American University Professor Jorge Contreras has recently proposed a “pseudo-pool” approach to addressing patent stacking and hold-up concerns for industry standards (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2232515).
The proposal has attracted some attention, including from the European Commission, which had the following to say in its recent report on patents and standards (European Comm’n, Patents and Standards: A Modern Framework for IPR-Based Standardization 140 (2014)) (http://ec.europa.eu/enterprise/policies/industrial-competitiveness/industrial-policy/intellectual-property-rights/patents-standards/):
Pseudo pool aggregate royalty cap. One of the most original yet promising ideas was submitted
by Jorge Contreras as a written contribution to the ITU Roundtable.231 It proposes an approach
to be adopted by SSO that includes some features from patent pools, while preserving the
flexibility and broad activity scope required in the SSO setting. In short (and not doing justice to
the depth of his analysis) Contreras argues that (1) assuming bilateral licensing processes, the
likelihood for FRAND terms is highest if the negotiations are concluded before inclusion of
technology in standard; (2) in practice, however, such licenses are almost invariably negotiated
after this inclusion, for a variety of reasons, (3) this creates risks for hold-up prices and risks for
royalty stacking and (4) a process is proposed that would alleviate such risks. In his proposal,
parties participating in the SSO would at the outset agree upon an objective reasonable
maximum fee level and a distribution/allocation mechanism for the individual right holders.
Several adjusting mechanisms are then proposed for changes over time, including a
mechanism that discourages parties from making over-declarations of essential IPR. While
further thinking and development would be necessary before such a mechanism could be
implemented, and competition authorities would have to weigh its pro-competitive aspects
against possible antitrust concerns, Contreras’ proposal is certainly interesting. It indeed has the
potential for simultaneously addressing the hold-up and royalty stacking problems.