Patent pools are a time-tested approach to licensing standard-essential patents, also known as SEPs. These collaborative arrangements allow implementers to conveniently obtain licenses to patents held by multiple owners through a single, standardized agreement.
Some pools, such as MPEG LA’s patent pool for audiovisual technology, have been operating for decades. But such pools are becoming even more commonplace in recent years — and for good reason.
By combining the portfolios of many — sometimes several dozen — patent owners into a single offering, patent pools create a one-stop shop for licensees. They offer market transparency by publicly sharing standard royalty rates and conducting public analyses to confirm that they are licensing only essential patents. The effect is to reduce the complexity of negotiations and lower transaction costs, making licensing feasible for companies of all sizes as well as universities and other research institutions.
But despite the long record of success achieved by decentralized patent pools, some companies and activists are advocating for courts to play a greater role in overseeing pool licensing terms.
In one high-profile case, Tesla v. InterDigital and Avanci, Tesla, the patent implementer, is asking UK courts to scrutinize voluntary pool licensing rates set by the market. Lower courts have so far declined to hear the case, but it is now pending before the UK Supreme Court.
In two other major UK court cases — Panasonic v. Xiaomi and Lenovo v. Ericsson — courts have contemplated or imposed interim licenses to resolve SEP licensing disputes.
The push to extend judicial oversight to patent pools is deeply concerning. It fundamentally undermines the pool model and the benefits it offers to both implementers and patent owners. It is also founded in part on a series of misconceptions about how SEP pools actually function.
How royalty rates are determined
Patent pool rates are determined through a market-based process in which a royalty approach is crafted that balances the interests of patent owners and licensees. The royalty must be low enough to be widely accepted by implementers. It must also ensure adequate returns that fairly compensate patent owners for their contributions.
If a pool fails to provide low enough royalties, few implementers will want to join it. If it fails to provide sufficient royalties, patent owners will not join. But when pools succeed in striking a balance, it can lead to wide adoption of their license terms.
Changing royalty rates
Many people falsely believe that SEP pool administrators will lower their royalty rates if a court finds that a different rate is fair, reasonable, and non-discriminatory (FRAND). This is wrong for several reasons.
First, the pool administrator might simply have no authority to implement such a change. Pool administrators’ authority to change existing rates is often severely constrained by the terms of their agreements with patent owners.
Second, even if the pool administrator has the ability to make such a change, doing so is likely to be difficult from an administrative standpoint. A key reason is that many pool licenses include “most-favored licensee” (MFL) provisions, which require the pool to extend better terms to all existing licensees if a lower rate is offered to a new one.
Finally, from a policy standpoint, replacing market-based royalty rates with court-determined or administratively regulated rates is both unnecessary and undesirable. Patent pools already use transparent, competitive market mechanisms to set rates that balance the interests of licensors and licensees.
While government officials who seek to override these market-based rates often claim to be promoting transparency, such interventions are rarely needed. In practice, they often serve simply as a means of price control and as a way to tilt the playing field toward certain licensees.
Royalty payment timing
Some excuse the widespread use of “hold-out” tactics by implementers — using patented technology without licensing it in the expectation of getting better terms after a patent infringement lawsuit — because they wrongly believe that as long as SEP owners eventually get paid, there’s no harm in delaying the deal.
On the contrary, it is essential for many companies to be able to officially recognize licensing income on their financial statements at the time it is earned. This makes the ability to offer timely, predictable royalty payments a core benefit of patent pools. When royalty payments are delayed due to gamesmanship or litigation, it weakens the utility of pool licensing for innovators.
Delayed payments are detrimental to companies that rely on timely revenue recognition. But with that said, it is also not true that SEP owners universally prefer to be paid sooner rather than later. For SEP owners that operate strategic licensing programs, what matters most isn’t being paid quickly, but receiving fair value for their innovation and building a portfolio of strong, consistent licenses that support the widespread adoption of their technologies.
It is not in SEP owners’ interest to sacrifice other terms in the license in order to be paid faster, as even one unbalanced deal could set a precedent that undermines the value of the company’s larger patent portfolio.
Put simply, businesses and their investors depend on accurate, fair, and timely royalty payments for their long-term planning and sustainability. Patent pools help fulfill this need, but overreliance on court-imposed licensing deals undermines the pool model.
Deterring hold-out
One of the most persistent misconceptions in SEP litigation is that modest compounding interest penalties are sufficient to deter hold-out.
Some courts have considered 4% annual compounding interest as a benchmark for effectively deterring hold-out. Yet in practice, this amounts to treating SEP owners like banks and giving implementers access to a very favorable loan: For an implementer who holds out, the worst-case scenario is paying the licensor’s offered royalty rate plus 4% interest several years down the line, while the best-case scenario is securing a significantly lower rate in court with the same 4% interest applied.
That makes hold-out a rational strategy — some would say the only rational strategy — encouraging, rather than discouraging, implementers to cheat licensors out of fair and timely compensation.
Rather than rely on compounding interest penalties, a more effective judicial approach is that taken by the UK Court of Appeal in InterDigital v. Lenovo (2024). In that case, the court held that an implementer engaging in hold-out could be held liable for royalties on all past sales, including sales predating the statutory limitation period.
If this decision stands, it would meaningfully raise the stakes of holding out and deter future hold-outs by implementers.
Conclusion
Patent pools offer an efficient, market-tested solution for licensing SEPs. But they only work when both licensors and licensees participate freely. As courts continue to weigh in on patent pool issues, it’s critical that they understand the incentives and commercial realities of all parties involved.