As Congress considers legislation aimed at limiting lawsuits filed by so-called patent "trolls" — those who collect patents solely so they can sue others for infringing upon them — there is another kind of intellectual property abuse that members should look into: patent pools.
Patent pools gather patents for a particular technology that is often made up of multiple components, each with its own patent held by a different company, so that manufacturers only have to go to one source for their licensing needs. When properly administered and managed, patent pools can benefit the market and innovation by making it easier to include a technology in new products. Unfortunately throughout history, they have also been used to stifle competition and raise prices.
The sewing machine patent wars of the 1850s, perhaps the first American patent war, only ended when the participants realized they could make more money by combining their patents and using that combination to earn monopoly profits. That combination was labeled in the press a "grinding, pitiless monopoly" that charged ruinous prices. One hundred years ago, John D. Rockefeller used pools to inflate prices and hold rivals of his Standard Oil Co. at bay.
Our innovation economy relies on patent pools, but there are some who become bad actors by abusing them. Patent pools may cause anti-competitive effects through price fixing, limiting supply to increase demand or foreclosing innovation. This potential for abuse triggers the need for antitrust scrutiny to ensure that the pool was not created as a cover for anti-competitive activities and that the collective arrangement does more good than competitive harm.
One pool, called MPEG LA, is under investigation by the Department of Justice and the California Attorney General's Office for allegedly stifling a competing MPEG standard used to encode and compress video images. In addition, MPEG LA's "MPEG 2" pool is criticized for charging unreasonably high licensing fees to access pools that contain mostly expired patents. This MPEG 2 standard can be found in consumer technologies such as PCs, DVD players and televisions.
Licensing demands by MPEG LA owners have raised the cost of our most popular consumer products. MPEG-2 owners have filed patent enforcement actions against Craig Electronics, Curtis International and ViewSonic for infringement on video compression standards for digital TVs and DVDs.
A pool called One-Blue, which administers licensing for patents essential to Blu-ray Disc products, is also today demanding the same royalties for having its technology in Blu-ray disc players, even though the products' prices have plummeted. One-Blue's royalty has remained the same at $9 per player despite a nearly 75 percent decrease in retail pricing over the past decade. This obviously forces consumers to pay more. Conversely, a DVD player licensing pool known as DVD6C has reduced its royalties at least three times since 2002 in response to a similar decrease in retail pricing.
Fortunately, the Federal Trade Commission is investigating trolls to examine how they impact innovation and competition. Congress is discussing patent reform legislation, and 11 patent reform bills were introduced last year. The Innovation Act recently passed by the House, for example, addresses some concerns with trolls and pools alike, such as who pays litigation fees and promoting transparency with patent pool ownership structure and scope of operations.
While legislation is helpful, heightened antitrust oversight is needed. Over-broad patent pools and mischievous licensing practices raise the costs to consumers and dampen innovation. This is a cost too great for the innovation economy.
David Balto is an antitrust attorney in Washington, D.C. He previously served in the Antitrust Division of the Department of Justice and the Federal Trade Commission and has written a paper entitled "Barriers to Competition on the Innovation Superhighway: How the Lack of Antitrust Scrutiny of Patent Pools Deters Competition." His email is firstname.lastname@example.org.
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