Australia: Google, Tesla, patent pooling and trolls – a brief history of patents or free competition

Last Updated: 7 October 2015
Article by Jack Redfern and Matthew Ford

It is hard to believe there was a time when tension did not exist between, on the one hand, the granting of patent rights and, on the other, free competition. As the number of patents granted globally continues to increase so too do the arguments for changes to the various patent systems in light of this inherent tension. In this article we look at some of the positive and negative aspects of the increasing number of patents and some innovative approaches that have arisen to alleviate the tension.

Patents, and more particularly patent systems, were created to facilitate individual innovation by granting a time limited monopoly for an innovation to the inventor, while at the same time providing the details of the innovation to the public by allowing early publication1. The incentive of an exclusive right to exploit the invention that was described and defined in the patent specification for a set period of time is a powerful motivator for a patentee. However, the granting of such an exclusive right inherently conflicts with the concept of free competition and so a balance must be struck between the interests of the individual and the overall interest of the society. Moreover, as the factors contributing to that balance change it is reasonable for legislators and others to periodically reassess and, if required, re-balance the patent system to best target the more contemporary social, economic and other objectives that are believed paramount at the time.

In more recent times there has been a global proliferation of patent applications being filed. By way of illustration Figure 1 shows the number of total patent applications filed in the US, Japan, Europe, China and Australia each year between 1980 and 2013. This indicates a steady rate of growth in the US, and a very high rate of growth more recently in China, reflecting the perceived commercial worth of such patent applications by individuals and companies over the relevant timeframe. While the number of patent applications filed each year is growing, not every patent application will progress to grant either for commercial or legal reasons, or both. For example, patent applications for standard patents2 are usually subject to an examination before the relevant patent office for matters of eligible subject matter, novelty, inventive step, and other criteria. Not all applications will pass this examination and, if not, they will not progress to grant as a patent. As Figure 2 illustrates, the total number of patents granted over the same period covered by the chart of Figure 1 is generally lower than the number of applications filed. Another factor is that patents have a finite lifetime – which for standard patents is usually twenty years – and there is a need to pay periodic maintenance fees throughout the lifetime of a patent to keep it in force. Accordingly, a more accurate indicator of the perceived commercial worth of patents can be provided from the total number of patents actually granted and in force. This indicator is illustrated in Figure 3 and shows a more steady increase in patent numbers in the relevant jurisdictions. There is a delay between the filing of patent applications in a given period and the grant of a patent on a subset of those applications in a later period. The almost exponential increase in the filing of patent applications illustrated in Figure 1 suggests the total number of patents granted and in force should also continue to rise in future years, although at a lesser pace due to: not all applications progressing to grant; and a subset of the existing patents that are granted and in force will cease through the non-payment of a renewal fee or expire at the end of their maximum term.

Figure 1: Total patent applications (direct and PCT national phase entries). (Source: WIPO)

Figure 2: Total patent grants (direct and PCT national phase entries). (Source: WIPO)

Figure 3: Total patents in force. (Source: WIPO)

The growing number of patent applications being filed and, to some extent, the more moderate growth in the number of patents granted and in force, has led to concerns from some commentators and industry luminaries about patents now being a barrier to innovation3. Elon Musk, the CEO of Tesla Motors and SpaceX, for example, has publicly expressed his concern about what is seen as a changing role for patents4 in the commercialisation of technology.

One aspect of the patent system that has attracted considerable attention in recent times is how patents have led to the creation and enablement of non-practicing entities or 'patent trolls'. These are companies or other patent holders which solely exist to stockpile patents and to generate revenue from royalties or court awarded remedies against those who infringe their patent rights. Some jurisdictions have codified non-use restrictions in an attempt to deter these non-practicing entities5. However, these restrictions are somewhat limited and activity from non-practicing entities continues particularly in the US. Various community organizations have been set up to identify and fight activity from potential non-practicing entities6. Moreover, recently the US Federal Trade Commission approved a final order settling charges against such a non-practicing entity7. While these individual battles are being won and lost, the war continues as a new balance is being sought between the various interests that are at play.

The existence of a large number of patent rights in any given field of technology can theoretically make it impossible for any one party to undertake any commercial enterprise without infringing the patent rights of another. However, in some circumstances where such conditions appear to exist it has been possible to take advantage of a more positive aspect of the patent system, which is to make use of patent pooling. Patent pools involve pooling patents from a number of patentees, and often tens or hundreds of patentees. This enables participating patentees to use the pooled patents under mutually agreed cross-licensed conditions, and optionally provides extended licensing conditions for the pooled patents for non-members of the pool. The idea of patent pools has been known for over 150 years and a very early example of patent pooling is provided by the 'Sewing Machine Combination" of 1856. In this early example four companies and one individual combined their IP into a trust and agreed to cross-license the IP held in the trust. In more recent times patent pools have become more commonplace, particularly in light of the increase in the overall number of patents. A more recent and well-known example of a patent pool was the MPEG-2 Patent Portfolio License. This license provides access to patents that are essential to the MPEG-2 Video and Systems coding standards used in set-top boxes, DVD players and recorders, TVs, personal computers, game machines, cameras, DVD Video Discs and other products8.

Patent pools have even given rise to a new industry of patent pool creation and management. Parties such as Sipro Lab Telecom specializes in creating and managing patent pools for standardized telecommunication technologies9.

Another aspect of patent use that has been given significant attention concerns those patents that are associated with an industry standard. It is not unusual for standard setting organisations to set rules governing the ownership of the standard or to require parties contributing to the definition of a standard to declare any patent rights that may be relevant. One common rule in the US is that a patent that applies to the relevant standard must be adopted on 'fair, reasonable, and non-discriminatory terms' (FRAND). The use of patent pools often ties closely with FRAND in allowing parties to collaborate around an industry standard.

On the one hand, the increased number of patents has created a more attractive environment for non-practicing entities. On the other hand, an increase in patents has promoted the use of patent pools, which are collaborative entities for allowing the members to gain reward for their individual contributions and ingenuity. These contrasting results have polarised supporters and opponents of the patent system, and has given rise to additional innovation in making use of the patent system. More recently, for example, high profile innovators like Tesla Motors and Google have commenced initiatives that are advances on patent pools. Recently, Tesla has stated it "... will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology"10. Google has rolled out a suite of agreements which aim to strike a different balance between competition and technological innovation. For example, the LOT Agreement managed by Lotnet11 was formed by Google and other major enterprises to provide members with a defence against non-practicing entities. The Patent Starter Program12 is designed to assist technology start-up companies quickly build a patent portfolio and requires prior participation in the LOT agreement. Other related agreements and incentives include:

Google's Patent Purchase Promotion13 – Invites businesses to sell their patents to Google to remove friction from the patent market.

Defensive Patent License14 – A standardized, networked, portfolio-wide, royalty-free patent cross license without the right to sublicense. Parties to the license agreement agree to cross license their entire patent portfolio to other parties of the agreement.

Open Invention Network15 – a shared defensive patent pool with the mission to protect Linux.

The LOT agreement and other types of collaborative patenting represent a modern use of patents which aims to strike a new balance between competition and innovation in fields that can often be perceived as being patent saturated. These agreements also aim to link the Open Innovation Community (OIC) with more patent focussed entities for the purpose of promoting innovation.

As the numbers of patents increases globally, so too do the innovative collaborative strategies for using those patents. This is positive for the patentees and for society, as those fields having high patent densities need not provide an insurmountable barrier to the commercialisation of the associated technology and to the ability of a new entrant to participate in the commercialisation.

If companies and other parties wish to engage in these increasingly prevalent and sophisticated strategies there is a need to adopt an approach that is commensurately sophisticated. Such a strategy is predicated on technological innovation that has real commercial appeal and value. With innovation underway it is then possible to obtain the required entry ticket – being one or more patents! – to enable higher level engagement with other innovators in the deployment of technical solutions.

Building a patent portfolio to facilitate commercialisation of technology needs to be, more than ever, highly tailored to the underlying business goals of an organisation. It requires bringing together the available business, technical and legal acumen to create an increasingly valuable asset that is increasingly open to different and innovative uses.

Footnotes

1 L Kass, 'Patenting Life' (1981) 63 Journal of the Patent Office Society 570, 580.

See also: http://www.alrc.gov.au/publications/2-patent-system/outline-patent-system#_ftn8

2 These are the more common form of patent and have a typically maximum lifetime of twenty years. They are also referred to as "utility patents" in the US, and "invention patents" in China.

3 http://www.economist.com/node/21660559?fsrc=scn/tw/te/pe/ed/AQuestionofUtility

4 http://www.teslamotors.com/en_AU/blog/all-our-patent-are-belong-you

5 Sections 133 and 134 of the Australian Patents Act provides for compulsory licenses and revocation actions available to parties when a patentee fails to legitimately exploit their patented technology.

6 See https://trollingeffects.org/ for example

7 https://www.ftc.gov/news-events/press-releases/2015/03/ftc-approves-final-order-barring-patent-assertion-entity-using;

See also, Federal Trade Commission Order dated 13 March 2015

8 http://www.mpegla.com;

Full details and lists of licensors and licensees can be found here: http://www.mpegla.com/main/programs/M2/Pages/Intro.aspx)

9 http://www.sipro.com/About-Sipro.html

10 http://www.teslamotors.com/en_AU/blog/all-our-patent-are-belong-you

11 http://www.lotnet.com/

12 http://static.googleusercontent.com/media/www.google.com/en//patents/licensing/doc/patent-starter-program-more-information.pdf

13 http://static.googleusercontent.com/media/www.google.com/en//patents/licensing/doc/patent-purchase-promotion-announcement.pdf

14 http://www.defensivepatentlicense.org/

15 http://www.openinventionnetwork.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Shelston IP ranked one of Australia's leading Intellectual Property firms in 2015.

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