Cross-Licensing

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 [Page 447]industry may be traced to a 1950s antitrust ruling concerning AT&T/Bell Labs that mandated behaviors parallel to those required of IBM.

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