Patent Holdout

Patent Hold-up

• Occurs when a SEP holder exploits the standard-implementer's locked-in investment to demand supra-FRAND royalties
• After the implementer has built a product on the standard, switching costs are high
• The SEP holder can threaten injunction (product exclusion) to extract more than the patent's true value

Patent Holdout

• Occurs when a standard implementer refuses to take a FRAND license even on fair terms
• The implementer uses the standard and the patented technology WITHOUT paying
• The SEP holder must litigate to force a license, incurring costs while the implementer continues benefiting from the patent

Why Holdout is Rational

• Litigation is expensive for the SEP holder
• Settlement may occur at below-FRAND rates reflecting litigation risk
• Implementer can delay payment for years
• The implementer earns interest on unpaid royalties

Prevalence

• Holdout is increasingly recognized as a significant problem
• Cellular SEP licensing: major smartphone OEMs routinely use patented 4G/5G technology for years without licenses
• Ericsson, Nokia, Qualcomm have all engaged in multi-year litigation against holdout implementers

EU

• European Commission has historically focused on hold-up
• More recently, regulators acknowledge holdout as equally problematic
• UK Supreme Court (Unwired Planet v. Huawei, 2020): affirmed global FRAND rate-setting and injunction for holdout implementers

US

• Courts have been less active in addressing holdout through injunctions
• FRAND obligation is a two-sided obligation: the SEP holder must offer FRAND terms
• The implementer who refuses a FRAND offer cannot claim hold-up as a defense.

Injunctive Relief

• The most powerful remedy against a holdout implementer
• If the SEP holder can obtain an injunction, the implementer must either take a license or stop selling the product

UK

• Injunctions available against holdout implementers (Unwired Planet)
• Courts set a global FRAND rate and grant an injunction if the implementer refuses
• EU/Germany: Huawei v. ZTE (EU Court of Justice, 2015) framework: SEP holder must offer a FRAND license before seeking injunction
• But if implementer refuses a FRAND offer, injunction is available

Critical

• US post-eBay (2006): permanent injunctions are NOT automatic in patent cases
• Courts apply four-factor test
• SEP holders rarely obtain injunctions in the US — limiting their leverage against holdout US-based implementers
• This asymmetry (EU/UK allow injunctions; US does not) affects global licensing strategy

Anti-suit Injunction

• In some courts, a SEP holder facing holdout can obtain an anti-suit injunction (ASI) preventing the implementer from pursuing parallel proceedings in other courts
• Purpose: prevent the implementer from using foreign courts to obtain a below-market rate or enjoin the SEP holder's home court litigation
• Examples: UK courts have issued ASIs against Chinese anti-suit injunctions
• Chinese courts have issued anti-anti-suit injunctions in response
• Creates complex multi-jurisdiction conflicts

Global FRAND Rate-setting

• UK Supreme Court (Unwired Planet, 2020): English courts can set a GLOBAL FRAND rate
• An implementer that refuses the global FRAND rate faces injunction in the UK
• US courts have been reluctant to set global rates

Prejudgment Royalties

• Some courts award royalties from the date of first use, not just from the filing of the lawsuit
• This reduces the incentive to delay taking a license.

(3) Implementer Response

• Implementer must respond diligently and in good faith
• If implementer does not respond or rejects without a counteroffer, the SEP holder may seek an injunction
• If implementer makes a FRAND counteroffer, further negotiation required

What Courts Look for

• (a) HAS THE IMPLEMENTER RESPONDED?: no response to a FRAND offer = strong evidence of holdout
• (b) HAS THE IMPLEMENTER MADE A COUNTEROFFER?: must be a genuine FRAND counteroffer, not a lowball attempt to avoid paying
• (c) HAS THE IMPLEMENTER PROVIDED SECURITY?: refusal to provide security while continuing to use the patent = holdout
• (d) IS THE IMPLEMENTER'S LITIGATION STRATEGY DILATORY?: filing weak invalidity challenges to delay
• Seeking forum shopping to obtain favorable rates
• Challenging jurisdiction in multiple countries simultaneously

Good Faith Negotiation

• The implementer must negotiate in good faith
• An implementer who has genuinely negotiated and reached an impasse is treated differently from one who refuses to engage

UK

• Unwired Planet confirms global FRAND rate-setting and injunction for holdout
• Germany: strong tradition of SEP injunctions
• China: increasingly active in SEP rate-setting and willing to issue global FRAND rates
• OPPO v. Sharp (2021): Chinese court set a global FRAND rate

Multi-jurisdiction Litigation

• SEP holders file in multiple courts simultaneously
• Implementers respond by filing declaratory judgment actions or seeking injunctions in favorable courts
• Anti-suit and anti-anti-suit injunctions create multi-year conflicts

Portfolio Size and Leverage

• Larger SEP portfolios = more leverage against holdout
• A company with 100 declared SEPs has much more litigation leverage than one with 5
• Portfolio cross-licensing: major industry players cross-license large portfolios bilaterally (Nokia-Apple, Ericsson-Apple, Qualcomm-Apple)
• Reduces holdout risk for both parties

Patent Pool Solution

• Patent pools (Avanci for 4G/5G IoT) offer fixed rates to all implementers
• Reduces holdout risk (fixed, published rate = take it or litigate)

But

• Not all SEP holders join pools
• Pools may not include major SEP holders
• HOLD-UP vs.

Holdout Balance

• Regulators are increasingly recognizing that the SEP system requires balanced treatment of both hold-up and holdout
• One-sided regulation addressing only hold-up (e.g., restricting injunctions) creates holdout incentives
• EU proposed SEP regulation (2023) would require FRAND rate determination before infringement claims — critics argue this creates holdout incentives.

SEP Holder FRAND Obligation

• Must offer a license on fair, reasonable, and non-discriminatory terms
• Must offer to license ALL willing licensees
• Cannot refuse to license to create market exclusion
• Cannot offer materially worse terms to competing implementers (non-discrimination)

Implementer's Obligation

• A FRAND WILLING LICENSEE must genuinely negotiate in good faith
• Must accept FRAND terms when offered or determined by a court
• A 'willing licensee' cannot hold out indefinitely while using the patent

What Makes an Implementer 'Willing'

• Offering a genuine counteroffer
• Responding to SEP holder alerts promptly
• Providing security when requested
• NOT forum shopping to avoid paying
• NOT filing endless procedural delays

Unwilling Licensee Consequences

• UK Unwired Planet: an unwilling licensee can be enjoined
• The court sets the FRAND rate and the implementer must accept or face injunction
• In the EU: Huawei v. ZTE framework: implementer who fails to respond diligently to a FRAND offer loses the ability to invoke the SEP holder's FRAND commitment as a shield against injunction

FRAND Rate Determination

• Courts now regularly determine FRAND rates: UK (Unwired Planet, IPCom v. Lenovo)
• German courts
• Chinese courts (OPPO v. Sharp, TCL v. Ericsson)
• US courts (HTC v. Ericsson)
• These rate determinations create public comparable benchmarks for other negotiations

FRAND Determination Methods

• Top-down approach: aggregate royalty for entire standard × SEP holder's proportionate share
• Comparable license approach: adjust prior licenses to the patent in suit
• Incremental value approach: value of the patented feature vs. next-best alternative.