The CP solves for innovation, patent thickets, and litigations

Patent pools are the oldest type of patent aggregators. They bundle patents from different owners and license them back to their members, outside implementers or both. Patent pools emerged in the US since the second half of the 19th century to provide freedom- to-operate to contributing members rather than licensing the pooled technologies to non-members. After a period of antitrust hostility in the US beginning in the mid-1900, patent pools gradually re-emerged during the 1980s for audio-visual technologies, such as the CD Audio pool between Philips, Sony and Pioneer. The MPEG-2 patent pool, approved by the US Department of Justice in 1997, set the conditions for modern pools over highly complex and fragmented information communication technology (ICT) stan- dards. After that, several standard-related pools followed, including for disks, audio-video compression, and telecommunication technologies.

The structure of pool is similar. Participation in pools requires agreement on both the internal management of pooled patents and the pool’s licensing terms and conditions. A pool member can be appointed as licensing administrator on behalf of all members, or pool members may entrust specialised entities as independent licensing administrators. By design, independent licensing administrators avoid conflicts of interest between pool members and implementers since their success rests on bringing both market sides aboard through impartial services at market-based prices. Further, pool members can monitor independent administrators with less antitrust suspicion, while these latter do not risk retaliatory infringement lawsuits if suing alleged infringers.

Without downstream product market operations, patent pools belong to the non-practising entity (NPE) type of patent aggregators and specific features distinguish them from other NPEs. Unlike R&D-only firms or universities, patent pools do not prosecute their patents, but only license their members’ patents. In contrast to patent assertion entities (PAEs) and defensive patent funds, they do not buy patents nor keep the licensing revenue to themselves but share it with members by pre-agreed formulas. Moreover, unless pools exclusively in-license the pooled patents, they cannot enforce them as they lack infringement legal standing.

Patent pools’ characteristics are prone for the complex 5G and IoT environment. Pools reduce transaction costs by offering a one- stop shop to implementers who need to conclude only one licence for many patents instead of bilateral licenses with each patentee. Merges and Mattioli estimate significant transaction costs savings by pool licensing. With an average estimation of negotiating a non- litigious patent license of at least $50,000, MPEG and HEVC patent pools saved approximately $600 million and $400 million in transaction costs, respectively. Thus, patent pool licensing can be more profitable for patentees and cheaper for implementers since they avoid countless individual licensing negotiations and possible litigation and provide more efficient royalty collection and wider licensing reach for SEP owners. Consequently, pools can address both the 5G patent thicket and patent infringement jungle by enabling implementers to achieve wide freedom-to-operate easily and plan their licensing costs. At the same time, SEP owners can more easily reach more licensees from diverse IoT industries than licensing individually.

Moreover, patent pools permit economic specialisation and the division of innovation labour, allowing technology firms to focus on R&D efforts and outsource patent monetisation and enforcement to specialised experts, which provide them with a quick return on investment. Meanwhile, implementers can develop downstream products without identifying and negotiating licences with individual SEP owners and avoiding infringement litigation risks.

Standard related pools also bring transparency and predictability to SEP licensing by publishing their FRAND offers, promoting non-discriminatory licensing. Pools’ royalties estimate the aggregate royalty for a standard, making it possible for implementers to plan their licensing costs. In addition, the mandatory essentiality checks of pooled patents weed out non-essential patents, increasing trust in standardisation. Further, the publication of pooled SEPs, summary claim charts mapping SEPs to standards features, and existing licensees enables implementers to verify whether they are infringing patents and whether their competitors are licensed.

Lastly, pools’ simplified licensing approach helps jumpstart the positive feedback loop between innovation in the upstream technology market and the downstream product markets. A stable licensing environment through which implementers can secure the requisite rights enables more rapid standard deployment and accelerates innovation diffusion. With all these characteristics, pools encourage innovation, simplifying the implementation and reward of standardisation.

Patent pools have downsides too. If they include substitute patents, namely patents covering alternative technologies, pools will lead to a loss of competition like a price-fixing cartel.3However, substitutability is rarely a concern in standard-related pools as SEPs are complementary, and pools of complementary patents resolve royalty stacking and double-marginalisation, leading to lower royalties than independent pricing. The primary concern with standard related pools is potential collusion between SEP owners who may use pools to fix prices and outputs. Thus, pro-competitive pools include safeguards to prevent sensitive information-sharing, ensure their independence from members, screen exclusivity clauses for potential anticompetitive effects and allow members’ independent licensing.

Another argument against pools is that they shield weak patents from challenges as potential licensees have reduced incentives to test their validity. While this may be a problem in small pools, the royalty rate of pools consisting of thousands of SEPs can account for the likely probability of some patents’ invalidity. Therefore, challenging only a few patents from a portfolio of thousands would not impact overall royalties3 A prospective licensee would have to invalidate a significant share of patents in a portfolio for a meaningful effect. For example, if there are ten patents in a pool, invalidating seven might reduce royalties. However, parties may simply negotiate the invalidity probability into the royalty rate as an alternative to costly patent litigation. The price of a pool’s license can reflect the aggregate value of all pooled patents, not the sum of the individual patent values. This is true especially for standards where a pool determines the aggregate royalty based on the value the whole standard brings to end products, regardless of individual SEPs’ value. Thus, identifying the number of truly valid patents is more of a concern for licensors in their internal division of pool’s licensing revenues than for licensees, as Subsection 6.3. Argues.

Overall, competition policy welcomes standard-related pools consisting of complementary patents. The US and EU antitrust authorities have guidelines for assessing the competitive conditions for pool formation. Typically, competition authorities will not challenge patent pools following specific criteria such as i) voluntary and open membership; ii) independently verified essentiality of pooled patents; iii) FRAND licensing terms and conditions; iv) members’ freedom to license independently and discounts to less than full portfolio license; v) grant-back clauses limited to essential patents, leaving licensees’ freedom to develop competing technologies and vi) freedom to challenge pooled patents’ validity and essentiality.

Following the competition requirements many successful patent pools have been formed in consumer electronics industries. Baron and Pohlman identify no fewer than fifty patent pools relating to digital disks and audio-video standards, run mainly by a few in- dependent administrators, such as Via Licensing, or Access Advance. While often these pools do not cover the totality of SEP owners and SEPs, they have generally been regarded as successful in facilitating licensing and ensuring smooth standards implementation.