Efficient infringement is when firms opt to “infringe now, pay later,” rather than accepting ex ante a license to use a patented technology. This behavior is particularly attractive when the infringer believes that, even if it is found to have infringed a valid patent, it will not be enjoined from continued infringement. At worst, absent injunctive relief, the infringer will need only pay damages for past infringement, approximating what it would have paid if it had licensed the technology ex ante, and then a royalty rate for future infringement. Essentially, the infringer is in no worse a position that it would be had it accepted a license and may even be in an improved position if the royalty rate set by a court is lower than it could have obtained via negotiation.

Efficient infringement is of particular concern in the standards essential patent (SEP) space because injunctive relief is generally unavailable to SEP owners. This chapter explains that courts are unlikely to grant requests for permanent injunctions and SEP owners are unlikely to even seek injunctive relief, setting up the necessary condition for efficient infringement to flourish. Unsurprisingly, there is evidence that infringers are selecting to “infringe now, pay later” when it comes to SEPs and this chapter sets out the case why this is problematic for a well-functioning innovation system.

In response to concerns that inefficiencies in standard essential patent (SEP) licensing may have a negative impact on the development of emerging 5G and Internet of Things (IoT) markets, the European Commission (EC) convened an Expert Group on Licensing and Valuation of Standards Essential Patents (SEP Expert Group) which produced a report including 79 proposals aimed at improving the SEP licensing market. A proposal formulated by an individual member of the SEP Expert Group regarding Licensing Negotiation Groups (LNGs) has recently generated a renewed interest in the topic in the context of IoT, where a large increase in the amount of SEP licensing activity is predicted as connectivity becomes ubiquitous across most industries. While LNGs have been previously promoted to solve the perceived problem of patent holdup, we propose that LNGs should be used to solve patent holdout, which is aggravated by a collective action problem among similarly situated IoT implementers. Applying legal, economic, and management principles and norms, the resulting LNG design seeks to significantly reduce transaction costs and patent holdout while curtailing potential antitrust risks, especially regarding SEP implementers situated in the “long tail” of new IoT markets.

In Memoriam: The authors dedicate this chapter to the memory of their treasured co-author Alexander Galetovic, who tragically passed away just a few months after completing it.Those who were privileged to know him will remember Alex as a great scholar, an inquisitive mind, a wonderful collaborator, a passionate advocate for free-market policies in the technology industry and beyond, a dedicated teacher, and above all a friend.

Over the last fifteen years, the cellular standard essential patent (SEP) market has achieved a long-run equilibrium spanning the development, deployment, and use of 2G, 3G, 4G, and now 5G technologies. Cumulative royalties have converged to market values and the market has apportioned royalties according to the incremental value generated by each SEP holder’s intellectual property assets. In this competitive market, cellular technologies earn Ricardian rents, which are determined by the differential value that those technologies create over alternatives. As with previous wireless generations, standardization, patents, and licensing support vertical specialization in 5G. As with prior cellular technologies, consumers, enterprises, and implementers can choose among many alternatives to 5G for various tasks. Thus, 5G is being deployed under the same conditions that characterize the well-functioning cellular SEP licensing market. There is therefore no apparent prima facie argument to justify the intervention of competition authorities to regulate 5G royalties. Competition authorities should instead be watchful over the equilibrium which has existed in the market for cellular SEPs over the past decade or more, ensuring that parties do not undermine it through tactics employed to maximize their share of economic surplus.

During recent decades, patent holders and implementers working within Standard Developing Organizations have successfully cooperated to develop new wireless standards that have benefited consumers all around the world. The standardization process has been successful because it has made all participants better off. The increased strategic use of jurisdiction-by-jurisdiction challenges by certain implementers to delay or avoid payment is threatening this successful process. In response, courts in various jurisdictions are moving to set global license terms. However, because some local courts are, or at least are perceived as, biased, licensors and licensees are maneuvering to influence which court ends up setting global FRAND terms (for example, by seeking anti-suit and anti-anti-suit injunctions). In this chapter, we explore the implications for the future of the standardization process of these developments. Specifically, we consider the implications of extraterritoriality when licensors and licensees belong to different jurisdictions and local courts may be biased in favor of local litigants. Our main concern is that current developments may lead to the fragmentation of global standards along geopolitical lines.

Since the Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange, LLC, increasingly large portions of the patentee population have no realistic expectation of securing injunctive relief against adjudicated infringers. This judicially imposed quasi-compulsory licensing regime induces well-resourced infringers to decline a license, appropriate patented technology, and negotiate the terms of use through litigation. Costly and protracted litigation is unlikely to adequately remunerate the patent owner whenever infringers have greater litigation resources, lower opportunity costs, and limited expectations of enhanced damages, which can induce the patent owner to settle for an amount that undervalues its technology. These litigation and settlement dynamics are illustrated through case studies of “holdout” tactics employed by well-resourced infringers in recent litigations involving standard-essential patents. To correct for the underdeterrence and undercompensation effects inherent to a no-injunction regime, it is proposed that courts enhance damages by an appropriately calibrated multiplier in all infringement litigations in which injunctive relief is not a practically available remedy.