Do Not Blame Patent Trolls

In our January 1 blog, we wondered “Will 2008 bring the same troll trend in Europe?”. Well it’s no surprise that it does. A yet relatively unknown NPE (Non Practicing Entity, or otherwise called "patent troll") an IP exploitation company called “IP-Com”, backed by private equity funds, sued Nokia for infringement of 8 patent families at the patent court in Mannheim (Germany) this week. IP-Com by doing so, threatens Nokia’s financials in its core business, mobile phones. IP-Com demands significant license fees. Nokia, in a common Pavlov reaction, rejected all allegations arguing that the NPEs patents are invalid.

So trolls or NPEs have now reached Germany as well. With the separation of infringement and validity procedure the German court system may be particularly suitable for such claims and litigations by exploitation companies backed by funds. As we set out in our blog on January 1, this clearly marks a new trend in European patent enforcement, where NPEs will soon crawl over European industry to assert patents to create value out of IP positions. We expect this phenomenon to increase dramatically in 2008.

In cases like this there are likely two options. Either the NPE, in this case IP-Com, asserts patents resulting from their own innovative efforts, or, as is more likely, the patents have been acquired from third parties with an eye to assert them against industries like Nokia to create license income. According to press publications the latter is the case, as IP-Com is said to have bought the patents from Bosch. Does this make a difference? It does.

If the patents are the result of own innovative R&D output, asserting them against alleged infringers who use these intangible assets in their own products in order to recoup investments in own R&D in no way differs from any patent assertion strategy as we know them. If however is these patents have been bought from a third party with the purpose of enforcing it against companies using the patented technology is exposes a flaw in existing IP strategies of major European companies. Or, at best, the uncovering of unused potentials in existing IP portfolios of those companies. Obviously these patents have been bought by a party that decided to make value of patents where the seller did not see it, or where the patents did not represent core business anymore, or, alternatively, where the seller decided that doing it themselves would be out of their (financial or organizational) reach. The price the buyer (IP-Com) was willing to pay (having made the analysis that they would be in a better position to make even more money of those patents, backed by investors, than the original owner) reflects the potential and true value of the patents.

This is what we will increasingly see happening. A lot of companies are sitting on IP that is not subject to active value creating strategies, but rather used as defensive (and passive) “freedom-to-operate” thinking. One can hardly blame parties for looking to find “Rembrandts in the attic” and come up with a viable value extracting enforcement strategy for pursuing financial rewards from intangible assets, where the original owners did not.

So, is this reason for European companies to grumble? If you read the commentaries and listen to the comments made in boardrooms of many companies, they certainly do. We would argue that this is not the way this phenomenon should be addressed. Rather than complaining, companies should more actively seek active strategies to extract value out of their own patent portfolios, or- depending on where they stand at the equation – hire expertise to pursue a more active IP strategy. Whether that is to engage arm’s length companies to license out their non used IP, or buy defensive IP positions on the market before NPEs doing just that. The point we would like to make is: get rid of that grinded and often wrong idea that patents are just to create freedom to operate.

This will in turn requires a much more active debate about the need to get a more transparent IP market. As there is no real and open “market” for IP - in the economic sense - where buyers and sellers can meet supply and demand, based on generally accepted value propositions, the call for improvement of the market conditions for IP will increase. The actions by NPEs will therefore have two positive outcomes. Firstly companies are forced to critically evaluate and reform their IP strategies and secondly, there will be a innovative push to create new market mechanisms for IP to be more easily change hands.