Patents PART II: How ICT patent pools are harming innovation

One approach to extracting revenue from intellectual property is the patent “pool” structure. Recently, an American patent pool administrator called MPEG LA – which manages patents that affect consumers and business across Europe and almost all ICT markets – has become the focus of larger public policy issues concerning who ultimately benefits from innovation and where and how these benefits are distributed. MPEG LA is a for-profit company that charges licensing fees for groups of individual patents that are essential to a technology standard. These patent pools often operate in the shadow of inter-corporate negotiations and are known to and understood by only a handful of people.

In this world of patent activism, the role of patent pools needs to be reviewed. DG Competition within the European Commission has begun to engage in the debate but as yet their focus has been on promoting an exchange of information between what it sees as the three spheres of influence – competition policy, patent legislation and standard setting (although there is some debate about sharpening the definition of essential patents). It is, however, illuminating to look at what is happening in specific cases.

Though they were initially developed to improve access to patents and increase the efficiency, MPEG LA seems to have deviated from these early objectives. It faces criticism for charging relatively high licensing fees for access to pools such as the MPEG-2 pool. It has been accused of charging innovators unusually high fees to gain access to the MPEG 2 technology even though the majority of the patents within the pool have already expired or will do so soon. MPEG LA allegedly does this by locking in licensees to contracts that extend far beyond the life of the patents within the pool. These high license fees erect barriers to innovation rather than promote it. They allow MPEG LA and its like to wield the power of the technology pools they manage to maximize profits.

MPEG LA is rapidly becoming notorious for its practices throughout the technology sector. Through another pool called H.264 it enables the distribution of videos across the Internet on sites such as YouTube. With the widespread adoption of H.264, MPEG LA has further cemented its patent-based monopoly power over those seeking to license patents essential to Internet video innovation and consumer products that stream video in particular. But the industry is beginning to question whether MPEG LA and similarly pools are hurting innovation more than helping foster it.

Hence the cacophony of concerns. The prime facie case is that MPEG LA has moved from being custodian of a patent pool and passive manager of the collective interests of both consumers and producers to a predatory organisation pro-actively seeking profits. The duty to support innovation and to foster consumer gains has been lost in a strategy designed to maximise rents and monopolize profits over an extended period. The unfortunate victims are Europe’s emerging innovator class and the millions of the potential beneficiaries of their products.

Governments, in some countries, are responding to this re-writing of the way patents are being used; ironically not by redrafting legislation and focusing on innovation but by sponsoring their own patent trolls. Notably examples include France Brevets, Industrial Technology Research Institute (Taiwan), Innovation Network Corporation of Japan and Intellectual Discovery (Korea). While each of these institutions has a different modus operandi they all share a common sets of objectives and tools.

These tools replicate those of the private sector patent trolls and patent pools by directly trying to ensure that national organizations enjoy an unfair advantage over international competitors. Such actions raise important trade concerns and portend the introduction of trade barriers and differential treatment of organizations – action contrary to the commitment under the WTO/GATS.

Why does all this matter? In the end it means consumers and small innovative companies are in all probability paying vastly more for products such as DVDs, televisions, gaming consoles, personal computers, and other hi-tech products. These high prices can stunt innovation and raises costs for consumers.

Innovation is stimulated by allowing those that are successful to enjoy financial reward (and national fiscal systems rightly recognise this with reduced rates or incentives such as the UK’s new ‘patent box’.) In a technologically-driven marketplace where intangible assets like design are crucial to innovation, the ability to protect intellectual property with patents is essential.

But what patent trolls and patent pools are doing is the turning patents into tradable assets and ultimately financial instruments rather than techniques and tools to stimulate and protect innovative activity. What is needed is a new IPR regime that supports innovation and rewards the innovative.

Howard Williams is Professor Emeritus at the University of Strathclyde and former Research Fellow at the Oxford Internet Institute.