Discussion Paper Details

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Title: A Theory of Socially-Inefficient Patent Holdout

Author(s): Gerard Llobet and Atilano Jorge Padilla

Publication Date: November 2021

Keyword(s): Global Jurisdictions, Intellectual Property, Patent Holdout, Patent Licensing and Standard Setting Organizations

Programme Area(s): Industrial Organization

Abstract: This paper proposes a framework to analyze holdout in patent licensing negotiations. We show that when the validity of a patent is probabilistic, a potential downstream user has incentives to shun to pay the price offered by a patent holder to license the technology and risk being brought to court. These incentives are exacerbated when jurisdictions are local and the downstream producer can approach courts sequentially. The informational spillovers across trials imply that this firm often finds optimal to go to court aiming to invalidate the patent in a jurisdiction due to the knock-on effect on future jurisdictions. This process results in excessive litigation compared to when the jurisdiction is global. The distortions from sequential litigation are likely to be aggravated when final competition is accounted for or when patent injunctions are not allowed.

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Bibliographic Reference

Llobet, G and Padilla, A. 2021. 'A Theory of Socially-Inefficient Patent Holdout'. London, Centre for Economic Policy Research.