article
Alternative licensing strategies
22 July 2009
So your company has developed an exciting new invention, obtained a
patent, and now you want to exploit that patent, or the technology
protected by it, for monetary gain? The knee-jerk reaction for most
organisations when faced with these circumstances is to follow one
of two conventional courses of action: (1) having achieved a
monopoly, to protect it and exploit the patent internally – for
example by commercialising the technology and offering it for sale;
or (2) to license the technology so that third parties can
commercialise it in return for paying a royalty. Whilst both of
these approaches has its merits, there two often-overlooked
alternatives which should also be considered – patent pools and
cross-licensing.
Patent pools
Patent pools are a mechanism for the management of patent
portfolios. A patent pool arises where a group of patent owners
agree to license their patents to one another and also, perhaps, to
third parties. This enables all of the parties concerned to exploit
the technology contained within the ‘pool’ without fear of
infringing each other’s intellectual property rights. Where large
numbers of patents are involved, licensees are also saved the
trouble of having to negotiate numerous different licences. The
patent pool acts as a one-stop-shop, enabling the licensee to
obtain a single licence covering a large number of patents relating
to a single technology.
Typically, each contributor to the pool will have access to all
of the pooled patents. Pools also usually offer standard licensing
terms to licensees who are not members of the pool. In these
circumstances, most patent pools will collect the licence fees
obtained and then allocate a portion of those fees to each member
according to a pre-set formula or procedure.
Patent pools are not a new concept. The first pool arose in 1856
when three sewing machine manufacturers, I. M. Singer Co., Wheeler
& Wilson Co., and the Grover & Baker Co., who had
previously been embroiled in litigation, decided to pool their
technologies and form the Sewing Machine Combination. Previously,
each manufacturer had been unable to exploit their technology
without infringing one or more of their competitors’ patents. In
forming the pool, they were able to commercialise their
technologies and avoid spending valuable time and money suing one
another.
Since then, patent pools have been put to a number of
interesting applications. In 1917, Franklin D Roosevelt, then the
Assistant Secretary of the Navy, formed a patent pool encompassing
almost all of the aircraft manufactures in the United States. At
the time, two major patent holders, the Wright Company and the
Curtiss Company, had blocked the building of new airplanes. The
forming of the pool, named the Manufactures Aircraft Association,
was crucial to the United States in entering World War I.
Pools have also been formed to commercialise numerous
technologies from the movie projector to the collapsible bed.
These, and the airplane patent pool, are good examples where pools,
have helped to resolve ‘patent thicket’ problems – i.e. where
overlapping patent claims preclude the adoption of new
technologies.
More recently patent pools have been used to address the need to
develop standardised technologies. The MPEG_2 patent pool is a good
example of this. Here, nine manufacturers contributed their patents
to the pool, on the basis that each of those patents is necessary
to enable the manufacture of products utilising MPEG_2 video
compression technology. Such products include televisions, DVD
players, computer software, and other video playing devices.
You should consider forming a patent pool if
you....
- work in an industry where several organisations are developing
related technologies and each of those organisations would benefit
from sharing each other’s technology and know-how.
- have developed a technology that could be used as part of a new
technical standard. This is one of the best known motivators for
starting a patent pool. Companies that spend extensive resources to
develop an industry standard in order to implement new technology
should be able to recoup, through licensing royalties, the money
spent developing those standards and technologies. A patent pool is
probably the most cost-effective and efficient way of collecting
and distributing royalties for patents that are essential to an
industry standard.
- are unable to commercialise your technology, or commercialising
your technology is made more difficult, due to the existence of
patents held by third parties. As seen in the sewing machine and
airplane patent pool examples, patent pools are often born out of
the so-called patent thicket problem.
- lack the resources to commercialise your technology alone. If
your invention is a valuable addition to the pool, you could obtain
a share of the licensing royalties earned by the pool without
having to spend the time and resources commercialising the
technology independently. Further, it may be the case that your
patent is more valuable when combined with other complementary
patents in a pool that it ever would be by simply licensing it as a
stand-alone patent.
- work in an industry where the innovation process is typically
cumulative, with innovations building on each other and requiring
multiple patents for the practice of the technology. In
circumstances such as these, there can be uncertainty as to the
validity and coverage of patents and disputes are inevitable. A
patent pool allows for the consolidation of intellectual property
rights so that the innovation can flourish, unhindered by
uncertainty and disagreement.
Creating the perfect pool – factors that contribute
to the success of the patent pool:
- Inter-operability: why would an organisation contribute its
patent to the pool if it did not want something in return? It
wouldn’t. Conditions are ideal for a patent pool where each and
every one of the patents in the pool can be integrated and utilised
by each of the pool’s contributors.
- Essentiality: where a pool is being formed to develop a
technical standard, each of the patents in the pool should be
essential to the commercialisation of that standard. Including only
essential patents in the pool ensures that, regardless of any
royalty arrangement, each contributor gains something extremely
valuable – the ability to commercialise the technology that they
have patented.
- Quality of the patents: if the pool has not been formed to
develop a technical standard, it is unlikely that all of the
patents will be “essential” (indeed there may be some debate as to
the meaning of “essential” in any event). Where this is true, care
should be taken to ensure that each and every patent included in
the pool adds value. Put simply, the stronger the patents in the
pool, the more successful the pool will be. Firstly, a high quality
pool will attract more patent holders to, enabling the existing
contributors to share valuable technology. Secondly, more desirable
patents will add to the pool’s marketability and attract higher
royalties, enabling the members to gain from the licence fees
obtained by offering third parties licences.
Common challenges to overcome:
- Valuation of the different patents: this is an area for
potential dispute. If all of the patents are ‘essential’ to the
technology, arguably the patents are equally valuable since the
technology cannot be utilised if any of the patents is not
available to be licensed, on the basis that it is missing from the
pool. In practice, valuation is unlikely to be as straightforward
as this and it is possible that patent holders will value their
patents higher than their co-contributors’ patents.
- Identification of the patents required for the pool: some
pools, particularly those relating to a technical standard, quite
often comprise a large number of patents – perhaps tens or even
hundreds. Identifying the valuable patents and disregarding the
others, in order to maintain the strength of the pool, can itself
be challenging task. It may be sensible to appoint a third party to
take responsibility for this particular task.
- Determination of the licence fee split: this challenge is
directly linked to the first issue. Most patent pools operate on a
standard licence arrangement whereby the patents in the pool are
licensed to third parties in return for a fixed fee. Determining
how this fee is subsequently split between the contributors is
likely to be determined following a detailed valuation of the
patents.
- Competition law issues: patent pool licensing can give rise to
competition law issues. For example, by including competing
technologies in a pool and refusing to license those technologies
to others outside of the pool may be seen as anti-competitive and
may even be tantamount to a cartel. Equally the licence fees are
often calculated on a fair, reasonable and non-discriminatory
(FRAND) basis and may be subject to review by the competition
authorities. Competition law is considered more generally later in
this article.
- Essentiality: whilst, as seen above, it is desirable to include
only essential patents in a pool creating a technical standard, the
issue of determining essentiality can be a highly contentious
point. Third parties may refuse to take a licence and consequently
challenge the essentiality of a particular patent to the pool. This
can give rise to litigation, the culmination of which may be a
declaration of non-essentiality (or essentiality) by the Court.
This has recently been most apparent in the telecommunications
sector where players, such as Nokia, Qualcomm and InterDigital have
engaged in substantial litigation over the essentiality of certain
patents owned by the parties declared to particular technical
standards.
Cross-licensing
In cross-licensing agreements, two or more parties grant
licences, enabling each other to use the technologies protected by
the other party’s patents. Cross-licensing arrangements are
distinct from patent pools in that there is no centralised pool of
patents through which third-parties can obtain a licence.
Essentially, a cross-licence is a simple IP swap in which the
parties say “you can use my patents and I can use yours”.
Cross-licences can eliminate a number of patent portfolio
challenges. For example, they can save an enormous amount of
litigation expense because a company that enters into
cross-licensing agreements with its competitors reduces the risk of
being blocked by the organisations most likely to hold competing
patents.
The process of research and development can also be simplified
because the need to invent around competing patents will be
avoided. More importantly, a cross-licence reduces the risk of
inadvertently infringing a competitor’s patent by re-developing a
technology that has already been patented. This is particularly
pertinent in high-tech sectors where a number of players have vast
portfolios, making it difficult to avoid infringing other parties’
patents. Hence, cross-licensing in these industries is quite
common.
Only last month LG Display entered into a cross-licensing deal
with Japan’s Idemitsu Kosan to share patented technologies in OLED
panels. OLED, or organic light-emitting diode, panels are used in
most electronics-related devices from TVs and PCs to mobile phones.
LG Display is second only to Samsung in this market and the
agreement is likely to contribute significantly to LG’s ability to
respond to the mid- to large-sized OLED market for notebook PCs and
TVs.
You should consider cross-licensing if
you…
- operate in a heavily-patented industry and are concerned about
infringing other parties’ patents;
- wish to enhance your market position through collaboration with
a competitor;
- want to pursue an R&D programme, having freedom to utilise
technologies patented by competitors;
- technology is closely aligned with that of a competitor and you
are both keen to avoid costly litigation.
Practical considerations
When developing new technology, a patent search can be critical.
A freedom to operate (FTO) analysis should entail a search of
patent literature for issued or pending patents and conclude with a
legal opinion as to whether the technology may be considered to
infringe an existing or pending patent (assuming that pending
patent proceeds to grant). In conducting an FTO analysis, it is
important to bear in mind the limitations of patent protection.
Patent protection is territorial, of limited duration, and of
limited scope. Just because a similar technology is patented, does
not mean that your activities will be infringing. Therefore, you
should not feel compelled to enter into a licence simply because
your competitor has a patent. It is crucial to understand the
nature and precise scope of protection of the patent.
In licensing your patent, you should limit the scope of the
licence to that which is absolutely necessary. In particular, if
the licensee wants exclusivity, the licence should be limited by
reference to geographic location and/or market sector (always
taking into account any competition concerns). Granting a narrow
licence will afford you greater opportunity to licence the
technology to other third-parties, operating in different market
segment or different geographical locations.
Competitive concerns
Care should be taken not to contravene competition law when
embarking upon any patent licensing strategy. Recently, the
European Commission agreed to drop its anti-trust probe into the
activities of Rambus Inc but only if the American company agreed to
drop the royalty rates for its DRAM (Dynamic Random Access Memory)
patents. The allegation was that Rambus had abused its dominant
position by charging overly-high licence fees for patents which had
been fraudulently set as industry standards.
While Rambus appears to have escaped the Commission’s grasp
relatively unscathed, others have not been so lucky. In February
last year, Microsoft was fined a (then) record €899 million fine
for abusing its dominant position by licensing its patents to
competitors at unreasonably high prices.
In particular, patent pools and cross-licensing can give rise
competition law concerns. This is because they are often entail
agreements been made between competing organisations and such
agreements can be seen as anti-competitive where the market shares
of the parties concerned are particularly high.
Before entering into any patent licensing arrangement it is
prudent to have the arrangement reviewed by a competition law
specialist. Competition law, and in particular its relationship
with patent licensing strategies, is itself very complex and
outside the scope of this article. However, by way of a very “broad
brushed” summary, you are more likely to encounter competition law
problems if:
- The proposed arrangement involves an agreement with a
competitor. Agreements with competitors, known as horizontal
agreements, are much more likely to be anti-competitive than
vertical agreements – i.e. agreements with entities operating at a
different level of the supply chain;
- Either you, or the other contracting party, has a high market
share. If either party has a market share exceeding 30%, this is
more likely to give rise to competition law problems;
- The agreement involves the fixing of prices, market sharing, or
bans on exports/imports. These are known as hardcore restrictions
and are almost always seen as anti-competitive.
Concluding thoughts
High-tech companies have always seen their intellectual property
rights as a competitive weapon, to prevent competitors from
exploiting or developing their technology further. This often
operates to the detriment of innovation and, to some at least, the
trend casts doubts on the patent system as a whole. Though designed
to encourage innovation, the protective use of patents can have the
opposite effect on future advances in technology. As product
developers are increasingly concerned about infringing other
people’s patents, inventiveness suffers. Further the existence of
blocking patents and patent thickets continue to limit the full
utilisation of new technologies.
By employing the alternative strategies considered in this
article, businesses can overcome the challenges created by the
modern patent system. What’s more, those innovators may quickly
realise that there is more to gain by using patents in a
collaborative rather than protectionist way.
This article was first published in Patent
World
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