ICT S ECTOR

A. GENERAL DEVELOPMENTS

With the shift from an industrial economy toward an information economy, the importance of intellectual property rights (IPRs) has increased. Today, a large proportion of companies’ assets constitute intangibles, and IPRs are used to protect and profit from certain of these. Patents, for instance, provide their holders with the right to forbid others from utilizing patented inventions.

Holders may thus gain competitive advantage due to their ability to stand out from the competition, or they may use their position to choose their licensees, which is one of their core rights due to the exhaustion doctrine (Kipnis, 2000). Then again, if the patent holder issues a license, as a rule he is entitled to secure any monetary or other compensation he is able to extract from the licensee (Shurmer & Lea, 1995) as long as the licensing terms are coherent with relevant regulation. The objective of licensing is to generate more revenue for the undertaking than it would be able to produce if it manufactured the patented products or utilized patented methods only by itself. Indeed, a well-reasoned licensing program helps a company to position itself favorably in the market place (Megantz, 2002; Soininen, 2005).

Obviously, there are differences between industries with respect to licensing tendencies, but generally speaking, the markets for technology licensing the component of which patents are have grown. In fact, in a survey conducted by the OECD/BIAC, 60% of the responding companies reported increased inward and outward licensing, and 40% reported increased cross-licensing. Other types of knowledge sharing have become more common too, and collaboration takes place in the form of sponsored and collaborative research, strategic alliances, as well as in mergers and acquisitions. This has been said to stem from the growing technological complexity, increased technological opportunities, rapid technological change, intense competition, and the higher costs and risks of innovation. As a consequence, companies have namely become more focused on certain areas while they acquire complementary technologies increasingly from other undertakings and universities (OECD, 2004).

The features mentioned previously apply also to the ICT sector, and companies lean heavily on cooperation and networks. Contemporary academic literature refers to this type of innovation as the open innovation model, in contrast to the closed model that used to dominate. Companies applying the closed model seek ultimate control and do everything themselves, while those adopting open innovation realize that valuable ideas do not only originate within their firms, and that it does not have to be the company itself that releases these ideas in the market. Whereas making innovation proprietary and exclusive is a central feature of the closed innovation model, open innovation is characterized by the exploitation of intellectual property in order to create value. The boundary between the company and its environment is said to have become more permeable, enabling ideas and knowledge to flow more freely (Chesbrough, 2003).

One further characteristic of the competitive environment of the ICT sector is so-called coopetition that was pointed out by one of the U.S. interviewees. Coopetition basically means that companies may very well be business partners in some fields and compete aggressively in others (Interview data U.S., 2004). Naturally, all the elements mentioned before signaling the importance of networks, openness in innovation, and coopetition are reflected in ICT firms’

patenting practices, the use of patents in their business, enforcement and infringement avoidance.

Furthermore they affect the technology licensing tendencies and licensing terms. Similarly it is

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possible to detect their implications on standardization and also on settling of disputes as some of the example cases discussed later on demonstrate.

B. THE U.S. PATENT LANDSCAPE

The patent landscape of the U.S. ICT sector could be described as a thicket to the birth of which strong patent system, technological complexity and fast technological development have contributed. Thus, although a reading of the patent laws gives the impression that there is a correspondence between a product and a patent, this is not necessarily the case: patents may overlap, and the manufacture of one product may require access to hundreds or thousands of patents, or one patent may “read on” many types of products, not just one (FTC, 2003).

Therefore, in order to avoid the resulting hold-up problem, many U.S. ICT companies employ defensive patent strategies, and if they have the resources to do so they build large patent portfolios in order to guarantee that others cannot prohibit them from innovating. This in turn increases the number of relevant patents in the industry. Naturally, in addition to the better negotiation position and increased ability to agree on the licensing and cross-licensing they facilitate, patents also provide the means to prevent outright imitation in these cases (FTC, 2003;

Interview data U.S., 2004; Soininen, 2005).

In general, the significance of patents as protection mechanisms used to exclude others and thus to generate competitive advantage appears not to be very high in the ICT field, and it is rather competition that spurs innovation in this sector (FTC, 2003). This was reflected in the patent-enforcement activities of the U.S. companies that were interviewed, and which operated on the basis of a defensive patent strategy. Unlike the company that employed an offensive patent strategy and attempted to generate its revenues from technology and patent licensing, defensively operating firms focused more on their core businesses of making and selling products rather than devoting resources to detecting infringements (Interview data U.S., 2004). Similarly, Messerschmitt & Szyperski (2003) have observed that the exclusionary use of patents is less common in the software industry than in some other industries such as biotechnology and pharmaceuticals. In their opinion this is in part because patents tend to be less fundamental and they can be circumvented easily. Furthermore, according to a quantitative study of U.S.

manufacturing firms conducted by Cohen, Nelson & Walsh (2000), compared to other appropriability mechanisms such as secrecy, other legal tools, lead time, complementary sales, services and manufacturing, patents ranked rather low in effectiveness in fields such as the manufacture of electrical equipment and electronic components, semiconductors and communications equipment, all of which are connected to the ICT sector. Moreover, there were substantial variations between industries: patents appeared to be most important in the chemical industry. This does not mean that they are not acquired for other purposes, such as those indicated earlier, and naturally all of their functions are based on the patent holder’s ability to prevent others from utilizing the invention.

Since many ICT companies are dependent on one another as indicated earlier and patents are not vital for protection, they generally have no reason to complicate their business relationships by claiming patent infringement. However, while particularly large U.S. ICT firms seem to be aggressive in building patent portfolios mainly for defensive purposes, offensive patent strategies tend to predominate for individuals and small software companies (Messerschmitt & Szyperski, 2003). Indeed, various sources have reported an increase in companies that derive their revenue purely from patents. These companies, also called patent trolls, do not typically have any R&D of

A^URA SOININEN PATENTS AND STANDARDS IN THE ICT^SECTOR: A^RE SUBMARINE

PATENTS A SUBSTANTIVE PROBLEM OR A RED HERRING?

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their own, nor do they manufacture any products themselves: unlike most ICT companies therefore, they are not dependent on other firms. Their business is to force companies involved in manufacturing to license their patents by claiming patent infringement (FTC, 2003; Interview data U.S., 2004; Peterson, 2002b; Surowiecki, 2006). Patent trolls seek for direct licensing revenues and do not usually benefit from a cross-license. Therefore a defensive patent strategy that might otherwise help certain ICT companies to maintain their freedom-to-operate, and that has proven successful also in the context of standards as will be illustrated later has only minimal influence on them.

It is not only patent trolls that seek to make better use of their patent portfolios, however. The prevailing trend in the U.S. has been to found patent-licensing programs, sometimes by forming a separate patent-licensing unit, for the purpose of generating extra revenues mainly from inventions that are not considered core to the company’s main operations (Rivette & Kline, 2000). This trend is likely to have an effect also on standardization as standards are becoming more and more vital for the ICT industry and thus they also carry a lot of economic significance.

Consequently, having a patent that claims a broadly adopted standard may be a dream come true for a company seeking licensing revenues and not operating in that particular technology area.

Basically, patents are viewed as core elements of corporate business strategies in the U.S. ICT sector. They are employed for multiple purposes in different contexts. They may be used as protection measures and as components in joint ventures, in patent pools, and technology licensing arrangements. A license may also be a pure patent license or a broad cross-license providing a company with not-to-sue coverage. Furthermore, patents may be used to attract other types of resources to the company. They serve as indicators of innovativeness, and can be helpful in attracting financing: they can be used as collateral and are seen as a positive indication in the eyes of venture-capital investors and potential buyers. In fact, one trend that is detectable in the U.S. is the increased tendency of selling and buying patent portfolios and individual patents (FTC, 2003; Interview data U.S., 2004). This may happen in conjunction with the acquisition of an entire company, or patents may be bought from bankrupt firms. This follows that it is not easy to avoid patent infringement as patents may easily find their way to unknown parties meaning that a notification of potential patent infringement may practically come from anyone.

There is one further feature about the U.S. patent landscape that should be noted. It has been claimed that a substantive number of patents are being granted particularly in new areas such as software and the Internet that do not actually fulfill the patentability requirements. These so-called bad patents have contributed to various patent-related difficulties and they have been deemed to be one of the main reasons why the U.S. patent system is not in balance (FTC, 2003).

C. THE EUROPEAN PATENT LANDSCAPE

So far Europe has not faced patent trolling on a large scale, which could be explained by the fact that the consequences of litigation and infringement are less severe: while the average cost of patent litigation in the U.S. amounts to more than $2 million per side (Vermont, 2002), in Finland the figure for hearing an infringement the case in the district court is closer to EUR 150 000 per side. Of course the total amount of litigation costs may be fundamentally higher if the case involves various phases such as a precautionary measure claim, and both infringement and annulment actions. Moreover, the damages issued are substantial in the U.S. For instance, in 1990 the Federal District Court awarded $910 million in damages to Polaroid in its

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infringement litigation against Kodak, Alpex Computers was awarded $260 million for patent infringement (litigation against Nintendo) in 1994, and in 2003 Microsoft was forced to pay Eolas

$521 million for infringement of an Internet browser patent (PwC Advisory, 2006). By way of comparison, the largest amount of damages ever awarded in Finland by the Court of Appeals was EUR 252,282 (Labsystems Oy v. Biohit Oy, HO S 94/1922, The Helsinki Court of Appeals).

Furthermore, the patent web in the ICT sector appears to be less complex in Europe than in the U.S., although there are certainly variations between different technology areas. For instance, the European mobile-phone industry and the electronics field are areas in which large patent portfolios are common (OECD, 2004; Watts & Baigent, 2002). However, with the exception of the large telecommunications and electronics companies, patents seem to be regarded not so much as strategic assets, but rather as legal tools applied and used for protecting the results of the company’s own R&D efforts, and occasionally for licensing (Interview data Finland, 2003; DLA, 2004).

It was evident, for instance, from the interviews with the Finnish companies that were not involved in the mobile-phone area as manufacturers, and had less than 70 issued patent families, that small-scale portfolio building was the preferred strategy for avoiding otherwise weak patent protection. There were no cross-licenses, however, and the companies appeared to be able to operate freely without paying much attention to the patents of others (Interview data Finland, 2003). In general, the patent application part of the patent strategy was well thought out, although it should be noted that the process was technology-oriented and lacked the type of business acumen that was present in the U.S. (Interview data Finland, 2003). In fact, this is a conclusion that has been shared also by others. For instance Kratzman (2005) pointed out in his research: “Finnish patents tend to be academic and not written to generate revenue. They are not commercial nor do they cover multiple applications, an essential element in generating licensing interest.” (p. 14).

With respect to the utilization of the patents in the company’s business transactions and the infringement surveillance, they could be described as incidental, perhaps because patents were not regarded as important contributors to the company’s revenue stream, and most Finnish companies had so few of them. Lead time, constant innovation and, in the area of software, copyright protection, were considered more important (Interview data Finland, 2003).

Furthermore, attitudes towards patents appear to be largely negative, even indifferent, in the software industry in particular (Interview data Finland, 2003), which, based on Blind et al. (2001), applies not only to Finland but also to the rest of the Europe as far as independent software developers are concerned. It should be noted, though, that even small and medium-sized companies are beginning to realize the importance of strategic patent management, perhaps partially as a response to the attention paid to patents by investors. Generally speaking, there is a steady increase in the propensity of filing patents in the European ICT sector (OECD, 2005), which in turn will probably increase the likelihood of patent-based conflicts, and make it more difficult to design around the patents when selecting a standard, for instance. Currently, however, European companies appear not to be employing their patents as aggressively as U.S.

undertakings and therefore there is a chance that even though European companies had patents that could be characterized as submarines, this would not create substantial hindrances to the industry. On the other hand, markets for technology are international and as the case with GSM standard that will be discussed in the licensing section of this article illustrates, also patent strategies of U.S. companies tend to influence European standardization efforts.