A New Way for Product Makers to Overcome Patent Roadblocks

By how much, exactly, do patent pools reduce transaction and litigation costs? Until now, hard data was unavailable. But Robert P. Merges, professor of law and co-director of the Berkeley Center for Law and Technology at the University of California at Berkeley, and Michael Mattioli, associate professor of law at Indiana University’s Maurer School of Law, have finally quantified the cost savings of patent pools.

Professors Merges and Mattioli first assessed the costs to the 805 manufacturer licensees of participating in Via’s AAC Audio patent pool. Then they estimated what the costs would have been for the product makers had they had to license those audio rights from each rights holder separately—i.e., identifying the owners of each audio component, contacting and negotiating licenses for each of those components with the various rights holders, and defending against patent infringement suits in the likely event that at least some of those negotiations fail.

The study’s conclusion? By collaborating in Via’s AAC Audio patent pool rather than going it alone, the licensees collectively saved more than $600 million in costs.

“By collaborating in Via’s AAC Audio patent pool rather than going it alone, the licensees collectively saved more than $600 million in costs.

Savings this large help explain why patent pools are growing in popularity (as are similar joint licensing arrangements like the new Avanci platform for standards essential “Internet of Things” patents from Ericsson, Qualcomm, InterDigital, KPN and ZTE).

But as the surprise license deals signed by Chinese product makers Xiaomi and Lenovo in recent weeks for Via’s advanced audio patents show, there’s another key advantage to patent pools besides the large cost savings and litigation avoidance. Via’s AAC audio patent pool was the first company to offer an alternate (i.e., discounted) rate structure to companies operating in China, India, Brazil and other emerging markets. This enables companies selling products at the lower margins and per-unit profits typical in emerging markets to license the audio technology they need in their tablets, laptops and smartphones at more affordable rates.

As patent strategy chief Paul Lin of Xiaomi, the 5th largest smartphone maker in the world, told the intellectual property business journal Intellectual Asset Management: “Xiaomi’s hardware business, like many other Chinese companies, has razor thin margins, which leaves a very small buffer to absorb patent royalty costs.” Via Licensing, he said, had offered a royalty rate that “reflects the reality” of business conditions in China and “met both parties’ needs.”

Perhaps that’s because Via Licensing’s president, Joe Siino, is a veteran dealmaker who understands licensing from both sides of the negotiating table. The former head of IP at Yahoo, Siino has been licensee as well as licensor.

For Siino, the Xiaomi and Lenovo deals were a matter of simple economics. “Patent pool licenses are a very efficient way for companies to reduce IP risk,” he noted. “This is particularly valuable in today’s environment of lawsuits, saber-rattling, and talk of trade sanctions.”

Patent pools may not be appropriate for every technology or industry. But given the ever-larger numbers of patented components in today’s complex products—and the costly and litigious side effects of trying to license each of those components separately—patent pools offer manufacturers a sensible way to help speed new products to market.