An arms race in patents. A surge in high-cost patent litigation. And the emergence of unscrupulous patent trolls who use the threat of lawsuits to extort nuisance settlements.
These are the costly side effects — the dark side, if you will — of America’s enormous technological progress over the last decade. That’s because while this progress has brought us wonderfully complex new products like smartphones that integrate many patented components, product makers must license each of these components individually from their owners. And the complexity and adversarial nature of bilateral licensing between the smartphone maker and each of the component rights holders imposes enormous transaction costs on all parties.
The economist Carl Shapiro analogized this process to assembling a pyramid. “In order to scale the pyramid and place a new block on the top,“ he said, “a [manufacturer] must gain the permission of each person who previously placed a block in the pyramid.”
Now, however, there’s a bright spot on the patent licensing front. The innovative licensing structure that ended the sewing machine patent wars of the 1850s — the 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 to license 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, to manufacturers. These manufacturers — including, as Allen Lo indicates, Google — then buy a single license to all the patents in the pool.
The pool’s advantages for product makers are significant: one-stop shopping for all the patents needed — these are curated by the pool administrator to include only the truly useful patents — at a huge cost saving 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, 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.
Patent pools bundle together related patents covering the building-block components of complex products.
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 (see list) participating in Via’s AAC patent pool. Then they estimated what the costs would have been to the product makers had they been forced 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 patent pool rather than going it alone, the licensees 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 for 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. By offering a discounted royalty rate that reflects the harsh reality of business conditions in China, they gave Chinese companies a way to achieve IP compliance and avoid having to fight a two-front patent war — against the growing army of litigants targeting them with patent suits on the one hand, and the more muscular China trade and IP policies likely to be implemented by President Trump on the other.
This is the first time a Western rights holder has voluntarily offered rates that reflect the conditions faced by businesses in emerging markets.
Xiaomi is the fifth largest smartphone maker in the world, with 70 million smartphones sold in China. As its head of patent strategy Paul Lin 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.” Therefore, he added, licensors need to develop a royalty rate that “reflects the reality” of business conditions in China. He noted that his patent pool deal with Via Licensing “met both parties’ needs.”
Added Via Licensing’s president Joe Siino: “Patent pool licenses are a very efficient way for companies to reduce IP risk. This is particularly valuable in today’s environment of lawsuits, saber-ratting, 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 alternative to help speed new products to market.