E pluribus unum – the continuing evolution of patent pools

It has been more than 150 years since a gang of sewing machine inventors and manufacturers grouped their intellectual property together to form one of the first patent pools. That collaborative effort helped to bring an end to an IP crisis comparable to the recent smartphone litigation wars. The premise was simple: by pooling their intellectual property, the patent owners could provide potential licensees with an easy and relatively cheap way to license, while helping to promote widespread adoption of the technology.

It was a simple and, for many years, effective approach. While pools fell out of favour for a while, due to concerns over collusive behaviour among patent owners, they enjoyed a renaissance in the mid-1990s, with the advent of the wildly successful MPEG-2 pool for video compression technology. From relatively humble beginnings – it started life with eight patent owners contributing around 100 patents – this grew into a licensing behemoth, returning royalties to its members on the sale of billions of devices such as DVD players and PCs.

Despite this success, some sectors remain stubbornly pool-less – the most notable being fourth-generation (4G) wireless technology, in which traditional bilateral licensing is the norm and which has seen several high-profile, expensive patent disputes over the last decade. Other pools have been drawn into disagreements between licensees and licensors over what constitutes a fair approach.

However, there are some signs that pools are evolving to take account of changing market conditions and tailoring their approaches to specific countries or regions. New licensing platform Avanci – which has many of the hallmarks of a pool – also heralds what could be a more collaborative approach by companies which have traditionally shunned pools. “I believe and others believe that pools are the answer to many of intellectual property’s problems today,” claims Peter Moller, head of the HEVC Advance pool. “The issue is getting it right where over time you’re able to attract a substantial percentage of a technology’s intellectual property value in one or maybe two pools.”

When they operate at their most efficient, patent pools can present a pain-free approach to licensing. On the flipside, they can also serve as a microcosm of everything that is wrong with much of the patent market.

Modern history

Although pools have proliferated in recent years – MPEG-LA alone runs 12 separate ones – none has hit the same heights as MPEG-2. By almost any measure it has been a phenomenal success; in many ways its creation heralded the modern era of patent pools. Since it was established in 1997, there has been an estimated $5 trillion in worldwide MPEG-2 product sales. In its lifetime it has also achieved significant global reach, covering patents filed in 57 different countries.

According to industry sources, 10 billion MPEG-2 decoding or encoding products – including PCs, TVs, set-top boxes and DVD players – and 70 billion MPEG-2 video discs were shipped by the end of 2016. Pool administrator MPEG-LA has declined to reveal just how much has been made through the MPEG-2 pool, but even at the lowest royalty rate of $2 per device, the overall return for licensors reaches into the billions.

MPEG-2 is a video compression technology which delivers near film resolution quality to digital video. Its widespread adoption was triggered by the TV industry moving from analogue to digital, which governments began to encourage in the 1990s. Fearful that they could be exposing themselves to future infringement lawsuits, cable companies mapped out the IP landscape to determine who owned patents which might read on the new standard. “There was a concern among a number of companies that a patent thicket would inhibit the adoption of the technology, with an unknown number of companies owning an unknown number of patents who would demand an unknown price,” recalls Ken Rubenstein, a partner at Proskauer Rose who had the important task of vetting which patents should be included in the pool. It became clear that a collaborative approach would help to ease that uncertainty and ensure that patent owners saw a return on their investment while licensees paid a relatively modest price.

However, industry will alone was not enough – pools still needed the approval of antitrust regulators in the United States and Europe. In the United States, that effort was led by Garrard Beeney, an IP specialist with New York law firm Sullivan & Cromwell. According to him, a number of approaches to help propagate the technology were considered, but it was clear that a pool would be most efficient. “The question was what structures we could put in place so that it was something that the regulators could support,” he explains.

Beeney, together with the US authorities, helped to hammer out the structure that ultimately led to a June 1997 business review letter from Joel Klein, an assistant attorney general in the Department of Justice’s Antitrust Division, which laid out the ground rules for the MPEG-2 pool. “The limitation of the portfolio to technically essential patents and the use of an independent expert to be the arbiter of that limitation reduces the risk that the patent pool will be used to eliminate rivalry between potentially competing technologies,” Klein wrote. “Potential licensees will be aided by the provision of a clear list of the portfolio patents, the availability of portfolio patents independent of the portfolio, and the warning that the portfolio many not contain all essential patents.”

Garrard Beeney
Partner, Sullivan & Cromwell

“A patent pool may have saved a lot of costs for 4G mobile companies”

With the department on board and the European Union set to follow suit, pool administrators and members had a clear set of rules to observe. As Klein’s letter highlighted, it was crucial that MPEG-2 took a rigorous approach to which patents it included. In addition, pool members had to agree that any patents they developed which improved the pool’s technology would be granted back for licence.

Larry Horn
CEO and president, MPEG-LA

“Pools may not proliferate if companies don’t take part in standards efforts”

MPEG-2 became so successful primarily because of the widespread adoption of the technology itself, but also – according to those who helped set it up – because it encapsulated a fair approach to licensing. “It recognised that striking an appropriate balance between generating a return for patent owners and a reasonable royalty rate for those using the technology was the right approach,” Beeney maintains.

Joe Siino
President, Via Licensing

“A different royalty rate makes sense for domestic companies in some markets”

Today’s patent licensing market is a very different place, where it can often be difficult if not impossible to strike a balance between licensors and licensees. Many believe that the heyday of patent pools is over. Yet at the same time, there are signs that pools and other collaborative approaches to licensing are changing in ways that may ensure their survival.

Global approach

Arguably the most significant way that patent pools are starting to evolve is by introducing different royalty rates for different parts of the world. Pools have long had global reach, but have mostly taken a one-size-fits-all approach to licensing, so that licensees pay the same royalty regardless of whether they are in the United States, Germany or China.

In the last couple of years a number of pools – including Via Licensing’s pool for AAC technology (see Table 1) and the HEVC Advance pool – have introduced different royalty structures which apply a more expensive royalty rate to the more mature IP markets in the United States, Europe, Korea and Japan, and then a cheaper one for the rest of the world. While such differential rates may appear to contradict the spirit of standard-essential patents (SEPs), which are supposed to be licensed on a fair, reasonable and non-discriminatory (FRAND) basis, to their proponents they simply represent market realities, with the price of products varying ‒ often markedly ‒ between different jurisdictions.

Theses differential rates are in part an attempt to bring more Chinese licensees on board. China as a manufacturing base and economic power has changed profoundly since patent pools took off around 20 years ago. Yet while local manufacturers are becoming global players in a range of sectors, many are still primarily domestic companies which might well baulk at the price of a worldwide licence to a US or European-based pool. “I noticed when I joined Via that there were a lot of challenges around licensing companies based in emerging markets whose sales were primarily in those markets,” Joe Siino, president of Via Licensing, comments. The feedback he received from local players was that they were resistant to taking a worldwide licence which might be based on a royalty rate rooted in developed markets.

“A company in China has a far different set of circumstances that are relevant to its business from a company in, say, Germany that is selling primarily in the European Union and United States,” Siino argues. He also stresses that Via continues to offer a worldwide licence to its AAC pool, and that the differential royalty structures provide more regionally focused licensees with another option.

However, others are not so sure that pools should apply different rates. “Favouring one country over another can be a slippery slope of unintended consequences,” insists Larry Horn, president and CEO of MPEG-LA. “For example, China is already the second largest economy in the world and it’s going to be number one. It’s hard to see why a special deal should apply there without applying everywhere, especially with the capability of products to circulate seamlessly worldwide; and others will credibly argue: ‘Why not us?’”

To some extent, the new structures introduced by the likes of Via and HEVC Advance reflect the rapidly evolving global licensing market. Over the last decade, China has become far more assertive as an IP force and has started to insist that licensing practices which might work in the United States or Europe be adapted for its domestic market. That was perhaps most evident when the National Development and Reform Commission launched an investigation into Qualcomm’s licensing practices, ultimately fining the giant chipmaker and forcing it to agree to license its intellectual property under different terms.

As Qualcomm’s travails in China, Korea and, most recently, the United States demonstrate, the market for some licensors is getting tougher.

Missed connection

Nowhere has that been more evident than in the licensing of wireless technology – most recently in the 4G Long-Term Evolution (LTE) standard which drives many of the world’s mobile devices. The owners of foundational 4G intellectual property and other patents which underpin today’s smartphones – including the likes of Qualcomm, Nokia and Ericsson – have largely licensed the mobile industry separately, building licensing businesses worth hundreds of millions of dollars, but also engaging in protracted and costly litigation with alleged infringers.

Pools from the likes of Via and Sisvel which have focused on LTE have struggled to gain traction and failed to sign up some of the largest players as licensors. Via’s Siino insists that “things are picking up” for its LTE pool, and that it takes time to get any new group off the ground – although he concedes that it has been a lengthy process.

Most recently, Via has looked to change the royalty structure of its LTE pool in a bid to convince more small and mid-sized players in the mobile market to take a licence. Under the new structure, licensees will pay nothing for the first 100,000 devices sold; $1 per unit for sales of between 100,001 and 1 million; $1.50 for sales of between 1 million and 2.5 million; and $2.10 thereafter. By growing its licensee base, Via might then be able to persuade some of the most important patent owners to join as members.

“I think there are a couple of trends at play that have maybe made the process longer than in other pools,” Siino argues. “One is that the number of patents applicable to a wireless standard, from 2G to 3G to 4G, has grown dramatically.” This means that each generation has been used in a much broader way than its predecessor, which in turn means that the size of the potential licensing base has exploded.

“Because of that complexity, it takes longer to aggregate a critical number of licensors and licensees and for a pool to reach a steady state,” Siino maintains. Attempts to develop an LTE pool have also not been helped by uncertainty in the United States around patent rights, while key court decisions have undermined patent values. However, if those challenges can be addressed and greater certainty restored to the market, then ‒ in theory at least ‒ pools could still succeed.

According to Beeney, LTE has become the poster child for a technology which suffers from the lack of a pool. He points out that the likes of Qualcomm and Ericsson may have developed profitable licensing operations, but those efforts have come at a price. “Look at the costs they’ve incurred by going it on their own in terms of litigation and regulatory fines,” remarks Beeney. “Then think about what the returns could have been with a properly structured pool; it’s not clear that bilateral licensing is better than the aggregation approach.” But there are some signs of a more collaborative, pool-like approach developing among wireless industry leaders.

Last September the Avanci platform was launched when six companies – Qualcomm, Ericsson, KPN, InterDigital, ZTE and Sony – agreed to make their SEPs that read on 2G, 3G and 4G technology available for license across a number of industry verticals in the Internet of Things space. The first three verticals which Avanci has targeted are the auto industry, smart meters and connected homes – although at the time of writing, it had yet to sign up any licensees.

While Avanci does not class itself as a pool per se, it does share some of the same characteristics. “We comply with the requirements of a pool,” admits Avanci CEO and former IP head at Ericsson Kasim Alfalahi, “but the way we go about it is completely different.” Alfalahi stresses that the human element is what sets Avanci apart from traditional pools. “When we create a platform, it’s not just about the number of patents or setting a price; it’s a more business-driven approach.” Others also point out that it is hard to classify Avanci as a pool in the strictest sense, as it does not focus on a particular technological standard such as MPEG-2, but is a much broader collection of patents.

However, perhaps the most important characteristic that Avanci shares with a patent pool is that both represent a collaborative approach to some of the problems of the IP market and provide a far more efficient way for users to license relevant intellectual property. This is nothing new for engineers at the wireless giants – technology standards have long been developed in collaboration – but it is a more novel idea for their patent licensing colleagues. Alfalahi and his team are now looking to take the Avanci approach and apply it to different platforms, covering different technologies.

A chief IP officer’s view of pools

Arvin Patel is chief IP officer at Technicolor, and a former IP executive at Rovi and before that IBM. A pioneer in audio and visual technology, Technicolor has a substantial licensing business, bringing in hundreds of millions of euros to the company’s coffers each year – in short, it is a major IP player. This is why Technicolor’s announcement last year that it was withdrawing from the HEVC Advance pool caused waves.

Head of HEVC Advance Peter Moller insists that the damage resulting from Technicolor’s decision was largely a matter of marketing rather than one of intellectual property. However, whenever a major IP player withdraws from a pool, questions are raised.

It is fair to say that the pool behind HEVC Advance – the latest video compression standard – has had a rocky start since it was formed in 2015. It was created following dissatisfaction over MPEG-LA’s own HEVC pool, which Moller claims was angled too much to the licensee side. However, soon after launch the HEVC Advance pool had to change its royalty rates and its approach to content providers after pushback from the industry.

Amid this turmoil, Technicolor announced its withdrawal and Patel went onto elaborate on his feelings about pools and, more broadly, the debate around standards in an article in issue 80 of IAM (see “Time to save standards”). In a series of emails for this article, Patel made clear that he had thought very deeply about the workings of patent pools and their future. Here are some of his thoughts on how they might be able to continue to serve the market:

• Patent pools can play an important role in clearing the market for standard-essential patents (SEPs), but historically they have worked well only when there is voluntary licensing in the industry or when one of their members has strongly enforced its SEPs. Since pools do not own the patents they license, they are not in a great position to enforce them, but must rely on their members to do so.
• If pools want to survive and thrive, one of two things must happen:
  • We return to a voluntary SEP licensing regime; or
  • Pool managers figure out how to use the new SEP enforcement rules in the context of a patent pool and how to manage collaborative enforcement campaigns which make it clear that standards-based product manufacturers cannot just ignore the patent pool.
• There is no established law or precedent about standing for patent pool administrators to send fair, reasonable and non-discriminatory (FRAND) offers or enforce pool patents which are owned by pool members – some pools may begin to explore this area.
• If they can figure out the legal mechanisms to use, patent pools should have a strong position to make FRAND offers and it seems likely that the courts and competition authorities will be favourably disposed to them. Pools are by their nature pro-competitive, so as long as they have truly reasonable rates, it seems likely that they should be in a good position to win in the courts. Up until now, they have not really figured out how to do this.

Future lessons

It may be that no pool will be able to replicate the success of MPEG-2, which is now coming towards the end of its life – its last patents are due to expire in the United States in February 2018, and then in the Philippines and Malaysia by 2025. There are certainly many sceptics who claim that today’s transformed patent licensing environment – where licensors and licensees often struggle to agree on a royalty – means that pools will find it hard to maintain their relevance. The decline in patent rights ‒ particularly in the United States, where injunctive relief and damages have been eroded over the last decade ‒ means that potential licensees feel far more emboldened not to take a licence at all.

There are also concerns that pools will become swept up in the debates around SEPs and what constitutes FRAND which are taking place in standard-setting bodies and in the courts. This has been an acute issue for the Institute of Electrical and Electronics Engineers, which in early 2015 changed its patent policy in a way that has proved highly controversial for some rights holders.

“My biggest fear is that pools don’t proliferate because patent owners become more and more reluctant to join standard-setting efforts at the front end,” Horn comments. As disagreements emerge over what should be seen as fair and reasonable when it comes to setting FRAND licensing terms, outside forces have started to have their say. “Standard-setting organisations and the courts have attached conditions to FRAND that were not anticipated and which may chill the willingness of patent owners to participate,” Horn adds. If those owners pull out, pools will not survive.

This view is echoed by Adam Mossoff, a law professor at George Mason University, who has written about the sewing machine wars which gave birth to one of the earliest pools. “If pools are going to be viable, they need to be extricated from standard-setting organisations and the confusion surrounding them,” he remarks. This may mean that more pools focus away from SEPs, which is one area that Via’s Siino says it is actively looking to expand into. As ever with patent pools and the licensing industry, the rationale is relatively simple, but the application is far from straightforward.