Patent pools are a favoured mode of technology sharing. In its 2017 Communication, “Setting out the EU approach to Standard Essential Patents” the European Commission noted:

The creation of patent pools or other licensing platforms, within the scope of EU competition law, should be encouraged. They can address many of the SEP licensing challenges by offering better scrutiny on essentiality, more clarity on aggregate licensing fees and one-stop- shop solutions. For IoT industries, and particularly SMEs, newly exposed to SEP licensing disputes, this will bring more clarity to licensing conditions of SEP holders in a specific sector.

Thus, it was surprising to see automobile parts supplier Continental sue the patent pool Avanci and others for violations of antitrust law. The gravamen of Continental’s complaint is that Avanci only offers its automotive licenses only to original equipment manufacturers (OEMs) (i.e. Ford, Toyota, Daimler etc.) and not to their suppliers like Continental. What made this perplexing was that, for more than two decades, patent pools have offered licenses at a single-point in the supply chain and generally at the end-product level.

Not surprisingly, Continental’s complaint was thrown out by the United States District Court for the Northern District of Texas. This decision is now on appeal to the United States Court of Appeal for the Fifth Circuit. As part of this process, third parties were allowed to file amicus briefs. Once such amicus brief was filed by MPEG LA.

MPEG LA is the granddaddy of patent pools. Since the 1990s, it has been the leading pioneer of the modern patent pool. As is noted in its amicus brief:

MPEG LA has operated licensing programs for a variety of technologies encompassing more than 24,000 patents in 94 countries with some 260 patent holders and more than 7,200 licensees. MPEG LA currently administers over a dozen patent pool programs, with other pools for groundbreaking technologies in development.

Suffice it to say, MPEG LA knows what it is talking about. And what does MPEG LA think of the notion that one should offer licenses to all levels of a supply chain? They begin by noting:

Among other things, required licensing at all levels would increase administration costs, cause confusion in the market, encourage avoidance of responsibility for royalties, generate a multitude of otherwise unnecessary litigation, and threaten the viability of patent pools to deliver their benefits to the market at large.

They then go on to detail the myriad practical problems that a “license-to-all” regime would entail:

[C]ompelling patent pools to license at all levels of a supply chain represents a radical departure from all past practice and precedent that would create inefficiencies even if all licensees were required to pay the same standard rate. Some users would refuse to take a license claiming that others in the supply chain have or should have taken a license instead. Those that do take a license would seek to avoid their royalty obligations by similarly claiming that others in the supply chain have or should have paid the royalties. Licensee reporting of royalties would become unreliable as licensees try to parcel out their royalty obligations from those of others in their supply chain and determine which patents have yet to be licensed.

Licensing administrators, too, would face similar difficulties. They would require burdensome reporting information from licensees, such as the source and subsequent purchasers of each unit. On top of that, licensing administrators would not be able to cross-check reported sales against industry figures because that information is not available at all levels of the supply chain. As a result, royalty audits, along with the time and cost they bring for all concerned, would become more frequent and take longer to complete. 

What is interesting is MPEG LA’s characterization of a “license-to-all” regime as “a radical departure from all past practice and precedent”. This is absolutely true. Many of those who tout “license-to-all” present this as a simple, practical option and completely gloss over the fact that such a regime has never been practiced. And there is a reason it has never been practiced: it is completely unworkable. Thus, MPEG LA concludes:

In sum, compelling patent pools to issue pool licenses to all levels of the supply chain through the threat of antitrust litigation would undermine the viability of procompetitive patent pools. It would result in increased litigation, increased transaction time and costs, increased administration costs, and decreased accuracy in royalty reporting. Ultimately, the cost of these decreased efficiencies would be passed onto consumers. It would likely also result in insufficient compensation to inventors for their research and development efforts and disincentivize their future efforts.

If patent pools become inefficient and unreliable, licensors will cease to participate in them, the interoperability of the standards they enable will be lost, and the competitive market benefits including convenience for licensees and savings to consumers that they provide will disappear. Licensing administrators, which bear the business risk in the event of failure, have the most incentive to ensure that the pools they design in their discretion license at the most efficient point in the supply chain and are otherwise structured to deliver the most value to participants. Individual licensees should not be permitted to interfere with these competitive market forces and a business’ freedom to make these decisions.