Who speaks for the SMEs?

The issue of non-practising entities (NPEs) or ‘patent trolls’ is among the most contentious debates in IP policy. In one narrative, advanced by those who want reforms to inhibit their behaviour, patent trolls are a pervasive threat—preying on small to medium-sized enterprises (SMEs) with frivolous litigation designed to extract a quick settlement.

But major patent owners have rejected this telling, arguing that the narrative around NPEs is effectively a Trojan horse intended to weaken patent rights and empower infringers.

Each side has produced arguments and counter-arguments, including empirical data to support their respective accounts. Few deny that patent trolls exist, but the extent to which they pose a threat to SMEs is deeply contested and difficult to verify.

“Not many patent troll victims will speak out about their experiences, partly because they fear further attacks and partly because no one wants to admit publicly to having paid millions to prevent a bogus patent lawsuit,” says Silvana Marcotulli, chair of the European Digital SME Alliance’s working group on software patents and IP rights.

The patent troll ‘myth’?

The past year has seen the patent troll issue raised more forcefully in European policy debates around IP. In a January 2020 op-ed in the Financial Times, Francisco Mingorance, senior advisor at IP Europe, urged policymakers to reject the “patent troll myth”.

IP Europe is a coalition of European patent owners, including some of the world leaders in telecommunications standard-essential patents (SEPs), such as Nokia, Ericsson, and Orange. For these companies, NPEs are invoked by implementers who want to weaken patent protections and enable infringing activity.

This highlights the incendiary nature of the ‘patent troll’ label. Many SEP owners feel the term is being weaponised against patent rights in general. Marcotulli says it’s important to distinguish between “abusive NPEs, or patent trolls, and other, legitimate patent rights holders, that do not commercialise products or services”.

“Unlike patent trolls, legitimate NPEs have a far more positive role to play in fostering innovation as their business model is based on monetising IP rights through licensing and technology transfer,” she says.

Mingorance’s letter came in response to BMW, Microsoft, and Apple urging the European Commission to crack down on patent troll behaviour which, they claimed, was harming innovation in Europe. This is where the back story to the patent troll debate comes into sharper focus.

The fault lines tend to be drawn along the same lines as other debates in the SEP and broader patent space: between rights owners and implementers. NPEs have become, if not exactly a proxy war, just one battleground in a much bigger policy dispute with a lot of money at stake. There is a risk of the independent voice of SMEs, so commonly invoked by both sides in the debate, becoming diluted amid the policy objectives of major corporations.

“There are horror stories of SMEs being on the receiving end of a letter before action from a patent troll. However, the risk of this happening needs to be put into perspective,” says Rhian Granleese, partner at Marks & Clerk in London.

Granleese advises multinational corporations and SMEs on patent matters in the electronics and physics fields.

“From my own practice, I do not see patent trolls as a huge threat to an SME in a knowledge-rich industry. However, they do change the ecosystem. Patent trolls acquire patent portfolios from both multinationals and SMEs and, therefore, provide a potential revenue stream for SMEs who have patents that they have decided not to commercialise,” she says.

Protecting the ecosystem

The relationship between patent trolls and SMEs, therefore, is not one-way. While small businesses can be targeted in NPE litigation, SMEs are also the source of many patents which are picked up on the market and later asserted in lawsuits.

“NPEs are allowing companies to monetise patents that would have otherwise been dropped and this in turn must lead to increased licensing and litigation,” Granleese explains.

NPE litigation is just one part of a wider ecosystem, which impacts businesses in different ways. There is no homogenous “SME interest” on the issue of patent trolls, any more than there is for other policy debates.

That’s not to say there isn’t a real concern among some SMEs that patent trolls and NPEs do pose a threat to businesses in the digital economy.

“I do not think that the issue of NPEs has been instrumentalised,” says Sebastiano Toffaletti, secretary general of the European Digital SME Alliance. He points to a 2017 European Commission policy document which raised the possibility of independent, third-party checks on the essentiality of SEPs. Reforms of this type could help “democratise” the market and make standardised technologies more accessible to SMEs, he argues.

“Many recent studies have shown what everyone in the industry knew for a fact—that a large majority of declared SEPs, perhaps at least 70%, are in fact non-essential, invalid, or sometimes just not infringed,” Toffaletti says.

One of the most prominent organisations lobbying for reform of EU IP policy is ACT | The App Association. According to ACT, its purpose is to campaign on behalf of app developers and small businesses in the technology sector. One of its key policy concerns is highlighting a patent system which, it says, is skewed towards the interests of SEP owners, and enabling patent trolls to target SMEs.

“Here’s the challenge for an organisation like ours that’s dealing with small businesses: they’re resource-constrained, they don’t have numerous product lines or the ability to write infinity-sized cheques like some larger companies do,” says Brian Scarpelli, senior global policy counsel at ACT.

“The negative effects of patent trolls on small companies are exacerbated, because they’re put into a position where everything is on the line,” he says. Scarpelli agrees that solid empirical data on NPE activity in Europe, including any trends indicating whether the problem is getting worse, is quite limited. But anecdotal evidence from ACT members concerns him, he says.

“What we hear from our members, not just in the EU, is that NPEs do pose a pretty significant threat. We’re at a point where our membership is asking us to do all we can to improve the situation, whether it’s small and incremental, or broad and sweeping reforms.”

Marcotulli agrees that digital SMEs operating in new, “patent-heavy fields such as the internet of things, artificial intelligence, and blockchain” find themselves on the “front line” against patent trolls. “The problem of attacks from opportunistic patent trolls is one that could literally sink them given the cost involved in IP litigation and/or the disbursement to avoid the court case,” she says.

ACT: ‘We’ve heard that claim for years’

It is typical for any group intervening in IP policy debates to argue that they are representing the interests of SMEs and promoting a healthy innovation system. But some claim there are bigger economic interests at play—those of implementers looking to reduce the amount of patent royalties they need to pay to SEP owners. ACT has been criticised for simply reflecting the policy objectives of Apple, one of its major sponsors.

This was the view behind Mingorance’s letter to the FT, which accused companies such as Apple of being “engaged in a campaign to change the licensing norms governing their access to the patented technologies underpinning cellular communications standards like 4G and 5G”.

This narrative—that groups such as ACT are a front for bigger corporate interests—is familiar to Scarpelli.

“I’ve heard that claim for years—that these are just insulting monikers used to devalue patents. I think that’s just an extreme view. My opinion is that, in reality, there’s a sliding scale. At one end of the scale is behaviour that most reasonable people would see as that of a patent troll,” he says.

He turns the criticism back at the types of companies who back IP Europe, those who hold large SEP portfolios.

“What I observe is there is a small number of large companies who are increasingly in the SEP monetisation business, and decreasingly actually making anything,” he says.

“If they can move the goalposts even one metre in a way that’s advantageous for them, it can translate into an increased royalty in their next negotiation.”

The debate around NPEs often comes back to the conflicting economic interests of very large corporations, grappling over access to the technology standards which will define future generations of consumer products. Each side, meanwhile, claims to be advancing the interests of the innovation economy and SMEs, whose independent voice it can sometimes be difficult to hear.

App wars

It’s useful to compare the patent troll debate to an antitrust dispute between tech platforms and app developers. The EU is currently engaged in a reform of the laws governing the digital marketplace in Europe. ACT has so far been critical of the latest draft of the Digital Markets Act (DMA), which some app developers argue will open up competition in the sector and reduce their reliance on a select number of very powerful tech platforms, such as Apple and Google.

Jurgita Miseviciute is public policy and government affairs lead at ProtonMail, a Switzerland-based email provider. According to Miseviciute, the DMA could be a “revolution for app stores”, and a critical opportunity to rebalance the marketplace in favour of developers.

“If done right, the DMA has a real potential to make the internet a level playing field,” Miseviciute says. Under the current draft, “Apple will have to allow business users to use alternative payment methods” other than the platforms’ in-house systems, she explains. Crucially, platforms would also have to allow third-party app stores to rival their own, where they collect a share of the sale price.

On the face of it, this is shaping up to be a major win for app developers. Yet ACT, which counts app developers as its major constituency, is opposing the reforms. One senior figure at a tech company supporting the DMA reforms suggested to WIPR that ACT’s policy positions tend to closely align with those of its major sponsor, Apple, rather than smaller businesses.

“Big tech is using its financial power to influence certain positions and improve its image,” they said. Smaller businesses, meanwhile, are offered a seat at the same table as Apple, even though their best interests may not be being represented in policy terms, the source suggests.

But ACT is not the only player in the debate to have a significant backer eyeing an opportunity to advance its policy goals. Scarpelli, for example, replies that there are “large companies with billions hiding in plain sight behind small business”, in reference to Spotify and smaller app developers pushing for the DMA reforms.

Of course, it is no surprise that many smaller app developers have reached the same conclusions as Spotify when it comes to Apple and Google’s dominance of the app marketplace. At issue in the debate over the DMA is how the profits of the app marketplace should be apportioned. Many SMEs are calling for developers to receive a greater share.

Defending its position on the DMA, Scarpelli says ACT’s interest is to avoid up-ending a system that has generally achieved high levels of growth. “A historical role that we have had is creating dialogue between the small business community and Apple,” he says, adding, “there’s a bunch of larger developers trying to seize the moment with a lot of politicised stuff”.

We can see parallels with the patent troll debate, where organisations backed by rival corporations advance competing policy positions, both in the name of innovation and small business.

In truth, SMEs’ policy interests are diverse. On antitrust, some developers may prefer to have a “seat at the table”. Others may see the DMA as an opportunity to challenge the dominance of the tech platforms. Some SMEs may see patent trolls as a threat, others as a revenue source that allows them to monetise their patents.

The NPE and antitrust debates highlight why it’s important to closely scrutinise the interests and backing of groups speaking for SMEs. Undoubtedly they speak for some. But the companies that tend to shape policy debates and secure lobbying groups are those with hefty resources.

Behind all these narratives are powerful industries and companies with specific policy goals. SMEs are, of course, entirely free to form alliances with whoever they wish on issues of concern. But it is easy to instrumentalise the interests of small businesses as a whole when the picture is nearly always more complex.

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