Reply: Patent Holdup and Royalty Stacking

Abstract

We argued in our paper, "Patent Hold-Up and Royalty Stacking," that thethreat to obtain a permanent injunction greatly enhances the patentholder's negotiating power, leading to royalty rates that exceed abenchmark level based on the value of the patented technology and thestrength of the patent. John Golden, in his extensive comment on our paper,claims: "Lemley and Shapiro err when they claim to have proven that'patentees whose inventions are only one component of a larger product aresystematically overcompensated.'" However, the error is Golden's not ours.When patentees systematically capture value they did not create from otherswho did create it, they are being overcompensated by any reasonablemeasure, including the standard economic models on which we relied. In PartII, we briefly respond to his criticism of our empirical study ofcourt-awarded reasonable royalties. Finally, Golden also claims that ourrecommendation to reduce the availability of permanent injunctions topatent holders who have claims to reasonable royalties but not lost profitsremedy "threatens to distort markets for innovation." We strongly disagree.It is patent holdup, which skews damages in ways more favorable toreasonable royalties, that distorts markets for innovation. A rule such asthe one we propose, in which damages are calibrated to compensate patenteesfor their loss, is sensible public policy.

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