How Patent Pools Form
In a previous blog post, we covered what patent pools are and the purposes that pools serve. In this post, we’ll cover how pools form, and some of the rules that govern their formation and operation.
How Pools Form
In general, pools form in several ways, but three patterns emerge. Historically, many pools formed when competitors in an industry realized that individual patents owned by different companies were blocking product development and enhancement by all companies. Combining the patents into a single pool eliminated this logjam and even enabled new competitors to enter the market, further monetizing the IP in the pool. This was the motivation for the sewing machine and airplane pools discussed in the first blog post of this series.
Secondly, many pools are formed when a technology standard like MPEG-2, MPEG-4 DVB-T, and DVB-T2 are created by multiple technological participants to the standard. Here, a patent pool is the most efficient mechanism to allow multiple companies to develop products based upon the standard, whether licensors to the pool or totally independent. This was the motivation for Sisvel’s many pools, including DVB-T, DVB-T2, the Wi-Fi Joint Licensing Program, and the MPEG LA MPEG-2 and H264 pools.
Thirdly, some pools form when a group of patent owners realizes that a third-party, proprietary, technology is making use of their respective patents. This was the motivation for the call for patents issued by MPEG LA in 2011 relating to Google’s VP8 technology, and for Sisvel’s VP9 and AV1 pools, which contain IP patents essential to the operation of the VP9 codec, owned by Google, and the supposedly royalty-free AV1 codec produced by the Alliance for Open Media.
Whatever the pattern may be, pools are typically initiated by a group of companies that seek to monetize the use of their patents. To form the pool, these companies retain a licensing administrator to create and operate the pool. Once the operational framework of the pool is ready, a “call for patents” is issued to help identify additional owners of relevant patents. When forming the pool, the goal is to include as many relevant patents as possible to deliver the best possible value to the eventual licensees. Due to some of the foundational requirements discussed below, this search for relevant patents can require consistent efforts in terms of time and money invested.
Avoiding Antitrust Issues
In general, most legal systems frown upon competitors working together since this can result in price-fixing and other anti-competitive behaviors. As mentioned in the previous blog post, the United States Justice Department has recognized that pools have pro-competitive benefits like “integrating complementary technologies, reducing transaction costs, clearing blocking conditions, and avoiding costly infringement litigation.” The European Commission likewise recognizes the transaction cost-saving effect of pools as well as other pro-competitive benefits such as one-stop licensing of the technologies included in the pool.
In various letters and rulings, the Justice Department has set forth multiple guidelines to ensure against anti-competitive behaviors. One of the most oft-cited letters is the DOJ response to MPEG LA’s request for a business review letter relating to the formation of the MPEG LA MPEG-2 patent pool. Some of the requirements are self-evident, like the requirement that all patents in the pool are enforceable and that pricing be standardized so as not to disadvantage any competitors.
Both the EC and the DoJ note that the use of independent experts to assess the essentiality of the patents in the pool is likely to lead to pro-competitive effects. This practice existed before the formation of the MPEG LA MPEG-2 pool but is now seen as essential to avoid antitrust violations in multiple jurisdictions. Differently from other pool administrators, following the review by each patent owner, Sisvel also incorporates an internal review before the expert review as an extra safeguard. As mentioned, this is a significant investment in terms of time and money, but it’s performed to ensure the use of each patent by the applicable codec and therefore build strong and valuable pools.
Whenever a new patent pool launches and notwithstanding how much effort has been invested in the technical analysis, some unsophisticated commentators will label the administrator and/or pool members “patent trolls,” or something similar. In evaluating these claims, it’s useful to remember that to avoid anti-trust scrutiny, a pool performs the due diligence described above. To read more about our view on this topic, please check our post on the demonization of non-practicing entities.
The Life Cycle of a Patent Pool
In general, pools start with a call for patents, and licensing begins with the publication of the patent list, which lets licensees know exactly what they are licensing and enables them to independently assess the essentiality of the patents in the pool. Of course, when a standards-related pool is formed, the list of potential contributors to the standard is generally well known, as it is when a small group of competitors forms a pool to avoid blocking and foster innovation within the industry. This known base of patent owners may simplify and accelerate pool formation and the publishing of the patent list. In the third instance, however, the potential list of contributors is much less clear. The patent pool administrator must balance the potentially conflicting goals of incorporating as many relevant patents as possible into the pool with publishing the patent list as soon as possible. Sometime between the call for patents and the publication of the patent list the administrator usually announces the pool to make potential technology adopters aware of the royalty obligation In the case of the VP9 and AV1 pools, Sisvel announced the pools with five participants and issued a call for patents that generated a much larger response than anticipated. After an initial review performed by all patent owners, all patents were reviewed by Sisvel technical staff and third-party experts, which slows down the process, but at the same time, ensures strong and valuable patent pools.
The good news is that the two initial patent lists have now been published (link). Once the evaluation process for the patents identified to-date is complete, also accounting for the number of patents currently pending third-party evaluation, Sisvel expects to reach a total portfolio offered for license of around 1000 patents for VP9 and nearly 2000 for AV1.