Patent Holdup and Oligopsonistic Collusion in Standard Setting Organizations

Gregory Sidak, International Institute for Competition Law and Economics

2/07/2008
(Original Publish Date: 1/9/2008)

In a recent article, Mark Lemley and Carl Shapiro assert that, in a standard setting organization (SSO), patent owners can \"hold up\" patent users by demanding high royalties for a patented input after the SSO has adopted the patented technology. Actual SSOs have begun to amend their rules to permit prospective licensees to exchange information concerning the price to be paid for the patented technology, if adopted. The Antitrust Division and Federal Trade Commission believe that such information exchange carries little risk of facilitating oligopsonistic collusion. They conclude that the rule of reason should apply rather than the rule of per se illegality. This approach is problematic. The antitrust agencies offer no theoretical or empirical foundation for their implicit assumption that the social cost of patent holdup exceeds the social cost of oligopsonistic collusion. It is more plausible that the related theoretical concern of preventing \"royalty stacking\" would justify applying the rule of reason to such ex ante exchange of purchase price information. However, neither antitrust agency has identified royalty stacking (as opposed to patent holdup) as a justification for coordinated action among competing buyers in an SSO. If a court did find royalty stacking to be a compelling business justification for restraining trade, the remaining legal question would be whether there are alternative means to avert royalty stacking that do not facilitate oligopsonistic collusion. At least five promising alternatives exist.