This article originally appeared in the Sept. 2010 issue of INTERNET TELEPHONY.
Licensing intellectual property is a complex process, particularly when it comes to patents essential to expansive mobile telecommunications technology standards. Diverse licensing practices can create confusion among technology users, and patent litigation can be so expensive, time consuming and unpredictable that the mere possibility of patent infringement claims can delay or deter adoption of new and innovative technologies.
Patent pools can simplify licensing, while reducing aggregate royalties and lowering transaction costs, by offering a single license to broad portfolio of essential patents held by different companies. This can reduce IP risk and encourage the use of patented technologies by making overall IP costs more predictable and transparent. With many companies holding significant LTE (News - Alert) IP positions, an LTE patent pool will make it much easier for parties throughout the LTE ecosystem to license essential patents through a streamlined method, on fair, reasonable, and non-discriminatory terms.
About Patent Pools
Patent pools bring together patent holders who agree to offer a single license for a group of patents that are essential to implement a given technology. This makes patent licensing faster, more transparent and more predictable than negotiating individual licenses. Pools also provide patent owners with a method to monetize their essential patents without incurring the costs and risks associated with independent licensing (and without selling the patents).
Patent pools are generally managed by third-party licensing firms that do not own patents. These independent firms administer licensing programs, collect licensing fees and disburse royalties to patent pool members, offering a centralized, one-stop shop to licensors and licensees, and supporting the faster adoption of new technologies.
Typically, it can take one to two years to create a patent pool, with an objective of pooling as many essential patents as possible, and making it easy for licensors to legally and properly license everything they need, in a single transaction. This way, patent pooling helps accelerate adoption of LTE and other mobile phone technology standards, and attracts a broader range of companies, such as consumer electronics makers and embedded device manufacturers.
The largest pools are often organized early in a technology adoption cycle; otherwise, too much intellectual property may become entangled in singular licensing agreements between companies, as has happened with 3G.
Pro-competitive Effects of Patent Pools
When organized as described above, patent pools reduce aggregate royalties by establishing a single royalty rate for participating companies’ patents. According to economic theory, a pool’s rate will be lower than the rates of separately negotiated licenses. Well-organized patent pools also clear blocking patents that could otherwise prevent competitive entry into a field. These pools reduce transaction and administrative costs for both patent owners and licensees, and increase the overall efficiency of IP licensing. And they promote RAND (reasonable and non-discriminatory) licensing terms and conditions by establishing a standard portfolio license, and engaging an independent licensing administrator
Economic Theory: Multiple Patents Can Lead to Royalty Stacking
In the absence of a patent pool, each essential patent owner has a blocking position, akin to a monopoly, over the patented technology. Acting independently, each owner might seek to maximize its profits by obtaining a royalty rate determined as if it were the only gatekeeper to the technology. For technologies incorporating the essential patents of several owners, this approach (although the most rational for each owner) will result in much higher aggregate royalties.
The problem of multiple patent burdens is often referred to as royalty stacking or a Cournot stack, following the work of French economist Augustin Cournot in the mid-19th century. Royalty stacking is a problem for consumers and patent owners because it can lead to both higher aggregate royalty rates (and therefore higher product prices), and those higher rates can suppress demand in a way that leads to lower aggregate royalty income for patent owners.
Economic experts have demonstrated that patent pools offer a means of avoiding royalty stacking for the benefit of patent owners, licensees, and consumers, because a pool license allows participating patent owners to coordinate and establish a royalty rate based on their single collective blocking position.
Patent Pool Enforcement and Compliance
Patent pool enforcement and compliance are not only in the interest of patent owners, but also in the interest of all licensees, to ensure that others do not gain an unfair advantage in the marketplace. A patent pool with a mechanism to enforce its portfolio is more compelling for both patent owner and licensee, given that leaving enforcement to individual patent owners means that those with the strongest patents may not participate in the pool (which in turn makes major potential licensees less likely to take a pool license).
To address these issues and promote rapid early adoption of LTE, a wide variety of global vendors and service providers have been participating in several efforts to create an LTE patent pool. An LTE patent pool will make it much easier for LTE product and system manufacturers and service providers to license essential patents, through a streamlined method, on fair, reasonable, and non-discriminatory terms.
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Edited by Stefania Viscusi