People will join

Many patent pools offer important cost savings to their members. These savings include access to shared patent rights, immunity from challenges to patent validity, and joint funds to offset litigation and patent prosecution costs. The desire to lower costs may explain why patent holders voluntarily join licensing collectives that offer limited control over royalties, and in some cases, no royalties at all.

Nine institutions examined in this study were not structured to collect or to distribute royalties to patent holders. Instead, these groups were formed purely to reduce the risk of patent infringement litigation by requiring each member to provide every other member a royalty-free license to its covered patent rights. As one would expect, these agreements were formed by companies that were both licensors and prospective licensees — that is, they manufactured potentially infringing products but also held patents of their own.

The royalty-free institutional design was first adopted by the Automobile Manufacturers Association (“AMA”) — one of the most significant patent licensing collectives in industrial history. Formed in 1914 by a set of leading automobile manufacturers, the AMA at one time pooled rights to over one thousand automobile patents contributed by hundreds of members. As a condition of membership, automobile makers who joined the AMA promised not to sue one another for patent infringement and were required to license all of their relevant patent rights on a royalty-free basis to all other members. As such, the group was structurally incapable of channeling royalties to would-be innovators.

As a corollary to its institutional design, the AMA did not seek to acquire patent rights to future innovations: Each time the organization’s massive cross-license was renewed, the contract explicitly excluded patents that members might obtain in the future. The AMA’s president testified in a 1938 congressional hearing that this limitation was intended to appease members who were reluctant to part with future patent rights, the value of which was as yet unknown. As a consequence, the AMA did not encourage innovation by offering prospective inventors the promise of collecting royalties.

A 1935 royalty-free licensing group related to petroleum refining provides another helpful example. The group’s five founding members — all large oil companies — promised to grant non-transferable licenses to a newly formed corporation that acted as the licensing administrator. The members received no royalties or “moneys” in exchange for these licenses. Instead, each received royalty-free access to all patents contributed by the other members and royalty-free access to any future patents acquired by the corporation. Access to patent rights was the main inducement to join.