The Complements Problem within Standard Setting: Assessing the Evidence on Royalty Stacking

Damien Geradin, Howrey LLP; Tilburg University - Tilburg Law and Economics Center (TILEC), Anne Layne-Farrar, Law and Economics Consulting Group (LECG), LLC - Chicago, IL Office, and A. Jorge Padilla, Law and Economics Consulting Group (LECG), LLC - Brussels, Belgium Office; Law and Economics Consulting Group (LECG), LLC - Madrid, Spain Office

12/08/2008
(Original Publish Date: 1/8/2008)

Royalty stacking, the most recent incarnation of the complements problem identified in the early 1800s by French engineer Augustine Cournot, has received considerable attention. The potential for royalty stacking within standard setting efforts arises from the fact that downstream manufacturing companies can face multiple upstream gatekeepers, each of whom must grant a license to their "essential" patents before the downstream firms can legally commercialize the standard. Some authors have claimed that in high-tech industries - which are frequently characterized by cumulative innovation, dispersed ownership of patents, and cooperative standard setting efforts - the cost of obtaining all necessary licenses is too high, such that innovation has been thwarted and consumers have been harmed. In this paper, we assess the case for royalty stacking within standards and find the evidentiary support weak at best. We note that the relevant question is not whether royalty stacking is possible, as the theoretical arguments behind it have withstood the test of time, but whether it is common enough and costly enough in actuality to warrant policy changes. The available evidence suggests not, implying that any policy changes aimed at solving royalty stacking are likely to cause more (unintended) harm than they cure.