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A cross-licensing contract between the two parties is an agreement where they grant patent licenses to each other. Such agreements, basically, involve exchange of essential patented knowledge between two parties who are seeking to further their own technological progresses.
The top players in every field, particularly the automobile, telecommunication, broadcasting and pharmaceutical industries are engaged with each other through cross-licensing contracts.
For example, Intel Inc. has several cross-licensing agreements with Advance Micro Devices Inc. (AMD). Similarly, Google and Samsung have agreements that cover existing patents as well as those to be filed in the next 10 years from the dates of agreements.
One of the main reasons why cross-licensing is prominent in patent transfers is that it guarantees both the parties the freedom to explore and exploit the opportunities in the same field without the fear of any conflict of interest or cumbersome litigation. The parties can achieve their interests in a peaceful quid-pro-quo manner.
Cross-Licensing Agreements and Patent Pools
A Patent Pool is an agreement between two or more patent owners to pool their patents and licenses amongst themselves or to a third party on pre-determined licensing terms. They work as a mechanism for collectively acquiring patent rights. Therefore, when more than two companies cross license their patents with respect to a particular technology, then a patent pool is formed.
Open Invention Network (OIN) is one such example of a patent pool which is built around the idea of sharing and developing the Linux operating system software among several industries. Here, companies that join OIN are provided with a cross-license to patents covering Linux system technologies which are either owned by other OIN members or OIN itself.
The objective of a patent pool is to make patent licensing easily accessible, thus, incentivising innovation. What distinguishes patent pools from multilateral cross-licensing agreements is that in the former scenario, a third party who is unable to contribute any innovation can still reap the benefits of the pool by just being a member but in the later case, only the party to the agreement can reap the benefits as according to the agreement
By looking at the inherent ways in which both cross-licensing agreements and patent pools work, it is easy to understand that both these methods help in participants combating patent thickets.
There is no agreed definition of patent thicket. However, it can be broadly classified into the following scenarios:
- When multiple organisations own individual patents that are collectively necessary for a particular technology, in such cases their competing intellectual property rights form a patent thicket.
- Set of overlapping property rights occurring in fragmented technology markets.
- When too many patents covering individual elements of a commercial product are separately owned by different entities.
Therefore, patent pools and cross-licensing agreement become effective ways to overcome the above situations as participants start creating networks that encourage sharing of technology and information.
Advantages of Cross-Licensing
Cross-licensing of patents offers various advantages to encourage innovation within markets to existing as well as new market players by-
- Ensuring mutual sharing of technology to improve products
- Lowering product development costs
- Boosting the development of the industry as a whole by creating IP sharing networks
- Reducing transaction costs
- Providing guarantee against upcoming patentable inventions
- Helping avoid cumbersome litigation involving infringement claims
Most recently, Smith & Nephew agreed to pay $10.5 million to settle and enter a cross-licensing agreement with Confor MIS, Inc. over a patent dispute.
Disadvantages of Cross-Licensing
Though cross-licensing is appreciated for the advantages, it also poses few threats to the market players.
- For existing members of the industry, the following are the disadvantages:
- Cross-licensing can become a way of enabling the competitor to imitate one’s own product.
- Depending on another party’s skills and abilities in order to make your own progress.
- Involvement of monetary clauses regarding royalties can deter them from mutually sharing their technology.
- Sometimes the competitors file infringement suits in order to arrive at a cross-licensing agreement promoting the culture of unnecessary and cumbersome litigation.
- For the new players/start-ups:
- When the existing members of an industry already have cross-licensing agreements amongst themselves it creates legal barriers for new entrants to make any contributions.
- This, in turn, discourages any innovation these potential new players can offer.
- For the industry as a whole, from an anti-trust viewpoint:
Similar to patent pools, one major concern that cross-licensing agreements attract is that they tend to negatively affect the competition in the market by concentrating essential technological know-how amongst the leading companies. These agreement promote formation of cartels when they go unregulated.
The Indian Competition Act, 2002 defines a cartel as an “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provisions of services”.
When the adverse effects of cross-licensing agreements are not kept in check, it defeats the whole purpose of such agreement to foster innovation and development of the industry. Therefore, a stringent anti-trust legislation must be in place in order to ensure that such anti-competitive tendencies are addressed and penalised.
The progress and development of any industry depends on how the players within the industry interact with each other by sharing knowledge. Cross-licensing agreements serve the purpose of creation of developed superior products by ensuring that the respective patent rights of the parties are protected. However, with the increasing number of these agreements and eventual formation into patent pools it becomes pertinent to ensure that they don’t foster any anti-competitive practises that defeat the whole purpose of IP sharing networks.
 Section 2(c) of Competition Act, 2002