Cross-Licensing Essay ⋆ Business Essay Examples ⋆ EssayEmpire

A cross-licensing agreement is a contractual arrangement that allows a group of companies to make use of one another’s patents. All firms involved agree to refrain from suing one another for patent infringement, usually for both currently held and future patents. These agreements are sometimes referred to as “patent pools.”

Cross-licensing allows the participating firms to design and manufacture new products without fear of being sued for patent infringement. Certain complexities, such as excluding specific patents from the pooled arrangement, are often part of the contract. The concept of cross-licensing has deep roots in certain industries, such as high technology, that rely heavily on patents. While there is some debate, on balance cross-licensing agreements are usually thought to be good for competition and good for the economy.

The key benefit of a cross-licensing agreement is “freedom to design.” Consider the situation of an established firm in a rapidly evolving industry where much of the competition is based upon the use of patented technology. Examples would include pharmaceuticals, consumer electronics, and almost any aspect of high technology. Such a firm may hold thousands of patents, and annually apply for hundreds more. Each of its major competitors also holds thousands of patents. Any one of these patents may apply to dozens or even hundreds of individual products, thousands in the case of a particularly important patent.

Thus, each firm in the industry faces enormous risk. With so many patents outstanding, it is not possible to be completely certain that a newly designed product will not infringe on any patent held by any competitor. Even if this new product avoids infringing on an existing patent, it could still infringe upon an applied-for, but not-yet-issued patent. Any patent—currently held or pending—held by any direct competitor represents a potential disaster for the new product. A patent infringement suit could delay the new product, drain the profits out of it, or kill it completely.

This situation makes any research and development (R&D) investment quite risky—unless competitors develop cross-licensing agreements. The arrangement reduces the risk of lawsuits for any participating firm. Thus, the participating firms have greater freedom to design; there is less need to filter each new design element to ensure that it will not violate someone else’s patent.

Concept Development

The concept of cross-licensing is not new. Early in the 20th century, new competitors moving into the rapidly evolving field of radio quickly realized that they were at constant risk of infringing on one or another of their competitor’s patents. The key competitors in the field formed a company to hold all major patents and license the use of those patents to all founding companies. This newly formed company, the Radio Corporation of America, or RCA, is still a major force in the field of entertainment today.

In the 1950s an antitrust ruling affecting IBM helped create a cross-licensing culture in the computer industry. Under the ruling, IBM was required to enter into a cross-licensing agreement with any firm wishing to enter such an arrangement. As part of the arrangement, the applicant agreed to allow IBM reciprocal patent access and agreed to pay reasonable royalties, similar to a modern cross-licensing contract. This open approach characterizes behavior in much of the computer industry to this day: IBM recently announced that it will allow free access to some 500 software patents considered key to software interoperability. Similar traditions in the communications industry may be traced to a 1950s antitrust ruling concerning AT&T/Bell Labs that mandated behaviors parallel to those required of IBM.

More recently, some firms have taken the entire concept of cross-licensing a step further and made patent licensing their core business. For example, Acacia Technologies Group is in the business of acquiring and licensing pools of patents. They design no products and manufacture no products. They are one of a new wave of patent clearing houses building an entire business on intellectual property (IP) alone. The largest of these firms is Intellectual Ventures (IV), founded by several Microsoft alumni. Some reports indicate that IV garners hundreds of millions in royalties and is seeking an additional investment of $2 billion to continue expansion of its patent portfolio.

Not all cross-licensing agreements are as straightforward as two firms agreeing to refrain from suing one another. First, the agreement would normally be limited to specific portions of either firm’s patent portfolio. For example, a diversified firm operating in both the chemical industry and in aviation may not wish to include all patents in any single agreement. If this hypothetical firm made an agreement involving chemical patents only, it might wish to further limit the agreement based on field of application. Such a limitation might allow a partner firm to make use of the patents for fertilizers but not for paints or other industrial applications.

Most important, the agreement will probably recognize that all patent portfolios are not of equal value. A firm with a more valuable portfolio will likely receive royalty payments from a firm with a less valuable portfolio. A valuable portfolio will include patents that enjoy broad application and are not yet nearing the end of their legal viability.

Is cross-licensing good or bad for the economy? While this is a hotly debated topic, there is little doubt that cross-licensing agreements, properly implemented, can facilitate the health of an industry and benefit consumers. By lowering the risk of investing in R&D and providing freedom to design, cross-licensing speeds innovation, accelerates the release of new products, and lowers operating costs.

Bibliography:

R. Beard and D. L. Kaserman, “Patent Thickets, Cross-licensing and Antitrust,” Antitrust Bulletin (2002);
W. Bratic, S. Webster, S. Matthews, R. S. Harrell, “How Patent Pools Can Avoid Competition Concerns,” Managing Intellectual Property (2005);
Buckman, “Patent Firm Lays Global Plans,” Wall Street Journal (2007);
Mark E. Crain, Intellectual Property Cross Licensing Agreements: Are They Taxable? (University of Houston Law Center, 2006);
C. Grindley and D. J. Teece, “Managing Intellectual Capital: Licensing and Cross-licensing in Semiconductors and Electronics,” California Management Review (1997);
I. Klein, Cross-Licensing and Antitrust Law (U.S. Department of Justice, 1997);
Josh Lerner, Marcin Strojwas, and Jean Tirole, “The Design of Patent Pools: The Determinants of Licensing Rules,” Rand Journal of Economics (v.38/3, 2007);
J. Mann, “Do Patents Facilitate Financing in the Software Industry?” Texas Law Review (2005);
McMillan, “Developers Voice Mixed Reactions to IBM Patent Policy,” InfoWorld (2005);
Sadao Nagaoka and Hyeong Ug, “The Incidence of Cross-Licensing: A Theory and New Evidence on the Firm and Contract Level Determinants,” Research Policy (v.35/9, 2006).

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