Recently published research by Bowman Heiden and Justus Baron is the first attempt to put a dollar figure on a very real problem

By Jake Schindler

Hold-out is an unfortunate fact of life for patent licensors. It’s an issue we have covered at Sisvel Insights before – the “deliberate frustration of FRAND negotiations by an unwilling licensee”, or, as or Head of Licensing Programmes David Muus has described it, a negotiation mentality of ‘Why don’t you make me?’.

While hold-out is an everyday reality for SEP dealmakers, much of the academic literature has treated it as a merely theoretical phenomenon. But a study recently published in the Harvard Journal of Law & Technology titled “The Economic Impact of Patent Holdout” changes that. It seeks to quantify the monetary losses to patent holders when infringers make a strategic decision to delay or refuse a licence.

The authors, Bowman Heiden and Justus Baron, find that in 2021 in the cellular SEP arena alone, patent owners lost out on royalties of between $7 billion and $28 billion due to hold-out. As that range indicates, it’s a difficult problem to pin down. But there is little doubt that hold-out strategies shortchange innovators. That is costly for society on an even deeper level.

What makes hold-out possible?

Heiden and Baron make clear that hold-out is a deliberate strategy – one that is a rational response to the prevailing legal and business norms in a certain country or market. Companies that engage in hold-out exploit “the cost and difficulty of enforcing patent rights”, they write.

Hold-out makes sense economically when remedies such as injunctions and enhanced damages are unavailable (or available only in exceptional circumstances). As challenging as litigation may be, hold-out leaves patent owners with few other options. If you do not file suit, your choices are settling for sub-FRAND rates or walking away with no royalty at all.

In the discourse, high litigation costs are often framed exclusively as a problem for patent defendants. But hold-out strategies mean that patent owners that wish to secure FRAND terms from a large implementer must often be prepared to fund extensive legal campaigns. “Most licensors do not have the means to engage in this kind of litigation,” the paper notes.

What does hold-out look like?

Hold-out is not just an outright refusal to license, but is also established, Heiden and Baron say, when an infringer demonstrates “unwillingness to license on reasonable terms”. It entails both maintaining an unreasonable bottom line in terms of the royalty to be paid and using unreasonable means to pursue those terms.

An example given of an objectively unreasonable rate is one that, if paid by all implementers to all patent owners, would provide no profit incentive for the invention of the technologies in the first place.

Objectively unjustified negotiating conduct, the authors say, includes imposing costs on the other party that will not help resolve genuine controversies between the parties. “Requesting detailed claim charts for large numbers of patents, requesting disclosure of large numbers of not directly relevant licenses, requesting disclosure of commercial information without an NDA” are all cited as examples. Behaviours intended primarily or exclusively to create a delay also fall into this category.

Here are some of the tactics that Sisvel’s Muus has previously identified among the most common tools of hold-out:

• Ignoring notice letters and other communications (for months or years).

• Saying that you are willing to take a FRAND licence for individual patents if essentiality and validity are confirmed by a court.

• Ceaseless, drawn-out information requests and endless NDA “negotiations”.

• Claiming not to understand licence offers.

• Denying access to information on sales that would enable royalty discussions.

• Making ridiculous counter offers (we have seen offers which turned out to be more than 350 times lower than what a court found reasonable) or not making any at all.

• Refusing offers of a global licence, despite having global sales and supply chains.

• Pointing negotiations towards suppliers that are, in turn, lukewarm on engaging.

Estimating the financial impact

The study posits three main ways in which hold-out costs patent owners money: some licence deals are never done; some large licensees are able to extract huge concessions; and transaction costs are driven up.

Available information on cellular SEP royalties, the authors say, provides evidence of systematic patent holdout. They point to several studies that have measured the aggregate royalty yield in the mobile phone market – total royalty receipts as a percentage of total device sales. The findings were between 2.8% and 3.5%. Courts in the US and the UK, meanwhile, have used figures anywhere between 5% and 10% for their expected aggregate royalty rate for cellular SEPs.

The gap between expected and actual royalties, applied to the $455 billion earned globally in mobile phone sales in 2021, yields the estimated losses from hold-out: from $7 billion to $28 billion per year.

The true cost is even higher

Of course, this figure is narrowly focused on cellular SEPs and mobile phones. There are many other areas where Sisvel operates – IoT, Wi-Fi, audio/video coding – in which we see the same strategies of hold-out.

What’s more, while the focus of the paper is on financial loss to patent owners, the impact is in fact felt more widely. Companies that hold out damage fair competition by putting royalty-paying competitors at a disadvantage. Consumers lose out when the market is distorted in this way. Society is harmed when incentives for R&D activity break down.

Jake Schindler is Senior Content & Communications Manager at Sisvel.