New Uses for Patent Pools

Introduction

In United States patent law, intellectual property owners use patent pools for a variety of purposes.  A patent pool is an agreement between at least two patent owners to license one or more of their patents to one another or to third parties.²   Historically, patent owners have used patent pools to make inventions available to the public, to promote a technical standard, or to create more efficient licensing markets.  Recent interest in patent pools, especially in the high tech industry, suggests other potential advantages.

Patent pools are not a new innovation.  In 1856, sewing machine manufacturers Grover, Baker, Singer, Wheeler, and Wilson all met in Albany, New York to resolve a patent dispute.³  Instead of protracted litigation, they agreed to pool their patents and formed the Sewing Machine Combination to mass produce sewing machines.⁴  To allow manufacturers to produce airplanes for use in World War I, aircraft manufacturers formed an aircraft patent pool in 1917.⁵

A modern example is the MPEG-2 patent pool, formed in 1997 by the International Organization for Standardization (ISO).⁶  An ISO working group studied the intellectual property issues raised by the proposed standard and identified 27 patents essential to compliance with the video and/or systems parts of the MPEG-2 standard.⁷  The owners of these patents combined their patents into a portfolio and selected a licensing administrator to grant licenses under the portfolio, collect royalties, and distribute them to the patent holders.⁸  Other patent holders have created similar types of pools to license other standardized technologies, such as DVD-Video and DVD-ROM.⁹

Pros And Cons Of Patent Tools

When properly formed, patent pools provide a number of advantages to their members, to licensees, and even to the general public.  For example, patent pools may remove a “sticky wicket” of blocking patents.  Blocking patents contain claims that overlap such that the invention claimed in one patent cannot be practiced without infringing the claims of the other patent, and vice versa.¹⁰  If two or more companies each hold patents on some basic technology, they may be able to prevent each other, and anyone else, from producing any products related to that basic technology.  This was the experience with the aircraft patents in the early 1900s.  To counter this, patent holders create a pool of the basic patents, and anyone willing to pay the licensing fee can obtain access to the licenses necessary to practice the technology.  A single entity provides the licenses, in most instances,¹¹ and those previously caught in the sticky wicket of patents may now enter the market, for a fee. 

Patent pools also save licensees time and money by providing one-stop access to intellectual property rights needed for a certain technology.  For example, a company that wants to manufacture a DVD player may obtain a license for the essential patents from six licensors in one transaction.¹²  The administrator of the patent pool handles licensing for all of the licensors, and collects and distributes the royalty payments.  This simplified licensing scheme creates a more efficient market for the technology covered by the patent pool. 

Patent pools may encourage the rapid development and implementation of standardized protocols, and allow companies to distribute the risk associated with research and development.¹³  Patent pools may also reduce royalty stacking, which occurs when a product is subject to a number of separate royalty obligations.  Assuming widespread participation by key patent holders, pools can also resolve hold out problems, which occur when a licensor demands a high royalty because other licenses obtained by the licensee are worthless without a final license from the hold out.¹⁴

Patent pools do have their disadvantages.  Pools may inflate the cost of licensing by pooling competitive technologies.  That is, patents may cover alternative technologies that compete with each other in the marketplace, but pooling these patents eliminates this competition and the pool may be able to command monopoly pricing for its licenses.¹⁵  Careful consideration of the Department of Justice’s Antitrust Guidelines for the Licensing of Intellectual Property may be advisable to identify any anticompetitive effects.¹⁶  Business review letters may be appropriate in these circumstances.¹⁷ 

Patent pools should not be used to inflate the value of invalid, unenforceable, inapplicable, or otherwise undesirable patents.¹⁸  If a patent pool contains undesirable patents, licensees may feel they are paying too much for the package license.  To avoid this, the pool should implement a strict and fair patent admission policy for the pool, ideally implemented by an independent expert.¹⁹  This independent review can reassure licensees that the patents in the pool are desirable and essential to the standard.

New And Creative Patent Pools

Patent holders use patent pools today for a variety of new purposes.  Allied Security Trust (AST) is a patent pool that seeks to lower the cost of patent litigation risks by acquiring patents as they enter the market.²⁰  AST’s members include Cisco Systems, Ericsson, Google, Hewlett-Packard, Verizon, and six other unnamed companies.²¹  AST’s members place money into an escrow account to buy patents, issue themselves nonexclusive licenses, and then sell the patents to another entity.  Brian Hinman, chief executive of AST, described this as “a catch- and-release formula handled on an opt-in basis.”²²  AST has also stated that it is not an investment vehicle, and the goal is not to make money or to hold onto patents.  Instead, AST will attempt to protect the member companies from entities that may acquire these patents in the future and seek to license or litigate the patents.  AST will likely raise fewer antitrust issues than traditional patent pools, since AST is not driving a technology standard, licensing its patents to third parties, or enforcing patents.

Open Invention Network (OIN), a patent pool formed to promote the Linux operating system, acquires patents applicable to Linux and makes these patents available on a royalty-free basis.²³  In return, the OIN asks that any licensee agree not to assert its patents against Linux.²⁴  OIN’s goals are to protect Linux so that other companies may invest in the operating system with a lowered risk of future patent litigation.

A few new patent pools seek to promote public health or public policy.  A patent pool conceived by UNITAID has a goal to reduce the costs of medicine or expand access to medical technology by reducing “the barriers to market entry for generic drug manufacturers while maintaining royalties to patent holders.”²⁵  The details of the pool’s structure and operation have not yet been determined, but UNITAID is setting up a task force to design and implement the pool.²⁶  Initially, the pool will focus on pediatric antiretrovirals, although there has also been discussion of patent pools related to AIDS medicines.  IBM’s Eco-Patent Commons focuses on environmental sustainability.²⁷  Patent holders donate patents to the pool and make them available to anyone free of charge.  The World Business Council for Sustainable Development, based in Geneva, administers the patent pool.²⁸ 

Open, Focused, And Broadly Supported

Irrespective of the goal, the best patent pools are open, focused, and broadly supported.  Patent pools should be open and transparent.  This lets both members and non- members know what the pool involves, and can help to relieve any concerns about the pool that others may have, such as its intentions or its impact on the marketplace.  If possible, the patent pool should also have open participation.  For example, if patent holders create a pool to practice a standard, open participation allows consideration for inclusion of all patents relating to the standard.  Open participation also reduces concerns about anticompetitive effects of the pool.

Patent pools should have focus.  This includes focusing the pool on a particular technology or standard, rather than a pool that attempts to encompass patents across an entire industry or across separate industries.  A focused pool, like an open pool, can also reduce concerns about anticompetitive effects and other antitrust issues.  Focused pools also help to ensure that the proper participants are included.  The pool should also implement a rigorous intake process for new patents to insure patents held are high quality and relevant.  Independent experts can help focus a patent pool, as can oversight of the pool by the Department of Justice and/or the Federal Trade Commission. 

Although focused in their purpose, patent pools must have broader support.  In technologies that require interoperability, such as telecommunications, broad industry support can lead to more widely implemented standards and more efficient licensing markets.  Broadly supported pools can also reduce patent exhaustion complications under Quanta Computer, Inc. v. LG Electronics, Inc.²⁹ by providing a single licensing transaction at a logical point in the distribution chain.  The viability of the newer initiatives, such as AST, OIN, or the Eco-Patent Commons, will depend greatly on the number and commitment of its contributors.

Conclusion

Patent pools, if structured and used properly, continue to be an effective vehicle to promote technology, especially in areas of standards and interoperability.  New and creative patent pools can also help manage patent litigation risk and even support policy initiatives.  However, whatever the ultimate purpose or goal, the most successful patent pools will be open, focused, and broadly supported.

Endnotes