Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro

J. Gregory Sidak, Criterion Economics, L.L.C.

9/02/2015
(Original Publish Date: 2008)

I critique the Lemley-Shapiro model of patent law. I dispute its main finding that the threat of an injunction inflates royalty payments in many cases relative to a hypothetical benchmark royalty rate. The Lemley-Shapiro framework does not properly account for the relevant error costs associated with weakening the presumption of injunctive relief. In particular, Lemley and Shapiro fail to consider how removing the presumption of injunctive relief could decrease dynamic efficiency. Furthermore, even if their framework were correct, Lemley and Shapiro rely on biased parameters that preordain their result. This outcome follows for two reasons. First, because Lemley and Shapiro fail to account for the real option conferred on potential users of the patent when a patent-holder makes sunk investments in new technologies or products, their hypothetically reasonable royalty rate is biased downwards. Second, the Lemley-Shapiro model reaches its result not by deriving a general bargaining model, but by assigning all the bargaining power to the patent-holder and claiming a general result. Both factors bias Lemley's and Shapiro's results in favor of the infringing party.