Posted by Social Science Research Network
Patent Pools and Related Technology Sharing Herbert J. Hovenkamp (University of Iowa) & Erik N. Hovenkamp (Northwestern University)
Abstract: A patent “pool” is an arrangement under which patent holders in a common technology commit their patents to a single holder, who then licenses them out to the original patentees and perhaps also to outsiders. The payoffs include both revenue earned as a licensor, and technology acquired by pool members as licensees. Public effects can also be significant. For example, technology sharing of complementary patents can improve product quality and variety. In some information technology markets pools can prevent patents from becoming a costly obstacle to innovation by clearing channels of technology transfer. By contrast, a pool’s aggregate output reduction or price fixing in a product market can produce cartel profits.
A traditional justification for patent pools is that they facilitate improved products by uniting complements Sharing of complementary patents means that licensees can then employ all the patents in their product, rather than creating silos in which each manufacturer incorporates only its own patented features. Pools created for this purpose can reduce problems of royalty stacking and holdup, as well as problems involving blocking patents. A more robust explanation for pooling in many markets comes out of the economics of transaction costs, which emphasizes the role of limited information and the costs of obtaining it, as well as uncertainty in bargaining and sharing. Pooling is an efficient solution to problems of technology development and transfer when determining patents’ validity or identifying their boundaries is costly. In this sense, patent pools function much as traditional common pool resources.
An individual patent’s boundaries distinguish its protected technological embodiments from noninfringing technology. But when multiple patents are aggregated what really matters are the outer boundaries that separate the portfolio as a whole from outside patents or the public domain. So long as the relevant rights are somewhere in the portfolio, the parties do not need to delineate the boundaries of individual patents in order to strike a deal. While most patent pools are socially beneficial, certain practices or structures can pose competitive problems. The biggest antitrust risk from pooling is collusion, and its threat depends on two things. First is the market structure and the power of the pool within its market. Second is the nature of pricing and exclusivity arrangements within the pool. Pool “exclusivity” can take several forms. First, it can refer to the contract that each licensor has with the pool, asking whether that licensor is free to license to others outside of the pool. Second it can refer to the pool’s willingness as licensee to accept an offered technology from an outsider for inclusion in the pool. Third it can refer to the pool’s willingness as licensor to license to outsider manufacturers. Fourth, it can refer to field-of-use or other restrictions given to licensees from the pool.
A large but inconclusive literature considers the relationship between pooling and innovation. Conclusions are sensitive to assumptions about patent strength and quality, about the relationship among the patents in a pool and the strength of alternatives outside the pool, about the impact on innovation of insiders vs. outsiders to the pool, and finally, about the strategic responses of participants. Most of the literature concludes that most pools increase innovation rates. A pool should increase the demand for innovation of complements to the pool. First of all, access to the existing technology by pool members should be guaranteed and cheaper. To the extent the pool reduces licensing costs and eliminates royalty stacking the cost of further improvements should decline. When innovation is cumulative the development of new technology may require the licensing of existing technology with multiple patent holders. Pooling can reduce these costs and thus facilitate cumulative innovation.
