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Weekly UpdatesSUMMARY
Based on a case study of the IPR (Intellectual Property Rights) pool in the lock industry, Wenzhou, Zhejiang Province, China, this paper examines the formation and operation in which producers collectively take action in regularization and management of innovative knowledge in small firm-dominated manufacturing clusters there. The study compares this emerging collective IPR management with patent pools in advanced economies, especially the United States, and explores the characteristics of the IPR Pool in Zheijiang manufacturing clusters. First, the essential rationale for collective action lies with the need for the survival and further development of the emerging rudimentary industry, as compared to mature or well-developed industries. Second, innovative knowledge regulated to protect the IPR pool is substitutive rather than complementary, and informal rather than formally granted by the IP administration as in advanced economy counterparts. Third, the local producers association plays a major role in institutional development for IPR regulation, while patent pools in the United States are alliances of members with no geographical proximity ties. The Zhejiang IPR pools example provides the necessary steps for latecomer manufacturing clusters to learn about intellectual assets and fair competition.
KEY WORDS
patent pool; IPR pool; manufacturing clusters; Zhejiang; IPR protection
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Patent pool is a collective institution for intellectual property rights (IPR) sharing and transaction. This paper aims to introduce the IP pooling phenomenon appearing in small firms-dominated manufacturing clusters in Zhejiang Province, China. The study is a sister piece to that reported in Xu, Chen and Bao [(2006) this issue, pp. 144-152]. While the work by Xu et al. focuses on formal patenting behavior of firms in Zhejiang, this work gives particular attention to informal, cluster or community-based knowledge sharing and protection initiatives; that is, firms in a cluster collectively take action in regularization and management of innovative knowledge and relative production and marketing.
Zhejiang is on the southeast coast of China. With limited arable land, mineral deposits and industrial investment in the planned economy period, in the past twenty years Zhejiang has developed the most market-oriented private small firms in China, employing some 10 million workers. Most firms are engaged in labor-intensive 'low-tech' manufacturing and, often, similar businesses are clustered in a certain geographical area of 'Town' or 'County', the lowest levels of administrative unit in China, with varying degree of vertical disintegration in division of labor among firms. There are 500 or so such specialized clusters in Zhejiang, producing socks, cloths, footwear, carpentry, low-voltage apparatus, ties, water pipes and valves.
This paper discusses the IP pooling phenomenon in Zhejiang with a detailed case study of the lock industry in Wenzhou, Zhejiang. Section 1 introduces patent pools in advanced economies, especially in the United States. Sections 2 presents and interprets patent pool practice in Zhejiang, using a detailed case study. Section 3 discusses findings and raises research questions for further study.
PATENT POOLS IN ADVANCED ECONOMIES
A patent pool is often based on an arrangement among multiple patent holders to aggregate their patents. A typical pool makes all pooled patents available to each member of the pool, and offers standard licensing terms to licensees who are not members of the pool. The pool then allocates a portion of the licensing fees to members according to a pre-set formula or procedure.
Patent pools appeared in the second half of the 19th century and the first half of the 20th century especially in the United States. Due to antitrust regulatory intolerance the use of patent pools declined in the second half of the 20th century. However, the use patent pools began to surge again recently in response to the accelerating pace of technological change and to a changing legal system for IPR in which patenting costs and barriers to enter into patented technological areas increased. Carlson (2003) estimated that in 2001 sales of devices based in whole or in part on pooled patents were at least $100 billion. Now patent pools are playing an important role in some high-tech industries in the present competition arena.
Following are some patent pool cases in early and present times. (1) The first patent pool was formed in 1856 around intellectual property conflicts in the sewing machine industry. In 1908, Armat, Biograph, Edison and Vitagraph formed a patent pool that aggregated all of the important patents for the early motion picture industry. The pooling agreement specified that royalties were to be paid into the pool by licensees of the pool patents.
An aircraft patent pool was founded in the United States by July 1917, urged by an advisory committee convened by the then Assistant Secretary of the Navy, Franklin D. Roosevelt. The aircraft pool, which encompassed practically all airplane manufacturers in the US, resolved all pending infringement claims and bound its members to give each other non-exclusive licenses of all airplane patents then or thereafter owned or controlled (with unimportant exceptions). The pool's charter contemplated only 100 members; apparently more than adequate to accommodate the potential membership. Members promised not to put relevant patents out of the pool's reach, by taking an exclusive but non-sublicensable license.
The MPEG-2 pool formed in 1994 began as an agreement among nine patent holders to meet an international standard known as MPEG-2 video compression technology. The pool was an outgrowth of the creation of the MPEG-2 standard established by the Moving Picture Experts Group of the International Standards Organisation (ISO) and the International Electrotechnical Commission. The MPEG-2 Standard patent pool comprises a number of essential patents put into the hands of a common licensing administrator empowered to grant licenses on a non-discriminating basis, collect royalties and distribute them on a pro-rata allocation based on each Licensor's contribution. The terms of the arrangement were negotiated with and approved by the US Department of Justice.
In 1998, Sony, Philips and Pioneer formed a patent pool for inventions that are essential to comply with certain DVD-Video and DVD-ROM standard specifications. In 1999, another patent pool was formed by Toshiba Corporation, Hitachi Ltd., Matsushita Electric Industrial Co. Ltd, Mitsubishi Electric Corporation, Time Warner Inc. and Victor Company of Japan Ltd for products manufactured in compliance with DVD-ROM and DVD-Video formats. Now companies that manufacture DVD discs or equipment have only to deal with these two pools, instead of the ten separate firms that formed them. These patent pools have been active in posing patent fee charges on China's emerging DVD industry.
The phenomenon of patent pools, resurging recently, has received inadequate attention. Nevertheless, the literature has been growing. Carlson (1999) and Gilbert (2002) provide a historical perspective to patent pools. Priest (1977) and Shapiro (2001) attempt to develop models on patent pool rationales. Bittlingmayer (1988) and Clark (2000) study single patent pools in the aircraft and biotechnology industries. Merges (1999) summarizes transaction characteristics of patent pools. For the purpose of this paper, we briefly summarize the findings relevant to our study.
Relations of patents in a pool
The relationships of patents in a pool can be divided as blocking, complementary or competing (or substitutable). Blocking patents are when one patent is necessary for the practice of other patents, while the others are not necessary for the former. The former patent hence is the dominant patent and the latter improvement patents. Complementary patents are those collectively necessary to practice a technology. And competing or substitutable patents are those with which associated technologies compete with each other.
Shapiro (2000) points out that patent pools raise welfare when patents in a pool are complementary but cause harm when they are substitutes. From an antitrust perspective, combining blocking or complementary patents into patent pools can be tolerated, but not combining competing patents. Theoretically, a patent pool with competing patents tends more possibly to constitute monopolization of the technology than a patent pool in which patents are competing. Scholars who study in the context of advanced market economies often see that blocking or complementary patent pools have been used advantageously to overcome transaction cost problems within the patenting system.
Interestingly, IPR pooling in Zhejiang small firm clusters, on which this paper reports, started with substitute technologies. The motivation was not to solve problems as blocking or complementary patent tools were faced, for there was not much blocking or complementary IPR in the clusters in the early stage of imitation. What, then, were the motivations of the pools that evolved in the Zhejiang, China cluster? We will argue that, based on observation, it comes initially from the need for survival of the primitive imitation-based manufacturing activities. It was an effort by a group of manufacturers to regulate competition behavior, associated with an emerging market.
Roles of patent pool
How do patent pools promote intra-industry technology transfer and strengthen cooperation of firms so as to increase economic efficiency in innovation? According to the available literature, patent pools play a role in reduction of transaction and enforcement costs, and promotion of knowledge sharing.
All patent pools observed commonly developed regularized mechanisms for patent transactions. With a simple, coherent menu of prices and other terms, the collective patent pool organizations reduce the high transaction costs of repeat contracting, both among members and between members and users. Combining right-holder property rights into useable bundles, along with the establishment of pool IP transaction rules are useful in overcoming the tragedy of 'anticommons' while still preserving the incentives that come with these rights.
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