Professor Nguyen on Sovereign Patent Funds

Professor Xuan-Thao Nguyen explores government created and funded patent funds in Sovereign Patent Funds recently published in the UC Davis Law Review.  In part, Professor Nguyen reviews and analyzes the sovereign patent funds of numerous countries and investigates their role in patent enforcement.  The following is a part of her introduction of her article:

What are SPFs? How are they created and structured? What purposes do SPFs serve? Are SPFs effective initiatives for foreign governments to encourage innovation and foster competition or are they merely state-sponsored patent trolls? Are they violating international trade law, specifically the World Trade Organization (“WTO”) Agreement on Subsidies and Countervailing Measures?

This Article is the first to address the above questions. The Article proceeds as follows. Part I traces the creation of SPFs in Japan, South Korea, Taiwan, China, and France. Part I also explains when, why, and how each country provides public funding to SPFs. There are many different types of SPFs in different technology and life sciences areas, and with specific goals and mandates, although several share the same goal of aggregating patents. Open innovation and patent licensing are two common themes among the different goals and approaches employed by SPFs. Part II investigates whether SPFs have engaged in patent assertions — attempts to use acquired patents “to generate revenue by asserting them against alleged infringers.” Part II focuses on the simultaneous litigations filed by the French SPF against LG Electronics Corporation and HTC Germany GmbH in Germany and the United States. Likewise, the Asian SPFs have filed lawsuits against multinational companies. The investigation reveals surprises, including that litigation is typically an SPF’s last resort. SPFs are reluctant to embrace litigation. Part II also examines SPFs’ licensing strategies. French and Korean SPFs seem to have success in licensing out. They direct more efforts to selecting quality patents for licensing. In addition, Korean and Japanese SPFs are engaging in licensing for open innovation.

SPFs have been condemned as global patent trolls and state sponsored patent trolls. Part III addresses whether the pejorative label is warranted. Exploring the popular narrative of patent trolls and the evolving landscape of the patent market where former manufacturing companies and research institutions, along with other non-practicing enterprises (“NPEs”), are participants, Part III reveals that the SPF label does not fit SPFs’ characteristics. SPFs are both diverse and complex. Some have collaborated with universities to engage in specific research and development projects. Some share their profits with original inventors. Some facilitate open innovation. Some are doing all of the above. Condemning SPFs as patent trolls amounts to dismissing the true innovations, research, and development that have been the hallmarks of many industries and sectors in Japan, South Korea, China, and France.

SPFs have also been condemned as a trade protectionist measure in violation of international trade law. Part IV examines the heavy charges that SPFs discourage international technology transfers, depress innovation, force foreign companies to accept unfavorable license terms akin to discriminatory tax, support domestic industries at the expense of foreign firms, resurrect ailing national companies, and cause a race to the bottom. Part IV found no evidence to support these condemnations. On the contrary, what SPFs have done since their existence refutes these charges.

If SPFs are illegal subsidies in violation of international trade law, there is an appropriate mechanism to remedy the harm. Part V turns to the WTO solution, analyzing relevant provisions of the WTO Agreement on Subsidies and Countervailing Measures. Part V discusses WTO Tribunal decisions, as they illuminate and interpret legal requirements in subsidy cases. Part V further suggests that the international framework is suited to eliminate SPFs if evidence exists that a particular subsidy is causing injury to a domestic industry. Certainly, using the appropriate channel to address SPFs is preferable to dismissive and pejorative labeling.

Part VI, however, posits that an international trade solution might be unnecessary because SPFs may soon be relics of the past. SPFs can easily alter their structure to remove the government-sponsored characteristic to quiet critics and restless nation litigants in the WTO Tribunal. Moreover, the global innovation and patent market is dynamic and complex; SPFs will not be able to survive and flourish if they are under governmental control. Part VI observes that, in fact, some prominent SPFs are planning to privatize in order to compete and adapt.

Overall, by creating and infusing SPFs with public funding to aggregate patents, a government can seem to have ownership and control of the patents while simultaneously wielding authority in dispute proceedings relating to those very same patents. The government can block or rule against others from challenging the validity of patents. The same government may coerce others into accepting unfavorable patent license terms. The same government also may protect domestic firms at the expense of foreign firms. Such an arrangement seems to create many conflicts. Additionally, SPFs may be illegal subsidies under international trade law. Also, the creation of SPFs suggests a new global chaos in patents. The new chaos raises fear that SPFs would cause a race to the bottom. SPFs become sovereign patent trolls with levers more potent than private patent trolls, depressing innovation for short-term gains. The fear about SPFs, however, is exaggerated. These concerns perhaps emanate from the tendency to group all SPFs from different countries into one and characterize them within the convenient patent troll narrative. Fear not, the present and future development of different SPFs should instead prompt us to rethink patents and the very laws creating them.

The article is available, here. 

China Ripe for Non-Practicing Entity Suits

A short time ago, I wrote about an article by Ma Si in the China Daily concerning the likelihood of an increase in patent suits filed in China.  On November 7, 2016, the Wall Street Journal has published an article by Juro Osawa, titled "China's Patent Lawsuit Profile Grows," about a Canadian non-practicing entity's (NPE) suit against Sony in Nanjing, China.  The article notes that China's IP enforcement system has changed substantially in the last few years and is less expensive than other systems making it an attractive place for NPE litigation for licensing leverage.  For one, according to the article, enforcement of the NPE's patents could result in stopping Sony from exporting infringing parts manufactured in China.  Notably, China's government has made clear its intention to move to an innovation and services based economy for continued economic growth and intellectual property protection will play an important part in that move.  The focus is usually on developing Chinese companies and protecting their technology, but there are obvious opportunities for other companies as well.  Indeed, I was in Beijing recently at a conference and there was talk concerning making patent enforcement in China even stronger than in the United States.  

China currently has three specialized IP courts: Shanghai, Beijing and Guangzhou.  It will be interesting to see if there is soon an expansion into other cities with intellectual property courts.  [hat tip to Professor Ed Lee of Chicago-Kent College of Law for the lead to the Wall Street Journal article] 

Nokia sued by German Patent Holding Company IPCom

Whilst much of Germany was following the debate surrounding the closure of Nokia's Bochum factory and whether subsidies paid by the local state government had been misused, IPCom a patent holding company in Munich was preparing another attack on the handset mega-company.

A company called IPCom purchased at the end of 2006 a number of patents from Robert Bosch GmbH relating to the GSM standard. Bosch had invested in the late 1980s and early 1990s extensively in the development of the mobile telephone standard. Bosch's efforts to commercialise their investment were unsuccessful and they withdrew from the telecommunications market after a few years.

According to an interview in Munich's serious daily newspaper, the Süddeutsche Zeitung Bosch had previously tried to negotiate a licensing deal with Nokia - without success. Under the GSM standard rules set by the European Telecommunications Standard Institute (ETSI), Bosch was obliged to offer so-called "essential patents" at Fair, Reasonable And Non-discriminatory ("FRAND") terms. Nokia apparently offered a licence fee of less than 1%.

Christoph Schoeller, the Managing Director of IPCom, states in the interview that IPCom considers the FRAND approach to be a licence fee of 5%. Based on the patented products, he states that he is looking for a return of €12 Million for the twenty year lifetime of the patents.

Not surprisingly there is no mention of the price paid to Bosch for the patents. Given that Bosch had barely exploited the patents (and that their telecommunications activities were for many years making huge losses), the sale of the patent rights was probably an unexpected income bonus. No doubt Nokia will not be the only company expected to pay IPCom a royalty for the use of the patents.

IPCom does not appear to have a website itself. It is part of the Schoeller Group based in Pullach, Germany. The German business daily Handelsblatt reports that 50% is held by a New York-based private equity fund Fortress Investments.

It is not clear which patents are currently involved. The German PTO's website records three utility models, 52 German national patents or applications and nine European patent or applications. Several of the applications are clearly divisional applications - presumably as IPCom tailors its claim language to other alleged infringers

Update 7 Feb 2008

Joff Wild of Intellectual Asset Management Magazine was kind enough to point out that the sum involved was EUR 12 Millarden (EUR 12 US Billion) and not the paltry sum of 12 Million.