April 18, 2002 

Maureen Sirhal

National Journal's Technology Daily

Intellectual Property: Experts Weigh Value Of Patent Pools, Cross Licensing Responding to the concerns of federal antitrust enforcers, industry and academic experts on Wednesday explained how new technology is facilitating the need for companies to develop common standards and how the practice of "patent pooling" so far seems to be enhancing technological developments. As part of an ongoing series, the Justice Department's Antitrust Division and the FTC convened a panel of experts from universities, law firms and private companies to weigh the anti-competitive implications of patent pools and cross licensing -- new mechanisms that allow firms to share inventions and avoid costly legal disputes. Patent pools typically feature two or more firms that agree to license their combined patents or inventions to third parties. Many pools typically form within a specific industry to create common standards for technologies. One such example is a pool known as MPEG-2 LA, a group of companies that joined to license a standard for the transmission of digital images and audio data for devices like high-definition televisions (HDTV). Cross licensing allows two firms to share their technologies and avoid patent infringement and the costly litigation that usually follows. Panelists touted the benefits of both approaches, arguing that they reduce the costs of transactions by providing a one-stop shop for companies to license various patented technologies. They also said two patent-licensing mechanisms also lower production costs for firms and, over time, may enable coordinated research and development efforts. But patent pools often include "substitute" or "complementary" technologies in addition to the "essential" standards that prompt the pools. Antitrust authorities fear that the additional patents could hamper competition by allowing companies in the pools to raise licensing prices. Still, the nascent licensing practices "have gone pretty well," said University of Minnesota law professor Douglas McGowan. Criteria for creating patent pools "are being used sensibly [and] employed in a reasonable manner." McGowan suggested that antitrust enforcers consider factors such as the firms' return on investment when analyzing the competition concerns raised by patent pools. He also said antitrust enforcers should question whether competition is better with pools than without. Jeffrey Fromm, senior managing counsel at Hewlett-Packard, noted that "to the extent that pools are smaller ... the propensity to license outside the pool is high." But the terms under which companies license their patents within pools can vary according to the parties and their respective industries. Additionally, he noted in prepared testimony that changing market conditions often can render licensing agreements useless. But Fromm added that in some cases, the structure of patent pools may discourage innovation because pool members often must provide "grantbacks," or the contribution of any improvements upon the shared patents to the larger pool. Another major problem with the two patent mechanisms, experts said, is the uncertainty surrounding their formation. Most firms rely on the Justice Department's 1997 Business Review Letter, which outlines basic guidelines for patent pools. Yet Fromm said "those rules ... often are not sufficient to provide a level playing field for all affected parties necessary to ensure unimpeded competition." by Maureen Sirhal National Journal's Technology Daily