A patented consumer rip-off

Of the millions of American consumers buying audio and video devices each year, few realize that the prices they pay for these devices are inflated, because a portion of the manufacturer’s costs reflect patents that have already expired.  That’s right – consumers are paying more to cover the costs of patents that should be, logically, free of charge.  How can this be?

In order to produce and sell many electronic devices – including personal computers, set top boxes, televisions, DVD players, game consoles and other media devices, as well as packaged medium and streaming – manufacturers pay patent royalty fees to incorporate audio and video standards, such as the MPEG-2 standard, licensed by MPEG LA, into each device that enables the playing and recording of content. On the surface, that seems straightforward and fair – if you use someone’s patented technology, then you need to compensate the patent owner for its use.

But, here is the problem.  Manufacturers are paying patent licensing fees for expired patents because these patents have been grouped into what is referred to as a patent pool, which can sometimes contain expired patents.  The result is that manufacturers are paying for expired patents that should be free, which means that consumers are paying more than they should be when they buy the goods that integrate the pooled technology standard. 

Patent pools can be an expedient way for manufactures to get access to a host of essential patents for a given technology standard at a single predetermined price– a price that is supposedly cheaper than negotiating individual agreements with many patent holders and much more efficient licensing.  While manufacturers could negotiate license agreements with each individual patent holder for a technology standard, doing so would defeat the entire purpose of pools and the increased efficiencies that they deliver.  The Department of Justice (DOJ) approves these patent pools and most are good.

However, not all patent pools are aligned with market values and can be anticompetitive.  For example, when the patents in the pool are not critical to technology standard, studies show that manufactures tend to pay more because they pay for patents that they do not need.  Similarly, because patents confer a monopoly to the patent holder, requiring manufacturers to buy expired patents in order to get unexpired patents would seem to amount to a “tie-in” or what the Federal Trade Commission (FTC) says “raises antitrust questions when it restricts competition without providing benefits to consumers.“

The MPEG-2 patent pool has nearly 85 percent of its patents expired and, by next year, that figure will reach 90 percent.  This means that if every consumer gadget – smart phone, computer device and portable audio/video player – includes a $6 fee for patents, the patents may soon be worth as little as 60 cents.  However, as long as one patent within the pool remains current, the entire pool remains viable.  This allows for a patent pool to get a longer patent monopoly than legally afforded to others.  This means that consumers are on the hook to pay higher prices for the many products that use it.

Intellectual property protections are crucial to economic growth and jobs in this country.  According to one study, about 45 percent of United States Gross Domestic Product was protected by trade and service marks, copyrights and patents.  Such protections encourage development of new products by rewarding innovators for their efforts and provide assurances of quality for consumers.  Policymakers need to recognize that patent abusers, patent trolls and, in some cases, patent pools are harming our economy rather than boosting it.

To be sure, Sen. Leahy’s (D-Vt.) Patent Transparency and Improvement Act (S. 1720) and Rep. Goodlatte’s (R-Va.) Innovation Act (H.R. 3309) contain a number of improvements that will curb patent trolls, but they come up short on addressing abusive patent pools.  Better patent protections are needed on all fronts.

The fact is that the problems of patent pools has been raised before, including comments from legal experts to technologists, and policymakers need to take action to stop this systematic gouging of consumer prices.  The problem is not going away on its own.  It is time to ensure that patent pools benefit the consumer, innovator, and the economy.

Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute.  For more information about the Institute, visit www.theamericanconsumer.org.

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