A Theory of Socially-Inefficient Patent Holdout

This paper proposes a framework to analyze holdout in patent licensing negotiations. We show that when the validity of a patent is probabilistic, a potentialdownstream user has incentives to shun to pay the price offered by a patent holderto license the technology and risk being brought to court. These incentives are exacerbated when jurisdictions are local and the downstream producer can approachcourts sequentially. The informational spillovers across trials imply that this firmoften finds optimal to go to court aiming to invalidate the patent in a jurisdictiondue to the knock-on effect on future jurisdictions. This process results in excessivelitigation compared to when the jurisdiction is global. The distortions from sequential litigation are likely to be aggravated when final competition is accounted for orwhen patent injunctions are not allowed