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Introduction
In conflicting cases of intellectual property, cross-licensing has emerged as an extremely potent solution for businesses. Within patent law, cross-licensing refers to an arrangement whereby two or more parties grant each other a license to utilize the subject matter claimed in one or more of their respective patents.
Typically, the aim of a cross-licensing agreement is to circumvent litigation or to settle a dispute regarding infringement.
The biggest companies in sectors such as semiconductor manufacturing, pharmaceutical industries, automotive component manufacture, telecommunications and broadcasting, engage continually with one another through cross-licensing agreements. This post discusses cross-licensing in detail and highlights how the arrangement reduces conflicts around patents.
Why Companies Choose Cross-Licensing
Cross-licensing is common in the area of patenting because it gives both parties the freedom to investigate and take advantage of opportunities in the same industry without worrying about a conflict of interest or getting involved in time-consuming litigation. With cross-licensing, both sides are able to exchange reciprocal interests and attain their goals peacefully.
In many cases, the primary elements of a certain commercial product are covered by different patents held by each party. Each of the parties thus retains their autonomy to promote the commercial product through cross-licensing. Although this may not always be the case, the notion of “cross-licensing” suggests that neither party pays the other any money in royalties.
Cross-licensing is advantageous to participating parties in a myriad of other ways, including:
- Reduction of Litigation Costs – Cross-licensing is a way to avoid expensive and time-consuming patent infringement lawsuits thereby preserving resources for core business activities.
- Leads to Faster Product Development – Companies are granted access to complementary technologies which accelerate innovation and product launch timelines.
- Cost-Sharing – Cross-licensing agreements provide access to valuable intellectual property without the upfront costs associated with independent R&D
- Strengthen Market Position – A stronger competitive advantage stems from standardization and compatibility within an industry; also increases collaborative efforts and avoids patent roadblocks
Cross Licensing and Patent Pools
Cross-licensing agreements act as a shared step towards the collective development of technology. Just recently, smartphone maker Nokia initiated a multi-year 5G patent cross-licensing agreement with the Eastern tech giant Oppo. In many cases, companies agree to create a patent pool.
Patent pools are a collection of patents from different owners, licensed to all members of the pool under agreed-upon terms. A patent pool basically operates as a system to collectively obtain patent rights. So, cross-licensing agreements are the building blocks of patent pools. While these agreements are bilateral, patent pools can involve a bigger group of members.
As patent pools bring multiple parties together, a pool can make it easier to negotiate cross-licensing agreements between its participants. Both cross-licensing agreements and patent pools, however, significantly reduce the transaction and intermediary costs as compared to individual licensing.
How Cross Licensing Avoids Patent Battles
To really grasp how cross-licensing helps reduce patent disputes, we must understand the mechanism of cross-licensing. In a cross-licensing agreement, two (or more) companies exchange licenses for their patented technologies. This allows both companies to legally use each other’s intellectual property (IP) without fear of infringement lawsuits.
And we already know how disputes over patents can be costly, time-consuming, and ultimately stifle innovation.
Take, for instance, the patent litigation between Pfizer Inc. and Teva Pharmaceuticals/Sun Pharma that spanned the 2000s. The court trials involving the two serve as a case study in patent litigation. The process was lengthy and intricate and required nearly a decade for full resolution. Pfizer ultimately emerged victorious in upholding the validity of its drug patents.
In a similar case, in order to resolve a patent dispute with Confor MIS, Inc. and enter into a cross-licensing deal, Smith & Nephew agreed to pay $10.5 million in legal costs.
Ways Cross Licensing Avoids Unnecessary Litigation
Cross-licensing can prevent such patent battles. Here’s how:
- Cross-licensing agreements clearly define usage rights and thus eliminate the ambiguity that can lead to disputes later. This often negates the need for infringement lawsuits.
- Avoiding court battles saves both companies significant legal fees and resources. Thus, litigation costs are saved and redirected towards core, innovation purposes.
- As cross-licensing facilitates the development of compatible products and technologies, it also sets a marker for standardization and interoperability.
A Fuel for Innovation through Shared Ingenuity
A cross-licensing agreement essentially creates a network that thrives on the collective sharing of technology and knowledge. Such a network is really conducive to innovation. And not just for the companies themselves, intellectual property-sharing networks boost the development of the industry as a whole.
Here’s how cross-licensing acts as a catalyst for innovation within diverse industries:
Reduces risk and speeds up development – Cross-licensing reduces risk and speeds up development. By eliminating the threat of infringement lawsuits, companies can focus their resources on R&D. This accelerates the innovation cycle. They don’t need to reinvent the wheel; they can just continue building upon existing technologies.
Access to expertise – Cross-licensing provides access to a larger pool of expertise. Companies can benefit from one another’s strengths and come together to develop more innovative ideas and pioneering products.
Better collaboration – A cross-licensing agreement would generally agree upon common technology standards. This ensures that the products of different (participating) companies work seamlessly together. A more open and collaborative ecosystem benefits both businesses and consumers.
The smartphone industry thrives on extensive cross-licensing agreements between giants like Apple, Google and Qualcomm. Each company incorporates and builds upon the others’ patented technologies. This collaboration ends up in the end user’s product – the amazing smartphones we use today.
Even in the pharmaceutical industry, companies often cross-license patents related to specific diseases or drug targets. For instance, AbbVie and Amgen cross-licensed patents for their drugs Humira and Enbrel which has led to faster development of new therapies for autoimmune diseases.
Another sector where the influence of cross-licensing is evident is the electric mobility industry. Leading car manufacturers, even in India, are collaborating to develop common standards for batteries, charging infrastructure and other key components.
Challenges Associated with Cross-Licensing Agreements
With all of the benefits that come with cross-licensing of intellectual property, what could possibly be the downsides? We are pointing out some disadvantages inherent in cross-licensing agreements that companies must be aware of.
- An added layer of expense is introduced with cross-licensing agreements in the form of licensing fees and royalties. These royalties can also impact the profit margins within IP value.
- With an exclusive cross-licensing agreement, sometimes one party becomes too dependent on the technology and capabilities possessed by the other party.
- Cross-licensing agreements create a barrier to entry for newcomers in every industry. The costs associated with licensing cross-licensed intellectual property are often prohibitively high and push away start-ups.
- It is also not uncommon to see most companies refrain from including their core, operational patents in agreements of this kind. This is done to safeguard the interests of the company along with maintaining the privacy and secrecy of business-critical technologies.
Conclusion
The cross-licensing of patents benefits the companies themselves, the industry and even consumers when dealt with sensibly and strategically. To maintain healthy competition, however, regulators charged with antitrust, anti-collusion and other patent disputes must closely monitor the larger and more expansive cross-licensing deals.
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