Monday, October 5, 2015

Some Recent Papers on FRAND

1.  Carl Shapiro and Fiona Scott Morton have posted a paper on ssrn titled Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?  Here is a link to the paper, and here is the abstract:
The 2011 America Invents Act was the most significant reform to the United States patent system in over fifty years. However, the AIA did not address a number of major problems associated with patent litigation in the United States. In this paper, we provide an economic analysis of post-AIA developments relating to Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs). For PAEs and SEPs, we examine the alignment, or lack of alignment, between the rewards provided to patent holders and their social contributions. Our report is mixed. Regarding PAEs, we see significantly improved alignment between rewards and contributions, largely due to a series of rulings by the Supreme Court. Legislation currently under consideration in Congress would further limit certain litigation tactics used by PAEs that generate rewards unrelated to contribution. We also see some notable developments relating to SEPs, especially with the recent reform to the patent policies of the IEEE, a leading Standard-Setting Organization (SSO) and with several recent court decisions clarifying what constitutes a Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate. However, other steps that could better align rewards with contributions on the SEP front have largely stalled out, particularly because other major SSOs do not seem poised to follow the lead of the IEEE. Antitrust enforcement in this area could further improve the alignment of rewards and contributions.
2.   Lizhi Ning, Shubha Ghosh, and Wei Zhou have published a paper in the Journal of Antitrust Enforcement titled Price discrimination in patent licensing and the application of FRANDHere is a link to the paper (behind a paywall, however), and here is the abstract:
With the increasing amount of global trade and the accelerating process of economic globalization, the economic entities of the world have reached a consensus on protecting equal trading opportunities—especially through pricing and other trading conditions—to achieve substantially fair global trade transactions. The arrival of the era of the knowledge economy increases the role of intellectual property in manufacture and trade and increases attention to the patent licence systems in many countries. In patent licence practice, licensors grant patent licences with many conditions attached. On the one hand, differential treatment will stimulate competition in the market and bring generous profits to the licensors; on the other hand, excessive differential treatment can seriously affect fair competition in the relevant market and undermine the normal operation of the market economy. Therefore, this article explores the issue of price differential treatment in the practice of patent licensing and reasonable royalty fees or rates under FRAND, in order to provide inspiration for further improvement and development of China’s patent licensing market. 
3.  Theo Bodewig has published an article in the July 2015 issue of GRUR Int. (pp. 626-34), titled Einige Überlegung zur Erschöpfung bei Zwangslizenzen an standardessentiellen Patenten ("Some Observations on the Exhaustion by Compulsory Licensing in Respect of Standard Essential Patents").  Here is my translation of the abstract:
In recent years, when the business sections of newspapers have discussed patent law, the military concept of "patent wars" frequently appeared.  It was and is a matter of complaints with values of over 100 million or even billions of euros in connection with patent infringement actions, with which the largest firms in the filed of information technology worldwide have been inundated.  In PCs, laptops, tablets, game consoles, smartphones, and other electronic devices hundreds of components are used, which incorporate protected patents, utility models, or design rights.  Insofar as these protected rights are incorporated into industrial standards (standard essential), one can scarcely avoid them.  As a rule, they also cannot be replaced with alternative technologies.  A single smartphone can include over 1000 protected inventions.  For component manufacturers or distributors it is however often difficult to clarify the scope of protection and to avoid infringing.
The author argues that a compulsory license accorded on competition grounds (e.g., under the Orange Book Standard) pursuant to national law will not exhaust the patent owner's rights outside the nation granting the license,  but that a compulsory license granted under EU law (e.g., under TFEU article 102) would exhaust those rights throughout the entire EU.

Friday, October 2, 2015

Three New Papers on Holdup, Standards

1.  Rudi Bekkers has posted a paper on ssrn titled Concerns and Evidence for Ex-Post Hold-Up with Essential PatentsHere is a link to the paper, and here is the abstract:
Patented technologies may add significant value to technical standards. But the owners of patents that are necessary required in order to implement a standard (“essential patents”) obtain a particularly powerful position. One of the widely recognized risks here is patent holdup, where the patent owner demands inflated prices, much beyond the value of their specific patented technology, knowing that implementers are locked in and have no other choice than to obtain a license. Many standard setting organisations have “FRAND” patent policies in place that aim to avoid hold-up, among other things. 
While it has been argued that hold-up is a theoretical risk only, and does not manifest itself in 'real world' scenarios, this paper discusses a number of recent, seminal court cases in which the judge determined that for essential patents, fees were demanded that wildly exceeded what the court ultimately deemed to be a FRAND royalty rate. In other cases, competition authorities have issued decision in which they ruled that for a patent owner, seeking injunctive relief for essential patents can be an illegal act as such, considering that such conduct further increases the risk for hold-up.
The risk for hold-up is recognised by standard setting bodies, witnessed by the many discussions taken place in these organisations, in the past but especially over the last two years. Yet, possible policy changes are often hard to agree upon, given the strongly divergent interests of the members of such organisations. IEEE is the first standard setting body to make significant changes to its policy, aiming to mitigate hold up risks. As pointed out by the US Department of Justice in their review, IEEE’s new policy has some significant potential benefits.
2.  Taking a rather different view is this paper by Alexander Galetovic, Stephen Haber, and Ross Levine, titled An Empirical Examination of Patent Holdup.  Here is the abstract:
A large theoretical literature asserts that standard-essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product. We evaluate two central, interrelated predictions of this SEP holdup hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries. We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.
(Hat tip to Danny Sokol, who mentioned this paper recently on his antitrust blog.)  For an earlier paper by the same three authors, titled Patent Holdup:  Do Patent Holders Hold Up Innovation?, Hoover IP2 Working Paper Series No. 14011 (May 2014), see here; for my reservations regarding the conclusion expressed in that paper, see here

3.  Nuno Pires de Carvalho has published a paper titled Technical standards, intellectual property, and competition--a holistic view, 47 Washington University Journal of Law & Policy 61 (2015).  Here is the abstract:
Until now, most of the literature that regards the interaction between intellectual property and both mandatory and voluntary technical standards has been limited to a particular area of intellectual property. This Article examines the interaction from a holistic perspective, involving the main intellectual property disciplines: patents, trademarks, and copyrights. Most generally, a tension exists between intellectual property and technical standards due to their differing—and somewhat opposing—objectives and public policies. Further, the interaction between technical standards and intellectual property typically depends on the categorization of the technical standard as mandatory or voluntary. Because the public policies that inform technical standards are oriented towards reducing product and service differentiation, they reduce market freedom. The reduction in market freedom is limited, however, because technical standards are frequently adopted for technical and economic efficiency, which may have a downstream, positive effect on competition.

Thursday, October 1, 2015

Microsoft, Google/Motorola, Settle Patent Disputes

Readers may have seen this news already, but if not here are stories in Bloomberg NewsReuters, and The Wall Street Journal. According to Reuters, "The companies said they have been cooperating on such issues as the development of a unified patent court for the European Union, and on royalty-free technology for speeding up video on the Internet," and Bloomberg News reports that "the two companies are lobbying to ensure" that PAE suits "don’t become as prevalent in Europe as they are in the U.S."

Update:  Florian Mueller's analysis on FOSS Patents is available here.

Wednesday, September 30, 2015

Federal Circuit Upholds Disgorgement Rule for Design Patent Infringement

In an opinion handed down yesterday, Nordock, Inc. v. Systems Inc., the U.S. Court of Appeals for the Federal Circuit affirmed a judgment of infringement and validity of a design patent, but vacated a  jury award of $46,825 in reasonable royalty damages and remanded for a new trial on damages.  I'll focus on the damages issues.

The design patent in suit "claims the ornamental design of a lip and hinge plate for a dock leveler" (p.2).  As the court notes (pp. 11-12):
In the case of design patent infringement, a patentee can recover damages under § 284 or under 35 U.S.C. § 289, which is entitled “[a]dditional remedy for infringement of design patent.” See Catalina Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277, 1290 (Fed. Cir. 2002). Section 289 provides as follows: 
Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties. 
Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.
35 U.S.C. § 289. Therefore, the plain language of the statute permits design patentees to claim either $250 or the infringer’s “total profit” on sales of “any article of manufacture” to which the patented design was applied.
We have recognized that where, as here, “only a design patent is at issue, a patentee may not recover both infringer profits and additional damages under” Catalina Lighting, 295 F.3d at 1291 . . . . ; see also Robert Bosch, LLC v. Pylon Mfg. Corp., 719 F.3d 1305, 1310 n.1 (Fed. Cir. 2013) (en banc) (“An infringer’s profits are, of course, no longer an available remedy for the infringement of a utility patent. See 35 U.S.C. § 284. Such profits, however, remain available in cases of design patent infringement. See 35 U.S.C. § 289.”); Signode Corp. v. Weld-Loc Sys., Inc., 700 F.2d 1108, 1113 n.6 (7th Cir. 1983) (“An infringer of a design patent is liable to the patent owner to the extent of his total profit or $250, whichever is greater, under 35 U.S.C. § 289.”). Accordingly, a design patentee can recover either (1) total profits from the infringer’s sales under § 289, or (2) damages in the form of the patentee’s lost profits or a reasonable royalty under § 284, or (3) $250 in statutory damages under § 289, whichever is greater. See Catalina Lighting, 295 F.3d at 1291. 
The district judge instructed the jury that "If you find infringement, and do not find the ’754 Design Patent is invalid, you are to award Nordock Systems’ total profit attributable to the infringement. Systems’ “total profit” means the entire profit on the sale of the article to which the patented design is applied, or with which it is used and not just the portion of profit attributable to the design or ornamental aspects of the patent" (p.12).  The jury came back with a reasonable royalty award of $46,825, and "found that Systems' profits were $0" (p.12).  The district judge denied a motion for new trial.

On appeal, the Federal Circuit vacates, stating that the district court's decision "was erroneous because it relied upon [defense expert] Bero's so-called 'cost savings methodology.'"  More specifically, Bero had testified that an appropriate award of profits would be the profit "Systems earned on its lip and hinge plate ornamental design. And the cost savings that Systems received as a result of using that design are something again less than $15 per unit. So on that lip and hinge plate design the profitability attributable that Systems earned—this is defendant’s profits—was something less than $15 per unit. It’s the same number as the royalty damages. It’s actually less than that" (pp. 13-14).  The problem is that Bero is right as a matter of economics but wrong as a matter of the Federal Circuit's interpretation of § 289, under which the infringer of a design patent can be required to pay the entire profit earned from the sale of the infringing article (as the Federal Circuit recently held in Apple v. Samsung, see blog post here).  

From an economic standpoint, of course, the rule that the court applies is stark raving mad:  there is no principled reason why the infringer of a design patent (or any IP right) should be required to disgorge the entire profit earned from sales of an infringing article, unless all of those profits are actually attributable to the infringing subject matter.  But such is the state of current U.S. design patent damages law:  even when the patented design accounts for only a portion of the defendant's profit on the sale of an article of manufacture, the defendant is required to disgorge the entire profit.  There is no allocation or apportionment.  To be fair, the Federal Circuit's interpretation of § 289 is one possible reading of the statute (though not necessarily the only one), and the court is following its own precedent in this regard.  But I really do hope that someday Congress considers correcting the statute to avoid what I predict is going to be an increasingly problematic remedy in years to come, as the number of design patents increases.  

In addition, the court held that "the manifest weight of the evidence shows that Systems' profits were over $600,000 for its infringing LHP/LHD levelers," so the verdict must be vacated and remanded for calculation of the infringer's profit.  Finally, the court held that the district court erred "[t]o the extent [it] believed that the jury could simply choose between awarding damages under § 284 or § 289 . . . . Only where § 289 damages are not sought, or are less than would be recoverable under § 284, is an award of § 284 damages appropriate. " (pp. 20-21).  So on remand it looks like Nordock will be entitled to a § 289 recovery in excess of $600,000.  Oy vey.

Tuesday, September 29, 2015

Does the E.C. Enforcement Directive Permit Supracompensatory Damages?

Interesting post on IPKat today on three cases now pending before the Court of Justice for the European Union on the subject of supracompensatory damages for the infringement of IP rights.  I have previously blogged on the first of them (see here), Case C-481/14 (Jørn Hansson), which was referred by the Oberlandesgericht Düsseldorf and involves Community Plant Variety Rights.  The other two, Case No. C-99/15 (Liffers) and Case No. C-367/15 (Stowarzyszenie Oławska Telewizja Kablowa) involve copyright matters and I was not previously aware of them.  No hearing dates or opinions are scheduled yet in any of these, so it could be quite a while before the court issues any judgments.  For general discussion of enhanced or punitive damages for IP infringement in my book, see pp. 72-73, 275-76.

Monday, September 28, 2015

Empirical Studies of Patent Remedies

Professor John Golden and I have recently completed a draft of a chapter titled Empirical Studies Relating to Patents—Remedies, which will be published in volume 2 of Research Handbook on the Economics of Intellectual Property Law (Peter Menell, David Schwartz & Ben Depoorter eds., Edward Elgar Publishing, forthcoming 2016).  Here is a link to the paper, and here is the abstract:
This chapter from the forthcoming Research Handbook on the Economics of Intellectual Property Law surveys the empirical literature on patent remedies. Part I discusses the literature on injunctions, beginning with an overview of legal doctrine and economic debates over “property rules” versus “liability rules,” and concluding with a summary of empirical studies that examine the frequency and circumstances of injunction grants or the nature of injunctions’ content and scope. Part II discusses the literature on patent damages, beginning with an overview of the law and economics of damages before proceeding to a review of the empirical literature on the prevalence of different types of damages, damages amounts, and possible explanations for damages outcomes. Part III briefly discusses other remedies, including declaratory judgments, for which there appears to be little relevant empirical literature. The Conclusion suggests possible avenues for future research.
We would appreciate comments and criticism, or citations to any relevant studies we may have overlooked.

Thursday, September 24, 2015

Why Switching Costs Are Irrelevant to Patent Holdup

Today's post is jointly authored by Norman Siebrasse and Thomas Cotter.

Over the past several months, the two of us have been working on a paper titled The Value of the Standard, which proposes a new theoretical framework for calculating FRAND royalties.  In the course of working on the paper, we’ve noticed that, in the standards context, the terms “sunk costs” and “switching costs” are often used more or less interchangeably as phenomena that give rise to patent holdup. This is a bit odd. In the general economic literature on holdup, “sunk costs” refers to transaction-specific investments that have been made by one of the parties. Holdup occurs when the other party tries to charge a higher price than it would have been able to before those sunk costs were incurred. In this sense, sunk costs were necessarily incurred in the past; a party cannot be held up for costs that it has not yet incurred. “Switching costs” on the other hand, imply costs that would take place in the future, to switch to an alternative, non-standard technology. For example, consider the statement that “If the patented technology is adopted after the standard issues and the adopting firm and consumers make investments that are specific to the standard, the cost of switching to the alternative technology is prohibitively expensive” (Gilbert, Deal or No Deal, 77 Antitrust LJ 855, 862 (2011)).* The first phrase of this sentence clearly refers to sunk costs – which is to say, transaction-specific investments – while the second phrase refers to the cost of switching to the alternative technology, which is evidently a future cost. We therefore thought it might be useful to analyze, as precisely as possible, the relationship between sunk costs and switching costs in order to better evaluate the extent to which the royalty that an implementer might agree to ex post under the threat of an injunction will exceed the value of the patented technology over the best alternative.

Our basic point is that switching costs as such – the ex post cost of implementing the alternative – are not in themselves relevant, even though in the standards context they can be very high. The amount that is subject to holdup is sunk costs plus the opportunity cost of selecting the infringing technology over a noninfringing alternative. Moreover, while our discussion was prompted by the standards context, both sunk costs and switching costs arise outside that context as well, and accordingly our discussion is general.

We will define Technology 1 as the technology which is in fact initially adopted, and Technology 2 as the next best available technology. The revenue from a technology is R and the cost of implementing the technology is C. Costs and revenues may change after Technology 1 is adopted. This will be indicated by the subscript “A” for ex ante costs / revenues and “P” for ex post costs / revenues. We will assume all expectations are accurate; changes in revenues and costs after Technology 1 is adopted are real changes, not due to new information. Because Technology 1 is actually adopted and expectations are accurate, it follows that:

R1A = R1P = R1

In general both the cost and revenue associated with Technology 2 may change ex post. For example, in the standards context, the expected revenue from Technology 2 conditional on its having been initially adopted as the standard might have been very high, but very low or even zero if in fact a particular implementer adopts it only after 1 has become the standard. It seems very unlikely that the expected revenue from 2 would go up ex post, so in general

R2A ≥ R2P

However, our analysis is not affected if R2A < R2P.

In general, the cost of implementing Technology 2 might go up or down. The cost of implementing Technologies 1 and 2 might include some costs that are common to both, such as training personnel in a general field of technology, which would need to be incurred to implement Technology 2 on its own, but do not need to be incurred a second time if Technology 2 is adopted after Technology 1 is first adopted, in which case C2P < C2A. On the other hand, complementary components might have been designed in light of 1, and redesigning them to function with 2 might be more expensive than it would have been to design them to function with 2 in the first place, in which case C2P > C2A. Further, in cases where the costs and revenues associated with the best alternative change, it is possible that one technology is the best alternative ex ante and a different technology is best ex post. The term Technology 2 refers to the technology that is the best alternative at any given point in time, and is not necessarily always the same technology.

The maximum royalty, r, that can be extracted ex ante as the value of Technology 1 is its incremental ex ante value over Technology 2

rmaxA =  (R1 – C1) – (R2A – C2A)

Now consider implementer D’s options if D adopts Technology 1, the patent on Technology 1 is found to be valid and infringed, and the court enjoins D’s further use.  If D is enjoined, it has three options: 

Option 1:  Abandon 1 and exit the market.   D’s future payoff (i.e., ignoring the sunk costs, which may affect D’s decision ex ante but not D’s decision ex post) = 0.
Option 2:  Switch from 1 to 2 :  D’s future payoff = R2P – C2P, where C2P = the cost of implementing (2), that is, the switching costs. 
Option 3:  Pay a post-injunction royalty for the use of 1:   D’s future payoff = R1 – r.
Given these options, D prefers to pay rather than to abandon if R1 – r > 0, that is, as long as r < R1.  D prefers to pay rather than to switch if R1 – r > R2P – C2P, that is, if r < R1 – (R2P – C2P).  And D prefers to switch rather than to abandon if R2P – C2P > 0, that is, if R2P > C2P, which is to say (intuitively) if using the alternative still would be profitable ex post.

Define rH, the holdup royalty, as the difference between the maximum ex post and ex ante royalty:

rH ≡ rmaxP – rmaxA

If switching is preferable to abandoning, then

rH = [R1 – (R2P – C2P)] – [(R1 – C1) – (R2A – C2A)] = C1 + [(R2A – C2A) – (R2P – C2P)]

That is, the holdup royalty is equal to the sunk costs associated with Technology 1, plus the difference between the ex ante and ex post payoffs associated with Technology 2: the “differential profit” of 2. A caveat is that both the terms (R2A – C2A) and (R2P – C2P) are bounded from below at zero. If (R2P – C2P) < 0,, 2 is not profitable ex post, abandoning is preferable to switching, and D will pay up to R1 to continue using 1, for a profit of 0 going forward. Similarly, if (R2A – C2A) < 0, then the alternative to Technology 1 is not to enter the market at all, and so R1 – C1 defines the ex ante value of the invention.

To simplify this equation, define “differential profit” of Technology 2:

ΔP2 ≡ [(R2A – C2A) – (R2P – C2P)]


rH = C1 + ΔP2  

This means that switching costs per se are irrelevant to holdup, in the sense that they cannot be extracted by a patentee with an injunction. It is only differential switching costs – the difference between the ex ante and ex post cost of adopting 2 – or more precisely, the differential profit of 2, ΔP2, that is relevant.

Now consider the special case when Technology 2 is entirely unrelated to Technology 1, so that the costs and revenues associated with 2 will not change when 1 is adopted; 2 is simply an outside option, which implies that  R2A = R2P and C2A = C2P, and so ΔP2 = 0. In that case:

rH = C1

This verifies that when the alternative is an outside option, our model reduces to the standard point that opportunism allows the patentee to extract sunk costs associated with the technology. But it also raises our main point. The cost of implementing Technology 2 might be very substantial, and that cost is no different from switching costs in the standards context. Whether the cost is that of switching to a different standard technology, or to an entirely different undertaking in an unrelated area, it is still the cost of the next best alternative. Yet it is not relevant to holdup, and no one has ever supposed it is. When we talk about holdup in the traditional context, such as Riles v Shell Oil, 298 F.3d 1302 (Fed. Cir. 2002), no one ever says that the patentee can hold up the user for the cost of switching to a different technology. The reason that these “switching costs” drop out is that they are considered both ex post and ex ante. It is true that by licensing ex post, the user will avoid the cost of adopting the alternative technology; but that is also true if the user licenses ex ante. The notion that the user can be held up for switching costs reflects ex post thinking.

Now consider the case where Technology 2 is related, in the sense that the costs and/or revenues associated with Technology 2 change when 1 is adopted. This will often be the case with standards.

First consider the simpler case when the cost of implementing 2 is not affected by whether 1 is adopted, but revenue is affected: that is, R2A > R2P and C2A = C2P. For standards it is likely that R2A > R2P, and it is at least plausible that C2A = C2P for some standards. In that case:

rH = C1 + [R2A – R2P]

Again, switching costs, C2P, are not zero – indeed they may be very large – but they are nonetheless irrelevant to holdup, for the reasons just discussed.

Thus, in the standards context, it is not switching costs that can be extracted in addition to sunk costs, it is differential profit.

The reason that it is only differential profits that are relevant is that both ex ante and ex post, the profitability of the best alternative disciplines the amount the patentee can charge. When these are the same, they drop out. But when they are different, the difference between the ex post and ex ante profitability adds to the amount the patentee can charge.

To understand why, it is perhaps helpful to approach the derivation from a different angle. The differential profit discussed above, ΔP, is the difference in profitability of a given technology at two different points in time (ex ante and ex post). Now let us focus instead on the difference in profitability between the two different technologies at a given point in time.

Define comparative differential profit, δ12 ≡ P1 – P2

We are accustomed to thinking of the true value of a technology as being its ex ante profitability over the next best available technology: in our notation, this is δ12A ≡ P1A – P2A, But from the perspective of a user, the value of a technology at any given time, and consequently the maximum royalty that can be charged, is always its profitability over the best alternative. Ex post, the value of a licence to Technology 1 is its differential profitability over Technology 2: δ12P ≡ P1P – P2P. The holdup royalty is the difference in the value of the technology to the user (which is not necessarily the same as the true value of the technology), ex ante versus ex post. That is:

rH = δ12P – δ12A

Once the cost of implementing 1 is sunk, P1P = R1

rH = [(R1 – (R2P – C2P)] –  [(R1 – C1) –  (R2A – C2A)]

    = C1 + ΔP2  

That is, sunk costs holdup really represents holdup due to the differential profitability of Technology 1 ex ante and ex post. The differential profitability of Technology 2 represents a separate source of holdup. The profitability of Technology 2 is relevant because the threat of switching to Technology 2 disciplines the amount that can be extracted by the patentee; it is not the absolute profitability that can be extracted, either ex ante or ex post, but only the profitability related to the alternative. The sunk costs holdup related to Technology 1 arises because the profitability of Technology 1 from the user’s perspective changes once costs are sunk; the profitability increases, because the costs no longer have to be incurred. Similarly, if the profitability of Technology 2 changes, the disciplining value of the user’s threat to switch also changes. We will refer to the term that captures this, ΔP2, as opportunity cost holdup: .the reduction in the profitability of Technology 2 ex post is the opportunity cost of not having chosen Technology 2 ex ante.

While there are no doubt cases where C2A < C2P so that differential costs contribute to the differential profit, we suspect that differential revenues are generally characteristic of standards. Normally, R2A > R2P because the value of a non-standard technology is much lower than the value of the same technology if it were the standard.

In summary, switching costs as such are irrelevant to hold up. Second, it is differential profits which are important. Third, differential revenue is likely to be an important contributor to differential profits in the standards context, and it may well be generally more important differential cost, so switching costs are doubly irrelevant. 

* Similarly, the joint report of the U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 28 (2007) states at 28 that "Generally, the greater the cost of switching to an alternative standard, the more an IP holder can charge for a license." And the Report of the Fed. Trade Comm’n, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition (2011) at 5, stating that "At the time a manufacturer faces an infringement allegation, switching to an alternative technology may be very expensive if it has sunk costs in production using the patented technology. That may be true even if choosing the alternative earlier would have entailed little additional cost. If so, the patentee can use the threat of an injunction to obtain royalties covering not only the market value of the patented invention, but also a portion of the costs that the infringer would incur if it were enjoined and had to switch. This higher royalty based on switching costs is called the “hold-up” value of the patent. Patent hold-up can overcompensate patentees, raise prices to consumers who lose the benefits of competition among technologies, and deter innovation by manufacturers facing the risk of hold-up."