Power and Governance in Patent Pools

I. INTRODUCTION II. THE PROMISE OF COOPERATION A. The Defect of Bargaining Regimes B. The Defect of Liability Regimes C. The Theory of Collective Patent Valuation III. A STUDY OF COLLECTIVE GOVERNANCE A. Ex Ante Bargains B. Corporate Dividends C. Rough-and-Ready Formulas D. Patent Assessors E. Royalty-free Licensing and Cost Savings IV. IMPLICATIONS FOR THEORY AND POLICY A. Implications for Theory B. A Proposal for the Recording of Patent Pooling Agreements V. CONCLUSION APPENDIX I. INTRODUCTION The recent influx of patent pools, research consortia, and similar cooperative groups led by companies at the vanguard of American innovation has raised a pressing question: How does collective action influence the incentive to innovate? This question hinges on how patent pools are internally governed--a topic that has not been deeply examined by legal scholars. (1) Through an original study of fifty-two private agreements, this Article pulls back the veil on patent licensing collectives to examine whether such organizations are designed to encourage long-term innovation. This study is prompted by a widely perceived crisis in our patent system. (2) Today, mosaics of thousands of patents held by many different owners are believed to cover the technologies that fuel our economy--e.g., pharmaceuticals, biotechnology, and software. (3) In this age of dispersed entitlements, "downstream" technology users are burdened with the high costs of identifying, evaluating, and negotiating licenses for multitudes of "upstream" patent rights. (4) Moreover, patent holders who learn that their cooperation is essential to a licensee can strategically hold out for prohibitively high royalties. (5) Experts believe that such costs and risks will leave innovation to languish. (6) A long-debated solution to this problem is compulsory licensing--or, in the parlance of Entitlements Theory, a shift from "property rules" to "liability rules." (7) In contrast to our current patent system, which permits patent holders to seek injunctions against infringers, a compulsory licensing regime would require patents to be licensed at rates set by an organ of the state, such as a court or Congress. (8) This solution would remove the need for licensees to bargain over patent rights. (9) Consequently, transaction costs and associated risks of holdouts would significantly drop. (10) However, critics of compulsory licensing believe that government authorities tasked with setting royalty rates would under-compensate innovators. (11) This, in turn, would discourage prospective inventors from investing time and money in research and development activities, leading to a drag on innovation. If so, while patent holders may have too much control over the fees they collect under the current regime, they would have too little control over these fees in a compulsory licensing regime. (12) In a landmark 1996 article, Robert Merges suggested that private collective action can resolve this problem. (13) Merges posited that private licensing groups such as patent pools occupy a middle ground between property regimes and liability regimes. (14) In this middle ground, groups of patent holders enter into private agreements in which they receive the ability to influence (albeit in a limited way) the royalties their inventions command. (15) This is achieved, Merges argued, through collective valuation procedures--e.g., negotiating or voting over decisions that affect royalty sharing. (16) Support for the foregoing theory, referred to herein as the Theory of Collective Patent Valuation, is suggested by a wealth of scholarly literature on collective valuation regimes in non-patent contexts. The Nobelist Elinor Ostrom, for example, documented communities around the globe that manage scarce natural resources through collective valuation procedures, such as democratic voting. (17) In the United States, law and economics scholars have observed similar collective property valuation systems at work in private condominium and neighborhood associations. …