Can Patent Abuse Endanger SMEs? (Follow up)
This article discusses the risk of patent abuse for small and medium-sized businesses during inbound license negotiations. It offers supplementary details to the original LinkedIn article of the same title.
In response to the recent European Commission draft on standards-essential patents (SEPs,) some individuals questioned whether small and medium-sized enterprises (SMEs) are even vulnerable to patent abuse.?Unfortunately, patent abuse poses a severe threat to SMEs, which make up a considerable part of the business community in both the US and Europe.?
In 2022, SMEs comprised?99% of the EU?and ~99.7% of the US businesses.?Non-Practicing Entities (NPE) in Europe, also referred to as Patent Assertion Entities (PAE) or 'patent trolls,' is becoming more prevalent.?According to a 2018 report from the Commission, there has been a rise in abusive litigation, with NPE-related litigation increasing by 20% annually over the previous decade. It is clear why the EC focused on supporting this vital part of the European economy, and the US should take note.??
Faulty logic that SMEs have little to no risk: Despite the growing number of NPE lawsuits in Europe, supporters of the?low-risk theory?claim that small and medium-sized businesses don't generate enough revenue to justify costly legal action. However, this argument overlooks two crucial points.?
First, potential licensees can and do accept unfavorable licensing terms due to the fear of being sued,?even if no lawsuit has been initiated. Leverage of the threat of exclusion from the market is a widely used ploy by some aggressive licensors to pressure vulnerable parties. In the Lenovo/InterDigital case, the UK court denied InterDigital's arguments to enter 20 former licenses and ruled that?their consistent seeking of supra-FRAND rates demonstrated a lack of willingness to license fairly. This part of the decision was stated in?paragraph 928.?
Secondly, any entity negotiating licenses poorly sets a dangerous precedent for all future small, medium, and large licensees.?
Tactics: During negotiations, patent licensors can gain an advantage by showing that some licensees have already agreed to their terms. However, some unscrupulous licensors send demand letters to companies (including SMEs) that do not have the knowledge or resources to understand the technology or protect themselves. Engaging vulnerable parties creates a dilemma for the recipient. They must choose between fighting a legal battle that could cost more than the initial demands or agreeing to unfavorable terms that may not even be relevant to their products or hold up in court.
Consequences: If left unopposed, the egregious outcomes can erroneously appear to support a market value that greatly surpasses the actual worth of the patented invention. Unearned and undeserved royalties can dangerously erode the margins of a whole industry of genuinely innovative companies trying to bring new products with new innovations to market (for example, the IOT market). Unfortunately, these tactics are common, especially when used by unscrupulous non-practicing entities (NPEs/Patent Trolls). Also, patents self-identified as essential to industry standards, known as SEPs, are often inaccurate.?
It is important to note that not all patent holders behave unethically. The challenges increase when dishonest individuals claim that their weak, irrelevant, or even invalid patents are being infringed.
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Example of extortive behavior: Innovatio IP Ventures engaged in?Patent Litigation?that clearly showed how they attempted to take advantage of parties with limited resources. Innovatio sent letters to more than?350 entities,?mostly individual hotels, coffee houses, fast-food establishments, grocery stores, and others?(see the attached list) that supply Wi-Fi access to their customers. Innovatio demanded a royalty of?$2500 for each entity location. However, the court determined that the maximum amount they were entitled to was only?9.56 cents per device. The court determination was a tiny fraction of the original asking price.
More examples: It's important to note that whenever cases go to court, the judgments usually end up being much less than initially requested. Also see Microsoft Corp. v. Motorola, Inc., 696 F.3d 872 (9th Cir. 2012), the recent InterDigital Technology Corporation & Ors v Lenovo Group Ltd (FRAND Judgment – Public Version) [2023] EWHC 539 (Pat), and many other examples.
But wait a minute – isn’t the European legal system less attractive to trolls???No, that is a myth.?Trolls regularly threaten to file cases and obtain injunctions in Europe. Damage claims may be limited in some European courts, but that is irrelevant when trolls use threats of market exclusion to get whatever licensing fees they want (regardless of whether those fees are deserved).?It's crucial to remember that the tactics above aim to intimidate the party into agreeing to exploitative license terms.?No one ever goes to court in such situations; there is no trail of evidence subject to public scrutiny and no well-publicized court decision.??
Why is there a lack of SME data in some EC studies???Small and medium-sized enterprises (SMEs) often lack knowledge about patents and may not receive a request for their involvement unless they are contacted directly.?This is not because they have favorable licenses or never have to worry.?The impact on SMEs comes when they show income or financing and/or when their na?veté can be exploited to set an undeserved precedent.?They are anything but immune.?Even if they are not initially sued, they may still be impacted by the negative consequences of someone else's poor choices in the long run.
In Summary:??This article specifically addresses how small and medium-sized businesses can be vulnerable to patent abuse during inbound license negotiations. Excessive and unfair royalties can lead to financial struggles for the entire industry, hindering research, development, and production investments. When a small group of special interests demands fees beyond reasonable, it can negatively affect economic growth (especially in the IOT space). To address this issue, policymakers, courts, patent holders, and potential licensees must carefully evaluate the creation of laws, regulations, judicial decisions, and licensing negotiation strategies.