What does “patent hold-up” mean?

Patent hold-up occurs when a patent owner threatens to shut down a company’s entire business using an injunction unless the company pays whatever exorbitant royalties the patent owner demands. As technology products have become more complex—and as patent application filings have continued to increase—consumer devices are likely to practice larger and larger numbers of patents. In fact, one patent risk management firm estimated in 2011 that 250,000 active U.S. patents were applicable to smartphones. Any one of those quarter-million patents might cover a very small portion of the overall smartphone, and a reasonable royalty would be sufficient to compensate that patent owner for use of the patented technology. However, by wielding the threat of an injunction that would block the sale of the smartphone altogether, that one patent owner would be able to legally coerce the manufacturer into paying a royalty far beyond the value of that patent’s trivial contribution to the overall smartphone.

What is a “standard”?

Industry standards set out common ways in which products operate. The configuration of electrical plugs and outlets provide a good example of the role of standards. When a consumer buys an appliance in a given country, the consumer can be confident that the plug will fit into an outlet at home because there is a standard for the configuration of plugs and outlets. Standards are also used in more complicated technology, like defining how electronic devices will communicate with each other by (e.g., by practicing Wi-Fi, Bluetooth, or LTE standards).

Standards thus allow competing companies to make products that can work together. That standardization benefits consumers by allowing them to choose among competing devices that can all communicate with each other. Standards are commonly developed by standard-setting organizations (SSOs) made up of members of the industry interested in developing a common technological approach for a particular product or field. Once that approach has been standardized, it can be used by any interested company regardless of whether it participated in the development of the standard. Standards thus promote accessibility and widespread adoption of technology, ultimately bringing consumers newer products faster and at lower cost.

How do patents and standards relate?

It is possible for patents to cover technologies that are required by standards. Such patents are called “standard-essential patents,” or “SEPs,” because it is necessary to use the patented technology in order to practice the standard.

Can SEPs be abused?

They can, and they frequently are. Once a standard has been adopted, companies invest heavily in designing and building products that use the standard. Even if perfectly acceptable alternative technologies were available before the standard was finalized, the standardization process “locks in” the chosen technology—changing to one of the alternatives would be too expensive and disruptive once companies have invested in designing standards-compliant products. At that point, a SEP owner can threaten to block use of the standard with an injunction—and destroy all of the companies’ investments in that standard—unless each company pays exorbitant licensing fees. Those companies may be willing to pay royalties far beyond the value of the SEP in order to remain in the market.