Public Pools fail, only government instituted pools solve

B. A Proposal for the Recording of Patent Pooling Agreements This Article’s findings show that private institutions have long had a significant and largely unappreciated impact on innovation incentives and returns. However, as explained in Part II, policy efforts to reform the patent system have generally focused on the institutions that define it — namely, the PTO and the Federal Circuit. In order to better encourage innovation, future patent reform efforts should be informed by the role of private institutions. To that end, I propose that Congress enact legislation that would mandate (or alternatively, encourage) the recording of patent pooling agreements with a federal agency. Patent pools are changing the rules of innovation. Our patent system is premised on the theory that innovation is encouraged by offering inventors limited monopoly pricing power. However, this study has shown that patent holders are increasingly ceding this power — sometimes in whole and sometimes just in part — to gain membership to private licensing communities. In some industries, joining such groups may be a necessary prerequisite to providing certain services or products. Consequently, the incentive to innovate is increasingly defined by private rules. Because collective patent agreements are usually private, the impact of collective action on innovation has been poorly understood. As this study has shown, the realities of collective governance are far more varied and complex than theorists have appreciated. Some patent pools are focused on lowering the cost of producing existing products. Others hold no promise of royalties but deliver important cost savings. Some patent pools may be capable of encouraging innovation, but through rough-and-ready rules rather than carefully tuned voting regimes. These insights come only from records that could be located; the true number of patent licensing collectives that have existed in the past is unknown, as are the full number and nature of any such groups that operate in secrecy today. It is striking how much will remain unknown about the internal governance of these organizations in the future if the historical lack of public reporting continues. A new law designed to encourage the recording of collective patent licenses would be an important first step in redirecting policy efforts; such a law would inform policymakers of the total number of patent licensing groups that operate in various industries, and the institutional forms such groups have adopted. With the benefit of this information, policymakers would be better able to understand how collective action influences the incentive to innovate. This knowledge will be essential to crafting new policies that maximize innovation, economic prosperity, and social welfare. What would a patent agreement recording law look like? A congressional bill proposed nearly eighty years ago provides a good model. In January of 1935, H.R. 4523 was introduced in the House of Representatives with the title “A Bill Providing for the Recording of Patent Pooling Agreements and Contracts with the Commissioner of Patents.” The core of the bill required the following: That every agreement by which rights in a plurality of patented inventions are rendered subject to common ownership, control, or enjoyment, whether by assignment, license, or otherwise . . . shall be recorded in the Patent Office within six months from the date thereof. . . . That any change or addition in the parties or patents involved in the agreements recorded as hereinbefore provided and any changes in the provisions of such agreements shall be fully set forth and duly recorded in the Patent Office within three months of the date thereof. Had this law been enacted, it would have imposed civil penalties on any person or organization that failed to comply with its provisions. However, the bill did not provide details on how compliance would be monitored. During the winter and spring of 1935, a special Committee on Patents investigated the possible usefulness of H.R. 4523 by interviewing a wide spectrum of patent holders — from some of the largest corporations in the country down to individual inventors. The Committee observed that some patent pooling arrangements are “beneficial . . . to the general public welfare,” while others are used to carry out “secret and sinister [goals] . . . prejudicial to public interest.” In its final report, the Committee concluded that “the recordation of such agreements in the United States Patent Office, and in the Federal Trade Commission would seem to be the best method of preventing such secret and sinister operations.” However, for reasons that are unclear from the legislative history the bill never advanced beyond the committee stage. If introduced today, a bill modeled on H.R. 4523 would solve several problems. First, and most importantly, such a law would provide much-needed information to policymakers. As mentioned earlier, patent reform legislation efforts have largely focused on the institutions that apportion patent rights. Patent pools, the internal structure of which is often unknown, redefine these rights in several respects. If policymakers are to make intelligent decisions, it seems they must have a clearer understanding of the impact of these private regimes. A second positive outcome of this proposal relates to its impact on contracting behavior. If such a law made patent pooling contracts available to the general public, it could indirectly place public pressure on patent holders to form pools that are forward-looking by design. By the same token, the new law would also discourage restrictive pooling agreements that slow the pace of innovation (to the extent such pools are not already prohibited by applicable antitrust law). While the foregoing reasons show why a bill like H.R. 4523 could very well gain the necessary political goodwill to be enacted into law, large patent holders might oppose a law that mandates the recording of private agreements. Thus, a gentler approach may be needed. The National Cooperative Research and Production Act (“NCRPA”) — a federal law passed in 1984 — provides a model for a more moderate approach. The law offers reduced antitrust penalties to research consortia that inform the DOJ and the Federal Trade Commission of their operations. An attorney with the DOJ who commented for this Article explained that “although the law does not require consortia to file their membership agreements under the Act, many do so in hopes of receiving favorable business reviews from the Department of Justice.” Thus, the NCRPA encourages the recording of research agreements with a carrot rather than a stick. A patent agreement recording law would do well to adopt a similar design. Drafters of a patent agreement recording law would have several important factors to consider. First, they would need to decide whether to mandate or merely encourage the recording of collective patent agreements. While a mandatory recording law could yield the most information, it might also face the greatest opposition from certain constituencies. Moreover, a mandatory recording law could spur collaborators to search for paths to cooperation that do not involve formal contracts (e.g., non-assertion pledges). This wasted activity would represent efficiency losses. For this reason, lawmakers might prefer a gentler approach that mirrors the NCRPA’s reductions in antitrust penalties in return for compliance. Compliance could also be encouraged through novel incentives such as an expedited review of patent applications submitted by members of participating organizations.

Second, lawmakers would need to decide where recorded agreements should be submitted and who would have access to them. Two prime choices are the DOJ and the PTO. The DOJ already reviews similar agreements in connection with requests for antitrust business review letters and agreements submitted in connection with the NCRPA. Moreover, if the bill proposed here were to offer a reduction in antitrust penalties, it would fall squarely within the DOJ’s purview. Thus, the DOJ appears to have a strong existing framework for receiving and analyzing patent pooling agreements. By contrast, the PTO could be a good custodian for different reasons. Unlike the DOJ, the PTO has a long history of receiving, reviewing, and storing vast collections of patent-related information. From this perspective, it could make sense for the PTO to collect related patent pooling agreements. The PTO has also long published periodic reports on patent application filings and grants. A new avenue of business for the office could be the publishing of reports on the number and nature of patent pooling agreements in operation across the country. The PTO’s institutional competency and internal resources could thus make it a strong choice for overseeing the collection of patent pooling agreements. The very existence of the NCRPA and H.R. 4523 indicates that this proposal could be both useful and achievable. To be sure, like any legislative proposal, such a bill would probably face some opposition. The most vocal opponents would likely be those with the most to lose: companies that perceive strategic advantages in keeping their patent pooling operations secret. Moreover, policing and enforcing compliance with such a law could create new administrative costs. However, as explained above, a moderate approach that solicits rather than mandates the recording of collective patent licenses should quell such criticism. At the same time, lawmakers, experts, and many industry stakeholders might rally in support of a law that would shed light on the transformative but often hidden practice of collective patent licensing.