In our last quarterly TMT briefing, we discussed the phenomenon of patent privateering, which is becoming increasingly common in the TMT sector (see here). A related emerging development is the Sovereign Patent Fund (“SPF”). An SPF is a wholly or partly government-backed entity which has, generally speaking, the aim of protecting domestic businesses from patent claims by foreign companies. Another undeniable aim is to assist domestic businesses to assert their patents against foreign companies, and hence to monetise their intellectual property. Overall, the aim is to assist with national economic goals. However, for foreign companies they raise the alarming prospect of patent litigation funded by the deep pockets of national treasuries for political ends.
Typically, a domestic business enters into an agreement with the SPF set up by its government, granting the SPF the exclusive right to control and manage licensing programmes relating to its patent portfolio in return for a share of the revenue generated by the licensing programme. The SPF assumes all risks and costs relating to the licensing programme, its aim is to explain to infringers how and why they are infringing and the benefits of taking a licence, thus generating higher revenue for the patent owners. The SPF is typically also authorised to enter into litigation to enforce the patent portfolio against reluctant target licensees, without reference to its domestic partner. It generally takes an assignment of the patent portfolio from the domestic partner, but may alternatively act as exclusive head-licensor. The SPF may also act as a defensive aggregator, using its funds to acquire patent portfolios which come onto the market and which might read onto the products or services of domestic businesses and granting them a licence under such patents.
Well-known examples include:
France: the French government set up France Brevets in March 2011, with €100 million under management, half coming from the French Government itself and half from Caisse des Dépôts et Consignations, a public-only owned French bank. This SPF operates in a wide range of technologies including smartphones, tablets, laptops, digital TVs and smart meters. One example of its work involved Inside Secure, a French SME in the semiconductor industry with a portfolio of 70 patents relating to Near Field Communication. France Brevets entered into an agreement with Inside Secure after being approached by a member of Inside Secure’s board. France Brevets identified HTC and LG as target licensees. Following unsuccessful licensing negotiations, France Brevets funded patent infringement actions against LG and HTC in the German and US Courts. LG settled soon afterwards. HTC did not settle, but France Brevets prevailed against it in the German action in April 2015, obtaining an injunction allowing it to exclude certain HTC products from the German market.
France: in light of the success of France Brevets, a second French SPF was created in December 2014 called Fonds Souverain de la Propriété Intéllectuelle. This SPF was established with €100 million of public funds under management and is managed by France Brevets.
South Korea: the South Korean government is reportedly participating in Intellectual Discovery, a patent fund with US$250m under management. According to publicly available information, Intellectual Discovery has acquired a portfolio of 3,800 patents. They cover well over 20 different technologies, but among the biggest sub-sets are those which relate to mobile services and communications, light emitting diodes, batteries, next-generation near field communications and cloud computing.
Japan: the Innovation Network Corporation of Japan was set up in September 2009, capitalized at $2.6bn. The Japanese government injected $2.5bn, with a consortium of 26 leading Japanese technology companies providing a further $0.1bn.
China and Taiwan: both have SPFs, but information about the size of the fund or the number of patents under management are not readily available.
Private-sector patent assertion entities (also known as patent trolls) are a well-known phenomenon which have changed the face of US patent litigation over the last 10 years. Highly controversial, they have attracted a torrent of criticism which eventually led to patent law reform in the US and ongoing calls for further reforms there.
SPFs share certain characteristics with these private-sector patent assertion entities, in particular holding patents primarily to generate licensing revenues rather than to manufacture products. However, their use of public funding adds an additional dimension of controversy, giving rise to the fear of state interventionism and economic nationalism. SPFs have no shortage of critics, who dub them “patent assertion entities with a nationalistic bent” or “government-sponsored patent trolls”. The US industry has been particularly vocal about this development, fearing that it will be targeted in patent litigation funded by the bottomless pockets of foreign governments supporting for political ends their domestic technology champions.
Regardless of the critics, SPFs appear to be here to stay. Whilst private-sector patent assertion entities are currently more established (for example, Intellectual Ventures alone has $5bn under management), no one can doubt that SPFs will become major players in the world of patent monetisation and enforcement.
The implications are potentially significant:
- For companies, particularly SMES, struggling to assert their patents against large well-funded defendants, an SPF may be an additional option, as a welcome source of support, expertise and litigation funding.
- Conversely, operating entities should take the potential involvement of SPFs into account when assessing the likelihood of an incoming patent infringement claim from a competitor, or when developing a defence strategy following receipt of an incoming claim.
- Anecdotal evidence suggests that the upcoming Unified Patent Court is perceived by private-sector patent assertion entities as an attractive forum, and some commentators are predicting a switch in patent troll activity from the US to the EU once the Court is up and running (expected to be in Q1 2017). The likely involvement of SPFs is another factor to bear in mind when assessing the risks and opportunities, which the upcoming patent reforms and the new patent landscape in the EU will bring.