On April 13, Doctor of Juridical Sciences (“SJD”) candidate Jake Wu shared his research about patent pools in his talk “Patent Pool: An Institutional Appraisal” at the College of Law.
Mr. Wu studied mechanical engineering in China before earning his Juris Doctor at Iowa. Now in the SJD program at Iowa, he is conducting advanced legal research on the subject of patent pools under the guidance of his dissertation advisor, Professor Herbert Hovenkamp. Specifically, Mr. Wu is analyzing patent pools through the lens of New Institutional Economics—a perspective that focuses on how institutional structure (including laws) impacts economic performance, while also exploring how those institutions evolve over time.
“I wanted to think of patent pools as a kind of a structure that can provide many functions, and explore why it is possible for that structure to provide those functions,” said Mr. Wu. “I asked: Why do patent pools exist and how are they designed to achieve certain purposes?”
A patent pool is a contractual arrangement where patent owners aggregate their patents to either share them with each other or bundle them for third parties. Basically, an independent patent owner grants the exclusive right to sublease its patent to the other members of the patent pool. Then, those patent pool members grant similar licenses to her for their respective patents.
People often think of patents as owned by a single entity, such as an inventor or a company to which the inventor has assigned the patent. However, it can also be beneficial for a group of patent holders to share access to each other’s patents. For example, if multiple parties own patents for different components of a single machine, those parties would be incentivized to pool their patents because doing so would make it easier for each of them to license that bundle of patents and assemble the complete machine.
In other words, “it makes sense to pool patents when they complement each other to create utility,” said Mr. Wu. He explained that this principle is presently being implemented in “the video and audio compression technology sector, where about 20 entities currently own over 600 patents.”
Though there are many examples of how patent pools could function in different industries, Mr. Wu was particularly interested by the ways in which patent pools could influence cartels.
A cartel is an association of manufacturers or suppliers unified by the desire to maintain prices at a high level and restrict competition. As they can be a very effective means of controlling a market (think OPEC in the 1970s), cartels are subject to antitrust scrutiny. Cartels have an inherent structural limitation, however, in that members of a cartel are incentivized to cheat the rules in order to maximize individual profit.
Patent pools offer a way to manage cartel members and reduce cheating behavior.
Mr. Wu argued that the patent pool structure creates a vertical relationship in which all members of the cartel (i.e. the patent holders) can monitor each other and punish any members who attempt to cheat. This disincentive to cheat could take the form of refusing to grant or renew licenses of the cheating members, increasing royalty costs for cheating members, or holding cheaters’ royalties hostage by refusing to issue them rebates.
By having a more effective method of internal policing, patent pools could also better avoid the problems typically associated with having a cartel manager: the potentially high cost of managing a cartel, the risk of having a manager who advances his or her own interests at the cost of the group, and the risk of attracting attention from antitrust enforcement agencies.
It is important to note that cartels are generally viewed as being detrimental to a competitive marketplace, and thus patent pools seeking to stifle competition will run afoul of antitrust enforcement agencies trying to protect free market activity. In the United States, for example, statutory protections have been enacted in the form of the Sherman Act, which is understood to prohibit price-fixing cartels. The question remains as to how society should respond to cartels that use the patent pool method to try to control the marketplace.