Towards a Solution for the Hold-Out Problem: Restoring Balance in the Licensing of Cellular SEPs


For much of its existence, the academic and policy debate on standards essential patents (SEPs) in mobile telecommunications was driven by the theory of “hold up”— the ability of SEP owners to supposedly extract value well beyond the contribution of their technology to downstream products. This theory of hold up was never empirically validated, and even as a theory, took no account of the non-self-enforcing nature of patents, including SEPs. Injunctive relief for infringement is far from automatic, and litigation is costly and carries asymmetric risks for licensors. In reality, licensors are often able to collect payment only several years after infringement began, may sometimes end up agreeing to rates that are too low to incentivise future investment, and may often be unable to collect payment for all the period of infringement by the implementer. Thus “hold out” by licensees who wish to delay, avoid and reduce payment for their use of SEPs is a potentially greater danger than “hold up.”

If injunctions are difficult to obtain and the eventual remedy for infringement is to take a license and pay damages based on FRAND rates, there is little positive incentive for licensees to take licenses. Instead, it is attractive for licensees to delay and force licensors into litigation. The attractiveness and increasing pervasiveness of such behaviour risks disrupting the “balance” of incentives that is sought by standards development organisations such as the European Telecommunications Standards Institute (ETSI), which has been responsible for shepherding the development of mobile telecommunications standards. The long-term consequences of disrupting this balance will likely be a diminished rate of future innovation, and the potential replacement of a remarkably successful model of “open innovation” by more closed models.

This paper suggests potential correctives to the holdout problem. The correctives involve the strengthening of injunctive relief regimes, and the recognition by Courts and policy-makers (especially antitrust or competition agencies) that achieving the “balance” sought out by ETSI may require limiting or withdrawing the unlimited availability of FRAND licenses for unwilling licensors. Courts and agencies should recognise that SEP holders are only obliged to be prepared to make FRAND licenses available, but also recognise that licensors are not compelled to conclude FRAND licenses with unwilling licensees. At the very least, Courts that are often asked to determine FRAND rates based on evaluating “comparable licenses” can still take measures that avoid putting unwilling licensees on the same footing as those who willingly negotiated “comparable” licenses.