In Launching the Innovation Renaissance I wrote:
In the software, semiconductor and biotech sectors, for example, a new product can require the use of hundreds or even thousands of previous patents, giving each patent owner veto-power over innovation. Most of the owners don’t want to actually stop innovation of course, they want to use their veto-power to grab a share of the profits. So in theory patent owners could agree to a system of licenses from which everyone would benefit. In practice, however, licensing is costly, time-consuming and less likely to work the more parties are involved. It’s easy for a bargain to break down when five owners each want 25 percent of the profits. It’s almost impossible for a bargain to work when hundreds of owners each want 10 percent of the profits.
The just decided Microsoft v. Motorola decision illustrates the problem and what judges can do to help resolve the problem. The case concerned two standards-essential patents (SEPs) which must be licensed to other parties at a reasonable and non-discriminatory (RAND) rates. Motorola, however, was claiming that a reasonable fee required Microsoft to pay over $4 billion annually. The court decided, however, that a truly reasonable free was about $1.8 million a year. Quite the discount. The decision by US District Judge James Robart is admirably clear:
When the standard becomes widely used, the holder of SEPs obtain substantial leverage to demand more than the value of their specific patented technology. This is so even if there were equally good alternatives to that technology available when the original standard was adoped. After the standard is widely implemented, switching to those alternatives is either no longer viable or would be very costly….The ability of a holder of an SEP to demand more than the value of its patented technology and to attempt to capture the value of the standard itself is referred to as patent “hold-up.”…Hold-up can threaten the diffusion of valuable standards and undermine the standard-setting process.
…In the context of standards having many SEPs and products that comply with multiple standards, the risk of the use of post-adoption leverage to exact excessive royalties is compounded by the number of potential licensors and can result in cumulative royalty payments that can undermine the standards…The payment of excessive royalty to many different holders of SEPs is referred to as “royalty stacking.”…a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.
Judges made patent law what it is today and they are beginning to remake it. The decision impacts not just Microsoft and Motorola but the value of future patents and the value of future patent litigation.