Research & Bio

Erik Hovenkamp
Research Areas
  • Patents and IP policy
  • Antitrust and competition policy
  • Law and economics
  • Innovation
  • Industrial organization
  • Applied game theory 

Selected Articles
(See my CV for a complete list of my research; click here to access my SSRN page.)

Tying, Exclusivity, and Standard-Essential Patents.  Columbia Science and Technology Law Review (forthcoming, 2018).
Abstract:     When a technological standard is adopted, implementers must pay to license all “standard-essential” patents (SEPs)—those covering core features of the standard—although the particular price terms usually cannot negotiated beforehand. To allay implementers’ fear of being “held up,” SEP owners usually make commitments to offer licenses on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among other things, this acts as a contractual price control for SEP licenses—albeit an imprecise one that is subject to judicial interpretation.
            Aside from licenses, an SEP holder may further supply an important “collateral input”—one that is not subject to the FRAND pledge, but which implementers nevertheless require in order to market a viable product. For example, this might be a physical component of the final product. The SEP holder might tie its SEP rights to the collateral input. It might also engage exclusive dealing or related practices, such as a “loyalty discounting” arrangement that imposes larger royalties on implementers who buy the input from competing providers. Importantly, FRAND’s operation as a price control significantly alters the economic analysis: here the primary impetus for tying may be to circumvent the price control by shifting the desired overcharge to the tied good—a concern that does not arise when a seller has complete autonomy over its pricing (as is usually the case). The natural result may be to foreclose competitors’ input sales.
            Such restraints have received little attention in the FRAND literature, but they are an emerging concern for innovation and competition policy. They have recently been attacked in two high-profile complaints filed against Qualcomm—one by the Federal Trade Commission, and the other by Apple. Against this backdrop, this article provides a legal and economic evaluation of tying and exclusive dealing arrangements in FRAND licensing. Such practices may act to undermine the FRAND price control, potentially violating the SEP holder’s commitment. The case for antitrust intervention is harder to make, but in principle the arrangement could act to exclude actual or potential competition in the collateral input market, bringing it within antitrust’s reach. I conclude by offering several policy recommendations for how courts and standard setting organizations might address these tying and exclusivity arrangements.

Reverse Settlement and Holdup at the Patent Office. (With Jorge Lemus).  Under review.
Abstract:     The Patent Trial and Appeal Board (PTAB) is an adjudicative division of the Patent Office that permits parties to challenge patents as invalid. We investigate whether PTAB's distinctive institutional characteristics—such as its lack of antitrust jurisdiction or traditional justiciability requirements—may be exploited to facilitate potentially anticompetitive "reverse settlements" between drug monopolists and prospective generic competitors. We offer empirical evidence that most pharmaceutical settlements reached in PTAB appear to forestall market entry by the generic-petitioner, even if the disputed patent claims had been deemed “reasonably likely” to be invalidated.
            We also address the so-called “reverse patent troll” phenomenon – non-producing companies that use PTAB purely as a holdup device for extracting settlements. The practice has inspired widespread concern, but it appears to be rare. And we show that, for a number of reasons, it is not a particularly viable business model.

Abstract:  Most influential economic theories about private disputes, including the Coase theorem, assume that there are no legal restraints on alienability. However, the parties to a patent dispute are often competing firms, and their private dealings may thus be constrained by the antitrust laws. Antitrust prohibits private transactions that allocate commercial rights in ways that unreasonably subvert competition between the parties. This creates an asymmetry between (1) the allocations of rights that the parties can effect through contract; and (2) those a court can effect through its judgment. For example, antitrust may condemn a “reverse payment” settlement in which a monopolist-patentee pays an accused infringer to stay off the market for several years. But if the dispute were litigated to judgment, a court could produce the same exclusionary outcome by issuing an injunction. The result is ultimately that, in contrast to familiar Coasean logic, a court’s delimitation of patent rights can influence the final allocation of such rights, even if the parties can bargain. Further, the parties may (rationally) litigate to judgment even if they have common expectations about litigation, and even if they are perfectly capable of entering into a lawful settlement ex ante.
            Antitrust limits on alienability may thus critically alter the nature of a private dispute, distinguishing it from the more conventional property conflicts studied in classical law and economics. Aside from altering the parties’ incentives and behavior, it changes the appropriate normative policies toward settlement and litigation. The parties may be settling not simply to avoid litigation costs, but rather to avoid a procompetitive judgment they cannot lawfully bargain around (e.g. patent invalidation), or to obtain a judicial stamp on what would otherwise be an unenforceable contract. As such, when a proposed settlement concerns rights that are not entirely alienable, the court should carefully review its terms to ensure they do not defy the relevant inalienability rule. Unfortunately, the patent courts have missed this important point (although it has been recognized implicitly in some other areas of law). They continue to treat patent suits as ordinary private conflicts over fully-alienable rights, approving virtually all settlement proposals as a matter of course. I explain the benefits of reviewing patent settlements in certain cases, and I offer a detailed account of how such review ought to operate in practice.

How Patent Damages Skew Licensing Markets. (With Jonathan Masur). Forthcoming, Review of Litigation.  
Abstract: If a litigated patent has previously been licensed to a third party, the courts generally adopt the terms of the prior agreement as the best measure of damages. However, while administratively convenient, this “licensing-based damages” standard creates problematic incentives and undermines the efficient commercialization of patented inventions. It rests on the trivialized (and generally false) presumption that a patent license is like a commodity, with the patentee charging a common price to all comers. As a consequence, patentees distort their future recovery prospects – and by extension the outcomes of future licensing negotiations – whenever they license their patents, whether or not today’s agreement will be a good proxy for tomorrow’s dealings or disputes. Knowing this, patentees are discouraged from licensing at anything less than a high royalty rate, even if they could reach many additional mutually-beneficial agreements on more modest terms. The result is that patent holders rationally cut off the bottom segment of the licensing market, creating substantial deadweight loss. This injures not only patentees, but also prospective licensees and their consumers. The standard creates additional problems by encouraging secrecy and “gamesmanship” in patent licensing. We propose that the licensing-based damages standard be abandoned, and that damages should instead be awarded ad hoc. That this necessitates some speculation does not suggest it is the less desirable approach, for it is better that damages be speculative but unbiased than systematically problematic.

Challenge Restraints and the Scope of the Patent.  Forthcoming, Antitrust Chronicle.    
Abstract:  Patent rights are not the only important legal entitlements conferred by the Patent Act. It also vests challenge rights in third parties, permitting them to challenge granted patents as invalid or uninfringed, and potentially clearing a path for privileged competition. These classes of rights perform opposite policy functions, with patent rights providing an inducement for invention and challenge rights providing a check against unwarranted or overbroad patent enforcement.  And, unlike patent rights, the Patent Act never provides that challenge rights are alienable – i.e. that they may be transacted or restrained through contract. As such, challenge restraints – contractual restrictions on a party’s challenge rights – are not within “the scope of the patent.” This suggests not that they are categorically unlawful, but simply that they do not enjoy safe harbor from antitrust attack. 
            Challenge restraints are utilized within a variety of different patent agreements – ranging from ordinary “vertical” licensing arrangements to reverse payment settlements – with varying competitive effects. However, the courts have failed to recognize challenge restraints as a standalone, broadly-applicable antitrust issue. This brief article explains why they ought to be viewed as such.

Buying Monopoly: Antitrust Limits on Damages for Externally Acquired Patents. (With Herbert Hovenkamp). Forthcoming, Texas Intellectual Property Law Journal.
Abstract: Most patent assignments are procompetitive and serve to promote the efficient commercialization of patented inventions. However, patent acquisitions may also be used to combine substitute patents from external patentees, giving the acquirer an unearned monopoly position in the relevant technology market. A producer requires only one of the substitutes, but by acquiring the combination it can impede product market rivals by limiting their access to important technological inputs. Similarly, a patent assertion entity may acquire substitute patents to eliminate inter-licensor competition, enabling it to charge supra-competitive license fees, much like a merger or cartel. For example, by acquiring two or more substitute patents that collectively dominate a market a PAE can effectively monopolize the technology for that market. Such anticompetitive practices are regularly condemned in conventional product contexts, but the courts have not yet applied the same antitrust logic to patent markets. And they passively encourage anticompetitive patent acquisitions by awarding large damages when such patents are infringed.
            We propose that infringement damages for an externally acquired patent be denied if the acquisition served materially to expand or perpetuate the plaintiff’s dominant position in the relevant technology market. By weakening enforcement, this limits the patent holder’s ability to use such acquisitions to anticompetitive ends. We do not suggest that a dominant patent holder should be prohibited from securing external patent rights in the relevant technology market, but simply that it should obtain them through nonexclusive licensing, not transactions that restrict third party access. This is as valuable to patent policy as it is to antitrust, for it will tend to increase innovation by discouraging systematic monopoly in technology markets.

Anticompetitive Patent Injunctions.  (With Tom Cotter). 100 Minnesota Law Review 871 (2016).
Abstract: The current approach for determining when courts should award injunctions in patent disputes involves a myopic focus on the hardships an injunction might impose on the litigants and the public. This article demonstrates, however, that courts sometimes could rely instead on a consideration far more relevant to the patent system's goal of promoting innovation: the extent to which the right to exclude was actually a necessary quid pro quo for the plaintiff's decision to bring its products to market. We illustrate the value of this approach with a critique of a recent Federal Circuit decision, Trebro Mfg. Inc. v. FireFly Equipment, LLC, which held that injunctive relief may be appropriate when a defendant infringes a patent that the plaintiff-competitor does not practice, and against which it lacked any legal protection when it entered the relevant downstream market. These circumstances — which are increasingly common in industries with rich markets for secondhand patents, result in the formation of what we refer to as a “diagonally integrated” nonpracticing entity (NPE) — a producer who owns a patent it does not practice, and who competes with downstream rivals who use (or would like to use) the patented technology.
            We develop a simple model showing that if such a firm acquired the unpracticed patent after entering the relevant product market, an injunction poses a threat to competition and consumer welfare that is not offset by any plausible benefit to innovation. Further, diagonally integrated NPEs have a perverse incentive to exclude or substantially limit all use of the patented technology, making them more likely to seek excessive licensing fees and aggressively seek injunctive relief than are conventional, “unintegrated” NPEs. This effort to foreclose all use of a technology is novel in the patent literature, but the spirit of this tactic is well known in antitrust: a dominant firm acquires patents that it has no intent to use simply in order to deny the technology to rivals, thus perpetuating its dominant position. The model’s implications also extend to a range of topics at the core of contemporary patent policy debates, including patent privateering, FRAND-encumbered patents, and preemptive patenting. It also suggests that in considering appropriate remedies the court should weigh competition concerns more seriously, particularly when there is little or no tradeoff with innovation concerns.

Abstract: Despite their expertise in patent law, the most litigious patent assertion entities (PAEs) frequently file dubious infringement claims on which they are ostensibly very unlikely to turn a profit. Thus one might conjecture that these PAEs are mistaken to follow through on their litigation threats when their chances of coming out ahead are so scant. To the contrary, this paper demonstrates that this is in fact a calculated strategy of predatory patent litigation: by following through on its threats of seemingly irrational litigation, the PAE develops a litigious reputation that convinces other producers that these threats are credible, leading them to accept licensing offers they would ordinarily rebuff. This allows the PAE to garner substantial licensing revenues using low quality patents that would otherwise be difficult or impossible to monetize.
            This paper develops a stylized dynamic model of patent assertion and reputation building by a PAE with low quality patents. The model has a unique equilibrium that involves predatory patent litigation, and in which the PAE intermittently forfeits and rebuilds its litigious reputation over time. Predatory patent litigation generates substantial social costs, and creates a perverse incentive for patent applicants to seek coverage of technologies so obvious or non-novel that they are likely to be widely unintentionally infringed by unsuspecting producers. Importantly, fee shifting will not solve the problem. Rather, it will lead predatory PAEs to focus their ire on small, vulnerable targets, such as technology startups, for whom litigation may be crippling even if attorney’s fees are ultimately recouped. Potential defendants could better deter predatory PAEs by entering a litigation cost-sharing agreement in which members jointly pay one another’s litigation costs and litigate all meritless claims to judgment. If properly limited in scope, such an arrangement is lawful and will not materially undermine meritorious infringement actions.

Profitable Double Marginalization.  (With Kevin Bryan). Submitting summber 2017.
Abstract: When successive monopolies transact through noncooperative linear pricing, the resulting double markup decreases their joint profits relative to vertical integration. However, if there are downstream rivals (which are not double marginalized), the same noncooperative interaction often inadvertently raises their joint profits. Profit effects depend on how the well-understood harm from misaligned interests compares to the value of the resulting strategic effect. When profitable, vertical noncooperation incidentally approximates strategic delegation a la Bonanno & Vickers (1988), but avoids its credibility problem, suggesting an inability to bargain may be indirectly beneficial. The "conjectural consistency" concept helps to explain the disparate profit effects, and to synthesize the literature on strategic delegation and vertical control. The optimal way to "distort" a downstream firm's behavior is always to make it behave as if it has a consistent conjecture, no matter the distortion mechanism. If upstream competitors do this in parallel, they induce a "consistent conjectures equilibrium" (CCE) -- or else a close analogue -- evincing a strong link between ordinary Nash games and the CCE.

Patent Pools and Related Technology Sharing.  (with Herbert Hovenkamp). Forthcoming, Cambridge Handbook on Antitrust Intellectual Property.
Abstract: A patent "pool" is an arrangement under which patent holders in a common technology commit their patents to a single holder, who then licenses them out to the original patentees and perhaps also to outsiders. The payoffs include both revenue earned as a licensor, and technology acquired by pool members as licensees. Public effects can also be significant. For example, technology sharing of complementary patents can improve product quality and variety. In some information technology markets pools can prevent patents from becoming a costly obstacle to innovation by clearing channels of technology transfer. By contrast, a pool's aggregate output reduction or price fixing in a product market can produce cartel profits.
            A traditional justification for patent pools is that they facilitate improved products by uniting complements Sharing of complementary patents means that licensees can then employ all the patents in their product, rather than creating silos in which each manufacturer incorporates only its own patented features. Pools created for this purpose can reduce problems of royalty stacking and holdup, as well as problems involving blocking patents. A more robust explanation for pooling in many markets comes out of the economics of transaction costs, which emphasizes the role of limited information and the costs of obtaining it, as well as uncertainty in bargaining and sharing. Pooling is an efficient solution to problems of technology development and transfer when determining patents' validity or identifying their boundaries is costly. In this sense, patent pools function much as traditional common pool resources.

Abstract: It is well known in antitrust economics that competitors can rely on patent licensing with supracompetitive royalties as a surrogate for price fixing. This paper addresses a number of alternative situations in which patent royalty agreements may raise antitrust concerns, even if the royalty rate is ostensibly reasonable (implying the agreement is not transparently anticompetitive). First, a royalty may serve effectively as a vertical restraint, preventing the downstream firm from passing too much of the licensing value through to consumers, which may enhance joint profits. Second, licensing to a rival creates an "alignment effect" by giving the licensor a stake in its rival's success, thereby diminishing inter-party competition. This is the same problem that arises when a firm buys stock in a competitor. Consequently, even if the royalty rate is reasonable, the arrangement may reduce consumer welfare overall. Indeed, it creates essentially the same welfare tradeoff as horizontal merger: it engenders some procompetitive efficiencies, but it makes the market less competitive. 
            Additionally, offsetting (i.e. reciprocal) license payments between competitors often warrant scrutiny even if each royalty appears individually reasonable. Even under cross-licensing, offsetting payments are generally unnecessary for the parties to reach a mutually-beneficial agreement, which is the relevant antitrust question. Instead, the practical effect of offsetting royalties is to replicate a collusive agreement to restrain consumer pass-through, ensuring the firms retain more of the licensing surplus. The results shed new light on the competitive impact of patent pools, which typically create widespread royalty offset and alignment between competing members, even if patents are complementary.

Abstract: In his seminal “prospect theory” of patents, Edmund Kitch contends that patents should be relatively broad in order to promote post-grant follow-on innovation and development. The argument rests critically on the assumption that post-grant competition will diminish such efforts. This is just a special case of the more general claim that a market will be more innovative when it is less competitive. When an innovator invents a new technology, it enters (or creates) a market for the relevant technology class, and the breadth of its patent determines how competitive this market can become. Prospect theory asserts that this post-grant market should involve little or no competition, and infers from this that patents should be broad. 
            However, economists have long debated the relationship between competition and innovation. A leading view among contemporary economists – the inverted-U hypothesis – contends that aggregate innovation is maximized somewhere in between monopoly and perfect competition; that is, the market should be relatively competitive, but not too competitive. This hypothesis is strongly supported by recent theoretical and empirical economic research, much of which suggests that the socially optimal market structure is in fact closer to perfect competition than monopoly. Although this theory has not previously been related to the question of optimal patent breadth, it provides perhaps the best economic machinery for addressing this problem. In particular, it suggests that, in contrast to the teachings of prospect theory, patent breadth should be fairly modest in order to elicit a relatively significant degree of post-grant competition.

I was born in Iowa City, Iowa, in 1988.  I attended Iowa City High School, where I played football and threw shot-put.  I attended college at the University of Iowa, where I majored in mathematics and economics.  I then went to Northwestern University for graduate school in economics and law.  Soon I will move to Boston to be a postdoctoral fellow at Harvard Law School.  I will also be a Guest Lecturer at Boston University School of Law in Spring 2018.

I am an avid piano player, and a big sports fan.  I am 100% Dutch, despite having been to the Netherlands only once.  I have a cat named Carl, who is remarkably indifferent to most things that are not food.