Corporate governed patent pools cause monopolies within pools

Corporate issuance of dividends is a second mechanism that has been adopted to apportion royalties within patent pools. Fifteen patent pools identified in this study were corporations that acquired full ownership of patents held by their members in exchange for stock that periodically yielded dividends. Unlike the ex ante bargains described in the foregoing Part, these share-based groups were capable of directing a portion of their profits to the contributors of after acquired patent rights. However, the decisions that governed the royalties that such patents earned — e.g., the amount of stock to be offered to an inventor in exchange for a patent, the amount of a given dividend distribution, the timing of dividend distributions — were made by officers of these organizations, and not by shareholders. As a result, these share-based groups were not truly platforms or forums for collective patent valuation.

The Pneumatic Steel Corporation, a steel patent licensing group formed in the late-nineteenth century, illustrates the share-based design. The group was born from a dispute: In the late 1850s, two American investor groups acquired patent rights to the “Bessemer process” — a breakthrough in steelmaking technology. One group of investors held patents developed by Sir Henry Bessemer, the original inventor of the process. A second group held a blocking patent derived from experiments with related processes.

Faced with this legal impasse, the two steelmaking concerns consolidated their patent rights — initially under a trust and later through a corporation. The Pneumatic Steel Corporation, as it was named, granted the various patent holders and their beneficiaries dividend-yielding stock in return for their assignment of patent rights. Ten thousand shares were distributed in total. These shares were distributed between the Kelley Process Company and the Albany investors based on the numerical ratio of patents that each group contributed. Private correspondence between the group and one shareholder shows that dividends were distributed several times each year.

It appears that the Pneumatic Steel Corporation either did not admit or, alternatively, did not attract outside patent holders: When the corporation was restructured as the Bessemer Steel Company in 1877, the new corporation’s articles of association listed only the patents originally held by the organization along with six after-acquired patents developed by the founding members. This shows that, during its eleven years in operation, the Pneumatic Steel Corporation acquired no patents developed by outside inventors.

In addition to limiting the decision-making power of shareholders, some share-based patent pools limited the transferability of stock. For example, a 1926 corporation that acquired patents on machinery and methods of removing the pits from peaches granted each of its two founders 2500 shares of common stock valued at $100 each. A provision in the pooling agreement limited the availability of stock to potential newcomers:

The parties hereto agree that before either of them may sell or otherwise dispose of the whole or any portion of the capital stock of the Corporation, and in the event a bona fide purchaser shall be obtained therefor, the party so wishing to sell or otherwise dispose of such stock shall give written notice to the other party advising it of the terms of sale or disposition, and the party to whom such notice is given shall have fifteen (15) days after the giving of such notice within which to elect to purchase or acquire the stock so being offered for sale upon the same terms and conditions upon which the bona fide purchaser is willing to purchase or acquire said stock, and should such party elect to so purchase or acquire such stock, it shall have the right to so purchase or acquire the same on demand.

This limitation is consistent with the theme that united all fifteen share-based pools examined in this study: Despite being capable of inducing innovation by, for instance, making stock available to innovators, such groups tended to concentrate patent ownership. Because these share-based pools did not give their members a meaningful voice in valuation decisions, and because they rarely included new members over time, they do not support the Theory of Collective Patent Valuation.