Preventing Patent Hold Up: An Economic Assessment of Ex Ante Licensing Negotiations in Standard Setting

Anne Layne-Farrar, Law and Economics Consulting Group (LECG), LLC - Chicago, IL Office, Gerard Llobet, Centro de Estudios Monetarios y Financieros (CEMFI), and A. Jorge Padilla, Law and Economics Consulting Group (LECG), LLC - Brussels, Belgium Office; Law and Economics Consulting Group (LECG), LLC - Madrid, Spain Office

9/04/2008
(Original Publish Date: 5/8/2008)

The quote in the title refers to a recurring principle in the Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the US Department of Justice and the Federal Trade Commission in 1995. That report states that "The Agencies' general approach in analyzing a licensing restraint under the rule of reason is to inquire whether the restraint is likely to have anticompetitive effects and, if so, whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh those anticompetitive effects." We apply this standard of evaluation to recent proposals for joint licensing negotiations in standard setting contexts, which have been offered as a solution to the problem of opportunistic licensing and patent hold up. We find that, to the contrary, joint negotiations are not "reasonably necessary" to prevent hold up. Instead, other more moderate policy solutions that take advantage of existing institutional features within standard setting bodies have a greater likelihood of preventing hold up without running the risk of anticompetitive licensee collusion that is present with joint negotiations. In particular, we posit that standard setting bodies should set voting rules to obtain majority support in the selection of technologies for a standard and should consider means of encouraging ex ante bilateral negotiations. In addition, competition authorities could focus on the enforcement of non-discriminatory licensing as a means of preventing anticompetitive opportunistic hold up.