Burgeoning Patent Licensing Programs Necessitate Best Practices

The Bottom Line

• Proliferation of patent pool licensing programs has spurred new best practices in the space.
• Patent pools should encourage open participation and minimal restrictions when engaging in licensing deals.
• Adopting best practices can foster a transparent and equitable environment for licensors and licensees.

Patent pools, which are agreements between two or more patent owners to license their patents to a third party, should adopt a series of best practices to foster a transparent and equitable environment for both innovators (licensors) and implementers (licensees).

Open participation, robust disclosures, transparent and consistent pricing, and fair distribution of royalties are essential to maintaining trust and integrity within the patent ecosystem. Pool contributors also should retain the freedom to license out their patents independently.

Patent pools should impose minimal restrictions in their licensed agreements—implementers shouldn’t be subject to no-challenge clauses on patent validity and essentiality, prohibitions on developing competing products or technologies, or exclusive grant-back obligations, where an implementer grants the innovator the exclusive right to use improvements to or new applications of the licensed technology.

Opening the Door

Open participation may be best explained by what it isn’t. A patent pool agreement doesn’t meet the best practice of open participation when the pool operator can punish participating patent owners—such as by reducing or entirely withholding royalty payments—for licensing outside the pool or supporting efforts to form other pools.

Patent pool agreements haven’t achieved open participation when blanket prohibitions prevent patent owners from licensing their patents through other pools. This includes all products that implement applicable standards or different products than the products that the pool can or is actively attempting to license.

Patent pools that have such punitive or restrictive terms aren’t designed to attract the most sophisticated patent owners and generally won’t approach one-stop shop status.

Still, patent licensing through multiple pools can be a double-edged sword: In situations involving multiple overlapping pools, licensees have reported experiencing complexity and confusion, leading to slower pool license acceptance.

Further, a patent pool that allows each implementer (or the pool operator) to pick and choose which patent owners’ patents are included in the license—rather than taking a license to all patents in the pool—isn’t open to all, as each patent owner risks being excluded from any individual license.

However, to fall within the safe harbors established by a long line of guidance from antitrust regulators, pool operators should ensure that only essential patents are included in the pool.

To achieve this best practice, patent pools typically subject contributors’ potential patents to an independent expert assessment and limit their licenses to patents that are essential to the standard(s) in question.

Side Deal Disclosure

Patent pools should disclose to pool contributors all side deals with licensees outside of pre-approved guardrails. Licensees often want assurances about the intended interpretation or application of certain provisions in the standard form license agreement, or additional representations and warranties from the pool operator that don’t implicate patent owners in any way.

Side letters addressing such points generally are acceptable on the part of pool contributors and can be consistent with best practices. This contrasts with side letters that make substantive changes to the pool’s standard license terms impacting other pool participants.

For example, side letters that change the royalty amounts, or that grant additional rights under patents included in the pool, are problematic if undisclosed to (and not approved by) the participating patent owners.

These types of side letters can prevent patent owners from being aware of the terms under which their patents are being licensed, resulting in both innovators and implementers being unable to trust in a level playing field.

Patent Rights Pricing

How pricing—and royalty rates in particular—is established is a critical aspect of any patent pool. Best practices include considering the needs of innovators and implementers, as well as providing consistent pricing terms.

Before establishing a price, patent pools should consider input from both innovators and implementers instead of launching a pool with innovators’ preferred terms and then expecting implementers to fall in line.

Patent pools should have consistent, transparent, and uniform pricing terms, with any changes announced in advance. This ensures a level playing field for implementers. Conversely, when pricing and payment terms vary because of secret side deals, implementers become doubtful, just as they do in bilateral licensing, where an innovator is granting licenses directly to implementers, instead of through a patent pool.

On the flip side, allowing licensee pricing (royalty rates or terms) to vary depending on the licensee’s country or region of incorporation wouldn’t be a best practice. Licensee pricing that varies based on where a licensed product is sold is acceptable.

But allowing pricing terms to shift purely based on the licensee’s place of incorporation or principal place of business risks undermining the core non-discriminatory principle embedded in Fair, Reasonable, and Non-Discriminatory licensing terms.

A licensing structure that imposes different pricing terms on similarly situated licensees due solely to their geographic identity would be discriminatory. Where a patent pool adopts this kind of tiered or nationality-based pricing structure, it gives benefiting licensees an unfair advantage competing in developed markets. This makes it difficult to understand how the pool’s licensing program could be deemed consistent with FRAND obligations.

Another important aspect of a pool’s pricing is how it deals with situations where the implementer separately has a license or the equivalent—such as a release or a covenant not to sue—from one or more of the participating patent owners. In such scenarios, the master pool agreement should obligate participating patent owners not to collect twice under the same patents for use of the same standards in the same products.

The agreement also should make implementers the beneficiaries of this obligation, which patent pools should enable patent owners to fulfill by crediting or refunding the implementer through the pool based on the amount the patent owner would have received from it.

It isn’t best practice, however, for a pool to have no meaningful mechanism for an implementer to raise these issues or relating to payment. Similarly, it would not be best practice when an implementer is unable to obtain relief from a patent owner it believes is collecting twice.

Pools that lack such a policy are exposed to legal risks, as was demonstrated in a 2021 German case, GE (Access Advance) v. Vestel, where the court criticized a patent pool’s policy as lacking a fair and reasonable mechanism for the reimbursement of duplicate royalty payments.

Additionally, pools should have a pre-agreed dispute resolution mechanism run by a third party, such as arbitration or a specified country’s courts, available to both the innovator and the implementer to resolve any disputes regarding duplicative royalty payments.

Another pricing best practice involves annual royalty caps. Royalty caps may advantage large implementers over smaller ones, because they can provide big players with a substantial discount off the per-unit rate paid by other implementers.

A fixed annual royalty option, where the implementer must commit in advance to pay a fixed royalty amount no matter how many licensed products it sells over the course of the upcoming year, is a best practice alternative to allocate risk and reward, since it provides a more level playing field among implementers.

Determining Payments

Patent pools should scrutinize the amount paid out to each participating patent owner. Best practices include equal treatment of all patent owners, as well as an objective, quantifiable approach to determining the payments made to each patent owner.

All patent owners should be treated alike by patent pools applying the same royalty allocation rules across the board instead of favoring some (such as the owners of the pool administrator) at the expense of others. But pool administrators should consider the level of contribution of patent owners to the pool.

Patent pools can reward patent owners who engage in bilateral licensing—and, when needed, enforcement—in parallel with the pool’s licensing activities. These patent owners are doing more to contribute to the pool and the health of the patent ecosystem in general.

In determining the payment amount to each patent owner, pools should have a reliable method of addressing the differences in value of patent portfolios instead of simply relying on the number of patents or patent families contributed, as numbers themselves might not accurately reflect the value of the patents involved.

In some cases, certain parts of the standard are much more important than others. The same is true for patents essential to those parts of the standard. In addition, portfolios that have been successfully enforced or widely licensed carry more weight, and their inclusion in the pool delivers more value to the licensee than portfolios that have been dormant.

Patent pools should implement objective and quantifiable methods for valuing contributions and should ensure that all parties are treated equally. By doing so, they reduce legal risks and promote broad participation by both innovators and implementers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Kappos is a partner at Cravath and co-chair of the firm’s intellectual property practice.

Leslie Liu is an associate in Cravath’s corporate department.

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