These days, the number of patents in certain fields has been increasing dramatically following the change from the analog to the digital era. New technologies are being invented under these conditions, but without any standards being established, these technologies could become diversified, complicated, and disordered. There is also a risk that they would not be utilized in the public and would disappear. This article explains how technical standards and patent pools overcome this problem and how they are closely related to the public’s enjoyment of technology in this digital era.
2. Examples of Technical Standards
Technical standards are defined as acts of standardizing the grab bag of technologies. Technical standards are divided into two main categories: standards for countries or industries under the initiative of administrative organizations or public entities, and standards established by private enterprises in accordance with their business policies. For example, technical standards related to social infrastructure, such as the World Trade Organization/Technical Barriers to Trade (WTO/TBT) Agreement, patent laws, or copyright laws, come in the first category, while standards related to our lifestyles, such as DVDs, hard disks, USBs, and i.LINK, fall into the latter one.
3. Benefits if a Company’s Technology is Adopted as an International Standard
If a company’s technology is adopted as an international standard, they do not need to change the related products’ specs for global manufacturing and sales. Therefore, they can enjoy a temporal advantage. In addition, they are also able to maintain their global competitiveness by internalization of their know-how and can gain license revenue based on RAND (Reasonable And Non-Discriminatory) licensing.
4. Relationship between Technical Standards and Patent Rights
However, it is often necessary to use standardized technologies for manufacturing and selling products which are compliant with the standard technologies in many fields since these technologies have already been standardized according to rules. Many of these standardized technologies have already been issued as patents, and there has been an increasing number of cases recently where a standardized technology involves a lot of patents. In principle, in order to avoid patent infringement, when manufacturing and selling products, a company must obtain a license from a patentee(s) who holds patents related to those products. Although each license fee may be
low, users have to conclude licensing agreements with many patentees individually, and the total license fees sometimes could be expensive. It is also troublesome to negotiate license agreements with several patentees individually. Therefore, if a company is considering developing new products, they would be struggling with expensive license fees and burdensome procedures, which could in turn cause delays in developing their markets and expanding demand. In other words, it is important for a company to receive patents related to the company’s standards.
Next, the following example of a famous digital animation compression technique, MPEG (Motion Picture Expert Group), illustrates in detail how important it is for a company’s technology to be adopted as an international standard. MPEG is often used to digitally send and preserve animation such as by digital transmission and DVDs. It is said that a patent holder of MPEG-related technology earns at least 1 billion JPY per year in license fees. With regard to MPEG-related patents, Lucent Technologies, Inc. (renamed as Alcatel-Lucent) filed a suit against Microsoft Corporation at the United States District Court in February 2007. The judge in the USDC of California ruled that Microsoft had infringed one of Lucent Technologies’ patents and ordered Microsoft to pay 185 billion JPY. It is worth noting that the amount of payment ordered by the District Court in California was quite high although another District Court had dismissed the request by Lucent Technologies. It is generally considered that a company has to achieve sales of more than ten billion JPY in order to earn a profit of one billion JPY during ordinary business. It could be said that license fees of one billion JPY means that a patent has a great impact on the market in excess of ten billion JPY. It could also be said that license fees are unearned income since the income from license fees is earned without relation to sales, and license fees are rewards for past research and development. As the above MPEG example shows, it is extremely important that a company’s technology be adopted as an international standard.
5. What is a Patent Pool?
A patent pool is a consortium of more than one patentee all of whom bring together their own patents and license them to other members of the patent pool and the like. Companies which form a patent pool can discuss royalty fees and acquire licenses of related patents at reasonable fees. This is the benefit of a patent pool for licensees.
6. Advantages to Participating in a Patent Pool
The following are advantages to a company for participating in a patent pool.
- To secure interconnectivity and compatibility
Patent pools enable a company, all at one time, to prevent potential IP disputes, avoid unnecessary
overlap in research and development, promote a project safely and efficiently, and secure interconnectivity and compatibility within a patent pool. To explain further, when hardware and software of related apparatuses cannot be supplied monopolistically by a single company, the use of common technical specs among other companies encourages the securing of compatibility, and as a result, the market is expanded. In addition, the company can gain manufacturers’ and consumers’ confidence in complementary products. Nowadays, DVD players of various companies are sold at electronics retail stores and we are free to choose among them. This allows a company to gain consumers' sense of trust which becomes a trigger for expanding the market. The manufacturers of subsidiary products will supply their products in large quantities to the market if they find that each company is putting a DVD player on the market. This can also lead to market expansion. On the contrary, if one company uses an indispensable patent monopolistically and other companies release other products to the market, consumers will be puzzled about whether this standard will become mainstream and whether they should buy such a product. Thus, a patent pool can realize expansion of a market based on network externality.
- Reasonable packaging of licenses
Intellectual property rights, such as patents, are often packaged by the common technical unit, and the licensees need to pay license fees which are uniformly set up, including the unnecessary fees relating to the intellectual property rights. However, since the companies who participate in a patent pool aim at promoting their products and expanding the market, a set royalty is reasonable.
- Proof of patent infringement
If a lawsuit concerning patent infringement is filed, a patentee attempts to prove the fact of patent infringement and the defendant usually denies infringement of the patentee’s product. It is hard work to prove patent infringement and sometimes the defendant refutes. In the case of establishing proof of infringement for patents related to the structure or quality of the material of a product, it is relatively easy to prove infringement. But for patents related to a method such as a manufacturing process, it becomes more difficult to prove and the burden of expenses from the collection of patent infringement evidence to legal fees will increase. On the other hand, establishing proof of infringement for a patent related to a standardized technology is easy. For example, devices that play CDs should be pooled with patents relevant to CDs and devices that connect to wireless LANs should be pooled with patents relevant to connection with wireless LANs. Companies that sell products based on international standards cannot deny enforcement of the patent. Even in such a case, it will be easier to prove patent infringement through a patent pool. Furthermore, if a member of a patent pool is sued for patent infringement by a third party, they can
deal with it together with the other members of the patent pool.
- Inhibition of other companies’ research
Generally speaking, the sales ratio of research and development costs is high in the industries of information and telecommunications, and electric and electronic engineering. Although members of patent pools obtain immense income from royalty fees and their sales usually are high, their research and development costs also tend to be tremendous. On the other hand, companies which are not members of patent pools rarely dominate the market share, and if those companies spend money on research and development at the same rate as members of a patent pool, the costs for companies which are not members of a patent pool will be lower than those for members of a pool. However, it is obvious that non-members of a patent pool would be desperate to develop new technologies. They will be determined to find weak points in member companies’ technologies. This situation is critical for members of a patent pool. One of the countermeasures for diminishing the volition of research and development of companies which are not members of a patent pool is the promise of a patent license. The members of a patent pool can bide the time lag to benefit from carrying out patent licenses with other companies which is an act that a company would not ordinarily conduct with a rival company.
7. Changes concerning Technical Standards and Patent Pools in Japan
The international environment surrounding patent pools has been changing as technical standardization continues to spread. In June 2005, the Japan Fair Trade Commission accepted the rationality of patent pool formation which is based on an indispensable patent related to standardized technology. In order to cope with such changes, the “Japan Intellectual Property Arbitration Center” was established and started the service of making evaluations regarding indispensable patents in April 2006 as a professional third party organization independent from the participants in patent pools.
8. How Should Companies Utilize Technical Standards and Patent Pools Effectively?
The active and practical use of international standards is also an effective means for utilizing technical standards and patent pools. For example, the cost-cutting standard which was set by the International Organization for Standardization (ISO) leads to a reduction of costs of a company by utilizing the standard in the operations department and its group companies, as well as in its cooperating companies. Moreover, a business model standard is a tool used by a company to earn profits by utilizing transactions with its group companies and cross-industrial companies. Furthermore, the various departments of a company, for example, the intellectual property section,
standardization section, and research and development division, should cooperate and establish a common understanding in order to facilitate international standardization efficiently. It is also important to visit the ISO, regional standardization organizations, and an independent standardization organization and to build connections with patent offices.
The active filing of applications relevant to technical standards is considered to be a preferable strategy. First, it is effective that the wording used in a claim coincide with terms used in written standards in order to reap advantages during the evaluation of whether or not a patent is indispensable. It is also desirable to effectively make amendments and describe many working examples in a patent specification since it is also important to adapt the standards into the specification. It is now also important to utilize division applications effectively considering the fact that the distribution of royalty fees in a patent pool depends on the “number” of indispensable patents.