Empirical Peek Inside the Black Box, 99 MICH. L. REV. 365 (2000).
10. M. A. Cunningham, Preliminary Injunctive Relief in Patent Litigation 35 IDEA 213 (1995).
11. Id.
12. Jay P. Kesan & Gwendolyn G. Ball, How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement ofPatent Disputes, 84 WASH. L. REV. 237 (2006).
13. See Dauer and Cleffi, supra note 5.
14. Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 150 F.3d 1374, 1377 (Fed. Cit. 1998).
15. With Justices Stevens, Souter, and Breyer joining.
16. See, e.g., Mark Lemley & Carl Shapiro, Patent Hold-Up and Royalty Stacking, 85 TEX. L. REV. 1991 (2007)
17. Doug Lichtman, Patent Holdouts in the Standard-Setting Process, ACAD. ADVISORY COUNC. BULL. 1.3, May 2006
18. Robert A. Skitol, Concerted Buying Power: Its Potential For Addressing The Patent Holdup Problem In Standard Setting, 72 ANTITRUST L. J. 727 (2005)
19. Lemley, supra note 3
20. and Carl Shapiro, Injunctions, Hold-Up, and Patent Royalties, (1 Aug. 2006) (unpublished manuscript, on file with the Univ. of California-Berkeley) http://faculty.haas.berkeley.edu/shapiro/ royalties.pdf.
21. eBay Inc. 126 S. Ct. 1842 (Kennedy, J. concurring).
22. See, e.g., Shapiro, Injunction, supra note 12
23. Lemley & Shapiro, supra note 12
24. Joseph Scott Miller, Standard Setting, Patents, and Access Lock-In: RAND Licensing and the Theory of the Firm, 40 IND. L. REV. 351 (2007). For an earlier paper discussing policy issues surrounding injunctive relief, see Dan L. Burk & Mark A. Lemley, Policy Levers in Patent Law, 89 VA. L. REV. 1575 (2003).
25. See Lemley & Shapiro, supra note 12, at 39.
26. Lemley & Shapiro, supra note 12, at 21.
27. Shapiro, Injuctions, supra note 12, at 24.
28. See, e.g., John M. Golden, 'Patent Trolls' and Patent Remedies 85 TEX. L. REV. 2111 (2007)
29. Andrew Beckerman-Rodau, The Aftermath of eBay v. MercExchange, 126 S. Ct. 1837 (2006): A Review of Subsequent Judicial Decisions, 89 J. PAT. & TRADEMARK OFF. SOC'Y 631 (2007).
30. Michael C. Smith, Reminding Everybody to Stop Wandering off the Path: The Effect of eBay v. MercExchange on District Courts' Decisions Whether to Grant Injunctions in Patent Cases, Address Before The Center for American And International Law's 44th Annual Conference on Intellectual Property Law (9-10 Nov. 2006).
31. Robert A. Cote, Partner, The Orrick Law Firm, The State of Injunctions in a Post eBay World, Address Before the IP Focus Series - Loyola Law School, Los Angeles, CA (15 June 2007), http://www.lls.edu/ip/ past-events/documents/Cote-Revised2.pdf.
32. For a more narrow definition of patent troll, see James F. McDonough III, The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy, 56 EMORY L.J. 189 (2007). McDonough argues that patent-holding companies can serve a valuable function as intermediaries in an economy, providing liquidity, market clearing, and increased efficiency to technology markets.
33. See also, Brief from Yahoo! Inc. as Amicus Curiae Supporting Petitioners, eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006) (No. 05-130), which offers a more tailored definition of patent troll as a firm with low-value patents and a history of aggressive litigation with the intent of garnering large settlements. A lack of goods downstream is not synonymous with this definition, as the authors, Joseph K. Siino and Robert Merges, point out. Lemley himself, in another paper, essentially limits the term "troll" to "for-profit licensing shops" that do not develop the innovations behind the patents, nor practice the patents, but instead simply collect the patents and license them.
34. See Mark A. Lemley, Are Universities Patent Trolls? (STAN PUB. L. Working Paper No. 980776, 2007), http://ssrn.com/ abstract=980776. Even this definition may be too broad, though, in light of McDonough.
35. According to the Economist, in 1998 roughly 18 percent of pharmaceutical R&D funds went toward outsourcing. G. Carr. Survey, The Pharmaceutical Industry: Beyond the Behemoths, ECONOMIST, 21 Feb. 1998, at 16.
36. See also the discussion of pharmaceutical outsourcing in Ashish Arora & Robert P. Merges, Specialized Supply Firms, Property Rights and Firm Boundaries, 13 INDUS. CORP. CHANGE 451 (2004).
37. See, e.g., Ashish Arora & Marco Ceccagnoli, Patent Protection, Complementary Assets, and Firms' Incentives for Technology Licensing, 52 MGMT. SCI. 293 (2006)
38. Gambardella A., Giuri P. & Luzzi A., The Market for Patents in Europe (LEM Working Paper No. 2006/04, 2006) http://ssrn.com/abstract=899539
39. Arora A., FOSFURI, A. & GAMBARDELLA, A., MARKETS FOR TECHNOLOGY: ECONOMICS OF INNOVATION AND CORPORATE STRATEGY (MIT Press, 1st ed., 2001)
40. Peter C. Grindley & David J. Tecce, Managing Intellectual Capital: Licensing and Cross-Licensing in Semiconductors and Electronics, Winter CAL. MGMT. REV. 92 (1997)
41. Sujitha Subrmanian, Different Rules for Different Owners: Does a Non-Competing Patentee Have a Right to Exclude? A Study of Post-eBay Cases (CCP Working Paper 07-18 2007) http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1022057.
42. See Robert Merges, Of Property Rules, Coase, and Intellectual Property, 94 COLUM. L. REV. 2655 (1994)
43. Richard A. Epstein, A Clear View of the Cathedral: The Dominance of Property Rules, 106 YALE L.J. 2091 (1997).
44. It is convenient to imagine that there is a large set of identical consumers, whose mass is normalized to unity, each of whom values the innovation at v. Then, v is also the total value of the innovation, because of the normalization, and we can use the royalty rate and the aggregate royalty interchangeably.
45. Lemley & Shapiro, supra note 12, at 3. The model these authors present is described in more detail in Section IIB.
46. This is not the only ex ante possibility of course. In fact, we believe it is more natural to assume that the negotiating parties would agree on a license fee of v, remunerating the patent holder fully for the value its innovation contributes to the product. Since the βv benchmark encompasses this case (when β = 1), and since it matches the assumptions of the one paper in the literature that presents a model of patent holdup, we follow the βv assumption here.
47. One could imagine that the manufacturer was not aware of the patent, or else the analysis is concerned with out-of-equilibrium scenarios that are never observed along the equilibrium path, but concur to determine the equilibrium play of the game.
48. The analysis that follows can be regarded as determining the disagreement point for the bargaining that may take place after I has detected the infringement but before litigation. If firms anticipate the outcome of litigation, the bargaining surplus at this stage is given by the litigation costs firms can save. Assuming for simplicity that litigation costs are borne by firms proportionally to their respective bargaining power, such bargaining would involve no redistribution of the compensation levels determined by the court.
49. This is, indeed, the socially appropriate goal if βv is the socially optimal level of the reward for the patentee and patent infringement is always detected with probability one (or retrospective money damages already provide the optimal level of deterrence). As we discuss later on, accounting for the risk that patent infringement might have never been detected can only reinforce the case for injunctive relief.
50. See Richard Gilbert & Carl Shapiro, An Economic Analysis of Unilateral Refusals to License Intellectual Property, 93 PROC. NATL. ACAD. SCI. USA 12749 (1996). They stress the difficulties courts face when assessing the value of innovative technological knowledge, defined as "typically a hugely complex undertaking."
51. Id. at 12755.
52. Given that there is no holdup problem and the validity of the patent is not at issue, the patent holder's bargaining power after the court has ruled that its patent is valid and violated by M is the same as its ex ante bargaining power. The manufacturer's threat point ex ante and ex post is also the same: Stop manufacturing. If this threat is credible ex ante, it must also be credible ex post.
53. The underlying probability distribution of v is not drawn in the figure, but may obviously be important for the computation of the reasonable royalty R.
54. Under a property rule, patent owners have a right to completely prevent all uses of the patented technology. In contrast, under a liability rule, someone might use the patent without permission, and if caught would then have to pay for that use. See Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View ofthe Cathedral, HARV. L. REV. 1089 (1972)
55. Epstein, supra note 24
56. Burk & Lemley, supra note 14.
57. A similar argument applies if the innovator is a firm other than M and I, which has licensed its innovation to manufacturer M.
58. Lemley and Shapiro distinguish between direct costs of redesigning and lost profits. This allows for a richer set of predictions, but complicates the analysis. Merging the two components of the cost into a single index simplifies matters without altering the logic of the argument.
59. When V - C is negative, M would prefer to simply stop marketing its product rather than redesign it.
60. To be precise, the condition is C > [(1 - β)/β] v.
61. To see the role of this assumption, suppose that V were small; more precisely, that V
62. In fact, the perceived level of v can be used by the courts as a criterion to sort out "real innovations" developed by a non-manufacturing patent holder from dubious patents held by a patent "troll." This is analogous to the reasoning in Yahoo!'s amicus brief in eBay, Inc. v. MereExchange, L.L.C., supra note 21.
63. Such an optimal royalty rate depends on the underlying probability distribution; if high values of v are more probable than low values, for instance, the court should order a relatively high royalty.
64. + in Figure 2 will be small and, therefore, the set of values of v for which the patent holder I is under-compensated very large.
65. See J. Gregory Sidak, Holdup, Royalty Staking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro 92 MINN. L. REV. 714 (2008)
66. http://ssrn.com/abstract=988694 and Robert Hahn & Hal Singer, Assessing Bias in Patent Infringement Cases: A Review of International Trade Commission Decisions, 21 HARVARD J. L. TECH. 487 (2008), for error-cost-based approaches applied to injunctive relief for patent infringement.
67. For applications of the error-cost approach to other contexts, see Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 399, 400 (1973) (applying error-cost analysis to civil, criminal, and administrative cases)
68. Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1 (1984) (analyzing scope for antitrust analysis and advocating structured rule of reason)
69. David Evans & Jorge Padilla, Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach, 72 U. CHI. L. REV. 73 (2005).
70. Lemley & Shapiro, supra note 12, at 39
71. see also Burk & Lemley, supra note 14
72. Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293 (1996).
73. Lemley and Shapiro recognize that their theoretical model is based on several restrictive assumptions. As we discuss at greater length later on, however, in the process of translating theory into a policy recommendation, the assumptions leading to hold up have been interpreted too broadly. Or at least, such too broad an interpretation seems to have been endorsed by the post eBay case law.
74. Adam Smith, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 4 (Edwin Carman ed., Methuen and Co., Ltd. 1904).
75. See Golden, supra note 18, at 2111.
76. Depending on the complexity of the industry, any number of variations is possible. A firm might be upstream (R&D only), downstream (manufacturing only), vertically integrated (both R&D and manufacturing), or some combination of these. For instance, a firm might be upstream for the purposes of the final consumer good but vertically integrated in terms of intermediary products necessary for making the final good.
77. See, e.g., Genctech, http://www.gene.com/gene/about/corporate/ history/timeline/index.jsp (last visited Aug. 28, 2007).
78. Acacia Research Corporation claims this as its goal. See About Us - Corporate Profile, http://www.acaciaresearch.com (follow these hyperlinks in this order: About Us, Corporate Profile, and History) (last visited Aug. 28, 2007).
79. See also the discussion in McDonough, supra note 21, at 193.
80. Richard N. Langlois, The Vanishing Hand: The Changing Dynamics of Industrial Capitalism, 12 IND. CORP. CHANGE 351 (2003).
81. See also, Richard N. Langlois, Organizing the Electronic Century, (Working Paper for the conference "Has There Been a Third Industrial Revolution in Global Business?" 16-18 November 2006, Bocconi University, Milan.
82. Langlois, supra note 51, at 373-374 (internal citations omitted).
83. See, Bronwyn H. Hall & Rosemarie Ham Ziedonis, The Patent Paradox Revisited: An Empirical Study of Patenting in the U.S. Semiconductor Industry, 1979-1995, 32 RAND J. ECON. 110 (2001).
84. Langlois also includes these firms in his list of disintegrating industries. See Langlois, supra note 51, at 373-374.
85. B.N. Anand & T Khanna, The Structure of Licensing Contracts, 48 J. INDUS. ECON. 103 (2000)
86. Joshua Gans, David Hsu & Scott Stern, When Does Start-up Innovation Spur the Gale of Creative Destruction?, 33 RAND J. ECON. 571 (2002)
87. and J.E. Oxley, Institutional Environment and the Mechanisms of Governance: The Impact of Intellectual Property Protection on the Structure of Inter-firm Alliances, 38 J. ECON. BEHAV. ORG. 309 (1999).
88. See, e.g., Nancy T Gallini & Ralph A. Winter, Licensing in the Theory of Innovation, 16 RAND J. ECON. 238 (1985)
89. James Anton & Dennis Yao, Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights, 84 AER 190 (1994)
90. and Robert Merges, Expanding Boundaries of the Law: Intellectual Property and the Costs of Commercial Exchange, 93 MICH. L. REV. 1570 (1995).
91. Michael Kanellos, Soaring Costs of Chipmaking Recast Industry, CNET News.com, 22 Jan. 2003, http://news.com.com/Semi+survival/ 2009-1001_3-981418.html.
92. See Klaus Schmidt, Licensing Complementary Patents and Vertical Integration, C.E.P.R. Discussion paper No. 5987, 2006), http://papers.ssm.com/so13/Papers.cfm?abstract_id=944169
93. see also Daniel G. Swanson & William J. Baurnol, Reasonable and Nondiscriminatory (RAND) Royalues, Standards Selection, and Control of Market Power, 73 ANTI TRUST L.J. 1, 57 (2005).
94. Rudi Bekkers, Bart Verspagen & Jan Smits, Intellectual Property Rights and Standardization: The Case of GSM, 26 TELECOMM. POL'Y 174 (2002)
95. Shailendra Pandey & Stuart Carlaw, Mobile Handset Royalties: Intellectual Property Rights Analysis for GSM, CDMA, WCDAMA, HSDPA, LTE, WiMAX, and UMB Devices, ABI Research Report 1, 2-3 (2007).
96. We focus on R&D firms. See McDonough, supra note 21, for arguments on the benefits of patent holding companies.
97. See Rudi Bekkers & Joel West, The Effect of Strategic Patenting on Cumulative Innovation in UMTS Standardization 23 (DIME, Working Paper No. 9, March 2006) available at: http://www.dime-cu.org/ files/active/1/IPR-WORKING-PAPER-9_BekkersWest.pdf.
98. Rebecca Eisenberg & R. R. Nelson, Public vs. Proprietary Science: A Fruitful Tension, DAEDALUS, 22 March 2002, at 89.
99. See, e.g., the arguments in Ashish Arora & Alfonso Gambardella, Patents, Licensing, And Market Structure in Chemicals, 26 REs. POL'Y 391 (1997)
100. and Langlois, supra note 51.
101. See Reiko Aoki & Sadao Nagaoka, The Consortium Standard and Patent Pools, (Hi-Stat Discussion Paper No. d04-32, May 2004), http://hi-stat.icr.hit-u.ac.jp/research/discussion/2004/pdf/D04-32.pdf.
102. For example, after a careful review of available evidence, Denicolò concludes that "a preponderance of the empirical evidence suggests that in the aggregate patents do not over-compensate innovators." See Vincenzo Denicolò, Do Patents Over-compensate Innovators?, 22 ECON. POL'Y 679 (Oct. 2007), and the references therein.
103. Pandey & Carlaw, supra note 58, at 25.
104. It could be argued that differently from I, manufacturer M2 may not really want to enforce its IP rights, because its product may in turn infringe on some of M1's patents and M2 may fear M1's retaliation. But here we are concerned with remedies for patent infringement, a problem that can only arise after M1 has been sued and found to have infringed. At this stage, it is irrelevant that ex ante M2 may have been relatively less likely to sue than I.
105. Shapiro recognizes that inadvertent infringement is necessary if the patent is ironclad, with θ = 1. Shapiro, supra note 3, at 13.
106. Note, however, that even in this case the extent of the overcompensation is at most a fraction of v, and so the problem cannot be significant when the value of the add-on feature is small. When infringement is inadvertent, in contrast, the patent holder can obtain a share of C, which can greatly exceed v. Indeed, the holdup problem is most serious precisely when the technology owned by the patent holder has a very low intrinsic value.
107. Before signing a licensing agreement, a potential infringer like M may face restrictions in meeting the U.S. Constitution's "case-or-controversy requirement" for bringing a suit. But patent holder I by assumption can obtain nothing in the absence of a licensing agreement, and so such an agreement must sooner or later be reached. After the Supreme Court's decision in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), M can sue even without breaching the licensing agreement. (It is unclear whether bargaining with patent holder I without reaching any agreement may suffice to sue.) If any policy reform were needed to allow M to better enforce its right to litigate before designing, such a reform would be a much more tailored and appropriate remedy to the problems created by weak patents than denying I injunctive relief once the patent is upheld by a court. More generally, we would welcome reforms that make it easier to litigate before designing, such as allowing patents to be contested even in the absence of any affirmative act by the patent holder.
108. Richard A. Epstein, E Scott Kieff & R. Polk Wagner, Brief of Various Law & Economics Professors as Amici Curiae in Support of Respondent, eBay, Inc. v. MercExchange, L.L.C., 2005 U.S. Briefs 130 (2006).
109. Even when the patent is probabilistic and Ms best strategy in the model would be to "infringe and litigate", what actually happens in equilibrium is that M and I reach a licensing agreement whose terms reflect their best alternative strategies (that is, the disagreement point).
110. Here, we focus on prospective damages. Some deterrence can also be provided by retrospective money damages; for instance, for firms that are determined to have willfully infringing a patent, judges can assess treble damages and oppositions' lawyers' fees. Nevertheless, the possibility of facing this punishment does not appear adequate to completely prevent purposeful infringement, especially when "rational ignorance" in conducting patent searches is included. See, e.g., Edwin H. Taylor & Glenn E. Von Tersch, A Proposal to Shore Up the Foundations of Patent Law that the Undenvater Line Eroded, 20 HASTINGS COMM. ENT. L.J. 721 (1998)
111. Mark Lemley and Ragesh K. Tangri, Ending Patent Law's Willfulness Game, 18 BERKELEY TECH. L.J. 1085 (2003)
112. William F. Lee & Lawrence P. Cogswell, Understanding and Addressing the Unfair Dilemma Created by the Doctrine of Willful Patent Infringement, 41 HOUS. L. REV. 393, 399 (2004)
113. Ira V. Heffan, Willful Patent Infringement, 7 FED. CIR. B.J. 115, 115 (1997).
114. Furthermore, the U.S. Court of Appeals for the Federal Circuit recently raised the standard for establishing willful infringement, making treble damages less of a threat. See In Re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007).
115. For simplicity, we assume that retrospective damages guarantee to the patent holder an expected compensation exactly equal to βv until the courts makes a decision, so that the problem of guaranteeing the same expected reward for the subsequent period remains.
116. Blair and Cotter present a similar model of detection. The ex post redesign costs C can be thought of to include a penalty for infringement, F in Blair and Cotter's model. See ROGER D. BLAIR & THOMAS F. COTTER, INTELLECTUAL PROPERTY: ECONOMIC AND LEGAL DIMENSIONS OF RIGHTS AND REMEDIES, chapter 3 (Cambridge: Cambridge University Press 2005).
117. Lemley & Shapiro, supra note 12, at 1994.
118. Each innovative component has zero stand-alone value and both must be obtained in order to operate a new technology.
119. Denicolò shows that with two innovative symmetric components the optimal aggregate degree of patent protection is twice as large as in the stand-alone case. Denicolò, supra note 64, at 5§.
120. Lemley & Shapiro, supra note 12, at 2016.
121. In practice, many complex products involve not one or two components, but hundreds. The issue is the same however: Is a product viable ex ante without the contested component(s) or not? If not, the difference between the ex ante and ex post redesign costs will be small to zero as both are quite large, and thus holdup will be minimal or non-existent, except for the issue of R&D costs discussed above.
122. Lemley & Shapiro, supra note 12, at 2037.
123. To be sure, there seems little doubt that Rambus tried to holdup its licensees, but its attempt was struck down by the FTC. There are indeed several reported cases in which patent holders unsuccessfully threatened to holdup manufacturers, suggesting the effectiveness of available remedies, such as antitrust policy, the traditional equitable doctrine of laches and estoppel, or the mere fact that manufacturers often take care of designing their products in a non-infringing way if they can.
124. Initial Decision, In the Matter of Rambus, Inc., FTC Docket No. 9302, Finding of Facts Nos. 502, 1546, 1558 (23 Feb. 2004). The royalty rates are 0.75 for SDRAM (1 262) and 3.5 for DDR SDRAM (1 390), both of which are covered by JEDEC standards. The DDR SDRAM royalty was higher due to more patented technologies incorporated: The JEDEC-compliant SDRAM parts were reported to use two of the four Rambus technologies at issue - programmable CAS latency and programmable burst length, but not dual-edge clocking or on-chip PLL/DLL - whereas the JEDEC-compliant DDR parts use all four (1260, 1261, 1388, 1389).
125. Lemley & Shapiro, supra note 12, at 2014 n. 35.
126. Id.
127. See Damien Geradin, Anne Layne-Farrar & A. Jorge Padilla, Royalty Stacking in High Tech Industries: Testing the Theory (Working Paper Series, May 2007), http://papers.ssrn.com/so13/ papers.cfm?abstract_id=949599 (providing a survey of the relevant literature).
128. See Mark Schankerman & Michael Noel, Strategic Patenting and Software Innovation, (CEPR Discussion Paper No. 5701, June 2006) www.cepr.org/pubs/dps/DP5701.asp.
129. See Hall & Ziedonis, supra note 53
130. Rosemarie Ham Ziedonis, Don't Fence Me In: Fragmented Markets For Technology And The Patent Acquisition Strategies Of Firms, 50 MGMT. SCI. 804 (2004).
131. Anne Layne-Farrar & Jorge Padilla, Royalty Stacking in High Tech Industries: Testing the Theory (unpublished working paper on file with the authors).
132. See, e.g., John P. Walsh, Ashish Arora & Wesley M. Cohen, Effects of Research Tool Patents and Licensing on Biomedical Innovation, in PATENTS in the KNOWLEDGE-BASED ECONOMY (Wesley M. Cohen & Stephen A. Merrill eds. 2003)
133. Richard A. Epstein & Bruce N. Kuhlik, Navigating the Anticommons for Pharmaceutical Patents: Steady the Course on Hatch-Waxman (Chicago Working Paper Series No. 209, March 2004), http://www.law.uchicago.edu/ Lawecon/WkngPprs_201-25/209.rae-bk.anticommons.pdf.
134. See also, Robert P. Merges, A New Dynamism in the Public Domain 71 U. CHI. L. REV. 183 (2004), reporting on a number of public domain activities in the biomedical field.
135. Interestingly, some of the empirical evidence quoted by Lemley & Shapiro does not rely on actual market data but rather on experimental simulations. See Lemley & Shapiro, supra note 12, at 2019 n. 53. While we recognize the value of experimental economics to the understanding of complex economic phenomena, we do not believe that this sort of analysis constitutes empirical proof of the importance and prevalence of royalty stacking in the marketplace.
136. They offer their case studies as "examples of the royalty stacking problem outside the litigation context, in the development of new technologies within a standard setting organization." Lemley & Shapiro, supra note 12, at 30.
137. Patent valuation is not a cut and dried science. It typically requires a close read of the patents at issue, from both a legal and technical perspective. Moreover, "value" is in the eye of the licensee as it depends on the uses that the patent will be put to. For a sampling of the literature on patent valuation methods, see Lynda M. Applegate & Gavin Clarkson, Intellectual Asset Valuation, Harvard Business School Case Study No. 9-801-192 (2000)
138. F. Russell Denton & Paul Heald, Random Walks, Non-Cooperative Games, and the Complex Mathematics of Patent Pricing, 55 RUTGERS L. REV. 1175 (2003)
139. and Ariel Pakes, Patents as Options: Some Estimates of the Value of Holding European Patent Stocks, 54 ECONOMETRICA 755 (1986).
140. Lemley & Shapiro, supra note 12, at 31.
141. Id.
142. They cite, in particular, Bekkers & West, supra note 60, at 22,
143. and Michael W. Thelander, The IPR Shell Game, 2 SIGNALS AHEAD 1, 7 (2005).
144. Interview by Information with Hakan Eriksson, CTO, Ericsson (21 Feb. 2007).
145. Interview for Reuters by Lucas van Grinsven with Carl-Henric Svanberg, CEO, Ericsson (3 Dec. 2006).
146. An additional consideration for pure manufacturing firms paying relatively higher royalty rates is that costs of this sort provide incentives for such firms to move beyond manufacturing. Two firms in the ICT sector that appear to be taking this evolutionary path are Samsung & Huawei. These firms began as manufacturing outsourcers, making other companies' products. They are now investing in R&D of their own and have begun to patent their inventions. As they begin to contribute to the development of cellular products (and the standards defining them), their royalty burden will likely fall through cross-licensing arrangements. Thus, it is only those manufacturing firms that decide not to innovate, or simply prove unable to do so, that continue to pay the highest royalty rates. See Shane Greenstein, Outsourcing and Climbing a Value Chain, IEEE MICRO, Sept.-Oct. 2005 at 84.
147. See also Craig Simmons, China's Telecom Giant: The Huawei Way NEWSWEEK INT'L, 2006, http://www.msnbc.msn.com/id/10756804/site/newsweek/page/0/.
148. For a similar line of reasoning applied to patents in the software industry, see Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, 83 TEX. L. REV. 961.
149. See, e.g., Lemley & Shapiro, supra note 12
150. Doug Licthman & Mark A. Lemley, Rethinking Patent Law's Presumption of Validity, 60 STAN. L. REV. 45 (2007)
151. Gregory M. Hasley & Manoj Gandhi, eBay, Inc. v. MercExchange, L.L.C.: Permanent Injunctions for Patent Infringement Are No Longer Automatic The Metropolitan Corporate Counsel, Dec. 2006, at 48.
152. See Smith, supra note 19.
153. eBay Inc., 126 S. Ct. at 1840.
154. As justice Kennedy observed in his concurring statement, "[t]he Court is correct, in my view, to hold that courts should apply the well-established, four-factor test - without resort to categorical rules - in deciding whether to grant injunctive relief in patent cases." eBay Inc., 126 S. Ct. at 1848 (Kennedy, J. concurring).
155. McDonough, supra note 21, at 197.
156. See also Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL. L. REV. 1293, 1343 (1996) (writing about the importance of the injunctive threat in creating a patent pool stating that "[w]ithout the property rights - backed by the threat of production-choking injunctions - the advantages conveyed by the pool would never have been realized").
157. In fact, this is just the advice of some practitioners. See, e.g., Cote, supra note 20.
158. Ashish Arora, Contracting for Tacit Knowledge: The Provision of Technical Services in Technology Licensing Contracts, 50 J. DEV. ECON. 233 (1996).
159. Lemley & Shapiro, supra note 12, at 41.
160. Jay P. Kesan & Gwendolyn G. Ball, How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes, 84 WASH. U. L. REV. 237 (2006).
161. In fact, scholars have commented on the possibility of "Financial predation" associated with denying a rival access to needed capital. See, e.g., Patrick Bolton, Joseph F. Brodley & Michael H. Riordan, [Predatory Pricing: Strategic Theory and Legal Practice, 88 GEO. L.J. 2239 (2000).
162. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y 1970).
163. Formally, assume that v was uniformly distributed in a finite interval [0, v*].
164. Lemley & Shapiro, supra note 12 at 36.
165. Id. at 38.
166. Others agree: see Golden, supra note 18, at 2116 ("There are significant reasons to suspect that Lemley & Shapiro's empirical data is unrepresentative. Further, such data cannot by itself indicate what the proper level of compensation is.").
167. See, e.g., Jean Lanjouw & Mark Schankerman, Characteristics of Patent Litigation: A Window on Competition, 32 RAND J. ECON. 129 (2001)
168. Jean Lanjouw & Mark Schankerman, Protecting Intellectual Property Rights: Are Small Firms Handicapped? 47 J.L. & ECON. 45 (2004).
169. Mark Lemley & Carl Shapiro, Probabilistic Patents, 19 J. ECON. PERSP. 75 (2005).
170. See Moore, supra note 5, at 365, 386.
171. Lemley & Shapiro, supra note 12, at 2044.
172. Denicolò shows that with complementary innovations and fragmented property rights, each innovator should be rewarded as if he contributed the whole technology if there are enough profits to do so; otherwise, there is no equilibrium with positive, simultaneous investments in R&D due to the externality innovators investing in one innovative component exert on those investing in the other, complementary components. See Denicolò, supra note 64. When firms invest in the separate innovative components sequentially, the optimal reward policy is more complicated; however, the optimal aggregate reward with complementary innovations is always greater than in the stand-alone case.
173. The current trend in district court rulings highlights this point. The recent Rambus opinion issued by the FTC also emphasizes the link, as that opinion cites a number of academic papers making theoretical points. For instance, when discussing Rambus' royalty rates the opinion quotes Swanson & Baumol, supra note 57, in saying that "a reasonable royalty 'is or approximates the outcome of an auction-like process appropriately designed to take lawful advantage of the state of competition existing ex ante... between and among available IP options."' Opinion of the Commission on Remedy, In the Matter of Rambus, Inc., FTC Docket No. 9302 at p. 17 (5 Feb. 2007). See also U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovations and Competition (2007).
174. eBay Inc., 126 S. Ct. at 1841 (2006) ("Such patent holders may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so.").