Patent Pool Licensing Project

This page documents the Patent Pool Licensing Project.

The project members are: Ed Egan, David Teece, and Ed Sherry. Access to this page and all sub-pages are restricted to project members.

Research Question

The basic research question is: Are licensing rates lower for patents that are held in pools?

The question is important to practitioners as patent pool licensing rates are used, increasingly frequently, in F/RAND licensing disputes.

And the question is important to economists as:

• There are normative reasons why licensing rates should be lower for patents held in pools.
• Patent licensing is currently poorly understood (what are typical rates?)
• Patent pools are growing in popularity and are an increasingly important part of the licensing ecosystem.

Basic Economics

There are a number of reasons why patents held in pools should charge lower rates than non-pool licensed patents. These include:

1. Anti-trust scrutiny
2. Cournot complements
3. Self-selection
   1. Exogenously given sharing rules
   2. Vertical (dis-)integration
   3. Network effects
   4. Substitution protection

These reasons may apply more or less in 'robust' versus 'fragile' pools. Each is currently a sketch outline - please add or fix each point as appropriate! Likewise, we should consider if there are reasons why patents held in pools might charge higher rates. Possibilities include:

1. Enforcement of a defacto monopoly (when the pool is linked to a standard)

Anti-trust scrutiny

Patents in pools must cover complements. Including two substitute patents in a pool would be price-fixing (i.e., using the pool to set a price above that which would result from competition).

Cournot Complements

For a basic model of Cournot complements applied to (blocking) patents, see Shapiro (2001), Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting. [[1]].

The essential argument is that by including patents in a pool, multiple entities can avoid charging higher prices (and receiving lower profits) that arise from a failure to coordinate (as a result of 'balkanized rights').

Self-selection

The choice to participate in a patent pool is clearly endogenous. An entity opts to include a patent in a pool (subject to the pool's approval) if and only if this leads to higher profits.

Exogenously-given sharing rules

Sharing rules are determined at the formation of the pool. From that point on the sharing rules are essentially exogenously given. A review of 'typical' sharing rules is needed. But the essential premise to this argument is that a weak patent may be able to secure greater revenue from a pool-share than from independent licensing.

Vertical (dis-)integration

A patent might cover anything from a small component (or component process) to an entire product (or entire production process). Patents in pools always cover components. Analogous to Williamson, if, for reasons of first-order economizing, a patented component would be more valuable integrated into the firm, then the firm would not include it in the pool. Including patents in a pool may prevent a hold-up problem, as the pool can act as a cross-licensing agreement, but weakens the patent-holder's protection. Specifically, in the context of cummulative innovation, a firm holding a patent outside of a pool can prevent future hold-up on a technology, whereas a firm that places a patent in the pool can not.

Network Effects

The value of a technology depends on its adoption. A patent pool may aid adoption by allowing developers access to all needed complementary technologies and by assuring comsumers that the technology is here to stay (particulary when a pool is linked to a standard). As such a firm may earn higher total rents from including a patent in a pool, even if its marginal rents from each unit are lower.

Substitution Protection

Particularly when pools are linked to standards, there is the possibility of later substitution. Standards undergo revision, and substituted patents might not be removed from the pool (this is an empirical question). As such, a firm with a weak patent that will be suffer from substitution in the next generation of the technology may have a strong incentive to join the pool. The firm can choose between higher rents for a short duration, or lower rents for the duration of the patent term (or the pool).

Empirics

In order to demonstrate that patent pool licensing rates are actually lower than non-pool licensing rates, we need a representative sample of non-pool licensing rates. This is essentially impossible on a population-basis, as licensing terms are confidential and incidences of licensing are unobservable to anyone except the licensee and licensor. The best we can do, therefore, is to find a sample with known properties. I propose the following possibilities:

1. Using university licensing
2. A product-based sample

University Licensing

The University of California Technology Licensing Program recently produced a report that to Board (of which David is a member?) that I was forwarded (email subject: PBSI May 30 - revised background material). This report claims that since 1980 UC has:

• 5,000 licensing agreements
• $2.1b in licensing revenue

We could use this data, but:

• 0.2% of licenses (10) account for 80% (1.68b) of revenue, so there isn't a lot of heterogeneity to exploit
• The data will be hard to get. Possibly David can facilitate it, but even then we will almost surely need to pay to have TTO/IPIRA/etc. staff code the data for us, as we won't be able to see the contracts ourselves (they will insist on anonymizing the data to some degree) and we will need richer detail than their summary stats (i.e., rates might vary with volume, etc.)
• It may be the case that no university patents have been included in pools, making this sample questionable (i.e. these may be more 'basic' patents or otherwise be different from those in pools in a way that we can't control for). Furthermore, the TTO explicitly factors social welfare in their licensing decisions, so they aren't a proper profit-maximizing entity. This would understate licensing rates, but might not be 'fatal'.

Regardless of the usefulness of this dataset for this project, we should probably follow up on what we could get (and then worry about what we could use it for). To the best of my knowledge, very, very little is known about univerity licensing rates.

A Product-based sample

Another, much more exciting option, would be to 'build' a product that requires a number of patents, including those from a pool. Ideally we would want to 'implement' one or more standards and actually negotiate potential licensing agreements. This might well require Human Subjects approval (see:http://cphs.berkeley.edu/review.html). We would (almost certainly, though for some standards I might be be able to do it) need assistance from an electrical engineer or other field expert, a lawyer, and considerable GSI support. This would not be cheap or easy. But we would have a well-defined sample and it would be fantastic research if we can pull it off.