Patent pools reduce transaction costs that would otherwise persist whenever a product must rely on multiple patents. They address this problem by granting manufacturers and service providers permission to use the necessary patents through a single agreement. Licensees agree, in return, to pay standard royalty rates, which the pools divide among the patent holders. In this way, patent pools operate as cooperative licensing clearinghouses.
By minimizing the number of licensing transactions that must take place for a product to be brought to the market, patent pools can significantly reduce transaction costs. These advantages are such that a growing number of economists and legal scholars are concerned that patent holders who refuse to join patent pools will undermine and sometimes entirely undo the benefits that patent pools deliver. If an important patent holder refused to join a patent pool and demanded greater royalties than it would otherwise receive as a member of that pool—i.e., supra-competitive prices—licensees would have to pay higher royalties than would otherwise be the case. Those higher royalties would offset at least some of the transaction cost savings the pool provides to those licensees. This might, in turn, motivate other companies to pull away from the pool.
Such outsider behaviour has been on the rise in recent years. Antitrust regulators have long assumed that outsider patent holders that decline to join pools do not disrupt the benefits that patent pools offer. Against this backdrop, a rising chorus of critics has theorized compellingly that outsiders are more harmful than regulators assume. Commentators who subscribe to this theory urge antitrust regulators, who must evaluate patent pools, to regard them more sceptically than they currently do.
This article – which you can find here – offers the first empirical view of this topic, and suggests that the regulators have it right: patent pool outsiders do not appear to significantly increase transaction costs.
The article is structured as follows:
Section I explains the relationship between patent pools and the promotion of competition and innovation. It builds on and summarizes prior research showing that ‘the benefits of patent pools appear to far exceed their costs’. The discussion then turns to a review of recent economic and legal scholarship concerning patent pool outsiders. This scholarship has shown that most modern patent pools do not include all the patents that relate to the technologies they support. In a recent study, for instance, it was found that the most “complete” pools contain on average only 89% of the patents that might be needed to market a product. This gives rise to the risk of holdout by patent pool outsiders – i.e. that a single patent holder aware that it can block access to a necessary technology could hold-out for high royalties (and lean-in on insiders for higher rates).
Section II presents a set of case studies of outsider behaviour in action, based on ethnographic work influenced by Elinor Nostrom’s work. The most important insight of this work is that patent pools significantly influence the royalty rates that outsiders can ask for and receive. By publishing their rates, patent pools signal the value of the portfolios of patents they offer. For those who may be interested, there are a number of case studies which purport to show that the royalty rates set by patent pools tend to limit the royalty rates that outsiders ask for and receive. Obviously, this directly contradicts theories that outsiders will eliminate the benefits of patent pools.
Section III develops a method that antitrust regulators can use to assess the impact of outsiders on patent pools. This method should allow regulators and courts to estimate the cost that a licensee either incurs or saves in the presence of an outsider. This section gets very technical, so I see no need to bother you all with its contents here – if you are interested, the paper is attached below. For fans of Nostrom (such as myself) there is also an interesting discussion on commons, property rights and optimal modes of cooperation.
This is an interesting paper, in particular for how it tries to assess the empirical validity of a number of controversial theoretical assumptions which can have a significant impact on competition law. On a personal note, this debate seems to me to share quite a bit with the controversy surrounding standard essential patents (SEPs) and the (potential) relevance of holdup and holdout for competition law.