Patent pools fail, freeriding and large firms won’t join

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

2.1. Stylized facts on essential patents and the standardization process

One may define the creation of a standard as the creation of a common and documented repository to harmonize the activities of a technological sector. Either formal (such as standard developing organizations) or informal (such as consortia) standardization bodies may conduct standardization. The creation of pools helps the dissemination of technology by allowing users to sign only a single license for several patents. A patent holder may choose whether to bring its patent to the pool or not. In practice, patent holders have few incentives to participate due to the possibility of freeriding (taking advantage of the pools’ creation by charging higher royalties without participating in it).

A patent has to be essential to the standard to be included in a pool. Nonetheless, it is difficult to identify precisely all the essential patents related to a technology. All pool patents are essential, but all essential patents are not in the pool. A vast majority of essential patents are not included in a pool probably due to the lack of incentives for patent holders to participate.

Pools usually have third-party experts that assess the essentiality of the patents before inclusion. This third-party expert establishes a patent essentiality report identifying the part of the standard to which the patent proves essential. One of our main hypotheses in this paper tests whether this essentiality evaluation by a patent expert reduces the uncertainty on the outcome of the dispute and, thus, facilitates the resolution by settlement.

Simcoe et al. (2009) study the effect of patent disclosure in Standard Setting Organizations (SSOs) on the number of litigations. In this paper, we analyze pool patents consisting of not only patents declared essential but also essential patents not disclosed in an SSO. There is a strikingly small overlap between patents disclosed as essential in an SSO and real essential patents included in a pool. This small overlap can be explained in two ways. First, the evaluators do not typically assess patent essentiality before disclosure in an SSO and, subsequently, many patents disclosed turn out not to be truly essential in reality. Moreover, some very large firms particularly active in the standardization field do not participate to patent pools (e.g., Qualcomm). In addition, the pool functioning rules (essentiality evaluation, patent holders discussion on royalties, etc.) should have an impact on litigations that the patent disclosure in an SSO does not have. Thus, although we use a similar method, we analyze a totally different underlying effect than that analyzed by Simcoe et al. (2009).