How Patent Pools Work

Patent pools and standards essential patents are the Holy Grail of intellectual property.

Patent pools are sophisticated ways that companies can bring technology together, cross license them, and license that package of intellectual property to the market. For many major technologies, such as Bluetooth, MPEG, 3G, 4G, and even electric vehicle charging, companies have banded together to get their technology in wide adoption – and patent pools are the vehicle.

Very few individual companies have the market power to dictate standards that are used across an industry. In almost all circumstances, an industry standard allows everyone to build to that standard.

For example, a cellular telephone from any manufacturer can, in most cases, operate on any provider’s network. The complex handshaking, data exchange, frequency allocation, and the rest of the industry standard makes this happen seamlessly.

Patent pools are a way for standards essential patents to be shared, and in many cases, for the patent owners to be paid for their contribution. A patent pool minimizes transaction costs because in one transaction, a company can get the benefit of multiple patents from multiple patent holders.

Licensees of a patent pool avoid patent litigation because they have access to all complementary patents in the pool.

The key to a patent pool is that that patents are essential to meet the standard. Patents that are not essential are (generally) not included in the pooled patents.

Patent pools make interoperability happen

All of us assume that when we buy a cell phone from any manufacturer that it will work on any carrier. We assume that when we buy a car, that the nozzle at the gas station will fit in our tank. We comparison shop television sets knowing that any one of them will connect to our cable service, the Internet, and an old fashioned, over-the-air antenna.

We just assume that products interact with each other and are interchangeable, even when there are many companies who are competing against each other.

As products are being developed, each company in the space proposes their own technology covered by their own patents. In many cases, these technologies or patents may block each other. Blocking patents are where two companies hold patents that block the other. In this situation, neither company has the right to build their products because the other company can shut them down.

Virtually every major technology uses inventions from multiple patent holders. In the case of a cell phone, one company may have patents on the way signals are modulated, another may have patents on the compression algorithms, and still another may have patents on the security and authentication. All of these technologies are necessary to make a “simple” call.

Patent pools bring all the patent owners together so that the problem of complementary patents is solved.

Anyone who takes a license from the patent pools is now free to use the intellectual property of all the patent holders without worry of patent litigation.

When there is widespread interoperability and interchangeability between products, there is a much bigger market for everybody, both consumers and companies.

How patent pools are structured

Patent pools come in two distinct flavors: free and paid.

Paid patent pools

The bigger patent pools collect money from licensees and distribute royalties to patent owners. These patents can generate enormous amounts of money, which is why “standards essential patents” in patent pools are the Holy Grail of intellectual property.

Paid patent pools have an administrator who collects patents, analyzes the patents to determine whether or not the patents are “standards essential patents,” and sells licenses. The promise of these patent pools is lower transaction costs, while accessing intellectual property from multiple patent holders.

For the patent owners, a patent pool reduces transaction costs by avoiding costly infringement litigation to chase down every potential infringer. More importantly, blocking patents from competitors are cross-licensed so that everyone in the patent pool can build products without worrying about patent litigation.

A patent pool is a way for companies to gain access to multiple patents from diverse patent owners in a single transaction. Being in a patent pool means that none of the patent owners will sue a licensee, but also the patent pool will have a huge reserve of cash to enforce the patents against companies who do not take a license.

When everybody in an ecosystem, such as Bluetooth or WiFi, takes a license, everybody is playing fair. The patent pool will go after companies who refuse to take a license.

For some technologies, these licenses can be in the billions of dollars a year, even though the royalty rate might be $0.25 per device sold.

Free or one-cost patent pools

One of the biggest administrative issues with patent pools is collecting and enforcing royalties.

A royalty agreement requires that a licensee keep track of every product produced, and they must pay the patent pool a certain amount of money.

Keeping track of exact sales of everyone in the ecosystem creates another problem: sensitive competitive information. No company wants a competitor to know exactly how many products they are shipping.

Paid patent pools have third party administrators that handle the sensitive information about royalties. The administrators have the right to audit each licensee’s sales records and procedures for correcting any discrepancies. Because this is handled by a third party administrator, the licensees can be assured that their sensitive competitive information is being held in confidence.

A free patent pool eliminates the need for tracking sales, since money is not collected. It also eliminates the need for access to sensitive competitive information.

A free patent pool eliminates all of the overhead and administrative issues.

A no-cost patent pool might be created by a patent holder who has a large amount of intellectual property for a particular technology. Their overwhelming position might strike terror in competitors, and other players might try to create a competing standard. A no-cost patent pool can make the intellectual property available – under some restrictions – but without ongoing costs.

Some patent pools may charge a one-time fee for taking a license, but may not charge for ongoing royalties. One example of a free patent pool is the Medicines Patent Pool run by several non-profit organizations.

Why would a company start a free patent pool?

Every ground-breaking technology takes an enormous effort to be successful in the market. One company cannot do it all, so having many companies build the market can be far more successful. Even though the companies are competing for customers, they are all advertising and marketing the technology. The combined marketing can be a much louder voice than what the patent owner could do on their own.

This makes a much bigger market for everybody.

A patent holder who starts a no-cost patent pool might be giving up their rights to license their hard-won technology, but they enter the market with a head start. They also set the standards to comply with their existing products.

In many cases, one company may start a free patent pool to encourage other companies to join by adding their technology and their patents.

Why would a company take a license from a free patent pool?

Licensees may take a license from a free patent pool to gain access to the pooled patents and the patented technologies behind the patents. By doing so, the licensee may gain access to a market that was previously controlled by the patent owners.

For example, a company that makes small accessories for electronics device might want to sell their lower cost accessories to consumers who bought the patent holder’s products. By granting a no-cost license through a patent pool, the patent holder can keep some control of the quality of the products, but can focus on their core business: making the electronics device itself.

A no-cost patent pools can come with restrictions

A no-cost patent pool may have stringent requirements, even though they do not collect royalties. For example, a pool may still require that products are tested to ensure compliance, and any product not meeting the specification would not be allowed.

These kind of requirements can be enforced by asserting patents against the non-compliant manufacturer, thereby ensuring the consumer’s confidence in the standard. It also benefits the entire system when all products function properly and interact with each other appropriately.

I have often argued that open source software projects should have their own patent pools. The key here is that the intellectual property – as protected in patents – gives the pool the legal teeth to enforce their viewpoint. If the open source community wants to ensure free use of their work product for educational purposes or for small companies, it can do so. It can also fund itself by licensing (if it chooses) to larger companies.

Patent pools and antitrust laws

Patent pools create a lot of antitrust concerns. Any time powerful companies collude on something, there is a chance that there is so-called “anti-competitive” behavior where they are exercising their intellectual property rights to stifle competition.

Patent pools have existed for well over a century since the sewing machine patent pools of the 1890’s. The antitrust law has developed since that time.

In the US, the administrator of a patent pool must meet several criteria to avoid anti trust law:

• Patents must be clearly identified and should be available for licensing individually as well as in a package chosen by a potential licensee.
• Patents in the pool must be valid and not expired.
• Patents must be technically essential which, by definition, are not competing.
• An independent expert must be used to determine if a patent is essential.
• Patent pool must be a limited duration.
• The royalties should be reasonable.
• Worldwide non-exclusive licenses must be available.
• Licensees must have the freedom to develop and use alternative patents.
• Licensees must grant-back non-exclusive, non-discriminatory licenses to use patents that are essential to comply with the technology.
• The pool participants must not collude on prices outside the scope of the pool, such as downstream products.

The key to getting patents into a patent pool is that the patent be essential.

An essential patent is one where there is no other way to solve a specific problem, or to comply with an industry standard.

Patent Pools and Standards Bodies

Standards setting organizations (“SSOs”) are organizations that set industrial standards. Institute for Electrical and Electronics Engineering (IEEE), American National Standards Institute (ANSI), International Organization for Standards (ISO), European Telecommunications Standards Institute (ETSI), are just some examples of standards setting organizations. Some standards bodies are national, such as the US-based ANSI, regional, such as the ETSI, or international, such as ISO.

Some standards setting organizations may be private industry consortia, such as World Wide Web Consortium (W3C) or Internet Engineering Task Force (ITEF).

Many standards are designed to be licensed, such as IEEE’s 802.11 set of WiFi standards, so there is a direct link between standards organizations and the eventual patent pools that follow.

When a company pushes for “their” technology to be included in a standard, the implicit or explicit rule is that any patents the company owns relating to the technology must be available for licensing under a fair, reasonable, and non-discriminatory basis. This is known as “FRAND” or “RAND” licensing.