As products become more complex with increasing numbers of patented components, product makers face a growing challenge in licensing each of these components from their individual owners. These negotiations are usually a time-consuming adversarial process that imposes large transaction costs on the parties, not to mention nasty side effects like high-cost patent litigation and attempts by some unscrupulous rights holders to seek exorbitant fees.
The economist Carl Shapiro likened traditional patent licensing to assembling a pyramid. “To scale the pyramid and place a new block on the top, a [manufacturer] must gain the permission of each person who previously placed a block in the pyramid,” he said.
But now there’s a bright spot on the patent licensing front. The innovative licensing structure known as a patent pool is attracting renewed interest from tech industry leaders and winning praise from product makers and patent owners alike, including even some of the patent system’s harshest critics.
“Google has been very clear about the need to prevent abuses in the patent system,” says Allen Lo, the company’s deputy general counsel for patents and one of the industry’s most influential figures on patent issues. “But we believe that patent pools offer an additional market-based approach to solving the costly and litigious licensing challenges companies face in bringing today’s complex products to market.”
Adds Comcast general counsel George Medlock: “Pools serve as a ‘one-stop shop’ for companies to license their IP rights, and also help companies avoid multiple costly litigation battles. It basically lowers transaction costs and litigation costs for the licensor and licensee.”
What’s a patent pool? Typically, patent pools bundle together related patents covering the building-block components of complex products—for example, the data compression protocols for transmitting high-density digital audio content that make up the Advanced Audio Coding (AAC) patent pool administered by San Francisco-based Via Licensing Corp. Via is a licensing organization spun out from Dolby Laboratories. It licenses its own cutting-edge audio patent rights, as well as those of AT&T, the Fraunhofer Institute, Philips, Microsoft, NEC, NTT DOCOMO, Orange SA, Panasonic and Ericsson. Manufacturers—including, as Lo indicates, Google—then buy a single license to all the patents in the pool.
The pool’s advantages for product makers (i.e., the buyers) are significant: one-stop shopping for all the patents needed—these are curated by the pool administrator to include only the most useful patents— at a huge cost savings compared to having to license each patent individually from disparate owners. It also reduces the opportunities for any one patent owner to hold out for exorbitant fees, as well as the chances that litigation may result from a stalled negotiation.
For patent owners (i.e., the sellers), meanwhile, the pool also offers benefits. They receive appropriate compensation for their innovations without having to engage in lengthy high-cost negotiations with multiple prospective licensees, at least a few of whom are likely to refuse to negotiate until an even costlier lawsuit is filed that demonstrates the patent owner’s seriousness.
What’s more, manufacturers wishing to license their own patent rights in a patent pool have greatly-reduced licensing and administration costs, and gain greater leverage as part of a pool, especially if they’re a small or mid-sized manufacturer. They also reduce their risk of overreaching when making royalty demands, which in turn reduces the risk of retaliation and blowback from individual licensees.
And finally, the pool also gives members opportunities to collaborate with other licensors in developing enhancements to the technologies in the pool.