New Paper Addresses Flaws in Patent Holdup Theory

Stephen Haber and Alexander Galetovic of the Hoover Institution’s Working Group on Intellectual Property, Innovation and Prosperity (IP2) published a new working paper on the problems with Patent Holdup Theory. In “The Fallacies of Patent Holdup Theory,” Professors Haber and Galetovic show that Patent Holdup Theory is based on three fundamental errors. Professor Haber presented this work in October at CPIP’s 2016 Fall Conference.

At its core, Patent Holdup Theory asserts that patents impede innovation through holdup and royalty stacking, and that these problems are exacerbated in fields reliant on standard essential patents. First, the paper shows that Patent Holdup Theory contradicts basic understandings of holdup in Transaction Cost Economics. The second problem identified in the paper is that “royalty stacking” cannot occur in the way the Theory requires because holdup cannot occur multiple times to the same firm. Third and finally, Patent Holdup Theory implicitly requires the fallacious result that patents add little or no value to the markets they help create, particularly in the context of technology standardization.

Haber and Galetovic also make an interesting observation about the implications of Patent Holdup Theory that show why it should have been obvious that the Theory was flawed from the beginning. If the premises of Patent Holdup Theory were correct, innovation in industries where it occurred would be stagnant. The fact that innovation is strong in the high tech industries suggests that there is a problem with the Theory. This paper provides excellent insights into identifying the exact problems with the Theory.