In light of the ever increasing, expanding and confusing smartphone patent litigation and licensing landscape, we have put together a three part series to apprise you of the current developments. Hopefully part one begins to untangle the mess for you. If you missed Part 1, please click this link.
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One possible approach that could have deflated the budding smartphone patent war at an early stage is a cooperative strategy called patent pooling. In a patent pool, two or more companies in a technological field come together and agree to cross-license their intellectual property holdings in order to cooperate for the benefit of all involved. Patent pools are useful because they are efficient. They give users and manufacturers of a technology a one-stop-shopping experience, and guarantee access to an entire technology space through the door of one relatively simple licensing arrangement.
One common example of patent pooling involves developing a patent pool around an already established technological standard in order to safeguard its boundaries and streamline compensation for the companies that created and continue to use the standard. Generally, in cases like this members of the committee overseeing the standard begin by hiring an independent evaluator. The independent evaluator examines potential pool submissions and determines whether these patents are essential to the pool. Essentiality can be determined under a number of different criteria, for instance whether a patent is technically necessary for the standard, whether it is commercially necessary for the standard, or whether a patent is necessarily infringed 100% of the time by a device that is compliant with the standard. Once the essential patents are determined, the holders of these patents form a group, which meets to determine the rules governing licensing agreements and other administrative matters. At this point, especially in modern patent pools, government regulators such as the Department of Justice may become involved. Once approval is obtained, a pool Administrator is hired, and then goes about signing up licensees, distributing royalties, and monitoring infringement.
Although patent pools may sound like a straightforward and collegial strategy for efficiently managing the growth of an entire industry, they are not ideal for every situation. For example, a pool may simply fail to get off the ground. If a critical mass of licensors contributing patents to the pool is not present, the pool can simply fail for lack of momentum. If several of the big players in the industry, or even one very large player, does not join the pool, there may not be enough coverage offered to entice others to join. Competing licensing arrangements for related technology may also frustrate pool formation and adoption.
Once a pool does get started, it may flounder because joining the pool does not present an attractive economic proposition. This may be, for instance, because administrative and royalty fees are set too high. Pools may also set terms for early adopters, who receive more favorable rates than those signing up later. This can also discourage acceptance by an industry. In other situations, such as unbalanced technology spaces in which a handful of large corporations do the majority of the manufacturing, those large manufacturers may pay more money by joining a pool than they would save by striking out on their own. Having a large number of products covered means large royalties paid into the pool, often placing money in the hands of competitors, which can be an unappealing circumstance for some participants. One of these large manufacturers can avoid the large royalty payments by taking advantage of the fact that in a patent pool, infringement suits are filed by the individual patent owners, not the pool itself. If one of these large manufacturers has its own independent patent position that is relatively strong, it can chip away at the pool by taking on the other manufacturers one-on-one.
While all of these problems are evident in the current smartphone patent standoff, there is also another major barrier to the development of a patent pool for managing the smartphone market: a fundamental incompatibility in the business strategies of the major industry players. In essence, Google takes in the vast majority of its revenue from advertising sales, not hardware or software sales, unlike its competitors. Google's main goal is to get people online and viewing ads, as often as possible and for as long as possible. As a result, Google is not interested in charging royalties, and in fact provides its Android operating system free of charge to smartphone manufacturers, with the goal of keeping those smartphones relatively inexpensive so that more people use them more often. This is directly at odds with, for instance, Apple's business model, which relies primarily on hardware sales, or Microsoft's, which relies on licensing fees from software. Because of these diverging goals, it is difficult to imagine how these three companies would ever be able to reach a patent pooling or other cross-licensing scheme that is mutually advantageous.
In the next installment, we will take a closer look at the tense situation that has resulted from the breakdown of patent pooling and other cooperative strategies.
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