Patent ambush

In earlier posts, we talked about the standards war between Blu-ray and HD DVD (Will this standards war become a quaqmire? and DVD war drags on). We have also talked about another way to wage a standards war, by competing within a Standard Setting Organization (Another Standards War--this one with rules).

Standard setting organizations (SSO's) are important for two reasons. First, intellectual property has never been as important to our economy as it is now. In the past 25 years, patent applications have tripled and, by some estimates, intellectual property now accounts for a third of the value of US companies. And second, SSO’s play a vital role in adoption and use of intellectual property by coordinating technology adoption decisions between users (manufacturers) and creators of intellectual property. However, standard-setting organizations (“SSOs”) can also create opportunities for members to engage in opportunistic behavior. There is a history of collusion in SSO's and recently cases have been brought against patent owners for "ambushing" SSO's. (article)

"Patent ambush" is a form of post-investment hold-up when a patent holder who owns a patent that writes on a standard does not assert his or her patent rights until after the manufacturer has made sunk-cost investments. After manufacturers sink costs, they are in a weaker bargaining position which may lead to higher license fees for the patented technology.

Of course, post-investment hold-up is not just a problem for the manufacturer who is held up. Every MBA student is taught to anticipate hold-up with the admonition, “look ahead and reason back," the title of Chapter 5 of our textbook. If manufacturers anticipate the possibility of hold-up, they will be reluctant to make sunk-cost investments and this harms the innovator as well as the manufacturer. To make money, the innovator and manufacturer must find ways to address the manufacturer's concern about hold-up, otherwise no transaction will occur, or it will occur on substantially worse terms for the innovator.