Michael Mattioli Discusses the Benefits of Outsiders …as They Relate to Patent Pools

By TAP Staff Blogger

Posted on August 4, 2017


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“Sometimes, the collective will of a group overpowers individual self-interest; sometimes, an outsider is also a good neighbor; sometimes, a little cooperation is not only better than none, but also better than more.” (“Patent Pool Outsiders” by Michael Mattioli, August 2017)

 

A new article by intellectual property law scholar Michael Mattioli examines the impact of ‘outsiders’ on patent pools. As he states in “Patent Pool Outsiders,” “a growing number of economists and legal scholars are concerned that patent holders who refuse to join patent pools—cooperative licensing clearinghouses—will undermine and sometimes entirely undo the benefits that these groups deliver.”

 

However, based on his research and analysis, Professor Mattioli finds that “outsiders and secondary pools do not appear to undermine the benefits that patent pools offer.”

 

Below are excerpts from “Patent Pool Outsiders.”

 

Overview of the Purpose of Patent Pools

 

Patent pools are important to the consumer technology industry, and by extension, to the entire US economy. That is because they address a big problem: transaction costs. Technology standards that the developed world relies upon, including LTE data and MPEG streaming video, cannot be commercialized without the permission of many different patent holders. Because dozens of patent holders often hold essential pieces of the puzzle, the transaction costs of negotiating a deal with each individually would be phenomenally high. A patent pool addresses 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—i.e., their members. By minimizing the number of licensing transactions that must take place, patent pools reduce transaction costs that would otherwise persist. The benefits are far-reaching. Anyone who has owned a smartphone, video game console, personal health device, or modern television has benefited directly from the work that patent pools do.

 

The Concerns Some Have about Patent Pool Outsiders

 

Theorists imagine the following: 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 they otherwise would. Those higher royalties would offset at least some of the transaction cost savings the pool provides to those licensees. This might motivate other companies to pull away from the pool. It is easy enough to spin out hypothetical problems that might follow: faced with prohibitively high licensing costs, some would-be licensees might decide to focus on other (less preferred) products and services. With fewer competing manufacturers to purchase goods from, consumers could encounter higher prices. Meanwhile, the reduced patent licensing activity could reduce the incentive that patents represent, dampening research investments.

 

Key Take-Aways

 

Benefits Come to All from Deals Made Outside of the Pool: The study reveals a characteristic of patent pools that has gone unappreciated until now: they subtly but powerfully influence bargains that take place “poolside”—i.e., deals between patent holders and licensees that take place “in the shadow” of the pool. This spill-over effect can beneficially limit the power that theorists have assumed outsiders to have. This is an unappreciated benefit of cooperation. The theorists, as it turns out, have not used the wrong approach, but rather, have been missing some important parameters.

 

Partial Cooperation May Be Better Than Complete: [T]this Article shows that, counterintuitively, patent licensees are sometimes better-off where cooperation among licensors is partial, rather than complete. The inflection point lies where the royalty rate hike that a unified pool would need to charge to draw in an outsider is equal to the transaction costs that licensees would conserve by dealing with a single pool.

 

The Value of an Ethnographic Approach: This Article’s lessons extend beyond patent law. Considering the widespread concern over outsiders in so many areas of law and policy, this Article shows that an ethnographic approach based upon interviews and novel documentary evidence can add critical information that theoretical models are missing. The argument is not that an economic analysis of outsiders is inappropriate, but rather, that such an analysis can yield more accurate and complete results when the dynamics of the situation are well understood. Experts in other domains far removed from patent and antitrust law may find the approach taken here helpful.

 

Conclusion

 

Putting this all together, cooperation among patent holders is not an all-or-nothing game. Contrary to theory, outsiders and secondary pools do not appear to undermine the benefits that patent pools offer. This is because patent pools have a quiet but powerful influence on negotiations that take place “poolside,” so to speak. This is why the gentle fragmentation among licensors that pervades technology licensing is mostly harmless, probably inevitable, and sometimes actually preferable to the alternative. Antitrust regulators who must evaluate patent pools should find this knowledge helpful. This finding can also be helpful to scholars concerned by outsider problems in many other areas of law and policy. An ethnographic approach like the one followed here can reveal aspects of an outsider situation that theory alone does not capture.

 

Read the entire article: “Patent Pool Outsiders.”

 

 

Michael Mattioli is an Associate Professor of Law at the Indiana University Maurer School of Law. He teaches and writes on intellectual property and innovation policy more generally, with a special emphasis on patents, data, and contract law.

 

Professor Mattioli’s research examines how the collective exchange of patents, data, and other forms of technological information relate to innovation policy. This theme canvases a variety of topics, including the structure, governance, and antitrust implications of patent pools, and how data pooling and the disclosure of metadata can advance “Big Data” technologies such as machine learning.

 


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