The pros and cons of using a patent pool

A patent pool is used to eliminate litigation and facilitate innovation, but they can present some complications. Carefully evaluate patent pool pros and cons before creating or entering into one.

Patent pool basics

A patent protects your intellectual property by preventing others from exploiting your ideas for their own gains. When competing businesses each have patents that cover different pieces of a new product opportunity, a stalemate can occur, which stifles innovation.

One solution to this is to create a patent pool. Essentially, a patent pool refers to an agreement between two or more patent holders who transfer their intellectual property to a joint venture. The businesses inside the pool then enter into cross-license agreements with one another and, sometimes, with outside third parties. This allows licensees to use patents on fair, reasonable, and nondiscriminatory (FRAND) terms.

When two or more companies simultaneously come up with the same idea, a patent pool agreement helps both businesses take their products to market by eliminating expensive and time-consuming lawsuits about which company ultimately has the right to develop the products. These agreements are commonly used by multinational corporations, most notably in the technology, telecom, and pharmaceutical fields.

One of the earliest examples of this in the U.S. was an agreement between four sewing machine manufacturers in 1856. Each of the four companies held different but related patents, and their holders were constantly suing each other for infringement. After meeting to discuss their common interests, the companies pooled nine patents.

Benefits of patent pools

Patent pools can increase opportunities for innovation and cost efficiencies while fostering competition and helping create industry standards.

• Innovation. When a patent pool works as intended, it facilitates innovation between companies while minimizing potential legal issues related to the use of other protected concepts.
• Cost and process efficiencies. Businesses that hold complementary patents can effectively agree not to sue each other for infringement as they work to get new products to the marketplace. Pools can reduce the time and expenses associated with innovation by reducing both litigation and the need to negotiate with other patent holders.
• Lower transaction costs. Patent pool agreements can lower transaction costs for third parties, who don't need to negotiate individual licensing agreements with each business, but can instead enter into a single agreement.

By pooling their patents in 1956, the sewing machine manufacturers were able to focus attention on manufacturing rather than on resource-consuming litigation.

Potential drawbacks of patent pools

Patent pools also have some potential drawbacks, which include the following.

• Time and expense. While they can lower the costs associated with introducing new products, pools also come with expenses. They can take years to form and may require an independent expert to evaluate the members' patents.
• Patent administrator. When you establish this kind of agreement, you also need to hire an administrator who maintains the pool, finds licensees, and ensures there is no infringement.
• Membership and regulation issues. If all of the major players don't agree to join the pool or if members don't agree on governance matters, it will not work effectively.
• Antitrust concerns. Perhaps the biggest potential drawbacks are regulatory concerns and the perception that pools distort competition. While intended to facilitate innovation, they can actually stifle it. This is particularly true in industries where small, outside companies account for the majority of innovation in the industry. Patent pool agreements can lead to antitrust and monopoly concerns. To address this, the U.S. Department of Justice requires reviews to determine if patents inside the pool are essential.

Before deciding to create or enter into a technology, medical, or other type of patent pool, understand the potential pros and cons so that you can minimize risks.

If you are ready to protect your own intellectual property by patenting it, a patent specialist can help make the process simple and affordable.