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For pool technologies, patent applications declined after the creation of a pool, both in absolute terms and relative to alternative definitions of the control. In pool subclasses, patent applications declined from 2.54 per subclass and year before the creation of a pool to 2.40 afterwards (Table 2), and from 2.80 to 2.48 within a 10-year window before and after the creation of a pool (Figure 1). In cross-reference subclasses, patent applications increased from 2.70 before the creation of a pool to 2.94 afterwards (Table 2), and from 2.94 to 3.02 within a 10-year window (Figure 1). In the broader control group that includes all subclasses in the same class, patent applications increased from 1.00 per year before the creation of a pool to 1.11 afterwards (Table 2).

Certain industries are said to be forced to rely on pools.121 As Steven Carlson argues, “in standard-dependent technologies, such as the MPEG protocol, there is essentially no choice but to deal with the patent pool.”122 This can also amount to a violation of abuse of dominance provisions.

Where horizontal competitors pool their patents, competition for licensees is reduced—and even where a patent holder retains the right to license outside of the pool there may not be much incentive to do so.123 Where the right to license out of the pool does not exist, this could discourage innovation.124 Moreover, where the pool requires the members to grant licences to each other for present and future technologies (“grant-back”) at minimal cost or without an adequate reward, this may further disincentivise members to engage in research and development or cost-reducing process and product innovations and lead them to just freeride on the works of others.125

On the flipside, patent pools have certain disadvantages associated with them as well. Patent pools may work ineffectively if there are regulation issues among the members of the pool. For instance, if members of the patent pool collectively disagree when it comes to governance issues or if prominent patent owners do not join the pool, the patent pool may be greatly unavailing. Patent pools also pose various issues related to antitrust law. Issues related to antitrust law arises when competitors are patent holders of overlapping patent rights. Consequently, neither of the competitors will end up developing the technology related to the patents they own without infringing each other’s patents. Primarily, there are two types of patent pools. An open patent pool may be defined as a patent pool that is largely controlled by management companies. These companies may control the patent pool by adding patent owners who meet certain criteria from time to time. The management company also coordinates among the patent owners and looks into licensing operations that occur within the patent pool. On the other hand, a closed patent pool may be defined as a patent pool wherein a patent administrator is selected. The patent administrator here regulates the pool, procures licensees, and ensures that the patent pool is conducted in a lawful manner.

In contrast, a pool comprised of pure substitute patents is very likely to offer limited technological choices to its own members and third parties. Such limitations are likewise capable of constraining innovation that generally relies on the supply of a variety of technologies. In a long run, it will likely lead to higher prices of, and constrain access to, standard products in downstream market as also noted by Gallini (2011). This is a negative consequence likely to arise from the scarcity of technologies alluded to early, which can have an opposite effect from that which might have otherwise occurred with a diverse supply of technologies. The latter generally help to lower the costs of production of standard products. From this standpoint, it would not be unseasonable to perceive pools loaded with substitute patents as a disguised stratagem that firms can use to control or fix the market prices, foreclose potential competitors and/or restrict downstream technology and knowledge spillover and licensing process.

The second type of exclusivity concerns the outside developer of technology who wants to include its patents in the pool but is denied. One clearly procompetitive explanation for the pool's refusal to accept an offeror's technology is that the excluded technology is inferior to or no better than technology that the pool already has. There are good reasons for a pool not to accept an inferior substitute technology; namely, it will not make the pool products better and it might raise fears of collusion. If the prospective licensor's technology is simply unwanted by pool members, that also indicates lack of competitive harm. The firms in the pool have a right to make their own technology choices, even when they do so by agreement. Indeed, even a dominant network should not have an obligation to accept a set of licenses to a technology that its members do not want, and no concern about competition arises.

Competitive harm can occur when some pool members already have technology in the pool that competes with the excluded firm's superior technology. In that case the pool can operate as an anticompetitive boycott.23 Assessing the merits of such claims is difficult, because it may require the fact finder to assess the merits of the excluded technology. As a result it is essential to make sure that structural prerequisites are present. For example, an essential element in such a claim would be the existence of an influential pool member or members who own competing technology and have sufficient power to foist an inferior technology on others, perhaps by manipulating the process.24

However, patent pools may also be restrictive of competition, which is perhaps not so surprising given they are basically agreements between competitors. The collective pricing of pooled patents, greater possibilities for collusion (e.g. through using the mechanism of the pool to exchange competitively sensitive information118) and generally larger number of market participants mean that patent pools need to be scrutinized for antitrust concerns. Specifically, they can lead to creation of price fixing cartels119, market allocation, and reduction of innovation in the form of standard setting or foreclosure of alternative technologies or barriers to the entry of new and improved technologies.120

While most patent pools provide overall social benefits, certain practices or structures within them can pose competitive challenges. The primary antitrust risk associated with pooling is collusion, which depends on two key factors. First is the market structure and the pool's influence within its market. Second is the nature of pricing and exclusivity arrangements within the pool (Merges, 1996).

Regarding market structure, cartels can only profit if they possess market power. Patent pools often cover entire industries, but they can also be limited to a small group of firms within a larger market that decide to share a unique technology. Whether this technology allows them to raise prices above costs is an empirical question. Naked price fixing is generally considered illegal per se. Courts have been cautious in applying this per se rule to agreements within pools, instead evaluating softer forms of price-affecting conduct under antitrust's rule of reason. This approach requires estimating the pool's market power.

Furthermore, such pools can distort the equilibrium of royalties payable to certain licensors (particularly those holding essential patents), if such distribution is a dependent variable of the aver-all population of patents present in a pool. Members holding large amounts of substitute patents are likely to shift such equilibrium to their side and internalise higher and undue benefits to the detriment of the other members holding essential patents. In the end, the owners of essential patents will likely exit such pools due to their respective imbalanced and unfair royalty-sharing scheme. The owners of essential patents, who elect to remain in such pools are likely to relax their expenditures in new technology development and dissemination initiatives because the conventionally pursued and expected payoffs will be prone to distortions, likely negligible and insufficient to sustain their innovation efforts.

The existence of a pool may distort innovation behavior. For example, a firm might decide to protect a particular innovation with a trade secret rather than a patent in order to avoid committing it to a pool. Alternatively, it may rely on simple first mover advantages in order to avoid patent disclosure requirements. Another distortion results from how royalties are divided up. For example, if the pool divides royalties by the number of patents, then pool members have an incentive to make patents thinner in order to increase their number. (Baron and Delcamp, 2015) Finally, one must distinguish anticipatory innovation which occurs when a patent pool is announced (Lerner & Tirole, 2004; Dequiedt & Versaevel, 2013), from equilibrium innovation which occurs on an ongoing basis after the pool is in operation (Baron & Pohlmann, 2015).

A well-functioning patent pool should reduce the costs of sharing technology, which it can do by making it easier for manufacturers to assemble complements, eliminate double marginalization, or reduce the costs of defining or defending patent boundaries. Since all of these costs operate as a deadweight loss on innovation one would think that the impact of a well designed pool is positive. On the other side, pooling may reduce the appropriation value of innovations, particularly if pool members must commit in advance to dedicate new patents to the pool. In that case, rather than obtaining the entire return the pool member must contemplate sharing with others, and this may create common pool management problems. Each firm will have a tendency to shirk, profiting instead from the inventions of others.

2. What is a standardization process, an essential patent and an infringement?

2.1. Stylized facts on essential patents and the standardization process

The market benefits of pools are not fully realized and, in some cases, entirely destroyed when the burdens are not shared equally. Expecting one party to shoulder all of the costs, such as requiring litigation-grade validity and essentiality checks, leads to an abusive market position, such as, e.g., hold-out. Such tactics frustrate the market benefits that pools are intended to foster, and drive parties into the very thing patent pools were designed to prevent: litigation.

In our next article, we examine some unfounded critiques of the patent pool system, and how these misunderstandings of patent pools lead to market inequities when parties refuse to entertain licensing discussions with a pool administrator.

It has been observed that the pharmaceutical patents under the TRIPS Agreement have increased the drug prices exorbitantly, especially in developing countries. This made the patent regime itself most unpopular especially in developing countries. Right to health is the heart of the idea of CL provisions. Voluntary licenses and patent pools are promising and a new approach to delivering affordable medicines to developing and least developed countries under the TRIPS regimes of intellectual property protection. These concepts may be converted into practical realities in treating poor patients throughout the world rather than only protecting the intellectual property rights and the interest of multinational pharmaceutical companies. There must be a balancing act between the social welfare and the protection of innovation and intellectual property rights. The system of voluntary license in any form will make the medicines more affordable and faster delivery in developing country markets. The WTO members should promote voluntary agreement system at international level like MPP and through their domestic legal system with more incentives for VL. It is not an easy task for the developing countries on the background that CL is always issued when VL is denied.

Certain of the reforms noted here are worthy of consideration in particular circumstances no matter what, if anything, were to occur with global IPR reform.  

Patent Pools.  One can imagine the utility of patent pools in at least two circumstances.  First, when the existence of multiple IP owners requires coordination, particularly when the IP in question is under dispute, patent pools represent a possible solution. This has been discussed in relation to genomic and biotechnology patenting, for example, to reduce transaction costs and facilitate the bringing together of multiple gene sequence owners for DNA microarrays and diagnostic tests (Clark, et al., 2000). The worry in this context is that the high transaction costs associated with negotiating between multiple IP owners could prevent inclusion of all the necessary gene sequences for a clinically effective diagnostic test.  In global health, patent pools have most recently been discussed in relation to the production of a SARS vaccine (Simon, et al., 2005).15   

Patent Pools (Merges, 1999).  A final reform that has begun circulating in the past several years is the idea of a patent pool geared toward essential medicines.  A patent pool is an arrangement among multiple patent holders to aggregate their patents. A typical pool makes all pooled patents available to each member of the pool. Pools also usually offer standard licensing terms to licensees who are not members of the pool. In addition, the typical patent pool allocates a portion of the licensing fees to each member according to a pre‐set formula or procedure. (Merges, 1999 10‐11)

Historically, one of the more well‐known examples of a patent pool is the Manufacturer’s Aircraft Association of 1917, formed at the behest of Franklin D. Roosevelt (Dykman, 1964).  The two major patent holders at the time, the Wright‐Martin Aircraft Corporation and the Curtiss‐Burgess Airplane & Motor Corporation, Inc., could not agree upon reasonable royalties and licensing terms.  This nearly blocked the manufacture of aircraft at a time when the U.S. government was quite interested in their production (for World War I).  To this end, the federal government essentially stepped in and insisted upon the formation of a patent pool with fixed royalty rates to both corporations under threat of simply taking the patents. (Of course, patent pools can also be voluntary, not just imposed by the federal government.9)  How might a patent pool apply to essential medicines?  Consider Essential Inventions, Inc., and its recent proposal for an Essential Patent Pool for AIDS.  Under this proposal, a non‐profit entity, the EPPA, would identify patent relevant to HIV/AIDS treatment and request voluntary licensing to the pool for use in low‐income countries.  If a voluntary license is not obtained, a compulsory license would be sought.  Licensees also agree to “grantback” any rights obtained through use of EPPA patents.  Although the EPPA, were it formed, would seek to pool all patents necessary for HIV/AIDS treatment and prevention, of particular interest might be the use of multiple patents to create fixed dose combinations (FDCs) and products that for one reason or another are currently unsuitable for low income settings (e.g., the HIV drug Fuzeon, which requires sterile water for mixing, refrigeration once mixed, and then subcutaneous injection).10

In a few weeks’ time world leaders will have the opportunity to usher in a new era of multilateral cooperation on climate change. This starts with the UN climate change conference in Paris, but it does not end there. Building momentum to tackle climate change is a common challenge for us all – individually and institutionally. The broader international community, including the WTO, has to play its part. Like most economic activity, trade is often linked to carbon emissions, but the world cannot stop trading – not least as trade is essential in achieving many other shared goals. Trade can help to improve the efficiency of production, it can improve food security and, above all, it has proven to be one of the best anti-poverty tools in history. Trade played a key role in helping us reach the millennium development goal to cut extreme poverty by half – and it is a cross-cutting element in many of the new sustainable development goals agreed at the UN in September, so this work will continue. The challenge is not to stop trading but to ensure that trade is an ally in the fight against climate change. We need to create a virtuous circle of trade and environmental policies which promote sustainable production and consumption while being pro-growth and development. It is just over 20 years since the signing of the United Nations Framework Convention on Climate Change in 1992 – and it is exactly 20 years since the WTO was created. The world has witnessed a profound transformation in the debate on trade and the environment since then – and a degree of convergence between the two. While international trade flows have increased dramatically over this period, the green economy has been built into business models and investment in renewable energy has been mainstreamed. Standards and technical regulations, which are so vital for the functioning of markets and trade, have followed suit with strengthened environmental requirements. So how can we ensure that trade policy plays its full part in future? First, we must improve the dissemination of and access to climate-friendly technologies, goods and services which support the transition towards a low carbon economy. In some countries, import tariffs on products such as solar water heaters are over 20%, and wind turbines over 15% – much higher than the average tariff of 9%. Making environmental goods and services cheaper and more accessible would help countries to leapfrog outmoded technologies and move quickly to apply climate-friendly alternatives. A group of WTO members, who account for the majority of global trade in environmental goods, are negotiating an environmental goods agreement to lower their trade barriers on a number of important environmental products. Success here would help to disseminate cutting-edge technologies, such as those identified by the Intergovernmental Panel on Climate Change (IPCC), at much lower costs while also stimulating innovation and strengthening the green economy around the world. Although these tariff reductions are being taken forward by a group of WTO members, the benefits would apply to the whole WTO membership. Second, we can make trade more efficient overall. Trade is often linked to carbon emissions – particularly through international transportation. Although 80% of trade volume utilises sea transport which has the lowest level of emissions of any form of transport, there is scope to do more. The International Maritime Organisation and the International Civil Aviation Organisation are working to find a global solution to emissions in the maritime and aviation sectors – and we should support these efforts. By streamlining customs processes, we also can reduce some transport emissions and cut the energy required to keep perishable goods fresh while they wait to cross the border. The WTO’s trade facilitation agreement will deliver this while also helping businesses to grow – green businesses included – and reducing trading costs by over 14% on average, and more for the poorest countries. Associated with every environmental good is a dense value chain of other goods and services suppliers. A wind turbine, for instance, consists of more than 8,000 component parts. Cutting the time that it takes to move these parts across borders would lower costs and help make climate friendly technologies more available. I hope that green businesses will use this opportunity. The international community is facing a historic test. We must ensure that the trade, development and environmental agendas complement each other. I am optimistic that we will rise to the challenge.

Without reforms, one or more major economies could leave the WTO, as President Trump has threatened. This would cripple the other two pillars of the WTO—its negotiating and monitoring arms—which are already atrophying. The absence of the WTO could potentially lead to a proliferation of bilateral and regional trade agreements that may better address member states’ complaints on a case-by-case basis. However, a bitter disintegration of the WTO could come with a Hobbesian erosion of trust between states. Governments may opt for self-sufficiency and isolation, rather than engagement and integration. An erosion of the WTO could lead to the return of more trade barriers, loss of predictability and certainty for multinational companies and governments alike, and the absence of a credible venue to mediate trade disputes and serve binding decisions. Those developments could extract a high cost on the global economy and severely diminish global growth and economic stability for years, if not decades.

In the strategic relationship between Japan and China, however, there are problems at both the political and military–technical levels. Firstly, there seems to be minimal political understanding of, or commitment to, avoiding escalation. It is hard to tell whether Japan and China will see it as in their political interests to constrain what begins as a minor conflict. These political obstacles increase the pressure created by military considerations that encourage swift escalation, to the point at which even nuclear options seem attractive. The close military links between Japan and the US would not necessarily encourage restraint. It may be militarily logical for the US to place China in a position in which further escalation seemed tempting, while it could be politically logical for Japan to create conditions in which American action became more likely. An initial outbreak of hostilities between Japan and China over the East China Sea could remain just that: a short, contained exchange of fire and a sobering lesson that encouraged much-needed efforts to improve communication and recognise their common interest in avoiding conflict. But it might also veer out of control before they had a chance to take preventative measures. The subsequent involvement of the United States could lead to Asia’s first serious war involving nuclear-armed states. And we have no precedent to suggest how dangerous that would become.

The confidence effect of joining the WTO, which signaled China's commitment to the same global rules and principles that other countries were bound by, was the reason why trade between Japan and China, as well as Japanese investment into China, grew at a record pace throughout the 2000s even while political relations waxed and waned, deteriorating seriously at times over this period (Armstrong 2012). Bilateral state visits were suspended over the 2001–2006 period between Japan and China. During that time, political relations deteriorated significantly with episodes such as large-scale protests in China against Japan in 2005, including an attempted public boycott of Japanese goods. Yet trade both ways between Japan and China, and investment from Japan into China, grew at a record pace. The growth in interdependence, and the constraints it put on the politics, was no more evident than in 2006 when Prime Minister Abe—long known as hawkish towards China—made China his first state visit to ‘break the ice’ in bilateral relations. It also resulted in the six prime ministers who followed Abe, avoiding visits to the Yasukuni Shrine, the main factor in the poor relations during the prime ministership of Koizumi from 2001 to 2006. The recent visit by Abe to Yasukuni in 2013 in his second time as prime minister, when he appeared to have much more political capital, has reversed that course politically, but the China–Japan economic relations have not been derailed. The Sino–Japan relationship is the most striking example of economics dominating politics because of the scale and depth of economic relations and the unresolved history and political mistrust between the two countries. And it importantly explains why thus far the territorial dispute over the Senkaku/Diaoyu Islands has not derailed the economic relationship. History is littered with examples of how bad politics have dominated economic relations. One such contemporary example is the India–Pakistan relationship. Despite having a single market—with the free flow of goods, capital and people, and having the many similar institutions—prior to partition, the political divide between the two countries since has meant that Pakistan accounts for less than 1 per cent of India's trade, and India accounts for less than 5 per cent of Pakistan's trade, with estimates suggesting that trade could be as much as 10 times higher (Khan 2009). Unlike Japan and China, India and Pakistan do not have normalised economic relations. Pakistan has not granted India most favoured nation (MFN) status despite both countries being members of the WTO. This is the result of the primacy of politics between South Asia's two largest economies. And neither India nor Pakistan has committed to openness to the global economy to the extent that their East Asian neighbours have. 3. Strengths of the Global Trading System Many countries, such as Russia recently, remain keen to join the WTO. This is despite some literature that suggests that WTO membership is largely insignificant because members do not trade more or have more liberal trade policies than non-members (Rose 2004). This literature misses the fact that there is a difference between old members, especially the original signatories of the GATT, and members who joined the GATT after the conclusion of the Uruguay Round. The gains from joining the GATT/WTO largely depend on what liberalisation a country agrees to undertake during the process of its accession to the organisation (Subramanian & Wei 2007). The strict accession requirements that the United States and the European Union (EU) imposed on China in the bilateral negotiations leading up to entry in 2001 were unprecedented. They were largely because of the impact that China was already having, and was predicted to have, on the international trading system. China's rapid rise and the adjustments that had to be made were causing friction for China, its trading partners and the international economic community. More stringent rules had to be put in place in order for other WTO members to be confident that China's accession would not impact the global trading system adversely (Garnaut & Huang 2000). It is precisely because of such unprecedented concessions that the signaling effect of membership to investors and trading partners was so strong. The accession commitments were a blueprint for China's institutional change and reforms for at least a decade from 2001 (Chow 2003). Japanese investors and traders, for example, could be confident of constraints on China retreating from the global market. 3.1 Dispute Settlement A major role of the GATT/WTO is in dispute resolution and the confidence that members, including developing countries, have in fair and equal treatment. That trade disputes can be settled in a universally (among members) accepted legal setting means that retaliation and escalation do not occur outside of the WTO rules, nor do these spill over into sensitive political problems. The dispute settlement function of the WTO is active and robust. While the number of WTO panels established to resolve disputes seems to have decreased in the wake of the global financial crisis (GFC), it has rebounded strongly since 2010 (see Figure 2). The number of disputes brought against trading partners by developing countries has grown, and the number of disputes that have been resolved or upheld demonstrates the relevance and importance of the mechanism. The relative number of disputes initiated by developing nations has increased (see Figure 3) as has their relative importance in the disputes resolution space. The establishment of the Advisory Centre on WTO Law in 2001 further demonstrates the ability of the WTO to adapt in order to remain relevant to developing countries (Bown & McCulloch 2010). The WTO's legitimacy depends on its relevance to developing as well as developed country members. The recent ruling against China on its restrictions on rare earth metals exports, 2 and China's acceptance of that ruling, 3 provide considerable confidence in the disputes settlement process under the WTO. Whether China's purpose in restraining exports was for consolidation of the domestic industry and environmental reasons, the manner in which that policy was executed and the anxiety it caused the international community—especially Japan, which relied heavily on Chinese rare earth supplies—meant that the way in which the ruling was handled is an important sign of faith in the WTO. The United States, Japan, EU and China resolved the dispute peacefully in the appropriate forum without resorting to embargos, a trade war or any form of conflict. This is but one example of confidence in the WTO and its dispute settlement mechanism preventing a trade dispute from escalating into more serious conflict.

Patent pools have many benefits that can be translated into the public health and pharmaceutical sphere. Stated benefits of pools include their procompetitive nature through integration of complementary technologies, the reductions of transaction costs, clearing innovative roadblocks, and increasing the widespread sharing of technologies.115 Patent pools show their efficiency and effectiveness when “multiple patented technologies are needed to produce a standardized product . . . . [These pools] are generally recognized as mitigating the ‘holdup’ and ‘holdout’ problems that can sometimes stymie industry efforts to make a product that conforms to an industry standard.”116

Critics of patent pools note different concerns, mostly related to competition and antitrust laws. Such concerns include “distortion of competition caused by pooling competing patents.”117 While there is an inextricable tie to antitrust law and the possibility of antitrust violations with patent pools, there is unlikely to be an “anticompetitive effect[] unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power.”118

Patent pools, which allow competing firms to combine their patents as if they are a single firm, have emerged as a prominent policy tool to address a key problem with the current patent system: Imperfect boundaries of intellectual property rights allow multiple firms to own mutually infringing patents for the same technology, which they use to threaten litigation and prevent each other from producing the technologies. Patent pools can mitigate this problem by allowing firms to combine their patents in a “pool” which all firms can access to produce the technology and license it to outside firms. For example, pools have been proposed to cover improvements in smart phones, tablet computers, video compression technologies, malaria and HIV drugs, and diagnostic test kits for breast cancer.

What are the mechanisms by which the creation of a patent pool may discourage innovation? Intuitively, complementarities across pool patents should encourage innovation, as the creation of a pool resolves blocking patents, mitigates litigation risks for members, and reduces license fees and transaction costs for outside firms (e.g., Shapiro 2001; Lerner and Tirole 2004). The creation of a pool may, however, also discourage innovation as it reduces competition among members to improve substitute technologies. 15 Regulators are particularly concerned that pools, which combine patents for substitute technologies “are more likely to harm social welfare and than are pools of complementary patents” (Department of Justice and Federal Trade Commission 2007). In practice, however, it is extremely difficult to identify pools of substitute patents. 16