1 Enabling value – the importance of innovators and implementers to markets that use technology standards

Topics covered in Part 1:

• Technology standards: what they are and why they matter economically

• How technology standards emerge and why that affects the value of products and technology

• Standard essential patents in context

Part 1 sets the scene by explaining what is at stake in standard essential patent (SEP) licensing negotiations. It describes how technology standards create economic value and why patents declared essential to a standard shape firms’ ability and incentives to develop and commercialize valuable technologies.

It then explains why standardization can make SEP negotiations more prone to dispute than bilateral licensing of non-standard essential patents. Limited commercial alternatives, information asymmetries, uncertainty about value and the interaction between remedies and bargaining dynamics can intensify negotiation frictions. These frictions underpin parties’ concerns that they may become victims of “hold-up” or “hold-out” – situations in which a party contributes to the success of a widely adopted standard, only to be exploited once it is irreversibly committed – potentially strangling incentives to invest in innovation and to adopt otherwise valuable technologies.

1.1 Technology standards: what they are and why they matter economically

Technology standards set technical requirements that allow products and services to perform particular tasks in a predictable way – for example, how devices connect to a network, how data are formatted and transmitted, or how signals are encoded and decoded.

Many widely used technologies are standardized. Universal Serial Bus (USB) enables devices to exchange data and power through common connectors and communication protocols. Hypertext Transfer Protocol (HTTP) supports the exchange of information between web browsers and servers. Near Field Communication (NFC) enables short-range wireless communication, including contactless payments. Wireless communication standards, including successive generations of cellular standards (such as 4G and 5G) ⁽¹⁾4G and 5G refer to fourth- and fifth-generation cellular network technologies, respectively. and Wi-Fi ⁽²⁾Wi-Fi is a wireless local area network (WLAN) technology based on the Institute of Electrical and Electronics Engineers (IEEE) 802.11 standards. standards, define how data are transmitted through the air, supporting services such as browsing, video calling and streaming.

Markets that use standards benefit in two ways:

1. Coordination: any product that complies with the standard can interoperate with other compliant products because they perform the relevant task in a compatible way.

2. Performance: the interfaces, protocols, data formats and processes specified by the standard determine the speed, reliability, efficiency and capabilities of those functionalities in compliant products.

Standards, obviously, do not operate in a vacuum. Many devices that implement technology standards (such as smartphones and laptops) also benefit from various associated technologies and other contributing factors. So, the value of a device may be affected by a particular technology standard to some extent, but those other technologies and factors also contribute. The question, therefore, is the extent to which the technologies essential to a particular standard contribute to a device’s value, and in what way.

1.1.1 How technology standards enable value

The dual roles of technology standards affect the economic value of the products that implement them. As mechanisms for coordination, they affect how easily independent firms can align with a common technical approach. As enabling technologies that shape performance, they influence what compliant products and services can do, and how well they can do it.

1.1.1.1 Standards as coordination devices

The scale of the value created when firms coordinate around a common technical approach can depend on several factors. ⁽³⁾Katz, M.L. and C. Shapiro (1985). Network externalities, competition, and compatibility. American Economic Review, 75(3), 424–440.

The importance of interoperability and competition. By defining shared technical requirements, standards allow products and services from different suppliers to work together. Where lack of interoperability would constrain consumer choice or raise integration costs, compatibility can intensify competition among suppliers of standard-compliant products. That can support greater choice, lower costs and more product innovation, because firms can compete on price, quality, design and complementary features rather than on incompatible technical foundations.

The importance of network effects. Many technology markets exhibit network effects, where a product or service becomes more valuable as more users adopt compatible products, and more complementary products and services are developed around them. Standards can strengthen these effects by discouraging fragmentation and allowing broad participation. A larger compatible ecosystem can increase value to users and raise the potential commercial returns available to firms operating within it.

The importance of scale economies. Technology markets often involve significant fixed costs in research and development (R&D), product development and market entry. A common standard can enlarge the addressable market over which such costs are spread, reducing firms’ per-unit costs and lowering barriers to entry. It can also reduce duplication of cost by limiting the need to develop and maintain multiple incompatible technologies, allowing firms to focus their resources on differentiation and complementary innovation.

1.1.1.2 Standards as enablers of functionality

In principle, the technologies that a particular standard incorporates can affect the value of a compliant product in several ways.

Enabling functionality and performance. Many standards define core capabilities that directly affect the functionality and performance of compliant products, and therefore their value to users. In wireless communications, for example, the speed, latency, reliability and energy efficiency supported by a standard shape the quality of services, such as browsing or streaming. A standard that enables gigabits per second can increase an implementing product’s value to users relative to one that is restricted to only megabits per second.

Enabling complementary innovation. Standards can act as technical platforms on which others may build complementary features and develop new use-cases that users value. A step-change in technological capability may improve the performance on an existing task; it can also expand the range of tasks that are feasible. For example, higher-bandwidth cellular standards enabled new use-cases, such as mobile high-definition video streaming, that were not practicable under earlier generations which restricted the functionality of handsets to phone calls and text messages.

Supporting incremental upgrades through generations and releases. Many standards evolve through successive versions or generations, introducing new features and improved performance while seeking to maintain compatibility with existing deployments. Implemented effectively, this evolutionary pathway can sustain innovation and increase value as market needs change.

All of this relates to the “standard” generally and not necessarily to each of the patented technologies that underlie it. The value associated with all the functionalities enabled by the standard may be separate from the contributions of specific patented technologies. ⁽⁴⁾Note that a patented technology could contribute to the economic value functionality that the standard enables but not contribute incremental value if another technology could have contributed to its value equally well. We discuss the significance of incentivizing technologies that provide incremental value to a standard in Part 4.

1.1.2 The nature of the economic value that depends on technology standards

The coordination and functionality provided by standards may affect the economic value of an implementing product – that is, the value of the benefits that the product provides to consumers, and the returns available to firms that develop and supply it. The impact on value has several features, detailed below.

1.1.2.1 A proportion of an implementing product’s value may relate to the standard

A standard can affect a product’s economic value in various ways: by changing the amount that consumers are willing to pay for the product, increasing or decreasing its production costs, and affecting the prices that implementers can charge and the quantities they sell. Either of a standard’s two roles may have this effect.

First, technical functionality can affect demand for a product. For example, if mobile devices were limited to data speeds measured in megabits per second rather than gigabits per second, the performance of devices would be reduced, some of their current features would not be available, consumers would not be willing to pay as much for devices, and the returns available to both implementers and innovators of the standard would be lower. The difference between these outcomes reflects the total economic value of the benefits that depend on the standardized technology.

Importantly, this effect – where it occurs – would typically affect only a proportion of the implementing product’s economic value. The value of the entire product depends on all its features, many of which may not be related to the functionality enabled by the standard.

Second, how widely adopted the standard is affects both consumer demand and production costs. If mobile devices had cellular technology that offered the same technical performance as 5G, but each device required its own incompatible version of that technology, then the market would probably be smaller and less competitive. Fragmentation would raise switching costs, weaken network effects and reduce scale economies, leaving consumers and firms worse off than in a coordinated ecosystem.

1.1.2.2 Economic value depends jointly on innovators and implementers

The economic value that a standard contributes does not solely depend on the standardized technology. The value is complementary: it reflects the combined contributions of two groups of firms:

• innovators of standards, who invest in developing technologies that may be incorporated into a standard and made available for others to implement; and

• implementers of standards, who invest in developing standard-compliant products that use the standard’s functionalities in ways that users value. ⁽⁵⁾The Report uses the wording “innovator” and “implementer” of standards. However, it should be noted that implementers of standards may also be innovative companies, and standard innovators (SEP holders) may assume dual roles, as they simultaneously implement standards in their products.

The value of each group’s contribution is enhanced by the other’s contribution. A technical solution creates less value if it is not implemented in ways that consumers value or not implemented at scale. Equally, implementers’ products are constrained if they cannot access compatible capabilities that enhance performance.

1.1.2.3 The scale of value depends on incentives, in both the short term and the long term

The economic value associated with a standard is dynamic rather than fixed. It varies with the quality of the technical solutions selected, the degree of coordination achieved, and the pace and direction of upgrades over time.

Outcomes depend on whether firms have adequate incentives to participate – innovators of standards to continue improving the technical functionalities and standard implementers to bring compliant products to market and compete within the standard.

The benefits of coordination and better functionality can reinforce each other: better functionality can encourage adoption, and wider adoption can strengthen incentives to invest in developing and implementing better functionality.

They can also come into tension. Where the benefits of interoperability, network effects and scale economies are strong, markets may “tip” toward a single technological approach, whether or not it is formally designated as an industry standard. In the short term, the prospect of tipping may be positive as a “race to market” intensifies efforts to develop and back a winning approach, hoping to capture the benefits of network effects. The impact can also be negative, deterring or delaying investment if firms fear ending up on the wrong side of the divide after the market tips.

In the long term, however, once a market has tipped, the benefits of coordination work against the incentive to develop new technologies that would otherwise improve functionality. To compete against an incumbent, rivals do not simply have to offer superior technical alternatives, those alternatives must be sufficiently superior that users are prepared to incur switching costs and the loss of established network effects. That additional hurdle may reduce the ability and incentive for rivals to compete in the market, which in turn reduces an incumbent’s incentive to improve its own technical functionality. In those circumstances, the pace of improving technical functionality will be slower than it would be in a market with more direct technological rivalry.

For these reasons, the processes by which standards are adopted, governed and updated can materially shape the value they deliver. Arrangements that sustain participation by both innovators and implementers of standards tend to support more frequent capability upgrades and larger product markets. Arrangements that weaken incentives for either group can reduce the value that standards would otherwise create, which is why the way in which new and updated standards emerge matters.

1.2 How technology standards emerge, and why that affects the value of products and technology

The technology standards we discuss in this Report are typically developed through collaborative processes in standards development organizations (SDOs). In doing so, SDOs aim to incentivize participation from both innovators and implementers of the standard, in the long-term interests of both innovators and implementers – and, ultimately, the consumers of compliant products.

Standards developed by an SDO (also referred to as de jure standards) can be usefully contrasted with technology standards developed by a single company (or small group of companies), often referred to as de facto standards. Box 1.1 compares an example of each. Either type can emerge from a “standards war”: 4G LTE ⁽⁶⁾4G Long Term Evolution. competed with rival 4G standard WiMAX, ⁽⁷⁾Worldwide Interoperability for Microwave Access. both developed by SDOs; and VHS, ⁽⁸⁾Video Home System. developed by JVC, ⁽⁹⁾Japan Victor Company. competed against Sony’s Betamax to become the de facto standard for video cassette technology. However, once the market tipped and each became widely adopted, the different processes for updating their technical functionality affected the pace of innovation.

1.2.1 How the standardization process works in an SDO

SDOs develop standards through collaborative processes, where rival innovators compete to contribute to the standard that implementers will later adopt. These processes provide a structured forum in which participants identify technical needs, propose solutions, evaluate trade-offs and converge on shared specifications that can be implemented by many firms. Standardization is commonly iterative: standards are developed, tested, released and then improved through successive updates.

The main features of three technology standards developed through SDOs are set out in Box 1.2

Although the exact procedures differ across SDOs, broadly they all provide institutional infrastructure that allows requirements and proposals to be scrutinized and agreed on. They typically convene participants, establish working groups and set procedures for submitting proposals, discussing alternatives, testing and revising drafts, and approving releases. They also manage documentation and decision-making processes (such as consensus or voting mechanisms) and maintain procedures for updating standards over time.

Innovators of standards propose and refine technical solutions to meet the agreed requirements. They may contribute engineering approaches, data, prototypes and research results, and they often engage in iterative development in response to feasibility concerns, interoperability needs and comparative evaluation against alternatives. Standardization therefore involves aligning technical possibilities with implementation constraints to produce a shared framework within which different firms can develop compatible products and services.

Implementers of standards contribute requirements and develop products based on users’ needs. This can include defining use cases, performance requirements (such as throughput, latency, reliability and energy consumption) and practical constraints (including cost, complexity, manufacturability and backward compatibility).

1.2.2 Incentives to participate in standardization

The value enabled by standards depends on the willingness of both innovators and implementers to participate in standardization. Participation is not costless: it requires firms to commit time, information and resources, and to accept that key technical choices will be shared across the industry. In this sense, it can generate significant ecosystem benefits, but only if enough parties find it worthwhile to contribute and adopt the result.

Innovators of standards face substantial upfront costs, including R&D, prototyping, testing and sustained participation in technical meetings and development cycles. Their incentives depend on a credible prospect of earning returns that justify risky investment and support ongoing improvement. ⁽¹⁰⁾Arrow, K.J. (1962). Economic welfare and the allocation of resources for invention. In National Bureau of Economic Research (NBER) chapters, The Rate and Direction of Inventive Activity. Princeton, NJ: Princeton University Press, 609–626. Some caution should be applied here. This discussion relates to incentives generally but does not address the exact trade-off between R&D, risk and reward, and the trade-off with public welfare. The goal of standard setting is not to encourage participation, per se, but to encourage the contribution of valuable technologies to a standard. Those returns are typically greater when a standard is widely adopted, because diffusion increases the commercial opportunity associated with successful technologies. Where markets fragment across incompatible approaches, diffusion and expected returns may fall, weakening incentives to invest and participate.

Implementers of standards also incur substantial upfront costs, including product design, integration of compliant components, alignment of manufacturing and supply chains, and the development of services and features that rely on the standard. Their incentives depend on expected returns from adoption, including the opportunity created by a large interoperable market and access costs of licensing.

A consolidated market aligned around a single standard can therefore increase the potential rewards for successful standard innovators and implementers. At the same time, it can increase the costs of being on the losing side of the standardization process and reduce practical alternatives once the market has coordinated around the chosen approach.

1.3 Standard essential patents in context

In many technology standards, some of the technologies incorporated into the specifications are protected by patents. In principle, licensing these patents should allow both innovators and implementers of standards to contribute and share the value created by standardization. In practice, however, SEP licensing negotiations may involve structural and informational frictions that can make it difficult for parties to identify and agree terms that reflect their respective contributions and preserve incentives to participate.

1.3.1 Understanding SEPs

A SEP is a patent that protects an invention that is essential to the implementation of a particular technology standard. The patent is considered “essential” if its claims correspond to the technical features of the technology standard, meaning that implementing the standard necessarily infringes the patent. ⁽¹¹⁾This is a simplified explanation and it should be noted that the proof of infringement is often not as clear-cut since some parts of standards may also rely on voluntary features that not every implementing product of the standards may enable.

In general, SDOs’ intellectual property rights (IPR) policies include rules that require participants to disclose at an early stage whether they may hold patents that could become essential to the standard.

An essentiality declaration, however, does not by itself establish that a patent is in fact essential. Essentiality declarations are often made at an early stage in the standardization process and are generally not updated once the standard is adopted. Furthermore, where the SDO’s IPR policy allows it, some standard innovators only provide general (blanket) declarations that they will license any potential SEP on FRAND terms. Moreover, declared patents may turn out to be invalid in some jurisdictions, or may not be infringed by particular implementations. The actual number of SEPs per standard (or product implementation) is therefore not readily determined.

Where essentiality is contested, it can be assessed using evidence such as claim charts mapping patent claims to the relevant provisions of the standard (and version). Assessments may be detailed for individual patents or may be conducted on a sample basis for larger portfolios, depending on the purpose and context of the exercise.

1.3.2 Balancing incentives in standardization

Standardization relies on contributions from innovators on the one hand and on widespread adoption by implementers on the other. Ensuring that both groups can participate on viable terms is therefore essential for the effectiveness and sustainability of standardization systems. This balance of incentives is central to standardization. The frameworks governing how technologies are contributed, accessed and implemented shape the incentives and ability of different stakeholders to participate. This, in turn, determines the extent to which standards enable innovation, interoperability and value creation across products and markets.

Standardization is generally recognized as capable of producing significant procompetitive effects – by improving interoperability, reducing costs, increasing efficiency, supporting innovation and enhancing consumer choice – while, depending on the design of the standard-developing process and access conditions, it may also give rise to competition concerns, including foreclosure, reduced innovation or exclusionary access to the standard. ⁽¹²⁾See, for example, European Commission,Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (2023), section 7.3.  ; U.S. DOJ/FTC, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition 2007 , Chapter 2; Nyman, S. andBegazo, T., Standards and Competition, World Bank background paper, pp. 2-6. SDOs’ IPR policies address competition law ⁽¹³⁾For consistency, this Report uses the term “competition law” throughout. In certain jurisdictions, in particular the United States of America, broadly equivalent rules are more commonly referred to as “antitrust law.” References in this Report to “competition law” should be understood, where appropriate, to include such equivalent concepts. concerns that can arise from the inclusion of patented technologies in standards. Provisions that aim to prevent standardization leading to foreclosure, or other anti-competitive effects, contribute to placing standardization agreements  under a lenient competition law treatment. In particular, transparency obligations, procedures for the disclosure of potentially essential patents ⁽¹⁴⁾See Section 1.3.1 above, Article 4, ETSI IPR Policy. and commitments to license on FRAND terms are intended to mitigate the risk that collective and individual market power derived from standardization is exercised in a manner that restricts competition. ⁽¹⁵⁾For example, European Commission, Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (2023), section 7, Standardisation agreements, in particular section 7.3.3.1 Agreements which generally do not restrict competition, which include inter alia transparent procedures and commitments to license SEPs on FRAND terms. At the same time, disclosure obligations ⁽¹⁶⁾See Section 1.3.1 above, Article 4, ETSI IPR Policy. and FRAND undertakings under the SDO policies that require participants to declare whether they are willing to license any potential SEP on FRAND terms, contribute to maintaining a broader economic and societal function of standardization by supporting a balance of incentives between innovators and implementers.

In this way, FRAND undertakings and the respective applicable competition laws ⁽¹⁷⁾This publication concentrates on the economic matters surrounding SEPs. The legal discussions on the nature of the FRAND undertaking are outside the scope of the Report. help to ensure that implementers can access the technologies necessary to comply with a standard, while preserving the ability of innovators to obtain a return on their investments. Where licenses are unavailable, SDOs may provide procedural rules governing how to proceed before and after the publication of a standard, further contributing to the stability and credibility of the standardization process. ⁽¹⁸⁾See, for example, ETSI Directives, Version 52, 5 December 2025 , Rules of Procedure, 4 September 2025, Annex 6, ETSI Intellectual Property Rights Policy, Article 8 Non-availability of Licences.

1.3.2.1 Incentives for innovators of standards

SEPs, like patents in general, are intended to support innovation by allowing inventors to earn returns on risky, upfront investments. In broad terms, the patent grants an exclusionary right for a limited period of time in exchange for public disclosure of the invention, after which it enters the public domain. This framework reflects a key feature of knowledge-based assets: once disclosed, inventions may be relatively easy to use or imitate, even where their development required significant time, expertise and risk. The prospect that others could benefit without contributing to an invention’s development may affect innovators’ incentives to invest in new technologies. Patents and their enforcement therefore provide innovators with a mechanism to prevent unauthorized use and to secure appropriate returns from their inventions. At the same time, patent rights, while conferring exclusivity, are subject to statutory exceptions and limitations on their exercise that balance innovation incentives with access.

In the context of standardization, innovators commit to license essential technologies on FRAND terms in accordance with SDO IPR policies and applicable competition laws. ⁽¹⁹⁾This publication concentrates on the economic matters surrounding SEPs. Legal discussions on the nature of the FRAND undertaking are outside the scope of the Report. This framework enables innovators to participate in standardization while retaining the prospect of remuneration. Conversely, where FRAND conditions are perceived as insufficiently protective of returns, incentives to contribute technology to standards may be reduced.

1.3.2.2 Incentives for implementers of standards

The incentives for implementers in standard-based markets include the ability to offer interoperable products, access widely adopted technologies and compete within established ecosystems. By building on a common technical foundation, implementers can focus on product differentiation and complementary innovation rather than duplicating core technologies.

Once a market has coordinated around a particular standard, a non-compliant product may not be viable, particularly where compatibility and network effects are important. Implementers therefore require access to the technologies that a standard specifies.

In this context, access to licenses on predictable terms enables implementers to develop and commercialize standard-compliant products. The conditions under which such access is provided can influence investment decisions, product development and market entry. Where licensing conditions are perceived as uncertain or difficult to assess, implementers may adjust the timing or scope of their participation in standard-based markets. Any imbalance in licensing conditions can affect implementers’ incentives to invest and compete in the development of standard-compliant products.

1.3.3 Particularities of SEP licensing negotiations

Licensing negotiations typically depend on the parties’ ability to compare the terms of a potential agreement with competitive alternatives. In non-SEP settings, a licensor may decide not to license and instead pursue other routes to market, while a licensee may choose a different technology, supplier or product design. These “outside options” constrain what each side is willing to accept and help the parties to converge on a range of mutually beneficial terms – or simply walk away without a deal.

SEP licensing can be different. The two features detailed below are especially important.

1.3.3.1 Limited outside options prevent competitive “price discovery”

In many non-SEP licensing settings, competitive alternatives help the parties to identify a range of mutually beneficial terms. In simplified form, that range lies between (i) the maximum amount that the implementer would pay before its next-best alternative offers better value – considering both the cost of a license and the benefits that the licensed technology enables and (ii) the minimum that the patent holder would accept before preferring its own next-best alternative. These competitive constraints help parties to converge on terms without needing perfect information about value. ⁽²⁰⁾See Section 4.2 below for a fuller discussion of the dynamics of negotiations.

However, where compliance with a standard is commercially necessary, implementers may have little practical ability to avoid the technologies specified by the standard. SEP holders may also have limited ability to pursue an alternative route to market for the same standardized use once the market has coordinated around the standard. So, it is possible that neither party has effective outside options.

Limited or no commercially viable alternatives for implementers. In many patent-licensing settings outside standards, an implementer can compare the net value of taking a license with the net value of using the next-best alternative technology, taking into account both the benefits that the technology provides and the cost of licensing. That alternative places competitive pressure on the maximum royalty that the implementer is willing to pay and, in turn, on what the patent holder can reasonably demand. Once a standard is widely adopted, however, implementers may be effectively locked into the technologies specified by the standard. Even if alternatives could offer similar functionality in principle, they may not be commercially viable if adopting them would require abandoning compatibility with the standard or incurring prohibitively high switching and redesign costs.

Limited or no commercially viable alternatives for innovators. A patent holder’s willingness to accept a given royalty is often influenced by its own alternatives – for example, implementing the technology itself, licensing it for other uses or licensing it to others on different terms. These alternatives can create a practical “floor” below which the patent holder would not license. In a standard setting, once the market has coordinated around a single specification, compatibility and network effects can make alternative routes to market for the same standardized use less realistic. At the same time, the licensing conditions associated with standardization commonly limit selective licensing or differential pricing among similarly situated implementers. These constraints serve important objectives but they may also weaken the SEP holder’s outside options in negotiations – as it is less able to use the rivalry between implementers to apply competitive pressure on royalties, for instance, through selective licensing or differential pricing.

Box 1.3 illustrates how the terms agreed in otherwise identical license negotiations may differ in a non-SEP setting and an SEP setting, simply because the parties’ commercial alternatives to the agreement differ.

1.3.3.2 Features that make the value of SEP licenses uncertain

Limited outside options are often compounded by features that make it difficult for parties to assess the value of a particular SEP license. These include the following.

Not all SEPs have the same value. A patent is not necessarily valuable in economic terms. ⁽²¹⁾Allison, J.R. and M.A. Lemley (1998). Empirical evidence of the validity of litigated patents. AIPLA Quarterly Journal, 26(3). The contribution of a particular SEP, or portfolio of SEPs, to the economic value of a technology standard may vary considerably. If a patent is shown to be essential, valid and infringed, the magnitude of that value depends on the significance of the specific technology it protects. Conversely, if a patent is not essential, not valid or not infringed, its value in relation to that standard will be nil. Before these issues are assessed, the value of an asserted SEP (or portfolio) is therefore often probabilistic, reflecting uncertainty about essentiality, validity, scope and technical importance. ⁽²²⁾Lemley, M.A. and C. Shapiro (2005). Probabilistic patents. Journal of Economic Perspectives, 19(2), 75–98.

Licenses may have too many SEPs to assess individually. Some standards have thousands of declared SEPs across multiple jurisdictions. A patent-by-patent and country-by-country assessment of essentiality, validity and infringement can be prohibitively expensive and time-consuming for all parties. Portfolio licensing is therefore common as a practical response. While portfolios can reduce transaction costs, and facilitate access to standardized technology, their size and heterogeneity can make it more difficult to determine how the proportion of essential, valid and technologically important patents translates into the incremental value delivered to implementers and users. ⁽²³⁾Shapiro, C. (2001). Navigating the patent thicket: Cross licenses, patent pools, and standard-setting. In Jaffe, A.B., J. Lerner and S. Stern (eds), Innovation Policy and the Economy (Vol. 1). Cambridge, MA: MIT Press, 119–150.

Fragmented ownership of complementary SEPs (“Cournot complements”). Relevant SEP rights may be held by multiple SEP holders whose rights are complementary, in the sense that each license is required to make a standard-compliant product. When complementary rights are priced separately, each licensor may set its royalty without fully accounting for the effect of its pricing on demand for the final product and on the royalties charged by other licensors. The combined royalty burden may therefore be higher than it would be if the same set of complementary SEPs were priced as a single package (for example, by a single owner or through a joint license arrangement, such as a patent pool). This phenomenon is often described as royalty stacking.

Contribution to the value of multi-feature products. Many technology standards are implemented in complex products whose economic value reflects a combination of standardized technology, product-specific features, design choices and other complementary innovations. For example, in a smartphone user value may depend in part on the quality of the cellular technology implemented but it also depends on features such as the screen, camera, operating system, hardware design, processor and brand. In such circumstances, it may be difficult to assess the economic significance of the standardized technology within the overall product. This may, in turn, complicate the assessment of royalties that appropriately reflect the value of the licensed technology.

1.3.4 Negotiation dynamics and potential imbalances

The combination of limited outside options and uncertainty about the value of SEP rights increases the likelihood that licensing negotiations are influenced by factors other than purely competitive benchmarks.

Concerns raised in this context revolve around the concept of patent hold-up and patent hold-out.

In economics, hold-up is generally defined as a situation in which one party makes relationship-specific investments before the terms of cooperation are fully determined and is then exposed to demands that it would not have accepted before committing. The concern is not only that outcomes may be inefficient, but that parties may be deterred from participating in the first place if they expect that they could be worse off after committing. ⁽²⁴⁾See Williamson, O.E. (1985). The fundamental transformation. The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting, Chapter 2.3. New York: Free Press; London: Collier Macmillan; Klein, B., R.G. Crawford and A.A. Alchian (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21(2), 297–326.

The concept affects standards because, even if several technical alternatives were available before a standard was set, once a single solution is incorporated into a standard and widely adopted, those alternatives may cease to be commercially viable. In economic terms, this gives rise to a risk of market failure: although innovators and implementers could create value by cooperating through standardization, the prospect of opportunistic behavior may deter both sides from making the investments needed for that cooperation to occur.

The counterpart that economic literature discusses, particularly in the context of SEPs and FRAND, ⁽²⁵⁾See, for example, Heiden, B. and Baron, J. (2024). The economic impact of patent holdout. Harvard Journal of Law & Technology, 38(3), 637–669. is the concept of hold-out. It can be defined as a strategy by an implementer exploiting the cost and difficulty of enforcing patent rights to knowingly use others’ patented technology without consenting to pay reasonable compensation. ⁽²⁶⁾Heiden, B. and Baron, J. (2024). The economic impact of patent holdout. Harvard Journal of Law & Technology, 38(3), 640.

1.3.4.1 Concerns relating to hold-up and hold-out in principle

There are two opposing concerns that are debated in this regard.

SEP holder “hold-up” (as described by implementers). Implementers argue that once they have developed and deployed standard-compliant products and incurred sunk costs in development and market entry, SEP holders may seek licensing terms that differ from those that would have been agreed prior to lock-in. In this context, the availability of exclusionary remedies – such as injunctive relief – may affect the parties’ positions in negotiation. Where such outcomes are considered relevant, an implementer’s willingness to pay may reflect the costs of disruption or adjustment of its broader product business, rather than the value contributed by the underlying SEP technology. Even where the concern does not materialize, the perception of this risk can influence decisions regarding market entry or reduce investment in standard-compliant products, which can limit adoption and ecosystem development. ⁽²⁷⁾See Lemley, M. and C. Shapiro (2007). Patent holdup and royalty stacking. 85 Texas Law Review, 1991 (2007), 1 Stanford Law and Economics Olin Working Paper No. 324, 1990-2049, available at SSRN .

Implementer hold-out concerns (as described by SEP holders). SEP holders argue that implementers can delay taking a license or prolong negotiations, relying on the cost, complexity and time involved in enforcing SEP rights – often across multiple jurisdictions – to obtain royalties below a reasonable range that the parties would agree in a competitive situation, where the licensor had outside options. In its strongest form, the concern is that an implementer may benefit from standardized technology while postponing payment, and that enforcement costs and delay can reduce the innovator’s ability to obtain adequate and timely compensation. ⁽²⁸⁾There may be mitigating factors, such as the availability of prejudgment interest. If such behavior were widespread, it could weaken incentives to invest in the development of technologies intended for standardization. ⁽²⁹⁾See Epstein, R.A. and K.B. Noroozi (2017) Why incentives for “patent holdout” threaten to dismantle FRAND, and why it matters. Berkeley Technology Law Journal, 1381, 1384 and Osenga, K. (2023). Efficient infringement in the SEP space. In Barnett, J.M. and S.M. O’Connor (eds), 5G and Beyond: Intellectual Property and Competition Policy in the Internet of Things. Cambridge University Press, 112, 111–128.

1.3.4.2 The impact of hold-up and hold-out in practice

There is considerable debate about the extent to which either hold-up or hold-out happen in practice. ⁽³⁰⁾For instance, see Galetovic, A., S. Haber and R. Levine (2015). An empirical examination of patent holdup. Journal of Competition Law & Economics, 11(3), 549–578; and Shapiro, C. and M.A. Lemley (2020). The role of antitrust in preventing patent holdup. Stanford Law and Economics Olin Working Paper No. 554. Two conceptual issues arise.

Deterrence of entry and investment. One concern is that the perceived risk of hold-up or hold-out may discourage entry or investment. For implementers, the risk can be more salient for small and medium-sized enterprises (SMEs) and new market entrants that lack scale, experience or resources to manage complex cross-border licensing negotiations and disputes. For innovators, the risk may be more salient for firms that depend on licensing revenues to fund R&D rather than product sales. Courts and competition authorities have in specific cases considered that large companies on either side are comparatively able to “look after themselves” – as they have the scale and resources needed to defend their interests in court. ⁽³¹⁾For instance, see InterDigital v. Lenovo [2023] EWHC 539 (Pat) (link) , para. 729; [2023] EWHC 1095 (Ch), para. 245; SEPs, Antitrust, and the FTC: Remarks of Commissioner Rebecca Kelly Slaughter, as prepared for delivery (2021); Optis v. Apple [2025] EWCA Civ 552 (link) , para. 122; and Heiden, B. and Baron, J. (2024). The economic impact of patent holdout. Harvard Journal of Law & Technology, 38(3), 6–669. However, this generalization is subject to debate and difficult to examine empirically because it relates to the absence of companies that could have developed or implemented standardized technologies but never entered the market in the first place.

Licensing outcomes outside a reasonable range. A further question is whether SEP licensing outcomes tend to fall within a reasonable range in practice, or whether they diverge due to differences in the concerned parties’ bargaining conditions. Courts and tribunals have identified, in specific cases, outcomes both above and below such a range. This reflects the fact that, where outside options are limited, negotiated outcomes depend on the parties’ relative bargaining positions. ⁽³²⁾Sidak, J.G. (2013). The meaning of FRAND, Part I: Royalties. Journal of Competition Law & Economics, 9(4), 931–1055. These positions are shaped by factors such as time, information, litigation costs and the availability and credibility of legal remedies, which vary across cases. As a result, outcomes may differ according to context, with different parties being comparatively better positioned in negotiations. ⁽³³⁾See Heiden, B. and Baron, J. (2024). The economic impact of patent holdout. Harvard Journal of Law & Technology, 38(3).

1.3.4.3 Levers of hold-up and hold-out

In SEP licensing, once a standard is widely adopted, competitive alternatives to an agreement (i.e., outside options) may have limited influence on negotiations. Therefore, the parties’ “inside options” – including the expected cost, duration and outcome of litigation – become more relevant. These factors typically shape the negotiation process, as parties assess the relative benefits of agreement compared to continued dispute.

Factors that change the expected cost, timing or risk of the dispute (pathway) influence the negotiation positions. Some factors may more often strengthen a licensor’s position, such as the realistic prospect of injunctive relief in a relevant jurisdiction. Others may more often strengthen an implementer’s position, such as low-cost delay where the licensor faces financial pressure to settle. In practice, the effect is context specific. The main considerations are detailed below.

Litigation costs

Litigation is costly for both sides, but its bargaining impact depends on how those costs compare with the expected change in royalties and on the parties’ ability and willingness to sustain them over time. Where incremental litigation costs are large relative to the likely uplift (or reduction) in license terms, parties may settle on terms that reflect their risk tolerance and budget constraints as much as portfolio value.

This effect is more pronounced where expected royalty exposure is small relative to largely fixed litigation costs. The effect is less pronounced where the dispute concerns potentially large changes in expected royalty payments – due to large volumes of licensed units and/or sizeable SEP portfolios. ⁽³⁴⁾See Heiden, B. and Baron, J. (2024). The economic impact of patent holdout. Harvard Journal of Law & Technology, 38(3), 637–669.

Injunctive relief

The prospect of injunctive relief can influence negotiation dynamics because the commercial consequence of exclusion may be large relative to the value of the specific portfolio in question. Where an injunction is realistically available, and where the licensee has meaningful exposure in that jurisdiction, the relative negotiation position of the licensor may be strengthened. At the same time, limitations on injunctions, or frameworks that condition them on other factors, restrict the potential impact and, in some settings, may increase the scope for implementers to delay while litigating validity, essentiality, infringement or FRAND compliance. ⁽³⁵⁾For instance, in the United States, access to injunctions is subject to the four-factor test set out by the Supreme Court in eBay v. MercExchange L.L.C., 547 U.S. 388 (2006) (link) . In Europe, access to injunctions for SEPs is subject to the considerations on the conduct of a willing licensor and a willing licensee set out by the Court of Justice of the European Union (CJEU) in Huawei v. ZTE Deutschland GmbH, CJEU [2015] Case No. C-170/13 (link) . In the United Kingdom, injunctions for SEPs are subject to a FRAND determination by the court. In China, injunctions for SEPs are granted on a fault-based approach, where the licensee is considered by the court to have acted in bad faith, for instance, by delaying negotiations, while the licensor acted in good faith with a FRAND offer, set out by the Beijing Intellectual Property court in Iwncomm v. Sony (2017) and Shenzhen Intermediate Court in Huawei v. Samsung (2018).

Patent-by-patent and jurisdiction-by-jurisdiction litigation

Because patent rights are territorial, a global business can face disputes on multiple fronts, potentially requiring separate proceedings to test validity, essentiality and infringement across jurisdictions. This can raise the cost and complexity of reaching a global portfolio license, even where both parties would prefer a single worldwide agreement. The use of anti-suit injunctions and anti-anti-suit injunctions can also concentrate the dispute in a forum perceived as favorable to one party, reducing predictability and affecting the conduct of dispute resolution. ⁽³⁶⁾See the discussion in Section 2.2.3 below.

Recovery of past sales

Licenses frequently address past sales, either through explicit back-royalties, lump sums that cover past and future sales, releases for past infringement, or practical limits, such as limitation periods. The treatment of past sales can affect bargaining incentives because specific courses of action can change the payoff from delay.

Where settlements include provisions on past sales through mechanisms such as forgiveness, limitation periods or a considerable difference between the royalties on past sales and those on future sales, some courts have treated this as potentially rewarding delay and thus as indicative of hold-out. ⁽³⁷⁾See, for instance, InterDigital v. Lenovo [2024] EWCA Civ 743 (link) , paras 187–188. Cited by Lenovo v. Ericsson [2025] EWCA Civ 182 (link) , para 23, which noted: “Key reasons for this conclusion were that the implementer required a licence from day one, that the implementer should pro-actively contact the SEP owner for a licence rather than sit back and wait for a demand, that the terms of the licence should not depend on the date it was entered into and that there should be no discrimination in favour of implementers who were slow to take a licence and against implementers who were quick to take a licence: [187]-[188]. In short, implementers should not be rewarded for hold out.” At the same time, discounts may reflect legitimate compromise in the face of litigation risk, or differences between forward-looking license terms and backward-looking damages frameworks, and that the inference to hold-out is not universal across jurisdictions. Ultimately, how past sales are treated in practice depends upon both case-specific evidence and legal considerations.

1.4 Summary

Standards can generate substantial coordination benefits and stimulate innovation by providing a common technical foundation for interoperable products and services. When licensing functions effectively, it can align incentives among participants: the prospect of reasonable terms for SEP holders incentivizes innovators to develop new technologies that provide valuable functionality and contribute them to standards, while implementers can obtain access on terms that support the development and commercialization of standard-compliant products. When balanced, those incentives deliver greater value – broader adoption, better functionality and more scope for complementary innovation.

Where incentives or bargaining positions are not aligned, however, that value is constrained. Because compliance with a widely adopted standard is a commercial necessity, the parties’ outside options no longer discipline bilateral license negotiations. Combined with information asymmetries, portfolio complexity and the strategic role of litigation and remedies, this situation can create scope for hold-up or hold-out, intensifying disputes over license terms. Over time, such frictions can affect incentives to invest and limit the quality and pace of new functionality and products built on the standard.

The disclosure requirement of potential SEPs and the FRAND undertaking seek to address those dynamics in the context of standardization inside SDOs. In particular, the FRAND undertaking aims to support conditions under which both innovators and implementers can benefit from standardization and obtain appropriate returns on their respective contributions.