Things keep getting more complicated. Take your DVD player, for example. You may not give it any more thought than you do your toaster. But the video compression tools that make it work depend upon hundreds of distinct innovations achieved by dozens of companies and individuals -- who, being no dummies, secured patents on their work. That's a lot of patent roadblocks for a manufacturer to clear. So how, in this litigious age, did we end up with myriad manufacturers producing hundreds of millions of DVD players? Why haven't DVDs gotten tangled in the patent lawsuits that are a fact of life in electronics and other industries?
The answer is a mechanism that has been around for a century and a half but that has never been more timely: the patent pool. A patent pool is a group of related patents from diverse sources, generally managed and licensed by a neutral third-party administrator on a for-profit basis. In place of a so-called patent thicket, an administrator can offer licensees one-stop shopping for the intellectual property they need to make a product. Two prominent patent-pool administrators are Via Licensing Corp., a San Francisco-based subsidiary of Dolby Laboratories Inc. that runs nine licensing programs related to audio and video delivery; and Denver-based MPEG LA LLC, which runs eight programs, including the MPEG-2 program, vital to DVD players and other video applications.
The first patent pool was created in 1856, when several sewing machine manufacturers banded together to create a large and profitable market for their technologies. During the First World War, the U.S. Navy pushed rival aircraft manufacturers Wright Co. and Curtiss Co. to participate in a pool so that manufacturers could get on with the task of making warplanes. "The success of a patent pool depends on there being many licensors and many licensees for a technology as well as the perception of there being a patent thicket," says Larry Horn, CEO of MPEG LA.
Administrators like Horn and even the U.S. Patent and Trademark Office are pushing pools for newer areas, such as biotechnology. They're also talking about combining smaller tech pools into bigger ones. But as they seek to expand the use of pools, they also have to keep in mind the issues they raise, from antitrust concerns to questions of business strategy.
For smaller licensors, the decision to participate in a pool is usually an easy one to make. Shawn Hopwood, a senior licensing director for research and development firm Coding Technologies AB, says his 65-person company, which develops audio compression software, doesn't have the staff to handle licensing arrangements. Instead, the marketing and work of licensing falls to Via, which licenses several of Coding Technologies' patents. "It works for us because we don't have to take a ton of patent requests from around the world, and it serves to shift our visibility a bit because otherwise [licensees] wouldn't necessarily know we are the originators of the patent," Hopwood says. The downside is that Coding Technologies doesn't know who licenses the pools, which could be valuable information for the company.
For larger companies, the reasons to participate in a patent pool are less compelling because they are more likely to have a licensing staff. Jon Meyer, vice president of intellectual property at Motorola Inc., says patent pools can be useful, but for the most part Motorola licenses its patents bilaterally because it has the staff to do so. He also recognizes that it's hard to achieve the win-win of a reasonable fee for licensees as well as a reasonable royalty rate for licensors. "When intellectual property is dispersed, it can be hard to get everyone to agree on the licensing principles," Meyer says.
Motorola inherited its only patent pool membership when it acquired General Instrument Corp., a set-top-box maker that participated in the MPEG-2 patent pool. Still, Meyer isn't ruling out pools for the future. He's aware that the IP landscape is changing and sees a need for transparency among patent holders and licensees. It's important to know who owns what patents, he says, so customers and device makers can design their products accordingly.
Large companies also sometimes find pools useful as a way of pushing their technology into a standard. Both Apple Inc. and Microsoft Corp. are members of several patent pools related to compression technologies. By placing their patents in the pools, they may have helped push the adoption of their standards, advancing their own strategies while solving a problem for smaller licensees. "It can be daunting for a company to seek patent holders. They need to be sure the searches are complete and licensing terms are fair," says Hopwood of Coding Technologies. "It's nice when there is one place you can go and get all that you need."
Meanwhile, the pool administrators have built a nice business bringing the two sides together. Firms such as Via and MPEG handle everything from seeking patents to form a pool, hiring a firm to evaluate those patents and marketing for the eventual technology protected by the pool. It can take about a year and an investment by the administrator of between $500,000 and $1 million to set up a pool. In return, the administrator takes a fee averaging about 10% of the royalties.
Companies participating in the pool grant a nonexclusive license to the pool and have to follow a few guidelines such as avoiding price fixing through the use of the pool in order to meet federal antitrust standards. As part of the process, patent holders get an evaluation of their patents that declares how essential they are to the technology in question. A company can sit in through all of the negotiations involved in the creation of a pool and still walk away without granting a license to the pool. But the evaluations are confidential: They cannot be used later in a lawsuit or in licensing negotiations.
That challenge of having more and more IP in unknown places and across many companies is leading both Via and MPEG LA to evaluate new types of pools and attempt to bring patent pools to new industries. Jason Johnson, senior vice president of development and marketing for Via, says the administrator is looking at combining various pools into one license agreement so a device maker can pick up licenses for a wireless standard and a compression technology without licensing from two or three pools.
Horn at MPEG LA is going further and hopes to create a patent pool for the biotechnology industry to help keep basic research available to many companies pursuing research.
The biotechnology pool has also been recommended by the Patent and Trademark Office. That was seven years ago, however, and so far nothing has come of it. "It's clear that the incentives that make up that industry are different and may not lend themselves to the current model," says Horn. "The owners don't want to create nonexclusive licenses; they want to own and commercialize it themselves."
But Horn is hopeful that patent owners in biotech may be less possessive of their patent rights. Will his hope be realized? Perhaps. It is clear that patent pools can benefit consumers and manufacturers, who gain access to a wide variety of patents for a reasonable cost. For the patent holders, though, the cost-benefit analysis for participating in a pool is more complex. On the one hand, they can push a technology further; on the other, they entail reduced royalty rates, and an erosion of the advantage that was the point of the patent in the first place. - Stacey Higginbotham
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