Value in intangible IP assets can come in a number of guises, whether that is showing potential investors that the SME values the assets that are being created and that they are investing in, licensing the assets out to others for monetization, or using the assets as leverage in the event the SME is later attacked by a competitor.
SMEs should seek advice from an attorney on creating an IP strategy, identifying any IP they may have, and protecting it cost-efficiently, considering budget and cash flow.
Developing a Commercial IP Strategy
Most high-tech companies will have a written patent strategy document. In some cases, this may be an informal and very simple patent strategy, but if patents and IP are important to a company, then a well-considered written document is far better. A simple written strategy or policy identifying a goal, such as stopping unauthorized copying, may be valuable, but there is much more that can be done to advance the company’s IP strategy.
It can be very easy for busy engineers to file patent applications covering inventions that don’t support the business strategy and thus spend a lot of money toward securing patents that protect relatively minor improvements to products coming out of engineering. It is very common to see companies overlooking potentially broader patents that are the result of “blue sky” thinking aligned to the future direction of the company. Opportunities for broad and more valuable patents may be lost, so a key part of the IP strategy might be to have regular brainstorming sessions for patenting with the business as a whole.
Making IP part of the development process is also useful. Many companies conduct regular reviews that identify technical problems they have solved since the last product development milestone and problems that need to be solved before the next milestone. These reviews capture potential areas where IP has been created and where IP will be created, so they can be reviewed with the legal team to explore how best to protect it.
Despite patents granting the patent owner a “negative right” (as opposed to the right to practice the claimed invention), SMEs should still consider filing for patent protection to reduce the risk of being sued by competitors (large or small) for patent infringement. This is traditionally the most important driver for developing large patent portfolios, the idea being that having a large patent portfolio generally may increase the chances of your portfolio covering subject matter that is being practiced by your competitors (i.e.,a potential cross-claim of patent infringement against the aggressor). For this strategy to be effective, this also means identifying potential aggressors and ensuring the SME has the right patents that can be used against the aggressors. Patents can also be used as currency or leverage in patent cross-licensing with competitors, in potential collaborative ventures, in acquisitions, or with suppliers.
SMEs should consider analyzing their patent filings to identify and monitor current competitors. They should also consider creating a patenting culture and exploring how closely tied the actual business development roadmap is to patent filings. Companies might consider benchmarking themselves and gauging how innovative they are in terms of patents filed per $1 million of R&D expense. Patent portfolios need to be regularly reviewed to remove “deadwood” and then systematically evaluated on a regular basis to assess how good or valuable the portfolio is.
To Standardize or Not to Standardize?
From a commercial perspective, SMEs may want to market their product or technology so that it becomes an industry must-have, rather than making it part of a standard. A company might want to retain its ability to seek an injunction and restrain competitors from infringing the patent, similar to how pharmaceutical companies want to maintain their monopoly over a new drug for the 20-year life of the patent.
On the other hand, an SME might want its product or technology to become part of a standard, where there may be opportunities to benefit from a larger addressable market. Participating in standardization and creating a standard for a product may well involve the SME committing to license its patents that are essential to use the standard (i.e.,standard essential patents, or SEPs) to any user of the standard on fair, reasonable, and nondiscriminatory (FRAND) terms, subject to reciprocity.
Participation in standardization is time-consuming and costly and may be very difficult to fund for an SME. Multinational practicing entities may also want to make it hard for the SME’s patent or invention to become essential to the standard. But participation in standardization can be useful when negotiating with multinational practicing entities as the obligations of reciprocity may be disproportionately valuable. For example, if the SME has one SEP and the multinational has 1,000 SEPs, the impact of an injunction is likely to be more financially threatening to the multinational if the negotiations for a cross-license of SEPs break down.
Nonessential patents may also be more valuable against a larger practicing competitor. One nonessential patent that is difficult to design around can have a very significant impact on a multinational with hundreds of millions of dollars of sales, compared to the impact of the multinational having 1,000 patents on an SME business turning over $5 million. An analysis of the impact of litigation, with a high risk for multinationals, may encourage cross-licensing discussions and settlements.
If the SME is attacked by a competitor with a patent infringement claim and it doesn’t yet have any patents, it should explore whether it can acquire any patents to cross-assert against the competitor. One or two patents may have a proportionately larger impact on a larger competitor’s business.
Depending on the business, the SME may come across standardization; particularly for SMEs selling connected products, this presents a minefield of issues. SEPs are patents that must necessarily be infringed when using, marketing, buying, or selling a product that is compliant with a standard. In normal commercial practice, suppliers will obtain the necessary IP licenses to sell their products and give common form warranties and indemnities. Unfortunately, in today’s connected world of the Internet of Things, the normal standard commercial practices of obtaining warranties and indemnities have been thrown into chaos, as many SEP holders tend to refuse to grant patent licenses to chipset and module suppliers. This means that the chipset and module suppliers can’t sell products with the IP licenses, and that exposes customers and clients further up the supply chain to risks of patent infringement claims.
Thoughts for Attorneys
Attorneys advising companies that buy components with wireless connectivity, or that use audio or video standards, therefore need to advise the companies to undertake more than normal due diligence to ask their suppliers whether they actually have the necessary patent licenses to use the standards, whether they have tried to get a license, and what the financial impact might be if the SEP holder comes after the SME, or the SME’s customers.
Attorneys advising SMEs seeking investment will need to be aware of these issues so that they can be identified to potential investors. Similarly, attorneys advising companies that acquire SMEs need to be aware of potential claims that may be made against the target company for past sales, given that claims for last infringements may go back more than six years.
Antitrust and Competition Issues
SEP holders may not contact SMEs; when they do, there is a problem of competitive disadvantage. By taking a license, SMEs will likely make their products less price competitive compared to those other companies and SMEs that do not have a license and have not been contacted. In addition, recent cases in the UK have highlighted that SEP holders discriminate against smaller companies, such as SMEs, by charging four or five times the rate that is payable by multinationals; this creates a competitive disadvantage by directly charging SMEs and smaller companies manifestly different prices. In the UK, this raises competition law issues under Chapter II of the Competition Act 1998 and in Europe under Article 102 of the Treaty on the Functioning of the European Union. Another case in the UK recently raised concerns that the practice of keeping true licensing rates secret in itself raises a cartel competition issue and may infringe Chapter I of the Competition Act.
FRAND Licensing
SMEs negotiating licenses need to ensure that any verbal representations made by SEP holders are recorded in writing. Some SEP holders will make representations in negotiations that their rates are FRAND, and that the rates payable by others are the same, but revelations in later court decisions have often exposed the “true” market rates payable by others. Therefore, SMEs and their attorneys should seek to require that representations made during the negotiations are confirmed in any written license agreement.
SMEs often suffer what is called the “willing licensee penalty” because they are forced to take a license without the ability to review any of the licenses that are claimed by the SEP holder to be comparable benchmarks. SEP holders will say that the agreements are confidential and can’t be shared unless there is active litigation; the SME would therefore see the licenses if there was litigation but, being unable to afford litigation, it is required to accept the representations made by the SEP holders that the rates are FRAND, effectively playing blind poker as the SME has to “trust” the representations made by the SEP holder that the rates are FRAND.
Patent Pools
Some technologies have patent pools, but there are many traps for the unwary. Pools often make false claims of being a solution and a one-stop shop, and of providing “cheap” patent licenses. SMEs should be extremely careful to investigate whether they need the licenses that are demanded by the pool, in particular whether the entire standard is being used, how much of all of the SEPs for the standard are actually being licensed, whether there is double dipping in the supply chain, whether there is double claiming for the same patent in the same product for other standards, and what direct or indirect vested interests the patent holders have in the patent pool administrator.
Competitive Advantage
An SME may think it easier not to address IP issues until it’s grown to be a large company, but identifying IP issues and opportunities early on in its growth stage will help the SME create a competitive advantage.