les Nouvelles

September 2017
XCELL
IP E E JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

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Volume LII No. 3 September 2017

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LES NOUVELLES
• The IP Gr Advancing the Business of Intellectual Property Globally
SMEs And The Patent Challenge
Introduction: SMEs—What We Know And Don’t Know PATRICK TERROIR — PAGE 139
Part 1: Main Challenges
SMEs And Patent Valorization JOSEP MARIA PUJALS — PAGE 149
SMEs And Open Innovation (OI) PAUL GERMERAAD — PAGE 156

JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

SMEs & Patent Litigation: European Perspective EMMANUEL GOUGÉ & VALICHA TORRECILLA — PAGE 162
Creating SEPs­— A Risky Business For SMEs MENNO TREFFERS, MATTEO SABATTINI &
ALESSANDRA MOSCA — PAGE 167

55 years of Dennemeyer
SMEs & Standard Essential Patents: Licensing Efficiently In IoT
HARRIS TSILIKAS & CLAUDIA TAPIA — PAGE 170
Part 2: A Journey Around The SMEs’ IP World
Europe: France EMMANUELLE FORTUNE — PAGE 177 | Germany TOBIAS WUTTKE — PAGE 179
Italy MATTIA DALLA COSTA — PAGE 181 | IP Manager For SMEs? ERCOLE BONINI — PAGE 184

Thanks for 55 years UK CHRISTI MITCHELL & ROBERT LOOKER — PAGE 186
U.S.A. JOHN CABECA & IVAN CHAPEROT — PAGE 189
Asia: China QINGHONG XU — PAGE 192

of entrusting your IP ASEAN & Singapore AUDREY YAP — PAGE 195

India SUNITA K. SREEDHARAN — PAGE 197

Latin America: Brazil CÂNDIDA CAFFÉ & MARIANA VICENTINI — PAGE 199 | Chili FELIPE CLARO — PAGE 202
Colombia FERNANDO TRIANA SOTO & MARCELA GÓMEZ RUBIO — PAGE 203

to Dennemeyer. Mexico ROXANA AISPURO & HECTOR CHAGOYA — PAGE 206 | Peru RENZO SCAVIA — PAGE 209
Africa: South Africa MADELEIN KLEYN — PAGE 210
Conclusion: Do Not Focus Only On SMEs, Make The Knowledge Economy Work PATRICK TERROIR — PAGE 214

The Exhaustion Theory Is Not Yet Exhausted: Part 4 ERIK VERBRAEKEN — PAGE 216
Licensing Standards Essential Patents JOSEPH A. ALFRED — PAGE 223
Magic Bullet: Determining Royalties With Corporate Discounts Rates BRIAN DIES & JOEL WACEK — PAGE 229
• Client-oriented • Self-funded • Owner-managed • Global A Guide To Commercial Innovation In Artificial Intelligence DEEPA RAVINDRANATH — PAGE 237
Disruption In The IP Services Industry? JOHN WALKER — PAGE 241
Intangible Asset Market Value Study? CATE M. ELSTEN & NICK HILL — PAGE 245
Software IPR Valuation Model SANTOSH MOHANTY & KAUSHIK GALA — PAGE 248
Recent U.S. Decisions Affecting Licensing JOHN PAUL & BRIAN KACEDON — PAGE 255 $62.50/Issue
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R
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or LESI 2018 ANNUAL CONFERENCE
Strong IP Drives the Bottom Line

Futurescape? April 29 – May 2 l

Manchester Grand Hyatt San Diego,California l

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 Introduction

SMEs And The Patent Challenge—Introduction

By Patrick Terroir

T
his special issue of les Nouvelles aims to pave the
way within LESI (Licensing Executives Society
International) to a broad and international reflec-
tion on the practice of small and medium-sized enter-
prises (SMEs), which represent an increasing share of
innovation in all economies, as regards their relations
with the systems of intellectual property.
This issue is the result of an international collabora-
tion with the cooperation of the LESI. The introduc-
tion presents the current research and knowledge on
the subject. The first part consists of expert analysis
about some of the most essential challenges for SMEs
regarding IP. The second part intends to be a beginning
of LESI “country sheets” about the specific measures
to support SMEs in the different countries.
Introduction: Patent and SMEs. What Do We Know
And Do Not Know?
Part 1: Main Challenges
1. SMEs and Patent Valorization by Josep Maria Pujals
2. SMEs and Open Innovation by Paul Germeraad
3. SMEs and Patent Litigation by Emmanuel Gougé
and Valicha Torrecilla
4. SMEs and SEP: Creating SEPs—A risky business
for SMEs by Menno Treffers, Matteo Sabattini
and Alessandra Mosca
5. Licensing In IoT And How SMEs Can Benefit From
It by Harris Tsilikas and Claudia Tapia
Part 2: A Journey Around the SMEs’ IP World
1. Europe:
a. France by Emmanuelle Fortune
b. Germany by Dr. Tobias Wuttke
c. Italy by Mattia della Costa and Barbara Sartori
d. Italy2 by Ercole Bonini
e. UK by Christi Mitchell and Robert Looker
2. USA: by John Cabeca and Ivan Chaperot
3. Asia:
a. China by Qinghong Xu
b. Asean and Singapore by Audrey Yap
c. India by Sunita K. Sreedharan
4. Latin America:
a. Brazil by Cândida Caffé and Mariana Vicentini
b. Chile by Felipe Claro
c. Colombia by Fernando Triana and Marcela Gómez
d. Mexico by Roxana Aispuro and Hector Chagoya
e. Peru by Renzo Scavia
5. Africa:
a. South Africa by Madelein Kleyn
Conclusion—A different perspective: do not focus
only on SMEs, make the knowledge economy works. 

Patent And SMEs. What Do We Know And Do Not

Know? (A Review Of The Literature)
By Patrick Terroir

The Importance of SMEs for the Economies ed.2 Micro firms constitute the

E
ven if there are no standard definitions of what bulk of MSMEs in all coun- ■ Patrick Terroir,
SMEs are, it is generally considered that small tries. In Europe for example, Innovation Legal;
and medium-sized enterprises (SMEs) are firms within the SME population,
Sciences Po Paris,
employing between 10 and 250 (or 500) people and micro-enterprises accounted
for 92.7 percent of all enter- Lawyer, Professor ,
that firms with up to 10 employees are referred to as
micro firms (it is often added as reference to a maxi- prises active in 2014 in the Paris, France
mum turnover, like less than EUR 50 million € in Eu- non-financial business sector, E-mail: pterroir@gmail.com
rope). The two categories constitute Micro, Small and and small and medium enter-
Medium Enterprises (MSMEs) in the statistics.1
1. IFC’s MSME Country Indicators http://www.ifc.org/
In OECD economies MSMEs account for over 95 wps/wcm/connect/Industry_EXT_Content/IFC_External_
percent of firms and 60 percent-70 percent of employ- Corporate_Site/Industries/Financial+Markets/msme+finance/
ment; they generate a large share of new jobs and pro- sme+banking/msme-countryindicators.
vide around 45 percent of business sector value add- 2. http://www.oecd.org/cfe/leed/1918307.pdf.

September 2017 139

 Introduction
develop after some years (25 percent only after six
Figure 1. Size Of Enterprises In years according to some studies).4 See Figure 1.
Different Economies
If we look at international comparisons, when it
1-9 10-19 20-49
comes to the number of SMEs, the EU28 and the
50-249 250+ U.S.A. are roughly comparable with 1.65 and 1.5
SMEs per million GDP. In contrast, the importance of
100 SMEs in providing employment is similar in the EU
90 and Japan (6.6 and 7.1 persons employed per SME),
and much lower in the U.S.A., where SMEs account
80
for slightly more than half (52 percent) of total employ-
70 ment in the non-financial business economy (see 3).
60 These micro, small and medium enterprises (MSMEs)
are distributed differently along the different sectors of
50 the economies.
40 A classification often used is to distinguish between
30
two typologies based on technology intensity or knowl-
edge intensity to characterize the activities of SMEs.7
20 (for a definition of these typologies see page 151 of the
10 Annual Report on European SMEs 2014/2015).
0
From the survey in Europe8 we learn that:
USA JPN Euro area • Within the SMEs, medium-sized enterprises are
Source: entrepreneurship-at-a-glance-2016, OECD very often part of a group.
• The knowledge-intensive busi-
Table 1. Sectoral Distribution ness services sector consists
Of MSMEs (%) mostly of SMEs.
Manufacturing Trade Services Agriculture/other • The large enterprises and de-
pendent SMEs dominate the high-
Share of micro enterprises tech sector across all countries.
• The low and medium-low tech-
Developed 8.0 35.0 56.0 1.0 nology sector is composed of a
roughly even proportion of large
enterprises and SMEs,
Developing 11.5 44.3 39.9 5.3
• The ‘other services’ sector con-
Source: WTO 2016 report. 6 sists mostly of SMEs (in particular
in wholesale and retail trade).
prises for only 6.1 percent and 1.0 percent.3 As regards The New Innovation Economy and the Impor-
to employment micro SMEs accounted for 29.2 per- tance of SMEs
cent of total employment, and small and medium-sized
SMEs for 20.4 percent and 17.3 percent respectively. As OECD observes9 from the 1940s to the 1970s
As regards to value added micro SMEs accounted for the innovation model is dominated by large corpora-
21.1 percent of total valued added, and small and me- tions able to exploit large economies of scale in pro-
dium-sized SMEs for 18.2 percent and 18.5 percent
respectively (see 3).
5. http://www.keepeek.com/Digital-Asset-Management/
However, research show that despite the crucial oecd/industry-and-services/entrepreneurship-at-a-glance-2016_
importance of the SME sector for the economy as a entrepreneur_aag-2016-en#page36.
whole, the harsh reality is that few SMEs survive and 6. World Trade Organisation 2016 report, Levelling the
trading field for SMEs.
3. Annual Report on European SMEs 2014/2015, http://www. 7. Annual Report on European SMEs 2014/2015, http://www.
pmievolution.it/wp-content/uploads/2016/04/annual-report- pmievolution.it/wp-content/uploads/2016/04/annual-report-
SME-2015.pdf. SME-2015.pdf.
4. “Accounting For Intangibles: Financial Reporting And Value 8. Eurostat, http://ec.europa.eu/eurostat/statistics-explained/
Creation In The Knowledge Economy,” The Work Foundation/ index.php/Statistics_on_small_and_medium-sized_enterprises.
Research Republic, August 2009. 9. SMEs entrepreneurship and innovation, OECD, 2010.

140 les Nouvelles


duction, distribution, management and R&D producing
standardised products in large volumes at low cost. In
this period SMEs participated only to a limited degree
in innovation, reflecting their low R&D expenditure.
But with the introduction of new technologies, the
globalization and the transformation of the global value
chain, the role of new and small firms in innovation
and economic development has increased tremen-
dously since the beginning of the ‘80s (the so called
“new economy”) to today. Within the reasons for these
changes, we should note with OECD:
• The diversification of the responses to the (encour-
aged) diversified needs of the consumer and hence
the emergence of multiple market niches, which
new and small firms are quick to fill
• The reduction of products’ lifetime and their more
rapid creation (the pace of “progress” is feeling as
ever accelerating and products are not conceived
to last)
• The diminishing entry cost in the invention pro-
cess as the computer simulation possibilities has
widened and as a growing part of the new services
relates to the digital economy (SAAS)
• The role of venture capital which seeks to invest in
every opportunity to leverage new sources of value
and profit
• The boundaries of the firm can no longer be assessed
independently of the cooperative relationships that
the firms get with their suppliers or partners
Introduction
• The functioning of the global value chains which
assemble many diverse actors in the new techno-
logical process
• Correlatively the growing part of networks where
distributed knowledge and open innovation are
feeding mostly SMEs and start-ups which use them
as a raw material.
Hence, if the large companies still remain innovative,
and the SMEs become more and more a main compo-
nent of the innovations in what is called the “knowl-
edge economy” where knowledge is becoming a true
factor of production. This does not mean that SMEs
are relatively specialised in non-technological innova-
tion compared with larger firms. Rather the evidence
suggests that they tend to lag behind larger firms in
both.10 So the presentation of the SBIR program before
the Small Business Technology Council underlined that
an analysis of R&D 100 awards shows that SBIR/STTR
Programs have resulted in 22-25 percent of all key in-
novations in the United States.11 See Table 2.
The innovative SMEs—start-up and spin-off
SMEs are, on average, more innovative than one
might think: according to the 4th Community Innova-
tion Survey (Parvan 2007; see also: Eurostat, 2004),
about 33 percent of the enterprises who have 10-49
employees and around 40 percent of the enterprises
with 50-249 employees can be considered innovative
(i.e. they introduced new or significantly improved
products or processes in the time frame of 2002 to
2004).12

Table 2. Where Do Key Innovations Come From?

10. Acs and Audretsch, 1990;

Total Fortune 500 Universities SBIR Firms and Audretsch, 1995, for R&D
Number of Innovations Out of Top 100

intensities and Chapter 2 for non-

technological innovation rates.
11. Jere Glover, Robert
50 Schmidt, and Alec Orban, “Small
Business Technology Council
45
reauthorization of the SBIR/STTR
40
Programs—The Importance of
35 Small Business Innovation to
30 National and Economic Security,”
25 28 January, 2016, https://www.
20 sbc.senate.gov/public/?a=Files.
15 Serve&File_id=57625744-A72A-
10 424D-8B0B-90E3385108EF.
5 12. Report: Benchmarking
0 national and regional support
1971 1975 1979 1982 1984 1988 1991 1995 1997 2002 2004 2006 services for SMEs in the field
of intellectual and industrial
property, http://ec.europa.eu/
Year DocsRoom/documents/4722/
attachments/1/translations.

September 2017 141

 Introduction
Table 3. The Patent System Tradeoffs
Effects on: Benefit Cost
Creates an incentive for Impedes the combination of
Innovation R&D; promotes the diffusion new ideas & inventions; raises
of ideas. transaction costs.
Facilitates entry of new small
firms with limited assets; Creates short- term
Competition
monopolies, which may
Allows trading of inventive become long-term in network
knowledge, markets for industries.
technology.
Source16
If we refer to the R&D tax credit in France as anoth-
er example,13 in 2011, 75 percent of the declarations
came from independent enterprises with less than 250
employees
As OECD underlined,14 “new and small firms have
become critical innovation players because of their
ability to recognise and exploit the commercial op-
portunities emerging from technological, competitive
and market changes. Furthermore, economies of scale
in research and development are no longer the barri-
ers they once were to small firm participation in in-
novation” and “one of the reasons that new start-ups
and small firms have become more important today is
that innovation in the knowledge economy is coming
from creativity and the unexpected, and this is more
likely to be found in new and small operations than in
the systematic research that characterises large firm
R&D laboratories.”
One of the phenomena that attenuates the bound-
aries between firms is actually the multiplication of
spin-off creations where individuals leave universities,
research organisations and large corporations to start
enterprises based on knowledge they developed there
in the form of “spin-off” companies. However, this re-
mains limited as studies show that academic spin-offs
accounted for no more than two percent of new firm
creation across eight OECD countries, and that even
in the United States, which seems to have one of the
highest rates of university spin-offs, only two spin-offs
were created per research institution per year.15
Another practice is the growing “spin-in” process
13. http://www.ccomptes.fr/Publications/Publications/L-evolution-
et-les-conditions-de-maitrise-du-credit-d-impot-en-faveur-de-la-
recherche).
14. SMEs entrepreneurship and innovation, OECD, 2010.
15. Callan, “Generating Spin-Offs: Evidence from Across the
OECD,” OECD Science Technology and Industry Review, 2001.
142 les Nouvelles
when large firms deliberately use
SMEs as laboratories, acquiring and
integrating the technologies that in-
terest them the most and then make
their acquisition in case of success.
SMEs and Patenting
The patent system has been de-
signed to give protection to economic
actors who are in a relative “weak”
position—because its benefits to so-
ciety are stronger than the disadvan-
tages it entails. As Phelps Marshal
quoted in his famous “Burning the
ship” essay, “the real genius of the
Founders…was to create a patent
system that encourage innovation on
a truly mass scale.” This goal of acces-
sibility for all is central in the patent system as it gives
to the society the guarantee that the invention reward
is not a matter of dominance but talent. See Table 3.
Why should SMEs patent?
IPRs (Intellectual Property Rights) are instrumental
for SMEs for a number of reasons:17
• the most important one is certainly the freedom to
operate as it protect its very existence,
• to protect from copying,
• to position themselves competitively vis-à-vis larger
enterprises in global markets,
• to gain access to revenues (licensing),
• to signal current and prospective value to investors,
competitors and partners,
• to access knowledge markets and networks,
• to open up new commercial pathways; or segment
existing markets.
On the economic side, the studies in both the Unit-
ed Kingdom and the United States have found that in-
creased patenting is related to increased growth and
jobs creation and “for start-up high-tech businesses
that have invented the core idea of a new technology,
it is critical.”18
Companies that own registered IPRs have in general
29 percent higher revenue per employee, about six
times as many employees and pay wages that are up
16. Hall, B. H., and D. Harhoff, “Recent Research on the
Economics of Patents.” National Bureau of Economic Research
Working Paper No. 17773, NBER, Cambridge (MA), (2012).
17. OECD (2011), “Intellectual Assets and Innovation: The
SME Dimension, OECD Studies on SMEs and Entrepreneurship,”
OECD Publishing. http://dx.doi.org/10.1787/9789264118263-en.
18. International Patent Protections For Small Businesses,
USPTO, January 2012.
 Introduction
to 20 percent higher than firms that do not own IPRs. to account for the vast majority of patent applicants,
Moreover the SMEs that own IPRs have 32 percent in fact the relative proportion of small and medium
higher revenue per employee (compared to the 29 enterprises applying for at least one patent over the
percent for all companies).19 period considered remains very low. Percentages
It must be stressed that registration protection range between 1 percent (Spain and Canada) and 4.9
against copying is a very important objective for SMEs, percent (Finland) in the case of firms of 20-49 em-
as many of them report having suffered from infringe- ployees, and between 1.8 percent (Ireland) and 12.5
ment the most. “Almost one-third of SMEs registering percent (Switzerland) in the case of medium firms.”21
IPRs declare having suffered an infringement. This See Figure 2 and 3.
proportion increases with the size of the SME, with SMEs often do not maximise the gains from their
medium-sized SMEs being affected most (39 percent) assets; either by not registering or licensing IPRs, or by
and micro SMEs suffering least from IPR infringement not enforcing their IPRs, especially in comparison to
(24 percent). The top three of IPRs infringed are trade- larger companies. According to a report of the EUIPO
marks, patents and designs.”20 through the European Observatory on Infringements
Why do SMEs patent so little? of Intellectual Property Rights, large companies are
As a number of studies indicate, patenting activity four times more likely to own registered IPRs than small-
is relatively uncommon among small businesses and, er companies—40 percent of larger firms have regis-
where it does occur, is concentrated in high technol- tered rights, compared with nine percent of SMEs. 22
ogy sectors. However, the Patenting Propensity of SMEs
A recent OECD study précises: “Evidence suggests Varies Along Sectors and Some Patents a
that only 0.1 percent-9.3 percent of firms apply for Lot More.
patents, with marked differences that exist between The SMEs, however, are an extremely heterogene-
industries and across countries. Small and medium ous group. “In certain high-technology sectors, such as
enterprises account for the majority of patenting semiconductors and biotechnology, innovative SMEs
firms, while big firms of more than 250 employees have been a key to the growth and dynamism of these
account for the majority of patent applications and of sectors. In such sectors, patenting activity is compar-
patent families. atively much higher than in other sectors and small
Whereas in terms of overall numbers SMEs, seems firms rely heavily on patents to signal expertise, either

Figure 2. Patenting Firms And Non-Patenting Firms

By Employee Size Class (2009)
20 to 40 employees 50 to 240 employees 200 to 400 employee 500 and more

100%

75%

50%

25%

0%
Patenting Firms

Non-Patenting Firms
Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms
Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms
Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms
Patenting Firms

Non-Patenting Firms

Patenting Firms

Non-Patenting Firms

Austria Belgium Canada Finland France Germany Ireland Italy Japan Netherlands Norway Spain Sweden Switzerland United
States
Note: Patenting firms are firms having filed for at least one patient application to the EPO, USPTO or through the PCT since 1978.
Source: OECO calculations based on EPO Worldwide Patient Statistical Database (April 2012) and OECO-ORBIS 2011, October
2012.

21. Squicciarini, M. and H. Dernis (2013), “A Cross-Country

Characterisation of the Patenting Behaviour of Firms based on
Matched Firm and Patent Data,” OECD Science, Technology and
19. Intellectual Property (IP) SME Scoreboard, EUPTO, 2016. Industry Working Papers, 2013/05, OECD Publishing, Paris.
20. Ibid. 22. Intellectual Property (IP) SME Scoreboard, EUPTO, 2016.

September 2017 143

 Introduction

Figure 3. Share Of Patenting Firms In Total Firms, By Employee Size Class (2009)
20 to 40 employees 50 to employees 200 to 400 employee 500 and more All
30%

20%

10%

0%

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to attract research partners or investment.”23
These specific SMEs could be identified through the
statistics reports which give complementary visions.
The OECD study evidences that with the international
standard classification (ISIC) the share of SMEs are the
highest in the following classes: computer, electronic
and optical products (sector 26), machinery and equip-
ment (sector 28), wholesale and retail trade, repair of
motor vehicles and motorcycles (sector 45-47)—as at
the same time this last sector (45-47) is the one where
there is the higher share of non-patenting firms (of all
sizes).
According to Eurostat study24, the share of SMEs is
important in the following patent areas: analysis of bi-
ological materials (23 percent of SMEs among patents
filed by companies), biotechnology (21 percent), phar-
maceuticals (17 percent), medical technology (14 per-
cent), games (14 percent), IT methods (13 percent),
food chemistry (13 percent), civil engineering (13
percent), handling (11 percent), nano-technology (10
percent), chemical engineering (10 percent). The oth-
er areas have a share of SMEs between nine and three
percent (digital communication). These proportions
may vary according to the industrial specialization of
each country.
These SMEs have a remarkable behavior as regards
to patenting. In the study conducted by the small
business and entrepreneuship council,25 R. Keating
citing a report of February 2003 titled “Small Serial
Innovators: The Small Firm Contribution to technical
Change” noted that “small patenting firms produce
23. Intellectual Property (IP) Rights And Innovation In Small
And Medium-Sized Enterprises, WIPO.
24. Patent statistics at Eurostat. Mapping the contribution of
SMEs in EU patenting, 2014.
25. Raymond J. Keating, “Unleashing Small Business Through
IP,” Chief Economist Small Business & Entrepreneurship Council,
2013. http://www.sbecouncil.org/wp-content/uploads/2013/06/
IP+and+Entrepreneurship+FINAL.pdf.
U
13-14 times more patents per employee as large pat-
enting firms. For good measure, small patent firms are
on average more technically important than large firm
patents, in that the smaller businesses produce more
highly cited patents.” It also was observed that “small
firm innovation is twice as closely linked to scientific
research as large firm innovation on average, and so
substantially more high-tech or leading edge.”
Anthony Breitzman and Diana Hicks authored a
2008 study—“An Analysis of Small Business Patents by
Industry and Firm Size”26 “[S]mall (technology) firms
are much more likely to develop emerging technolo-
gies than are large firms. Small firms are a significant
source of innovation and patent activity. Small busi-
nesses develop more patents per employee than larger
businesses, with the smallest firms, those with fewer
than 25 employees, producing the greatest number of
patents per employee. Furthermore, small firm patents
tend to be more significant than large firm patents,
outperforming them in a number of categories includ-
ing growth, citation impact, and originality. Finally,
small firms tend to specialize in high tech, high growth
industries, such as biotechnology, pharmaceuticals, in-
formation technology, and semiconductors. Specifical-
ly, although small firms account for only eight percent
of patents granted, they account for 24 percent of the
patents in the top 100 emerging clusters.”
Too Many Challenges Impede SMEs Patenting
Despite these sectors of excellence, the global
picture is that SMEs do not protect their innova-
tion for top three reasons: “not seeing any benefit
in protecting innovations, lack of knowledge on how
to protect innovations and the cost of procedures.”27
See Figure 4.
26. Anthony Breitzman and Diana Hicks., “An Analysis of
Small Business Patents by Industry and Firm Size,” Haddonfield,
NJ 08033 2008.

144 les Nouvelles

 Introduction
If we focus on patents
specifically, different studies
Figure 4. Costs And Lengthy Procedures Are The Key
show that the main reasons Reasons Why SMEs Refrain From Court Procedures As
for not filing are: A Means To Solve IPR Infringement Conflict
• Patent filing is complicate Too expensive court fees 58%
and expensive.
• Patent and especially port- Too lengthy 55%

folio of patents are too ex-
pensive to maintain.
• Patent protection is diffi-
cult and their enforcement
is too costly and their effec-
tiveness too low.
• Competitors can legally in-
vent around most patents.
• Rapid changes in technolo-
gy limit patent protection.
Too expensive lawyers’ fees 53%
Low likelihood of being compensated 47%
Risk of losing the case and having to 41%
pay high fees or compensation
Difficulty in dealing with legal actions taken 38%
Low likelihood of stopping the infringement 37%
Insufficiency of available legal remedies 36%
Small chance of succeeding against
big companies or organizations 33%
Reluctance to publicly expose the case and suffer
potential damage to the company’s reputation 18%

The Question of the Costs Risk of losing company trade secrets

disclosed to the court 15%

Patent costs are different Other 5%

among the countries—with
no rationale explaining those different national patent systems, as everyone of them
differences—and these costs represent a heavy burden have their particularities and a specific doctrine (a pat-
for the SMEs: See Table 4. ent could be granted in one economy, but rejected in
(Note: Process costs are the costs associated with the another). They also face the limited time in which to de-
drafting of the application and with the monitoring of cide where to pursue international stage patent protec-
the procedure (interaction with examiners and the pat- tion and in which countries, in a period of time when
ent office) on the applicant’s side. These costs can be they have financial constraint and few experience.
incurred in-house or externalized.) Yet for “small businesses trying to compete in global
However, to get a more precise view on patent markets, securing patent protection overseas can be a
cost, it is necessary to take into account the weight critical precondition to successfully internationalizing
of each market: the cost of a U.S.
or a Chinese patent relative to the
size of their market is then very low
Table 4. Patent Costs 2011
compared to the cost in any other
Patent Cost Structure
country.
Administrative Maintenance 20 years Process
Compexity of the Procedures
Coming just after the cost prob- France 742 5,608 12,414
lem, the complexity of the proce- Germany 550 13,170 11,443
dures is considered by the SMEs as Italy 1,935 6,620 11,294
the most important obstacle. See
UK 323 5,244 11,827
Table 5.
This barrier is all the more impor- Six EU countries 5,987 46,659 12,727
tant when it comes to filing patent China 379 9,162 5,736
internationally, as the small busi- India 407 2,959 3,423
nesses not only face higher costs
Japan 2,124 13,971 14,236
(estimated to several thousand eu-
ros/$) but are confronted with the South Korea 881 9,233 8,153
impossibility to understand the U.S.A. 3,453 5,446 10,573

Numbers are in euros.

Source: Patent costs and impact on innovation, Publications Office of
27. Intellectual Property (IP) SME the European Union, 2015.
Scoreboard, EUPTO, 2016.

September 2017 145

 Introduction
and developing into the productivity powerhouses of access to patenting, but the new system where the
tomorrow”28 but the current system is too penalizing enterprises will have to choose between three types
for SMEs. of patent protection (national, several European coun-
“In Europe the consequences of the ‘fragmentation’ tries or the whole European EPO countries) and to
of the European patent system are more dramatic than decide to use or not the possibilities of some opting
the mere prohibitive costs of maintaining a patent in out provisions, introduce a new degree of complexity
force in many jurisdictions.”29 The reform to be intro- and have certainly not been conceived to simplify the
duced by the Unitary Patent will certainly improve the patent landscape for the SMEs.
How do the SMEs try to pro-
Table 5. Main Barriers For Patenting For SMEs, tect their inventions?
PROs And Universities SMEs Most SMEs protect their intan-
gible assets not through the IP sys-
Main barriers found during the process of patent filing tem but through informal methods
Country of origin Information (1) Costs (2) Language (3) Complexity (4) such as developing high-trust rela-
China 77% 23% 38% 62%
tionships or maintaining lead-time
advantages. Often, IP protection in
France 0% 94% 0% 36% SMEs relies upon the simple inimi-
Germany 36% 64% 9% 45% tability of their intangibles.
India 50% 83% 33% 17% These “rustic” means have
gained more attraction as the re-
Japan 37% 74% 47% 37% cent uncertainty on the validity of
Poland 50% 33% 0% 33% patent, exacerbated by some judi-
cial decision and new procedures,
South Korea 29% 57% 43% 57%
make trade secret more easy to
Spain 31% 85% 27% 69% assert in front of investors than a
Sweden 0% 84% 11% 58% patent which could always be chal-
lenged and drive to long and com-
UK 7% 86% 7% 50% plicate due diligences.
U.S.A. 7% 100% 20% 33% We use hereunder a study30 made
Source: (13) Patent cost and impact on innovation. for UK because it is more complete
on the means that SMEs use to pro-
tect their inventions—and at the
same time it is representative of the
Figure 5. Protecting Innovation: common behavior of the SMEs: See
Techniques Preferred By UK Firms Figure 5.
The fact that many SMEs con-
Large Firms SMEs sider lead time as the true protec-
Confidentiality agreement
tion of an invention correspond of
course to the acceleration—in cer-
Secrecy tain domains—of the innovation
process where one innovation re-
Lead-time place another in a very short peri-
od of time. This observation should
Trademarks

Patents 28. International Patent Protections

For Small Businesses, USPTO, January
Registration of designs
2012.
29. Economic Incongruities in the
Copyright European Patent System, M.Mejer and
B. van Pottelsberghe (2009).
Complexity of design 30. Alan Hughes and Andrea Mina,
“The Impact Of The Patent System On
0% 5% 10% 15% 20% 25% SMEs,” Centre for Business Research,
University of Cambridge, Working Paper
No.411, September 2010.

146 les Nouvelles


Table 6. Ways To Enhance SMEs Patenting
Conditions For Registering Company Size
in the Future Micro Small
Reduction of costs 27% 19%
Easier to access 29% 25%
Easier to understand 31% 28%
Certitude of adequate protection 32% 29%
Easier to take legal action 31% 28%
Other 28% 31%
lead to consider new ways to accelerate the delivery of
invention acknowledgment. As such alternative meas-
ures such as Internet domain registration are mostly
described as ‘easy’ or ‘very easy,’ with a greater pro-
portion of micro SMEs finding it ‘very easy.’ 31
Hence we could conclude as an European study
does: “From the study findings, we can infer that no
32
preference should be given priority to any particular
means of protecting and/or appropriating a company’s
IP, be it large or small.” But it would be necessary to
agree with this assertion that all companies for which
patenting is the appropriate solution, can file it in an
accessible and cost affordable process. As we have
seen, this is certainly not the case today.
What Policies exist for Enhancing SMEs Pat-
enting? The Challenge Ahead
All around the world (see part 2 of this issue) the
governments and public institutions have implemented
policies to support SMEs as they identified evidence of
true market failures of the IPR system regarding SMEs.
The Most Effective and Desired Ways to Enhance
SMEs Patenting: Some Paths
Simplification and shortening of procedures and
better access to IPR databases are seen as the most
effective support measures to help SMEs protect
their Intellectual Property assets. Yet few studies
33
explained how this could be done.
Less important, but nevertheless generally consid-
ered moderately effective, are reduction of costs or
financial support (25 percent high effectiveness),
and information, guidance and support services to
SMEs (19 percent). See Table 6.
34
Cost Reduction: A Necessity but Not a Mira-
cle Remedy
Some countries only granted some advantage to
31. Intellectual Property (IP) SME Scoreboard, EUPTO, 2016.
32. Benchmarking National And Regional Support Services
For SMEs In The Field Of Intellectual And Industrial Property,
PRO INNO Europe paper N° 4, EC 2007.
33. Intellectual Property (IP) SME Scoreboard, EUPTO, 2016.
Introduction
SMEs through discounted filing and
maintenance fees.
Price reductions of the overall costs
are significant for the USA, Brazil and
Medium
Canada where costs reductions are
available for both in pre-grant (admin-
21% istrative costs) and for every annuity
26% of the maintenance fees. The rest of
26%
the national patent offices offer reduc-
tions that only affect pre-grant fees
30% and, in some cases, the first years of
30% the renewal fees. The most favorable
29%
system seems to be for the USA: the
SMEs (companies with less than 500
employees which have not assigned,
granted, conveyed a license to an entity which does
not fulfil the SMEs requirements) will only pay 50 per-
cent of the pre-grant fees and maintenance fees to the
USPTO.35 See Figure 6.
For Europe the system is about to change dramatical-
ly: “After decades of negotiations on the unitary pat-
ent, on 24 June 2015 EU countries agreed on the level
of renewal fees of the unitary patent. The renewal fees
will be equal to the sum of national renewal fees in
four countries (Germany, France, the United Kingdom
and the Netherlands). This means that an inventor pro-
tecting their innovation with the unitary patent will
pay less than €5,000 in renewal fees over 10 years for
a territory that covers 26 EU countries, instead of the
current level of around €30,000, which has proven
to discourage companies from patenting in Europe.”36
However the impact of cost reduction is not straight-
forward. As a survey concludes: “we have not found
any quantitative evidence on the positive impact of
such special pricing on patenting activity. This could
be based on the fact that most NPOs (with the excep-
tion of the USA, Brazil and Canada) offer reductions
that only affect pre-grant fees and, in some cases, the
first years of the renewal fees. Although this special
pricing may be an incentive, it must be stressed that
maintenance costs are the most relevant ones for SMEs
and may not be fully incurred if the economic value of
the patent does not compensate for them.” The study
concludes: “As mentioned, there is no strong evidence
suggesting that patent costs can be a constraint for pat-
enting… respondents consider patent costs a burden,
34. Intellectual Property (IP) SME Scoreboard, EUPTO, 2016.
35. Patent costs and impact on innovation, International
comparison and analysis of the impact on the exploitation of R&D
results by SMEs, Universities and Public Research Organisations;
European Commission, 2014. http://ec.europa.eu/research/
innovation-union/pdf/patent_cost_impact_2015.pdf.
36. https://ec.europa.eu/growth/industry/intellectual-property/
patents/unitary-patent_fr.
September 2017 147
 Introduction
relevance of a system of protection of the
Figure 6. Cost Reductions In Overall Patent Costs IPR for the SMEs.
For SMEs in EUR (2011) Bringing More Support to SMEs:
We Can do Better
18,000 € In most countries, national patent offices
14,000 € and governmental administration for SMEs
provide various means of support to SMEs.
12,000 €
In terms of type of services, the services
Overall costs 20 years

12,000 € identified can be classified into five categories:39

10,000 € (a) Awareness-raising and training in IP
8,000 € (b) Technological information services
6,000 € (c) Financial assistance
(d) Customized advisory services in IP
4,000 €
(e) Assistance for IP exploitation and
2,000 € technology transfer
0 € These services bring significant support
to the SMEs and must certainly be en-
ce

ia

da
ay

ia
an

A
an

pa
rw

il

ss
na

US hanced. Some studies gives indications on

m

az
Fr

Ru
Ja
No

Ca
Ro

Br

General case SMEs

but it does not mean that lower fees will increase the
issuing of high quality patents. Following this com-
ment, one question that could be answered in future
studies could be: what is the right balance between
patent costs and patent application quality?”
The Accessibility to Enforcing Patent
IP rights can only work to the extent to which they
are enforceable. In case a competitor infringes the IPR
of a firm, the firm should be able to litigate successfully,
at sufficiently low costs and in a timely manner. In prac-
tice, however, litigation often turns out to be difficult.37
An expert group “making IPR works for SMEs, IPR
enforcement expert group report” has made some
recommendations. In this regards, the Unitary Patent
Court which will be implemented in the European EPO
countries is certainly a progress. As far as we know,
the court fees will be made up of a fixed fee, com-
bined with a value-based fee when the value of a case
is above the set ceiling of 500,000 €. The value-based
fees rise according to the value of a case. Small and Mi-
cro-entities will benefit from a 40 percent reduction
in court fees.38 But as for the patent procedure, the
cost of a litigation is not the only factor to evaluate the
the way to proceed: “most of the services
are rather small offerings, operated by few
people and endowed with rather low fund-
ing. The performance of the present IPR
support system are highly ambiguous. Despite a rather
large number of identified services, fairly few services
can be described as high performers. Some “islands”
of well-designed programmes exist, but the majority of
measures do not seem to have a strong track record.”40
Conclusion
Although our knowledges are incomplete, there is a
certainty that SMEs do not use the patent system as they
should, because the system that was designed to protect
inventors of any size—but in a limited space—seems to
become ineffective in too many cases and is now being
challenged by profound changes in the conditions of in-
novation and the globalization of the economy.
However, there are still more precise analysis to
be made concerning the nature and number of in-
novative enterprises within the SMEs, the nature of
inventions, the means of protecting and enhancing
them, and the functioning of exchanges and circula-
tion of inventions. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009015

37. Benchmarking National And Regional Support Services
For SMEs In The Field Of Intellectual And Industrial Property,
PRO INNO Europe paper N° 4, EC 2007.
38. https://www.unified-patent-court.org/faq/fees.
39. Intellectual Property (IP) Rights And Innovation In Small
And Medium-Sized Enterprises, WIPO.
40. Benchmarking National And Regional Support Services
For SMEs In The Field Of Intellectual And Industrial Property,
PRO INNO Europe paper N° 4, EC 2007.

148 les Nouvelles

 SMEs And Patent Valorization

SMEs And Patent Valorization

By Josep Maria Pujals

E
ven though Small Medium Entities (SMEs) rep- embrace open innovation and
resent almost 95% of businesses and contribute to leverage its market position
■ Josep Maria Pujals,
significantly to global GDP1 not all type of SMEs across Global Value Chains.
own or manage Intellectual Property rights to support Super Monetisation Enti-
Ponti,
their business. It depends on their size, the type of ties contribute to economic IP Lawyer,
activities that contribute to their competitiveness and growth by introducing com- Barcelona, Spain
also the sector in which they operate.2 Thus small busi- mercial, scientific and techno- E-mail: pepepujals@
nesses carrying out R&D activities in the life science logical knowledge embedded
sector or in other industries that are innovation inten- yahoo.com
in inventions and capital 1 as
sive are more likely to be aware of the strategic role of intellectual Property to the
Intellectual Property. By contrast, small retail compa- markets.
nies usually own one or two trademarks and domain Super Monetisation Entities challenge established
names protecting their business and main product or businesses and monopolies by creating more efficient
service identity at a national level, as their customer customer relationships, adding disruptive features to
base is only domestic or local. They do not use Intellec- existing products and services or by introducing new
tual Property to i.e. access new markets or to collabo- ones, thus improving client’s satisfaction and expe-
rate with others to develop new products and services rience, gaining competitive advantage and driving eco-
because of their lack of sophistication. 3
nomic growth and technological change.
But in the so-called 21st century knowledge-based Intellectual Property Management and Valori-
economies, where intellectual capital is key for the sation are at the heart of the Super Monetisation
development of added value technologies and services, Entity’s strategy.
the use of Intellectual Property is crucial for innovative
SMEs to successfully link R&D and innovation efforts Super Monetisation Entities are relevant holders of
with commercialisation and internationalisation. Intellectual Property assets in accordance with their
capabilities and intensive focus on innovation and new
Those innovative Small Medium Entities are what product development. According to some innovation
we call “Super Monetisation Enterprises,” as they metrics, they are found to produce more than twice
are able to introduce disruptive, niche innovations into as many innovations and file more patents and trade-
global markets and are aware of the vital contri-
bution of Intellectual Property assets creation and Table 1. IP Intensity, Relative To Assets, Of SMEs Versus
management to their business strategy and capita- Large UK Firms. (Rogers, Helmers & Greenhalgh, 2007)
lising on differentiation.
Large Films SMEs
Intellectual Property management and owner- 0.45
ship then allows the Super Monetisation Enter- 0.40
prise to appropriate internal R&D developments, to
0.35

0.30
1. Stanley P. Kowalski Director ITTI, Franklin Pierce Law
0.25
Center, “SMES, Open Innovation and IP Management:
Advancing Global Development” (Concord, NH) 0.20
http://www.wipo.int/edocs/mdocs/sme/en/wipo_smes_ 0.15
rom_09/wipo_smes_rom_09_b_theme02_2.pdf.
0.10
2. “Intellectual Property (IP) SME Scoreboard,”
EUIPO (2016) https://euipo.europa.eu/tunnel-web/secure/ 0.05
webdav/guest/document_library/observatory/documents/ 0.00
sme_scoreboard_study_2016/seme_scoreboard_ UK Community UK Patents EPO
study_2016_en.pdf. Trademarks Trademarks Patents
3. Suzanne S. Harrison, Patrick H. Sullivan, “Edison
in the Boardroom Revisited: How Leading Companies 4. Intellectual Property: Powerhouse for Innovation and
Realise Value from Their Intellectual Property,” (2nd Economic Growth https://cdn.iccwbo.org/content/uploads/
Edition) http://eu.wiley.com/WileyCDA/WileyTitle/ sites/3/2011/02/Intellectual-Property-Powerhouse-for-
productCd-1118004531.html. Innovation-and-Economic-Growth.pdf.
September 2017 149
 SMEs And Patent Valorization
marks applications per employee than large firms.4 the fact that Super Monetisation Entities’ management
Thus, Super Monetisation Entities sustainably drive is extremely focused on creating new Intellectual Pro-
the Darwinian innovation cycle of creative destruction, 5 perty linked to radical innovations, makes its advanta-
because of their ability to change market rules through geous market position and leadership inevitable.
the introduction of disruptive technologies and inno- The IP marketplace9 or the market for inventions6
vations and also due to the fact that established compa- plays a vital role for Super Monetisation Entities to le-
nies “experience innovative inertia because of limited verage codified and tacit knowledge and experience, to
management attention to new business, management strengthen their competitive advantage, and to deliver
misperceptions of competitive threats and opportu- new products and services, creating new markets and
nities, organisational rent seeking and bureaucratic gaining clients via IPRs.
routines.”6 Thus, we find many examples of leading We define IP monetization-valorisation as the dif-
companies who have introduced disruptive technolo- ferent options available to Super Monetisation Entities
gies and monopolise their objective market but then in the IP Market to leverage internal or external codi-
are unable to find the path for sustainably delivering fied knowledge for competitive advantage: “Preventing
new innovations and products, or anticipate their cus- others from copying products or services, improving
tomers’ new likes. “While Kodak invented many of chances of securing investment, obtaining licensing re-
the core technologies underlying digital cameras, its venues, improving chances/quality of liquidity (e.g. ac-
management was too addicted to the steady flow of fat quisition/IPO) preventing patent infringement actions
profits from its film, paper, and chemical franchises to
risk cannibalising it. Hence,
Kodak let others pioneer the
field, waking up too late to Table 2. Optimized Allocations
catch up.” Established firms Technology categorisation
7
Start- up New entrant Leading
also face The Innovator’s (moderate size) company
Dilemma when managing (high mkt share)
IP. Thus, big firms are very Sustaining technology 10% 20% 50%
conservative when creating (improvement to existing market)
and managing their IP port-
folios.8 Their IP assets mainly Sustaining technology 20% 50% 35%
(applied to new market)
relate to technologies and
services that already contri- Disruptive technology 70% 30% 15%
bute to sales and incomes Total Budget 100% 100% 100%
but not to future options
linked to disruptive techno-
logies and R&D efforts that Table 3. ICT SMEs’ Reported Goals For Using IPR. (IDC, 2008)
can win the next markets to
the detriment of alternatives Patents Copyright Trademarks Registered Utility
Designs Models
developed by newcomers
and competitors. This gap in Launch new products 69% 81% 71% 67% 63%
and services; exploit
IP management can deter big new innovations
firms’ ability to take advan-
Exchange, license, 10%46% 21% 19% 23% 18%
tage of their market supre- collaborate
macy and is a further signal
of complacency. By contrast, Gain access to funding 34%% 27% 18% 26% 16%
Block competitors 32% 23% 12% 16% 14%

5. https://en.wikipedia.org/wiki/Creative_destruction. 8. “Welcoming ‘The Innovator’s Dilemma,’” IAM Magazine

http://www.iam-media.com/Search?qs=Welcoming+%E2%80%
6. “The Innovative Enterpreneur: Daniel F. Spulber.”
98the+innovator%E2%80%99s+dilemma+IAM+Magazine.
7. “Polaroid, Kodak, Apple: No One Escapes the Winds of
9. “Shortcomings on the Market for IP.” http://tinyurl.com/
Creative Destruction.” https://www.forbes.com/sites/billfrezza/
ybtuxrwu
2012/09/05/polaroid-kodak-apple-no-one-escapes-the-winds-of-
creative-destruction/#22aa9a75d002. 10. Stuart J. Graham, Ted Sichelman, “Why do start up
patent?” http://scholarship.law.berkeley.edu/cgi/viewcontent.
cgi?article=1757&context=btlj.

150 les Nouvelles

 SMEs And Patent Valorization
against the company; improving the company’s nego-
tiation position with other companies (e.g. cross-licen-
sing) and enhancing the company reputation image.”10
But, despite all the existing empirical evidence avai-
lable on the advantages that IP management can bring
to innovative firms for accessing new clients and mar-
kets, seeking investment, building strategical partner-
ships and collaborations or enhancing its reputation,
not too many innovative SMEs are engaged with the
patent system.11
One of the reasons for innovative SMEs not
being fully aware of the opportunity that IP mar-
kets offer is the current transition from the manufac-
turing age—towards the age of innovation.
In such context, IP systems differences, lack of smart
capital, costs and access to expertise amongst other
problems in the IP market6 reduces or limits innova-
tive SMEs’ ability to develop internally sustained IP
strategies and fully deploy the role of intangible assets
for value capture from a very early stage.
Putting IPRs to Work for Sustained Innovation
and Competitive Advantage
Super Monetisation Entities are rich in IP assets and
IP management capabilities developed both internally
and outsourced. They also tend to be specialised in
niche areas and are flexible, thus needing and being
able to scale up into new international markets.
10. Stuart J. Graham, Ted Sichelman, “Why do start up
patent?” http://scholarship.law.berkeley.edu/cgi/viewcontent.
cgi?article=1757&context=btlj.
11. “Delivering Agile Innovation,” E&Y http://www.ey.com/
Publication/vwLUAssets/EY-DeliveringAgileInnovation-exec-
summary/$File/EY-DeliveringAgileInnovation-exec-summary.
pdf).
Thus govern-
ments are increa-
singly trying to pro-
mote the strategic
use of IP by inno-
vative firms in the
new knowledge-
based economies,
where the ability to
appropriate tech-
nological and mar-
ket differentiation
is crucial for new
companies’ abi-
lity to growth and
conquer new mar-
kets.
“The key role of
IP in the success
of start-ups and innovative SMEs has long been reco-
gnised: it allows innovative businesses to appropriate
the results of their creativity, inventiveness and R&D
investments, and creates an incentive for further in-
vestment in innovation3. Recent data from the EU Intel-
lectual Property Office (EUIPO) show that businesses
using IP rights perform better, and this is particularly
true in the case of SMEs. SMEs owning IP rights have
almost 32 percent higher revenue per employee than
SMEs that do not. They also expand their workforce
faster and pay higher salaries. IP is therefore key for
smart and sustainable growth.”13
Also, the phenomenon of the so-called Gazelles enti-
ties (all enterprises up to five years old with average
annualised growth greater than 20 percent per annum
over a three-year period) is associated with Intellectual
Property use and great innovation potential.14
Super Monetisation Entities’ ability to align its
organisational and management operations towards
12. “Lack of Access to Patent Advice Is a Huge Problem for
Start-ups and SMEs in Europe.” IAM http://www.iam-media.com/
Blog/Detail.aspx?g=36616482-6fce-41fe-bb35-fd7264376412.
13. “Commission Staff Working Document” Accompanying
the document Communication from the Commission
to the European Parliament, the Council, the European
Economic and Social Committee and the Committee of
the Regions Europe’s next leaders: the Start-up and Scale-
up Initiative Putting intellectual property at the service of
SMEs to foster innovation and growth (COM, 2016) 733.
http://eur-lex.europa.eu/legal-content/EN/
TXT/?uri=SWD:2016:373:FIN.
14. David B. Audretsch, University of Indiana, U.S.A.,
“Determinants of High-Growth Entrepreneurship Report.”
prepared for the OECD/DBA International Workshop on ―
High-growth firms: local policies and local determinants.
(Copenhagen, 2012). https://www.oecd.org/cfe/leed/
Audretsch_determinants%20of%20high-growth%20firms.pdf.
September 2017 151
 SMEs And Patent Valorization
the development of new technolo-
Table 4: U.S. Gazelles And High-Impact Firms gies and innovations in very specific
Number of Period Number Of Job Change Revenue Change niche markets place them in a better
Employed Gazelles ($1,000s) position to deliver a more agile res-
1994-1998 309,160 3,018,440 $577,533,025
ponse and reaction to different cus-
1-19 tomer demands and change of needs.
1998-2002 301, 275 3,573,918 $716,504,242 “In some particularly fast-paced and
2002-2006 283,308 2,883,475 $589,072,471 innovative industries, which include
20-499 1994-1998 43,342 3,014,683 $762,963,829 process control equipment and infor-
1998-2002 42,390 3,291,048 $957,923,241
mation technology, capital intensity
is a less important constraint. An
2002-2006 39,617 2,138,682 $1,014,653,361
innovative SME may be more easily
500-plus 1994-1998 1,547 5,063,517 $$1,195,977,664 able to focus on a narrow range of
1998-2002 1,665 4,515,417 $1,841,396,607 specific inventions. Organisational
2002-2006 1,485 2,514,558 $1,663,635,336 differences—such as a less bureau-
cratic, more innovation-focussed ma-
1994-1998 354,049 11,096,640 $2,536,474,518
Total
nagement structure or more direct
1998-2002 345,330 11,380,383 $3,515,824,090 incentives to succeed—may also give
2002-2006 324,410 7,528,715 $3,267,361,168 SMEs a relative advantage over their
Number of Period Number Of High- Job Change Revenue Change larger counterparts in developing
Employed Impact Firms ($1,000s) innovations.”4
1994-1998 327,397 3,170,729 $346,038,292 When Super Monetisation Entities’
1-19
1998-2002 278,190 3,577,111 $423,042,570
products and technologies are domi-
nant and irreplaceable in a specific
2002-2006 359,289 4,041,099 $425,041,975
industry, they became “indispensable
1994-1998 23,464 2,788,969 $503,059,203 and non-substitutable in the whole
20-499 Global Value Chain (GVC).” Such
1998-2002 20,601 2,966,647 570,102,604
2002-2006 16.523 2,001,835 $549,674,434
firms can be described as the “bott-
leneck” of the GVC (Jacobides et al.,
1994-1998 1,253 5,501,049 $1,110,073,562
500-plus
2006). Example of such bottlenecks
1998-2002 1,182 5,192,558 $1,657,759,197 are the so-called “hidden champions”
2002-2006 793 2,966,826 $1,060,128,527 (Simon, 2009): firms that capture
1994-1998 152,114 11,460,747 $1,959,171,057 high shares of the world market in
Total specific products (Table 5). Hidden
1998-2002 299,973 11,737,316 $2,650,904,371
champions usually have state-of-the-
2002-2006 376,605 9,009,7760 $2,034,844,936 art technology and superior product
Source: Corporate Research Board, American Corporate Statistical Library (2007). Ace, Parsons and Tracy (2008) quality in niche products, both of

Table 5: Examples Of “Hidden Champions”

Company Main Product World Share
Dr. Suwelack Collagen 100%
Skysails Towing kite wind propulsion system 100%
Ulvac LCD panel coating 96%
Nivarox Regulating mechanism for wristwatch 90%
GKD- Gebr. Kufferath Metal fabrics 90%
Saes Getters Barium getters 85%
alki-Technik Special screw systems 80%
Delo Adhesives for chip modules on smart cards 80%
Nissha Small touch panel 80%
Kern-Liebers Springs for safety belts 80%
Weckerie Lipstick machines 80%
Omicron Tunnel grid/tunnel probe microscopes 70%
Source: Simon (2009), Hidden Champions of the 21st Century, Springer Publishing. Supporting Investment in Knowledge Capital, Growth and Innovation OECD 2013

152 les Nouvelles

 SMEs And Patent Valorization
which rivals find very hard to match.”15 adopt their technology: “The action that the pledgor
In terms of patent ownership, while “large corpora- seeks to induce in others can vary, but it is generally
tions have six patents per 1000 employees, the Hidden related to third parties’ adoption of certain technology
Champions have 31. The costs of a Hidden Champion choices that are favoured by the pledgor. There are
patent are only about one-fifth of those in a large cor- three principal sub-categories of inducement pledges:
poration.”16 those intended to induce other firms to adopt and
Super Monetisation Entities also use Intellectual Pro- make investments in products that comply with one or
perty strategically. For instance, “lead firms in electro- more interoperability standards, those intended to in-
nics GVCs have deployed standards not only to enhance duce other firms to adopt a particular technology plat-
knowledge transfer to their suppliers, but also to lower the form favoured, if not actually sold, by the pledgor, and
barriers to entry in the corresponding segment of the those intended to induce market participants to adopt
GVC and increase competition among suppliers (Shapi- a broad platform technology. In each of these cases,
ro and Varian, the pledgor calculates that it is likely to derive greater
Figure 6. The Confluence Of The Driv- 1999).”15 benefit from the behaviour that it seeks to induce in
ers Of Productivity Growth In 21st others than from using its patents to exclude others
Century Knowledge Economies Thus, accor- from the market.”
ding to Jorge
L. Contreras,17 The Super Monetisation Entity and the Digital
innovative Challenge and Opportunity
companies As innovations can be codified via IPRs in the new
KBC GVC deactivate Connected-4.0 knowledge-based economy, where a
Productivity strategically number of connected questions rapidly arise, “inclu-
growth their ability ding those relating to the models for successful exploi-
to enforce tation of digital intellectual property, the future of
ICT their patents patent law vis-àvis creative computers, or the regime
Source20 to induce of data ownership and privacy in the big data environ-
other firms to ment,”18 Super Monetisation Entities are best placed

Figure 7. Intensity And Development Speed In ICT-related Technologies, 2000-12

Note: Data refer to patent applications filed at the EPO or the USPTO that belong to IP5 families, by filing date, using fractional counts. ICT-related patents
are defined on the basis of their International Patent Classification (IPC) codes. Source: OCED (2015c) Science, Technology and Industry Scoreboard 2015,
OECD Publishing , Paris, http://dx/doi/org/10/1787/888933273469.
16. “Who are the Hidden Champions?” https://www.anca.
15. “Supporting Investment in Knowledge Capital, Growth com/Files/Editorials/MannMonthly_Oct2013.pdf.
and Innovation.” OECD. http://www.oecd-ilibrary.org/indus- 17. Jorge L. Contreras, “Patent Pledges.” http://arizonas-
try-and-services/supporting-investment-in-knowledge-capi- tatelawjournal.org/wp-content/uploads/2015/12/Contreras_Fi-
tal-growth-and-innovation_9789264193307-en. nal.pdf.

September 2017 153

 SMEs And Patent Valorization

Figure 8. 4th Year Maintenance Rate vs. Forward Citation Rate

As a percentage of all ICT- related patent applications also belonging to other technology fields

% 2010-12 2000-02

16

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Note: Patent counts are based on the priority date. Source:OECD (2015a) Digital Economy outlook, OECD Publishing, Paris,
based on OECD, Patent Database, February 2015. http://dx.doi.org/10.1787.888933224483.

for benefiting from the intangible nature of intellectual

property assets, allowing them to deliver innovative Figure 9. Economic Characterization of IP:
products and services in new markets and gaining cus- Value Chain IP Economic
tomers directly or through partner collaborations, ie. Bio-Technology Intensity Characterization Strategy
through 3D printing. “The potential advantages of 3D
Routine Joint Venture
printing are numerous for innovation-intensive compa-
Market
nies. In particular, 3D printing allows them to reduce
their overheads when developing, designing and tes-
ting new products or improving existing ones. They no Routine Outsource
longer have to pay for costly prototypes but can rapidly Manufacture

and cheaply undertake multiple iterations of complex

elements in-house using 3D printers.”19 Entrepreneurial Internal
Develop
In the new hyper-connected industry, where Development

knowledge-based capital, Global Value Chains and ICT

are the drivers of productivity growth in the 21st cen-
Discover
tury,20 Super Monetisation Entities profit from IP asset Entrepreneurial License

management to retain competitive advantage and seek

complementarities.
“The concept of complementary assets is a very But exceptions clearly exist as in the case of Dell,
relevant one since it highlights the fact that the suc- and its innovative manufacturing processes.

cessful commercialisation of an innovation requires

manufacturing, marketing and after sales capabilities,
among other factors. This means that appropriability
cannot be entirely dependent on the more or less suc-
cessful features of the technology to be protected, but
is heavily based on the firms’ other capabilities.”21
IP: Towards a Recognised Valuable Asset
As governments move toward IP Systems harmonisa-
tion, traditional institutions, legal, banks, stakeholders
through the innovation value chain, will be more likely
to recognise the economic value of IP assets and thus
18. Intellectual Property And Digitalisation—Challenges for
Intellectual Property—A conference jointly organised by CEIPI
/ BETA / I3PM. http://www.i3pm.org/files/misc/Conference_on_
intellectual_Property_and_Digitalization.pdf.
19. WIPO Magazine. 3D http://www.wipo.int/wipo_maga-
zine/en/2017/01/article_0006.html.
20. “Stimulating Digital Innovation for Growth and Inclu-
siveness.” http://www.oecd-ilibrary.org/science-and-technology/stimulat-
ing-digital-innovation-for-growth-and-inclusiveness_5jlwqvhg3l31-en.
21. “Innovation and Appropriability, Empirical Evidence and Re-
search Agenda.” http://www.oecd.org/officialdocuments/publicdisplay-
documentpdf/?cote=DSTI/ICCP(2015)18/FINAL&docLanguage=En.

154 les Nouvelles

 SMEs And Patent Valorization

Figure 10. Valuation Purposes & Standards

Transaction-M&A/Licensing Financial Reporting Bankruptcy/Reorganization
Audience: Audience: Audience:
Management Investors Bankruptcy Judge
Investors SEC Creditors
Standards: Standards: Standards:
Company Specific GAAP Statute/Case law
FASB Bank requirements
Tax Legal Financing/Securitization
Audience: Audience: Audience:
IRS, Foreign Tax Authority Trial court Creditors
Standards: Investors
Standards: “Georgia Pacific” Standards:
Per Tax Code (367; 482; 350; “Panduit” Factors Statute/Case law
197; 170) Statute/Case Law

the importance of IP markets and IP valorisation will financial distress.”24

increase for extracting-realising value from innovation Conclusion:
activities.
Because innovative SMEs are stronger at integrating
This inertia will help to develop new economic dy- technology and customer needs than big firms but lack
namics based on intangible capital ownership, on the other complementary assets, they need to recognise
acknowledgement that IP mainly: and institutionalise intangible capital management as
• Allows innovative firms to appropriate market and a principal means to valorise—capture strategic value
technology differentiation and protect and expand from—their innovation efforts.
market share; When doing that, they become Super Monetisation
• Allows innovative firms to collaborate with exter- Entities, and are best positioned to leverage their po-
nal firms with complementary assets. sition within the innovation ecosystem and navigate
“SMEs can use patents as enablers of open innova- through the current “extreme uncertainty” 25 towards
tion in order to connect their technological innovations sustained benefits. ■
with the complementary assets needed for commercia- Available at Social Science Research Network (SSRN):
lisation (e.g., Chesbrough, 2003, 2006; Chesbrough et https://ssrn.com/abstract=3009019
al., 2006; Enkel et al., 2009; Gassmann et al., 2009;
Dahlander and Gann, 2010; Bogers et al., 2012+ ).23
And therefore, IP represents a signal of innovation
capacity for investors and a source of finance.
“First, IPRs help to reveal to investors the quality of
the firm’s management and of its technological capabi-
lities. Second, as legally protected economic resources,
IPRs can raise the projected profitability of a firm, and
can be separated from the business and sold in case of

22. “Intangible Asset & Intellectual Property Valuation: A

Multidisciplinary Perspective.” http://www.wipo.int/sme/en/
documents/ip_valuation_fulltext.html.
23. Marcus Holgersson, “Patent Management in
Entrepreneurial SMEs: A Literature Review and an Empirical
Study of Innovation Appropriation, Patent Propensity,
and Motives.” http://www.ip-research.org/wp-content/
uploads/2012/09/PAM11-20120814a-with-publ-info.pdf.
24. “Enquiries Into Intellectual Property’s Economic
Impact” (Chapter 9) Ip-Based Financing of Innovative Firms
http://www.oecd.org/officialdocuments/publicdisplay
documentpdf/?cote=DSTI/ICCP(2014)17/CHAP9/FINAL&
docLanguage=En.
25. Eric Ries, “The Lean Start-up.”
http://theleanstartup.com/principles.

September 2017 155

 SMEs And OI

SMEs And Open Innovation (OI)

By Paul Germeraad

Abstract cal solution. It also involves being clear on how “new”

The trick in using Open Innovation (OI) to augment any
corporation’s (large and small) business development
programs is typically not in the decision of whether or
not to consider OI as an option, but rather the challenge
of how to best use OI. This paper provides insights and
tools specific to the latter challenge for Small and Me-
dium Enterprises (SMEs).
I. Introduction
and “unfamiliar” the technology they seek must be in
order to meet their business objectives. Once a SME
is clear on what it is looking for, the three steps in
SMEs finding technologies from external partners are
(1) Searching for Technology Solutions, (2) Evaluating
and Choosing Solutions, and (3) Negotiating for Tech-
nology and IP Solutions.
II. Clarity on what kind of technology SMEs
should obtain via OI strategies

S
MEs differ in their use of OI from large compa-
nies in that they are typically looking for compo-
nents and new features to enable and improve
their company’s primary product offerings. In contrast
larger companies are often using OI as a means to offer
completely new products and services that are typical-
ly adjacent to or differentiated from their current offer-
ings. This differentiation exists because of where each
company is in their business lifecycle.
This distinction in the use of OI by SMEs versus
large companies is important because to date much of
the published literature and conference presentations
focus on the use of OI by large companies. The conclu-
sions and recommendations of these papers and pres-
entations somewhat miss the mark when it comes to
what is best to help SMEs. For example OI studies on
large companies find that inbound practices utilize cus-
tomer co-creation, informal networking, and universi-
ty grants. Use of crowdsourcing and OI intermediary
services are rated of lowest value. The three leading oi
partner categories large companies use are customers,
universities and suppliers. Finally, and most important-
Studies on OI continually highlight the need for or-
ganizations to be able to specifically state the problem
they seek to solve.1 This point is critical for SMEs with
limited resources. Being able to articulate what exactly
is the organization trying to address/solve is imperative
for a good OI outcome. Once the problem is clearly
stated, the market growth in the SME’s targeted mar-
ket and SME market share constrain the innovation
options available to SMEs. Utilizing a standard market-
ing position graph of SME and competitor positions
as shown in Figure 1, an SME can double check its
search criteria for the newness and unfamiliarity re-
quired of a technology it seeks. In Figure 1, innova-
tion posture contours (maverick, offensive, defensive)
are super-imposed on market growth rate and relative
Figure 1. Innovation Postures
Derived from Market Growth
and Relative Share
20%
File/Maintain File/Maintain
18%
Broad & Deep Broadly

ly, the three leading reasons given for using OI in large

organizations are (1) establishing new partnerships, (2) 16%
Offensive Long Range R&D-
exploring new technological trends, and (3) identifying 14% Maverick- Next Generation
new business opportunities. Breakthrough
12%
These three leading reasons for OI don’t apply to
Market Growth

SME’s. For SMEs the key driver for using OI is to get 10%

access to critical technology that it can’t otherwise ob- 8%

Defensive
tain because of time or money constraints. More suc- Maintenance R&D-
Next Generation
cinctly, the business goal for SME OI is to obtain a sus- 6%
&Incremental Offensive
tained advantaged market position that it can’t obtain 4%
Short Term
utilizing only its own capabilities. Maintenance R&D-
Withold R&D- Incremental
2%
Thus the OI Reality for SME’s is that SME’s are Customer Tech Support
File/Maintain
Lightly
more constrained and must carefully and thoughtfully 0%
0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
understand what technology they are looking for. This
Relative Market Share To Largest Competitor
is more complex than just stating the desired techni-

156 les Nouvelles


SME market share positions. Once an SME determines
the appropriate innovation posture for its project, the
innovation posture can be combined with patent land-
scape densities (described below) to arrive at the best
OI approach.
To provide some detail on how IP density determ-
ines any corporations’ entry business development
scenario, consider the following: (1) If there is little
art (called an IP “Desert”), a company has to invest its
own R&D and/or use OI co-development with typically
a university or research institute. In contrast if there
are hundreds of documents (called an IP “Forest”) a
company has the option make, buy or ally with oth-
ers. Here the best OI option is to license “almost com-
plete” technology from another entity. Finally, if there
are tens of thousands of patent family documents in
the technical area of interest (called an IP “Jungle”), it
is best for the company to buy or license this art from
an individual or another for-profit company.
These “innovation posture” and “patent density”
concepts were introduced in order to allow segmenta-
tion of R&D and business development initiatives into
those which are best or ill-suited for an OI approach.
A high level summary of such approaches is shown in
Figure 2.
Utilizing the recommended R&D approaches shown
in Figure 2 the OI sweet spot for SME’s is at the bot-
tom left of the matrix shown in Figure 3. When SMEs
try to work in the upper rows or right hand side of this
matrix they often find their OI initiatives do not pro-
duce favorable business outcomes. This is in contrast
to the recommended sweet spot for large companies
who can utilize approaches on the diagonal from lower
left upper right. For SMEs, IP Density is like “Moth-
SMEs And OI
er Nature” when it comes to OI. This is because for
SMEs in particular you not have the time or money to
ever “Mess with Mother Nature.”
Another distinction between large and small com-
panies when it comes to OI has to do with the rate at
which all entities are investing in the SME’s technol-
ogy of interest. In this context patent velocity is an
excellent analogue for investment rate. As such it is
the “Father Time” for OI
in that “Time is the Ene-
my.” Figure 4 shows three ■ Paul Germeraad,
typical patent velocity pat- President,
terns that come from plot-
ting patent family counts Intellectual Assets, Inc.,
per year. Saratoga, CA, USA
These graphs can be E-mail: germeraadgroup@
created by SME personnel gmail.com
starting with simple Inter-
net search engines like
Google. A more sophisticated investigation of patent
databases can be accomplished using tools like Google
patents using free text, Questel and Innography us-
ing concepts, and Questel, Innography, Thompson,
etc. by using of similarity engines. Depending upon
in the technology being sought, selected science da-
tabases such as chemical abstracts, STN, IEEE etc. are
also useful. Utilizing multiple approaches assures the
best chance of finding technologies that will meet the
SME’s project needs.
Looking first at the overall number of patent families
in a field and using an approximation of $1 million in-
vested by a company for each patent family published,
the overall number of patent families shows the extent
to which a field has attracted enough investment to

Figure 2. Innovation Posture and IP Landscape Sets the OI Approach

Posture vs. IP Position IP Jungle IP Forest IP Desert

Kill Project Proposal Screen for Start-Ups Fund Internal or Academic

Maverick - Breakthrough Technology

Offensive Long Range - Next Fund to Find and Re- Fund External or Internal Fund Internal Technology
Generation (New Feature or purpose External Technology or Screen for Start-ups
Big Cost Savings) Technology

Offensive Short Term Use External Already Fund to Find and Re- Fund to External or Internal
Maintenance - Incremental “Baked” Technology purpose External Technology
(New but Familiar Feature Technology
or Solid Cost Savings)

Defensive Short Term Screen for Low Cost Use External Already Fund to Find and
Maintenance - Next External “Baked” “Baked” Technology Re-purpose External
Generation or Incremental Technology Technology
(Familiar Feature)

September 2017 157

 SMEs And OI

Figure 3. Sweet Spot for SME OI Innovation Initiatives

Posture vs. IP Position IP Jungle IP Forest IP Desert

Fund Internal or Academic

Maverick- Breakthrough Kill Project Proposal Screen for Start-Ups
Technology

Offensive Long Range- Next Fund to Find and Re-

Fund External or Internal Fund Internal Technology
Generation (New Feature or purpose External
Technology or Screen for Start-ups
Big Cost Savings) Technology

Offensive Short Term Use External Already Fund to find and

Maintenance- Incremental “Baked” Technology Re-purpose External Fund to external or internal
(New But Familiar Feature Technology Technology
or Solid Cost Savings) Open Innovation
Defensive Short Term
Sweet Spot
Screen for Low Cost Fund to Find and Re-
Maintenance- Next Use External Already
External “Baked” purpose External
Generation or Incremental “Baked” Technology
Technology Technology
(Familiar Feature)

match the SME’s needs. This initial step

Figure 4. Tough Areas for
SME OI Innovation Initiatives
make finding an OI opportunity likely. Returning now to
Figure 4 (showing the pattern by which the overall num-
ber of patent families have been created) only the left
and right patterns offer OI promise for SME’s because
of the time and financial constraints typical of SMEs.
Assuming that an SME has looked for the technology
it wants and has found that the environment is in the
sweet spot of both Figures 3 and 4, the next step is
to begin evaluating and choosing technology solutions.
III. Searching, Evaluating and Choosing Tech-
nology Solutions
A six step process has been found to most quickly
and productively screen and evaluate technology solu-
tions. The logic behind this six-step process is that
information sources should first be analyzed at the
broadest level to ensure that investigators understand
the overall technology landscape before focusing close-
ly on those individual technology options that closely
should ideally produce a small number of
potential options.
For the final candidates selected, the
methodology then switches to estimating
the IP “freedom to operate” risk and “IP’s
ability to exclude other competitors” for
each option. This is necessary as some IP
environments have inherently more ag-
gressive and well-funded participants than
others (compared to the SME).
The last step in the process is to careful-
ly summarize the strengths, weaknesses,
opportunities, and threats so the negoti-
ating team is well prepared to negotiate a
mutually beneficial agreement. The six steps follow.2
The first step is to understand the IP landscape: De-
termining investment rates. The goal of this step is
to determine whether the product or service will be
launched in a favorable commercial environment. The
key questions to be answered are: (1) Which entities
have invested the most R&D money in this field? (2)
What are the most common technical approaches and
associated products? Patent database mining is an ex-
cellent tool to answer such questions.
The second step is to understand recent trends:
Heat and bubble maps of the technical domains. This
step checks whether there is consistency between the
technical and commercial lifecycle positions. The key
questions are: (1) Which technologies are emerging
and falling out of favor? and (2) Which entities are en-
tering or leaving this field?
A heat or bubble map of patents in the overall tech-

158 les Nouvelles

 SMEs And OI
nical field shows individual technology domains which
helps an SME to reduce the number of technology areas Figure 5. Frequency Distribution of
it needs to investigate. Plotting the number of patent Potential OI Opportunities
families in each technology domain that were filed annu-
ally shows the relative rates of investment in each one.
Shrinking fields (where the number of patents/year de-
creases over time) represent subsets of the overall tech-
nology in which a technical alternate to membranes has
been discovered. Growing fields indicate where mem-
brane technology is likely to be of value in the future.
Likewise, the change in number of companies entering
and leaving specific technology domains provides insight
into potential competitors and partners.
What the SME can learn from heat and bubble di-
agrams is whether other people think the technology
has commercial value and if the SME is betting correct-
ly with its R&D and IP investments. This is validation
of a good idea, but on the flip side there is a caution
that in attractive areas there will also be determined
competitors.
The third step is to focus on and understand the
best performance/cost technology option. The goal of
this step is to evaluate potentially relevant technol-
ogies for their quality and ability to speed the intro-
duction of a new product or service. The key question
is: “Which technology option is the best suited for a
company to utilize?” been spun-out from original work at a university. The
follow-on R&D efforts of the small company, combined
Typically the overview set of patent documents is too
large to be mined manually. Therefore, patent meta- with university patents and know-how, make such en-
data is used to narrow the opportunities to those that tities a true nugget for an OI scouting project. Tools
are: (1) Relatively recent, with the presumption that such as top-cited-by-art, IP landscape white space, etc.
older technologies have either already been exploit- all serve to quickly identify such options if they exist.
ed or have poor performance versus cost ratios; (2) The fifth step is to estimate legal threats and op-
Aligned with the company’s core competencies; and portunities. The goal of this step is to estimate from
(3) Aligned with the company’s strategic/risk profile a business—not legal—perspective the likely degree
for incremental (“baked”), next-generation (engineer- of overlap between proposed technical solutions and
ing needed) or breakthrough (science needed) options. those already existing in the literature. The overlap
This is done by sorting patents based on a combination must be small enough to bring the risk of intellectual
of four patent related segmentation criteria: patent property infringement below an acceptable level.
ages, radicalness, generality, and citation rate. The key questions are: (1) In which countries are
In an exemplary case study, 77 patents were iden- patents being filed? (2) Will you have freedom to prac-
tified by these segmentation criteria to be the “most tice? (3) Will you have the ability to exclude others? (4)
likely scouting opportunities” within a dataset of 9,056 Are IP sharks and trolls present?
patents (see Figure 5). Important for an SME is that This “business-person perspective” can be rapidly
77 documents can be manageably reviewed by subject formed by utilizing patent and business metrics de-
matter experts to determine which have the best rela- veloped to assess at a high level the ownership, validity
tive performance vs. relative cost ratios. and enforceability of patents. If the assessment raises
The fourth step is to expand your perspective to uti- red flags a subsequent legal assessment is warranted
lize all potential options. The goal of this step is to prior to negotiations (3). This is particularly important
ensure that all sources of potentially relevant technolo- for an SME that doesn’t have the resources to engage
gy—individual, commercial and academic—have been in an IP dispute.
explored for their ability to contribute to the quality The sixth and last step is to prepare for negotiat-
and speed of introducing the new product or service. ing purchase/access to desired technology. The goal
The key question is, “What other entities have technol- of this step is to ensure that the project and manage-
ogy that might help the SME?” ment teams know how to negotiate for the desired ex-
It often occurs that a small company’s technology has ternal technology. The key question to be answered is,
September 2017 159
 SMEs And OI
“Which gaps, strengths and weaknesses exist in the
IP portfolio the company will possess upon license or
acquisition?”
The SME must obtain the technology at a fair price
along with a commitment to transfer the know-how. To
ensure that the negotiations are conducted in a man-
ner that yields the expected results, the negotiating
team uses individual patent-based metrics that enable
it to negotiate point by point.
This statistical process involves more than 40 patent
metrics covering the probable strength and validity of
the patent portfolio, the strength and breadth of the
technology and uses covered, and finally, the geo-
graphic coverage of the portfolio. Spider diagrams are
often used to understand the statistical significance of
any one metric when preparing for negotiations.3
IV. Negotiating for Technology and IP Solutions
When preparing for negotiations it is imperative to
remember that all OI projects must have an IP Strate-
gy. Such an IP Strategy describes how the project will
be managed to gain an advantaged position derived
from patents, trade secrets, trademarks, copyrights
and know-how versus key competitors. Such a strate-
gy should specifically describe the advantaged position
that can be gained via the number and scope of claims
coverage, geographic coverage, filing velocity, size of
IP portfolio, number and scope of trademarks, number
and scope of copyrights, and withheld, embedded/im-
plied use rights. Without knowing the SME’s IP strat-
egy a fair win-win negotiation for the OI technology is
unlikely.
Since IP strategies vary depending upon the indus-
try sector in which the SME participates, it is impor-
tant that the SME’s IP strategy be based on the R&D /
IP Game Type as shown in Figure 6.4
Particularly important during negotiations are the de-
tailed metrics that inform the SME on how much value
the to-be-acquired OI patents are really worth to them.
An example of such metrics is shown in Figure 7.
For negotiations a short strategy document can be
summarized as a four page word document. The sec-
tions include: (1) business strengths, weaknesses,
threats & opportunities, (2) business vision, mission
statement, values, (3) business objectives, (4) key IP
strategies, (5) IP strengths, weaknesses, threats & op-
portunities, and (6) strategic IP action programs.
V. Summary
In summary Lessons learned from SME OI Imple-
menters are:
• Leverage IP Databases To Find, Assess, And Place A
Value Upon, OI Opportunities
– Ensure projects are in the Sweet Spots of Mother
Nature and Father Time before proceeding with an
OI project.

Figure 6. Each IP Game Type Has a Slightly Different Patent Portfolio Sweet Spot
Technology Creation Dynamism
High (Science) Average (Engineering) Low (Application & Design)
Biotech, Fuel Cells, Pharmaceutical Drugs, Medical Electric Power, Gas, Petrochemicals, Mining,
High Nanotechnologies Equipment, Aerospace Regulated Telecom
(Government
Rules and Largest portfolio size with Key Grandfather patent with
A small number of next- generation patents
Regulations) multi-generation patent multi-generation patent
proactively pruned
fences fences

Drug & Biotech Research and Chemical Products &

Mass Software, Computers,
Discovery Tools, Specialty Polymers, industrial Gas Automobile, Snowmobile,
Internet and Telecom
Cosmetic Research Tools, Products, Packaging Farm Equipment, Mass
Services, Networking
Engineering Test Materials, Building Materials, Consumer Product
Market Control

Average Equipment, Semiconductors

Equipment Pharmaceutical Carriers
(Industry
Standards)
One of the largest
Average size portfolio Average size portfolio
portfolios with a Average size portfolio with
with limited patent fences, with no patent fences,
grandfather patent and some patent fences
proactively pruned proactively pruned
patent fences

Specialty Food, Ingredients,

MIS, Specialized Newspapers,
Specialty Consumer Specialty Chemicals,
Telecom Systems, Clothing,
Products, Toys Electronic Equipment,
Enterprise Solutions Food
Low (Customer Industrial Controls
Expectations)
Average size portfolio with Average size portfolio
Dominating portfolio size One of the largest portfolios
no patent fences, with no patent fences,
and focused patent fences with few patent fences
proactively pruned proactively pruned

160 les Nouvelles

 SMEs And OI

Figure 7. Example of Patent Metrics for Mass Software, Computers, etc.

IP Environment Battles for Architectures

Patent Density Jungle

Innovation & Patent Growth Rate High
Landscape
Desired IP

Typical Number of IP Holders Many

Competitor’s Citation Position Present but no Predators

Non-Competitor’s Citations Many with trolls and predators but no sharks

IP Aggregators Presence Trolls Present

Size of Portfolio Within 20% of Average; Participating Portfolio for standards control

New Patent Velocity Faster than Average First non- self Cite Time
Portfolio Attributes
Desired Patent Owner

Self Citation Position Patent Fences

Portfolio Management Posture Building

Claim Quality High

Behavior

Claim Scope for Technology and Uses Broad

Geographic Coverage Broad
IP Holders’ Posture versus Infringers Aggressive
IP Holders’ Posture When Challenged Proactively Defend Challenge

– Find and qualify the best potential partners and Notes and References
sources of external technology with the aid of patent i. IRI Community Forums, Industrial Research Insti-
databases.
tute, (April 28, 2017) web forum.
– Value OI assets and negotiate agreements appro-
priately. ii. Paul Germeraad and Wim Vanhaverbeke, “How to
Find, Assess and Value Open Innovation Opportu-
• Use IP based Business Analysis tools to support
nities by Leveraging IP Databases,” les Nouvelles,
high-quality, fast and sticky decisions.
Vol LI No. 3, (September 2016) p 154 and at http://
• Use commercial resources for term sheets and www.intellectualassetsinc.com/openinnovation.
royalty rates.
iii. Arvin Patel and Paul Germeraad, “How to Value
• Fight for Win/Win Negotiations.
IP Portfolios for Acquisition,” Intellectual Assets
– Win/Lose Is Really Lose/Lose. Management Magazine, Issue 63 (2014). This ar-
• Use Licensing databases to arrive at fair rates. ticle first appeared in IAM issue 63/57, published
– Avoid Asymmetrical Deals. by Globe Media Group­—IP Division. View the is-
• Don’t Kill A Good Project By Insisting On A Perfect sue in full at www.IAM-media.com.
Deal. iv. Paul Germeraad, “All In The Game: R&D Games
– Keep A Business Head That Values Speed and Pro- Theory Can Be a Valuable Tool in Working Out
ductivity. How IP Issues Have an Impact On OI,” Intellectual
– Utilize Different Deal Structures and Terms as IP Assets Management Magazine, Issue 39, (2010).
Licensing Enables Many Good Business Options. This article first appeared in IAM issue 39/63,
• SME’s have the advantage over large companies here. published by Globe Media Group—IP Division;
• Metrics Count. View the issue in full at www.IAM-media.com.
– Use Simple Metrics that include IP and Know-how.
• Recognize Success Available at Social Science Research Network (SSRN):
– Extrinsic Measures Are More Powerful Than Fi- https://ssrn.com/abstract=3009020
nancial. ■

September 2017 161

 SMEs And Patent Litigation
SMEs And Patent Litigation:
A European Perspective
By Emmanuel Gougé and Valicha Torrecilla
S
mall and medium-sized enterprises (“SMEs”) are
defined in the European Union (“EU”) Commis-
sion Recommendation of May 6, 20031 as “enter-
prises which employ fewer than 250 persons and which
2
have an annual turnover not exceeding EUR 50 million,
and/or an annual balance sheet total not exceeding EUR
43 million.” Globally, according to a report from the
World Intellectual Property Organisation, SMEs ac-
count for 95 percent of companies and 60 to 70 per-
cent of employment in the OECD countries.3
SMEs are important players in innovation (notably in
the field of emerging technologies) and are therefore
more and more the subject of policy support in many
countries. This support come from public authorities,
such as intellectual property offices who allow SMEs to
protect their inventions by obtaining and maintaining
their patents at lower costs,4 but also from other enti-
ties such as universities who support SMEs upstream.
In the UK for instance, Oxford University created the
“SME Smart Intellectual Property Scheme” to help
SMEs at the stage of developing innovative technol-
ogy by giving them access to its intellectual property
under licence. Oxford University is known for having
a large portfolio of inventions. With access to them,
SMEs have an opportunity to develop new and im-
proved products and thus gain a decisive competitive
advantage. Governments also intend to help SMEs by
creating investment funds dedicated to the licensing
of patents, human and financial resources which are
mobilized for innovation.
1. EU Commission Recommendation of May 6, 2003
concerning the definition of micro, small and medium-sized
enterprises, 361/EC, Art. 2. (2003).
2. The term “enterprise” shall be understood as “any entity
engaged in an economic activity, irrespective of its legal
form. This includes, in particular, self-employed persons and
family businesses engaged in a craft or other activities, and
partnerships or associations regularly engaged in an economic
activity” (EU Commission Recommendation of May 6, 2003
concerning the definition of micro, small and medium-sized
enterprises, 361/EC, Art. 1. (2003).
3. “Intellectual Property Rights and Innovation in SMEs,”
WIPO Report, (2005).
4. For instance, the French Intellectual Property Office (INPI)
offers a reduction of 50 percent on the procedural fees and on
the maintenance fees.
162 les Nouvelles
Studies and reports from various OECD countries re-
veal, however, that SMEs face a number of difficulties
in using the intellectual property system at large.5 This
may be explained by their limited knowledge of the ins
and outs of the intellectual property system (they fre-
quently lack in-house counsels and employees who are
familiar with intellectual property issues) and the lack
of clarity about its relevance to their business strategy
and competitiveness. Another critical issue for SMEs
with regard to the protection of their intellectual prop-
erty is their lack of capital. For all these reasons, pro-
tecting intellectual property rights appears expensive
and time-consuming to SMEs.
Even when SMEs decide to invest in intellectual
property rights, they may not be, because of limited
budget and human resources (e.g. 9 out of 10 Europe-
an SMEs are micros—less than 10 employees6), in a
strong position to defend them properly when need-
ed. The acquisition and maintenance of an intellectual
property right is, however, meaningless if that right
cannot be enforced in the marketplace. If SMEs do
not use their patents to threat and actually sue in-
fringers, the latter will take advantage of this absence
of reaction and unduly benefit from their innovations
and inventions. It could in the end impede, or even
annul, any return on investment.
Consequently, the current fragmented European pat-
ent litigation landscape is not always suited for SMEs
who are cost-conscious enterprises (A.). The upcoming
Unified Patent Court (“UPC”) may bring responses to
some of the issues to which SMEs are confronted when
it comes to litigate for or against a European patent (B.).
In any case, patent infringements may also be settled
out of courts, as long as both parties agree. Arbitration
and mediation are alternative ways of resolving a dis-
pute that may be more appropriate for SMEs (C.).
A. The Current European Patent Litigation
Landscape
The current European patent litigation landscape is
a fragmented one. An infringement claim or a revoca-
5. “The Intersection of Intellectual Property Rights and
Innovation Policy Making—A Literature Review,” WIPO Report,
(July 2015).
6. “European Commission,” 2015/2016 Annual Report on
European SMEs.
 SMEs And Patent Litigation
tion action has indeed to be filed before every national asymmetries existing between SMEs and larger en-
patent court of the European member state where the tities about the intellectual property process (larger
patent is infringed, or—in the case of a revocation ac- entities are well informed and may better anticipate
tion—where the patent is an obstacle to the SME’s intellectual property related issues), and finally the
business. fact that some SMEs attach less importance to their
This European patent litigation structure reflects the patents and inventions.
functioning of the European patents system. Once a The conclusion that can be drawn is that a good in-
European patent has been granted by the EPO, it is tellectual property litigation system (which would not
broken in as many national patents as there are con- be seen as an obstacle
tracting states of the European Patent Convention by SMEs) should resolve
(“EPC”)7 designated in the application. Every post- cases fast and at low cost, ■ Emmanuel Gougé,
grant enforcement and litigation procedures are there- which is no surprise. Partner,
fore national procedures and, obviously, the litigation One of the risks of a
practice differs widely across contracting States. Pinsent Masons LLP,
too expensive litigation
This leads to a diversity of decisions, which may cre- system is notably the Paris, France
ate some legal uncertainty. For instance, a patent may possible development of E-mail: emmanuel.gouge@
be revoked in the UK whereas held valid in Germany. “patent assertion entities” pinsentmasons.com
This also implies a multiplication of procedures, and (“PAE”), or “patent trolls,”
consequently, a multiplication of costs. considered as “firms that ■ Valicha Torrecilla,
From the SME’s perspective, intellectual property primarily acquire patents Associate,
enforcement’s costs work against the enforcement of from third parties [they
often buy cheap patents Pinsent Masons LLP,
patents, even though, according to a report from the
UK Intellectual Property Office (“UKIPO”), the vast from bankrupt companies] Paris, France
majority of European SMEs (around 75 percent) have and seek to generate rev- E-mail: valicha.torrecilla@
experienced some sort of intellectual property abuse, enue by asserting them pinsentmasons.com
including infringement.8 against accused infringers.
Although available specific data on patent litigation […] Patents are a PAE’s
remains limited, the above-mentioned UKIPO report principal asset; a PAE does not manufacture, distribute,
provides some interesting information. It states that or sell products.”9
the number of patent cases depends on the costs of This phenomenon initially started in the U.S. and
litigation related to the size of the market. (UK has has now become an emerging issue in Europe as well.
high litigation costs and a low level of litigation cases Among European countries, it should be noted that
compared, for instance, to France, the Netherlands or most PAE typically commence patent infringement
Germany, where litigation costs are lower.) Further- lawsuits in Germany10 (where they benefit from bifur-
more, it shows that litigation rates vary significantly by cation).11 Furthermore, it appears that PAEs favourite
sector and firm size. SMEs, which tend to have small- “victims” are SMEs which,12 most of the time, may not
er patent portfolios, are more vulnerable to litigation be in a position to bear the costs associated to patent
and tend to be the ones who are sued (by larger firms) litigation.
than the ones to sue. Possible reasons of such a finding This makes patent trolls a real threat to innovative
could be the lower bargaining power of SMEs (larger SMEs, which are more likely to settle and enter into
entities seem usually less adverse to entering litigation a settlement agreement in order to avoid costly and
and have stronger financial resources), the knowledge time-consuming litigation.

7. There are 38 EPC contracting states: Albania, Austria, 9. “Patent Assertion Entity Activity,” Federal Trade
Belgium, Republic of Bulgaria, Switzerland, Cyprus, Czech Commission Study, (October 2016).
Republic, Germany, Denmark, Republic of Estonia, Spain, 10. “Digital Innovation Downturn as Patent Trolls Invade
Finland, France, United Kingdom, Hellenic Republic (Greece), Europe,” IP2I Press Release, (April 4, 2017).
Hungary, Croatia, Ireland, Iceland, Italy, Liechtenstein,
11. The German bifurcation system means that the
Lithuania, Luxembourg, Latvia, Monaco, Former Yugoslav
infringement issue and the validity are each dealt with in two
Republic of Macedonia, Malta, Netherlands, Norway, Poland,
distinct court procedures, so that a decision on infringement
Portugal, Republic of Romania, Serbia, Sweden, Slovenia,
may be obtained before a decision on the validity of the patent.
Slovakia, San Marino, and Turkey.
12. “SME Patenting—An Empirical Analysis in Nine
8. “The Impact of the Patent System on SMEs,” UKIPO
Countries,” Fraunhofer Institute for Systems and Innovation
Report, commissioned by the Strategic Advisory Board for
Research ISI, (October 2013).
Intellectual Property, (September 2010).

September 2017 163

 SMEs And Patent Litigation
Among possible responses to tackle the above-
mentioned problem, the following ones have been
considered: improving transparency regarding patent
ownership (PAEs usually use complicated corporate
structures to hide their true identity), improving the
quality of issued patents (litigated patents are general-
ly low quality because patents that are vague, unclear
and have an overly broad scope are more likely to be
allegedly infringed), and providing information to con-
sumers and retailers regarding the risks and benefits of
litigating or settling a patent suit.13
As of today, there has been no official study lead by
national European governments, as regards the impact
of PAEs, and in particular as regards their negative im-
pact on SMEs and innovation. The European Commis-
sion has, however, recently published a report according
to which the quality of the patent asserted is “the most
decisive factor” in the impact of patent assertion.14
A number of national initiatives from European gov-
ernments show how their interest is in relation to sup-
porting SMEs when it comes to litigation.
In some EU member States, specialised courts have
been created, such as the Intellectual Property Enter-
prise Court (“IPEC”) in the UK. The IPEC, established
in October 2013, hears less complex cases than the
traditional UK High Court (Patent Court) and sets mon-
etary caps on claims. The IPEC is a fast and cost-effec-
tive intellectual property litigation forum, and should
therefore become attractive to SMEs. When litigating,
to generate any revenue, a PAE must either settle
with the defendant or ultimately prevail in litigation
and obtain relief from the court. Thanks to courts like
the IPEC, SMEs could be less reluctant to go to court
when being attacked by a patent troll, notably in cases
where the validity of the patent at stake seems ques-
tionable (which is often the case).
Another public investment which has proved to be
supporting SMEs is represented by public investment
funds, such as “France Brevets” in France. It has already
been observed that SMEs have limited knowledge in
the patent systems and have low financial capacities.
On the contrary, funds like France Brevets may have
the sufficient financial resource to sue potential in-
fringers (at the time of its creation in 2011, France
Brevets was awarded 100 million euros by the French
State), and benefits of a team composed of profession-
als with a longstanding experience in monetizing intel-
lectual property. Thus, some SMEs prefer to shift the
13. “Patent Assertion Entity Activity, Government Interest
in and Response to PAE Activity,” Federal Trade Commission
Study, (October 2016).
14. “Patent Assertion Entities in Europe—Their impact on
Innovation and Knowledge Transfer in ICT Markets,” European
Commission Report, (October 2016).
164 les Nouvelles
responsibility of monitoring the use of their invention
in the marketplace, of identifying any infringers and
sometimes even of deciding whether, how and when
to take action against them, to such entities.
B. The New EU Patent Litigation Landscape
The aim of the upcoming UPC,15 established by the
UPC Agreement (“UPCA”) of February 19, 2013,16 is
to harmonise the European patent litigation system.
The UPC will have exclusive jurisdiction concerning
infringement and validity issues relating to European
patents (unless they have been opted-out from the
UPC jurisdiction by their owners) and European pat-
ents with unitary effects (so-called “unitary patents,”)
which will offer protection in all member States having
entered the new UPC system.17
The UPC presents a number of potential advantag-
es for SMEs: it will not be necessary anymore to file
a claim in every European member State where the
patent is infringed, or where the SME needs it to be
revoked. Furthermore, the procedure will be unique
and decisions of the UPC will have effect on every con-
tracting member State.
Another important practical aspect relates to the
timing of proceedings: the preamble of the draft UPC
rules of procedure18 provides that the final hearing
on the issues of infringement and validity at first in-
stance should take place within approximately one
year (“complex actions may require more time and pro-
cedural steps and simple actions less time and fewer
procedural steps.”)19
Finally, the UPC court fees are intended to be re-
duced for SMEs. Rule 370.8 of the UPC rules of pro-
cedure provides that small enterprises and micro-en-
terprises are required to pay only 60% of the court
fees. Notwithstanding the above-mentioned, the UPC
may, of its own motion, deny this reduction of fees
if it appears that it is manifestly disproportionate and
unreasonable having regard to the financial capacities
of the party.20
One of the main disadvantages of the UPC, which
is a direct counterpart of its advantages, is that once
a patent is litigated before the UPC, it risks a central-
15. The UPC should enter into force by end of 2017 or
beginning of 2018.
16. The UPCA has been signed by all the European member
states except Spain, Poland and Croatia.
17. Regulation (UE) No. 1257/2012 implementing enhanced
cooperation in the area of the creation of unitary patent
protection.
18. Latest available version of the Rules of Procedures: 18th
draft, of October 19, 2015, as updated on March 15, 2017.
19. Preamble of the UPC rules of procedure, Paragraph 7.
20. UPC Rules of Procedure, Rule 370.8 (d)(i).
 SMEs And Patent Litigation
ised revocation. The patent holder could therefore at
once lose its protection in all the contracting member
States. As a result, some companies will consider opt-
ing-out of these patents in order to avoid the UPC’s
jurisdiction. The opt-out procedure is set out in article
83 of the UPCA and supplemented by a number of pro-
visions in Rule 5 of the UPC rules of procedure, ena-
bling the owners of a European patent (granted or still
pending) to remove it from the exclusive jurisdiction of
the UPC, that would otherwise apply to it. (This exclu-
sion from the UPC’s jurisdiction will only be possible
during the transitional period of seven years as of the
entry into force of the UPC.)21 Once a patent has been
opted-out, it will last for the whole life of the patent,
unless the opt-out is withdrawn. It should be noted
that once an opt-out has been withdrawn, a further
opt-out is impossible.
Moreover, the UPC is a self-financially sustained
court, which means that the plaintiffs will have to pay
court fees for each action they want to lodge before
the UPC. An infringement action will cost a fixed fee
of 11.000 euros and a revocation action may cost up
to 20.000 euros. Most importantly however, and what
should be kept in mind of the SMEs, is the fact that
a part of variable costs could be added and calculated
according to the value of the case (close to the German
legal concept of “Streitwert,”) on top of which come
the other litigation costs, such as counsels fees.
Another potential disadvantage of the UPC, point-
ed out by industry players in innovative technologies,
is the fact that it could be (mis)used by patent trolls.
Recently, a new industry body called “IP2Innovate,”
which is a coalition of small and larger innovative
companies, also including larger companies such as
Daimler, Intel, Google and Spotify, has been created to
bring together policy makers and the legal profession
to fight against abusive patent lawsuits and its effect
on innovation in order to work towards a strong and
balanced patent legal system. On February 21, 2017,
said coalition sent a letter to Andrus Ansip, Vice Pres-
ident for the European Digital Single Market, raising
his attention on the negative consequences that the
UPC could bring to the European patent litigation sys-
tem if the threat of PAEs is not properly recognized. In
their letter, they first recognize the above-mentioned
advantages of the UPC over today’s system, but they
also warn about the fact that “its EU wide enforcement
opportunities, including EU wide injunctions covering
a market larger than the U.S., will offer PAEs a fertile
ground.”22
21. This period of seven years could be extended for another
seven-year period.
22. http://www.ip2innovate.eu/wp-content/uploads/2017/
04/IP2I_Letter-VP-ANSIP_210217_FINAL.pdf.
In his response,23 Andrus Ansip agreed on the fact that
the phenomenon of patent trolls is increasing in Europe
and that “it should be fully monitored.” He, however,
disagreed on the fact that new actions are needed as
the existing system and the upcoming new UPC system
already provide safeguards. According to him:
• The EPO opposition procedure is sufficient to re-
voke unjustified patents;
• A strong power of discretion is given to UPC judges
in the UPCA, which means that they will be able
to weight up the interests of the parties before
granting injunction (no automatic injunction shall
be granted); and
• The Court of Justice of the European Union
(CJEU)’s caselaw already prevents patentees, in-
cluding standard essential patent holders, from ab-
using injunctions.24
C. Alternative Dispute Resolution
Mediation or arbitration is sometimes the best way
to resolve intellectual property related disputes. Al-
ternative disputes resolutions enables the parties to
retain control of the dispute resolution process which,
in many instances, may even help preserving business
relationship between parties. Arbitration definitively
offers a procedural flexibility that is likely to be una-
vailable in judicial courts.
One other key advantage of arbitration is the confid-
entiality of the information disclosed during the pro-
cedure and of the arbitration awards.
Furthermore, the possibility to enforce arbitration
awards in multiple jurisdictions, as a result of the 1958
New York Convention, is also very appealing to com-
panies. Pursuant to article III of the New York Conven-
tion, “Each Contracting State shall recognize arbitral
awards as binding and enforce them in accordance with
the rules of procedure of the territory where the award
is relied upon […].”
Arbitration or mediation may therefore be of particu-
lar interest to SMEs which intend to maintain the viab-
ility of their intellectual property rights at reasonable
costs and in a time-effective manner.
In the current landscape of international disputes re-
lated to intellectual property, patent owners may refer
to the WIPO Abitration and Mediation Centre, based
in Geneva and established in 1994.25
23. http://ip2innovate.eu/wp-content/uploads/2017/04/IP2I_
VPAA-reply_170329.pdf. (March 29, 2017).
24. See notably, CJEU, Huawei v. ZTE, CJEU, C-170/13 (July
16, 2015).
25. Since 2010, the WIPO Arbitration and Mediation Centre
has a further office at Maxwell Chambers in Singapore.
September 2017 165
 SMEs And Patent Litigation
In relation to future proceedings in Europe, patent
cases may also be referred to the Mediation and Ar-
bitration Centre set forth under the UPCA,26 located
in Ljubljana and Lisbon, bearing in mind that a patent
may not be revoked or limited there.
Conclusion
Compared to larger entities, SMEs are not yet well
equipped to properly deal with patent litigation. They
often lack intellectual property knowledge and finan-
cial capacities. On the contrary, large entities fre-
quently have significant financial and human capacities
to invest in their research and development, to file
patents and monetize their patent portfolio, as well as
to face any patent dispute that may arise from their
patents portfolio or from their activities.
Because of their low financial capacities and their
dependence on a few patents, SMEs are often reluc-
tant to use the current (and possibly upcoming as well)
patent litigation system (the costs of a patent litigation
could slow down the SME’s activity, or even some-
times put it out of business) and seem therefore to be
easier targets for PAEs.
As a result, governments and public authorities,
aware of the fact that the majority of innovative com-
panies remain SMEs, have initiated various solutions to
support SMEs when it comes to litigation for instance,
specific time and cost-effective courts. In Europe, the
upcoming Unified Patent Court will have to show that
it is fit for purpose for SMEs. ■

Available at Social Science Research Network (SSRN):

https://ssrn.com/abstract=3009023

26. Article 35 of the UPCA, likely to enter in force early

2018.

166 les Nouvelles

 Creating SEPs

Creating SEPs­—A Risky Business For SMEs

By Menno Treffers, Matteo Sabattini and Alessandra Mosca

S
tandard Essential Patents (SEPs) can be huge- A Long Bet
ly valuable. In particular, when the standard is Contributing to standards ■ Menno Treffers,
used in mass-market consumer products, pat- development is not only a
ents that are necessarily used create significant value Treffers Alliance
drain on engineering resourc-
for their owners. For companies large and small, the es, it also takes years, some- Management,
challenges are, first of all, to get their ideas used in times more than 10 years, Managing Director,
the standards and then, if the standard is successful, before the company benefits Eindhoven, The Netherlands
to extract value (e.g. in the form of royalties) from from its contribution with the
their essential patents. E-mail: menno.treffers@
significant risk that the stand- treffersam.com
These are tough challenges, even for large compa- ard is not adopted and all in-
nies. For small and medium-sized enterprises (SMEs), vestments lost. ■ Matteo Sabattini,
an attempt to benefit from participating in standards SMEs will only be able to
development can threaten the survival of the company Ericsson,
afford such a long term bet Director IPR Policy,
if not managed carefully.
when their cost of capital is
SMEs Creating Essential Patents low, and their investors are Washington D.C., USA
Standards development is a slow process and, even extraordinarily patient. These E-mail: matteo.sabattini@
when the standard is ready, it usually takes years be- conditions are not optimal ericsson.com
fore a standard is used in mass-market products. For for venture capital funded
example, work on the Wi-Fi standard (IEEE 802.11) start-ups. SMEs with an es- ■ Alessandra Mosca,
started in 1991, the first specification was released in tablished and profitable busi- Sisvel Group,
1997,1 and only around 2003/2004 the installed base ness stand a better chance of R&D Engineer,
reached 100 million units.2 That slow adoption curve is gaining benefits from creat- Turin, Italy
typical for standards that specify an interface between ing SEPs.
products that are subject to strong network effects.3 E-mail: alessandra.mosca@
The Complexity of SDOs sisveltech.com
The time scale for development standards CD-R,4
GSM,5 Wi-Fi,6 Bluetooth,7 and Qi8 are similar. It took Negotiating technology
these standards between five and nine years to reach contributions in a standards
100 million units sales. development organization (SDO) is a specialized skill.

1. http://www.ieee802.org/11/Reports/802.11_ Sales Of Products That Use The Standard In Million Units

Timelines.htm. (Log Scale) Years After Finalizing The First Specification
2. http://www.scribd.com/doc/173132403/13-
10-03-Innovatio-v-Mult-Def-WiFi-Patents-FRAND- 10000
Determination#page=78.
3. Carl Shapiro and Hal R. Varian, “Information
Rules,” Harvard Business School Press, ISBN
1000
0-87584- 863-X (1999).
4. Source for CD-R disc market: TSR – http://
www.t-s-r.co.jp/e/.
5. Source for GSM: http://www.gsma.com/ 100
aboutus/history.
6. Source for Wi-Fi: ABI Research, http://
www.scribd.com/doc/173132403/13-10-03- 10
Innovatio-v-Mult-Def-WiFi-Patents-FR AND-
Determination#page=78.
7. Source for Bluetooth: https://www.bluetooth.
com/about-us/our-history. 1
3 4 5 6 7 8 9 10 11 12 13 14 15
8. Source for Qi Wireless Power Standard:
https://technology.ihs.com/584705/wireless- CD-R disc (1988) GSM (1989) Wi-Fi (1997) Bluetooth (1999) Qi (2010)
power-market-tracker.
September 2017 167
 Creating SEPs
There are the difficulties of negotiating with foreign
cultures, but dealing with the complexity of internal
procedures of an SDO can be just as daunting. The
procedures and terminology of an SDO is established
when its first specification is developed and, by the
time the group works its 2nd or 3rd generation specifi-
cation, the way of working is often understood only by
people who have participated for many years.
An example of cultural complexity is the use of Rob-
ert’s Rules of Order9 to conduct meetings. It may come
naturally for someone with a U.S. college education
“to move a motion,” or “second a motion,” but for Eu-
ropean or Asian participant adhering to Robert’s Rules
of Order makes it difficult to influence meetings, let
only chair such a meeting.
An SME with the ambition to contribute technology
in a long established SDO should consider hiring an
expert with a multi-year history of contributing and a
personal network in that SDO.
Some SDOs have governance rules that make it eas-
ier for large companies to influence standards devel-
opment. If, for example, voting rights are restricted
to a membership class with a high membership fee,
smaller companies will usually opt for a lower cost
and less influential membership class. Another, more
subtle, governance rule that creates an advantage for
large companies is to assign voting rights to individual
participants, because that allows large companies to
“buy” voting rights simply by sending more people to
meetings. An SME will find it easier to have its propos-
als accepted by an SDO when decisions are influenced
more by technical merit of proposals and less by the
amount of money companies are willing to spend on
voting rights.
Some SMEs Are Successful in Standards Develop-
ment
Despite the challenges, some SMEs participate suc-
cessfully in standards development. In our experience,
the successful SMEs usually operate a profitable busi-
ness in the same technology with products that do not
suffer from network effects—typically low volume,
high margin, professional applications. The profitable
business gives them the expertise and the long-term
viability to contribute technology to an SDO.
Other successful SMEs started with the rights on a
portfolio with university patent that cover solutions for
fundamental problems in the standard. That portfolio
then gives these SMEs the possibility to obtain license
income earlier and makes them an attractive partner
for joint product development.
More often, SMEs benefit from participating in
standards development not by contributing technolo-
gy, but by being first to market with products that use
9. https://en.wikipedia.org/wiki/Robert’s_Rules_of_Order.
168 les Nouvelles
the standard. When the standard is ready, adoption is
usually slow to begin with. In that phase, SMEs are
particularly well positioned to serve niche applications
for users with special needs who are willing to pay a
premium for products that support the standard.
Despite the challenges that SMEs face to actively
participate and contribute technologies to major in-
ternational standards, there are several examples of
smaller companies or even research centers that have
been very successful in navigating the standardization
activities, and have monetized their SEPS effectively.
Examples in the ICT (Information and Communica-
tions Technology) industry are TeamCast and Dektec.
TeamCast is a medium-size company offering technol-
ogy solutions for digital television and radio broad-
casting. Since its foundation in 2003, TeamCast has
been contributing to the definition and validation of
many standards for the worldwide broadcast ecosys-
tem: DVB, WorldDAB, CMMB, ATSC among others,
also leading some technical working groups. Founded
in 2000, Dektec is a small company serving the profes-
sional digital television market with a complete range
of professional equipment. DekTec is an active mem-
ber of different standards committees such as DVB,
HDMI, IABM, PCI-SIG, SMPTE, USB Forum and VSF.
SMEs Extracting Value from SEPs
The standard is successful, used in a hundred mil-
lion products, and an SME believes it owns patents
that are necessarily infringed by all these products.
How can this SME benefit from owning these patents?
SMEs have the same options as large companies. The
obvious methods are: (i) license and collect royalties;
(ii) sell the patents; (iii) use patents to gain freedom to
operate; or (iv) participate in a patent pool.
SMEs are at a disadvantage when trying to operate
their own SEP licensing program because it is not suf-
ficient to own a couple of essential patents. A success-
ful licensing programs needs multiple patents that are
suitable for litigation. That means they need to survive
validity challenges and it must be easy to determine
infringement by products that use the standard. In
practice, only a small percentage of essential patents
are suitable for litigation. An SME will, therefore, only
be able to license their own portfolio if that portfolio
is large or if the portfolio contains some exceptionally
strong patents. And even then, the manpower need-
ed to operate an SEP licensing program and the cost
and risks of litigation make this option unattractive for
most SMEs. Moreover, the current licensing environ-
ment, which in some jurisdictions has favoured im-
plementers over technology providers and condoned
practices like efficient infringement,10 requires costly
litigation sometimes to even start licensing discussions
10. http://www.iam-media.com/magazine/issue/79/Features/
Efficient-infringement-and-the-undervaluation-of-standard-
essential-patents.

with large players. On one hand, SMEs rarely have
enough resources and investors willing to embark in
costly litigation. On the other hand, companies unwill-
ing to acquire license exploit the limited resources that
SMEs can invest in litigation to drain them in court
while continuing to infringe on their IP.
Participating in a patent pool, selling the portfolio, or
selling sub-licensing rights for a limited field of use are,
generally, better options for SMEs. However, let us an-
alyse a few exemplary SMEs who have taken different
approaches in order to monetise their IP assets.
Sell the Patents or Sell The Right To License/Enforce
Inside Secure,11 a French company that worked on
the development and the standard definition of Near-
Field Communication (NFC) technology, has generat-
ed a sizeable portfolio of SEPs covering fundamental
aspects of NFC. Although the company was relatively
successful to license its technology to some OEMs, a
large percentage of the market remained unlicensed,
despite the licensing offers and negotiations that
were initiated. Inside Secure then decided to assign
the rights to its portfolio to France Brevets,12 a French
patent investment fund that was created to leverage
French technologies and whose mission it is to mone-
tize IP assets developed or owned by French entities.
France Brevets invested several millions of Euros—a
sum that a company the size of Inside Secure would
have never been able to cover—in the promotion of
an NFC licensing program, and initiated litigation with
several Original Equipment Manufacturers (OEMs.)
These efforts resulted in license agreements with sev-
eral large OEMs, most notably Samsung,13 that were
using Inside Secure’s NFC technology.
Incidentally, the example of Inside Secure highlights
the importance of Patent Assertion Entities (PAEs) as a
fundamental element in the innovation ecosystem, and
represents a necessary market intermediary to serve the
needs of several stakeholders that, like Inside Secure,
would otherwise have no access to the licensing market.
Participate in a Patent Pool
FastVDO14 is a small company based in Melbourne.
Founded in 1998, FastVDO has developed technologies
on media communications and actively contributed to
the development of well-known video coding standards
such as ITU/H.264 and ISO/IEC MPEG-4, ITU/H.265
and ISO/MPEG HEVC.
The H.264/AVC standard was the result of a joint
project between the ITU-T’s Video Coding Experts
11. https://www.insidesecure.com.
12. http://www.francebrevets.com.
13. https://www.insidesecure.com/Company/Press-releases/
France-Brevets-licenses-NFC-Patents-to-Samsung.
14. http://www.fastvdo.com.
Creating SEPs
Group and the ISO/IEC Moving Picture Experts Group
(MPEG). Many companies, research centres and uni-
versities contributed to its development: Columbia
University, ETRI, France Telecom, Fujitsu, LG Elec-
tronics, Matsushita, Mitsubishi, Microsoft, Motorola,
Nokia, Philips, Robert Bosch GmbH, Samsung, Sharp,
Sony, Toshiba, JVC, Apple, Dolby, FastVDO, Fraun-
hofer-Gesellschaft, IBM, LSI Logic, Microsoft, Motoro-
la, Polycom, Real Networks, etc.
FastVDO owns several Standard Essential Patents
and successfully joined in the H264 patent pool of
Via Licensing.15
Conclusion
The challenges for SMEs and large companies are
not fundamentally different. It is the level of commer-
cial risk that makes failure, or even delay in adoption of
the standard, potentially lethal for smaller companies.
And even when the standard is successful, generation
value from an SEP portfolio is challenging, in particular
for SMEs.
Fortunately, alternative approaches to licensing do
exist. This paper addresses some of these options that
could help de-risk investments in standards develop-
ment and patent monetization by SMEs.
Ultimately, participation by SMEs to the standard-
ization process should be encouraged, as it provides
specific advantages to the SMEs themselves but it also
benefits the society as a whole. The larger the partici-
pation of stakeholders to the standardization activities,
the more efficient and advanced the standards so de-
veloped will be.
SMEs can make a business success from partici-
pation in standards development when (a) they un-
derstand that adoption will be slow and may never
happen, and (b) their business case for participation
is primarily based on selling products that implement
the standard and license income from SEPs is consid-
ered an optional extra.
We contend that SDOs should not discourage
smaller entities to participate by making voting
rights expensive, by increasing the cost for, mone-
tization and enforcement of SEPs. More specifical-
ly, SDOs’ patent policies should not interfere with
commercial and licensing discussions between pat-
ent owners and implementers, and should not place
unnecessary burdens on patent owners favouring a
few, large implementers. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009034
15. “Understanding MPEG-4, Diepold K., Moeritz S.,”
Focal Press (2005). https://books.google.it/books?id=Vz3IQ
WZz7msC.
September 2017 169
 Internet Of Things
SMEs And Standard Essential Patents:
Licensing Efficiently In The Internet Of Things
By Harris Tsilikas and Dr. Claudia Tapia1
I. Introduction
M
odern knowledge-based economies increas-
ingly rely on standards upon which innova-
tive products are built. Standards allow busi-
nesses to benefit from economies of scale, to specialise
in what they do best and invest in product differenti-
ation. Standards reduce barriers to trade, create open
markets and a level playing field, thus spurring compe-
tition and innovation. Consumers also reap substantial
benefits from standardisation, in terms of lower prices,
wider and interoperable product variety and more in-
novation. Standards can be arrived at either through
unmediated market competition processes as de fac-
to standards, or through industry coordination within
standards-development organisations (SDOs.)
In a consensus-driven process SDOs select the best
technologies amongst technical contributions result-
ing from substantial R&D investment, with a view to
solving complex technical problems raised in standards
development.2 Although open and accessible to all in-
terested parties to implement, standards often com-
prise proprietary technologies contributed by techno-
logy sponsors. In particular, innovative ICT standards
involve hundreds or even thousands of patents reading
on standards specifications, without access to which
implementation is technically impossible.
Standard-essential patents (SEPs) enable innovators
and contributors to benefit from positive externalities
from standardisation and earn a fair return on their
investment in R&D. Standardisation has facilitated the
emergence and growth of a vibrant and open innov-
ation marketplace, bringing together contributors of
cutting-edge technologies and suppliers of innovative
consumer products and services.3
1. The views expressed herein belong to Dr. Claudia Tapia,
LL.M. alone and do not necessarily represent Ericsson’s views.
2. Claudia Tapia, “Securing a Competitive Future in Europe,
The Patent Lawyer,” explaining that in only one Working Group
of the several ones established to develop the LTE Standard
23,235 technical contributions were submitted, from which
less than 16% were selected to become part of the standard.
(January/February 2016).
3. Haris Tsilikas, “Collaborative Standardization and
Disruptive Innovation: The Case of Wireless Telecommunication
Standards,” Max Planck Institute for Innovation and Competition
Research Paper No. 16-06 (May 17, 2016). Summary available
at http://www.4ipcouncil.com/download_file/view_inline/163
170 les Nouvelles
This has only been possible thanks to the commit-
ment of contributors to make their technology essen-
tial to the standard accessible on Fair, Reasonable and
Non-Discriminatory (FRAND) terms and conditions.
Its significant benefits notwithstanding, collaborative
standardisation is a costly and risky affair. Meaning-
ful involvement in SDOs and their working groups re-
quires substantial investment in R&D and in human
capital, including highly specialised and experienced
standardisation experts. Such challenges to effective
participation are especially pronounced for small and
medium-sized enterprises (SMEs).4 SMEs form the
backbone of European economies. The 23 million
European SMEs account for 98 percent of businesses
and provide for around 80 percent of private-sector
jobs in Europe.5 But SMEs’ involvement in standard-
isation fails to reflect their paramount importance for
jobs and growth; SMEs lag behind bigger companies in
standardisation.6 A major reason for SMEs’ secondary
role in collaborative standardisation is technological
complexity and the scale of investment needed to de-
velop a competitive technological platform.
Yet at the same time standardisation offers an open
ecosystem within which SMEs can successfully contrib-
ute their innovative technologies.7 This is largely due to
4. The term SMEs refers to businesses employing less than
250 employees. SMEs are further distinguished between
micro enterprises, employing fewer than 10 employees, small
enterprises employing between 10 and 49 employees and medium-
sized enterprises employing between 50 and 250 employees.
“Thinking Big for SMEs,” European Commission, Luxembourg:
Publications Office of the European Union (2011) 1. http://www.
google.de/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&
cad=rja&uact=8&ved=0ahUKEwjDtfSxr5LUAhXGEVAKH
ZKFDNwQFggqMAE&url=http%3A%2F%2Fec.europa.eu
%2FDocsRoom%2Fdocuments%2F874%2Fattachments%
2 F 1 % 2 F t r a n s l a t i o n s % 2 Fe n % 2 Fr e n d i t i o n s % 2 F p d f & u s g
=AFQjCNGrPSSkUhODkhke4hdLRTIo5pWpfA.
5. “Thinking Big for SMEs,” European Commission.
See also Franc Le Gall and Martin Prager, “Participation of SMEs
in Standardization,” (ETSI White Paper no. 6, (2011) http://
www.etsi.org/images/files/ETSIWhitePapers/WP_No_6_SME_
FINAL.pdf.
6. Henk de Vries, Knut Blind, Axel Mangelsdorf, Hugo
Verheul and Jappe van der Zwan, “SMEs Access to European
Standardization: Enabling Small and Medium-Sized Enterprises
to Achieve Greater Benefit from Involvement in Standardization,”
(2009) https://www.erim.eur.nl/fileadmin/default/content/erim/
content_area/news/2009/smeaccessreport%202009.pdf.
 Internet Of Things
SDOs’ high due process standards that many propriet- ive growth and the Digital Single Market Strategy.10
ary ecosystems fail to observe. Nonetheless, once their EU standardisation policy is closely intertwined with
technology is selected to become part of a standard, the establishment and operation of the three official
SMEs depend on effective intellectual property protec- European standardisation organisations (ESOs), ETSI,
tion in order to earn a return on their R&D investment. CEN and CENELEC.
SMEs have hitherto enjoyed the potential of the patent The ESOs develop mandated European Standards,
system for incentivising innovation and commercialisa- but they also engage in cutting-edge market-driven
tion of knowledge only to a limited extent.8 standardisation, in particular in ICT sectors. ESOs are
SMEs can enhance their competitiveness and repu- expected to observe strict
tation not only by contributing but also by implement- standards of openness
ing formal standards in their products. However, SMEs to all interested parties, ■ Harris Tsilikas, LL.M.,
which are purely implementers are said to often lack transparency and consen- Junior Research Associate,
the skills necessary to identify the key players in the sus in decision-making
field, and the reasonable compensation for the techno- and voluntary application Max Planck Institute for Inno-
logy they are using, and do not know how to react to li- of standards, in accord- vation and Competition,
censors that fail to offer FRAND terms. In the context ance with standardisation Munich, Germany
of the Internet of Things, in particular, where billions best practices elaborated E-mail: haris.tsilikas@ip.mpg.de
of devices are interconnected, it is crucial for SMEs to in the WTO Agreement
establish a good IP strategy. on Technical Barriers to ■ Dr. Claudia Tapia, LL.M.,
The present article will attempt briefly to outline the Trade.11 Standardisation is
also particularly relevant Director IPR Policy,
challenges SMEs face in licensing within the field of
ICT standardisation and provide some practical solu- from an EU competition Ericsson,
tions that might contribute to overcoming them. In policy perspective. The Munich, Germany
part II we discuss the EU policy framework for stand- EU Commission in its E-mail: claudia.tapia@
ardisation and SMEs; in part III the scenario of SMEs Horizontal Guidelines has
set out a comprehensive ericsson.com
as technology contributors and licensors, and our
recommendations; in part IV the issues for SMEs as framework for assessing
implementers of standards and licensees, and possible the impact of standardisation agreements on compe-
solutions; in part V the IoT new licensing model and in tition and has provided a safe harbour from liability
part VI the conclusions of the present article. under Article 101 TFEU for agreements with the ob-
II. EU Policy for Standardisation and SMEs ject or effect of restricting competition;12 SDOs that
observe the aforementioned principles of transparen-
Standards and collaborative standardisation are a cy, openness, due process and voluntary accessibility,
valuable instrument of international market integra- as well as the principle that essential IPRs (Intellectual
tion and of lowering non-tariff barriers to international Property Rights) are to be made accessible on fair, rea-
trade.9 Hence they are also central to the integration sonable and non-discriminatory (FRAND) terms, are
of the internal market of the EU and they have been immune from competition law liability under Article
at the centre of a wide array of EU policies, such as 101 TFEU.13
the Europe 2020 Strategy for sustainable and inclus-
EU policymakers pay close attention to the issue of
SME participation in collaborative standardisation.14
Regulation 1025/2012 “on European standardisation”
7. Kirti Gupta, “The Role of SMEs and Startups in the
Standards Development Process,” showing a probability of
approval of 33.37 percent for SMEs/Start-ups contributions 10. Regulation on European Standardisation, recital 5. See also
versus a 29.06 percent probability if the submission is made by Communication from the European Commission, A Strategic
non-SMEs/non-Startups. (forthcoming, 2017). Vision for European Standards: Moving Forward to Enhance and
8. According to an SME scoreboard, 35 percent of SMEs Accelerate the Sustainable Growth of the European Economy
do not take any measures to protect their innovations, citing by 2020, COM (2011) 311 final: 3. Communication from the
various reasons, such as the cost and complexity of the patent European Commission, A Digital Single Market Strategy for
system. See European Union Intellectual Property Office Europe, COM (2015) 192 final, 15-16.
(EUIPO), IP SME Scoreboard (2016). https://euipo.europa.eu/ 11. “WTO Agreement on Technical Barriers to Trade,” Annex 3.
tunnel-web/secure/webdav/guest/document_library/observatory/
documents/sme_scoreboard_study_2016/sme_scoreboard_ 12. Communication from the European Commission,
study_2016_en.pdf “Guidelines on the Applicability of Article 101 TFEU to Horizontal
Cooperation Agreements,” C3/2, 2001, paras 257-335.
9. “Agreement on Technical Barriers to Trade,” Annex 3,
World Trade Organization. See also “Regulation of the European 13. Ibid. para 280.
Parliament and of the Council,” (October 25, 2012) on European 14. European Parliament Resolution (October 21, 2010) on
Standardisation OJ L 316/12, recital 6. (2012). “The Future of European Standardisation,” [2010/2051(INI)].

September 2017 171

 Internet Of Things
calls for ESOs to adopt concrete and specific measures
to enhance the accessibility of standards and of the
standards development process to SMEs.15 Moreover,
SMEs can benefit from a congenial regulatory frame-
work, such as the Small Business Act,16 and a variety
of public funding, including subsidies by the Horizon
2020 project, the European Structural and Investment
Funds17 and reduced SDO membership fees. SDOs
have also undertaken steps to lower participation
costs, in particular through the use of online working
group meetings and online communication that reduce
travelling costs for SME representatives.
SMEs engaged in standardisation also benefit from
collective representation by industry bodies and or-
ganisations, such as the Small Business Standards, an
organisation established in 2013 to represent SMEs in
European standardisation bodies.18 Additionally, the EU,
the European Patent Office (EPO) and national patent
offices within the EU have taken measures to reduce
the cost and enhance the accessibility of the patent
system to SMEs. Support to SMEs may include lower
patent filing and renewal fees, IP training for SME ex-
ecutives, IP helplines and the creation of the IPR Help-
desk which offers assistance and expertise to SMEs.19
It is true that such policy measures have had some
effect in boosting SME participation in standardisa-
tion. In ETSI, for instance, SMEs now account for 28
percent of its membership, and of participating SMEs
65 percent are active—both as contributors and imple-
menters—in standardisation committees. Moreover,
SMEs have managed to hold 10 percent of ETSI work-
ing group elected positions, such as chair, vice-chair
and rapporteur.20 Moreover, SMEs may have strong
private incentives to participate in standardisation.
Engagement in standardisation and implementation of
standards present significant business opportunities
for SMEs: they can benefit from access to cutting-edge
technologies, from interaction with some of the most
important technical experts in their field, from the
opening-up of new markets and economies of scale,
from increasing visibility and opportunities for benefi-
cial partnerships, and from signalling their innovation
capacity.21 Standards also lower regulatory compliance
15. Article 6, Regulation on European Standardisation.
16. Communication from the European Commission, “A
Small Business Act for Europe,) COM, 394 final (2008).
17. A Digital Single Market, 18.
18. “Small Business Standards, Who are We?,” http://www.
sbs-sme.eu/who-are-we.
19. Philippe Deléarde and Séverine Ouvry, “Exploitation of IP
for Industrial Innovation,” Report to the Commission Ref. Ares
4677128, 13 (2015).
20. Le Gall and Prager, “Participation of SMEs,” 5.
172 les Nouvelles
costs for SMEs and they enable interoperability and
compatibility between products and components.22
Yet significant challenges to a meaningful SME parti-
cipation remain. An important weakness of EU support
measures to SMEs in standardisation is their general-
ist nature: they mostly attend to the collective needs
of SMEs, they enhance for instance their collective
representation in SDOs, and they are not tailored to
individual SME needs. More importantly, a generalist
outlook fails to grasp the heterogeneity of incentives
and interests of SMEs that wish to engage in stand-
ardisation. In particular, collective support measures
lose sight of the significant distinction between SMEs
that are active in the development of standards by con-
tributing their technologies and SMEs that are mainly
interested in implementing the standards in their
products and services.
III. SMEs as Technology Contributors—
Licensors
A. Costs
SMEs contributing to standardisation must bear the
substantial costs of patent development, licensing and
enforcement. Since standardisation involves interna-
tional or even global markets, patent protection and
enforcement must also be on an international scale,
further raising costs: a PCT application for instance
costs between EUR 10,000 and 40,000.23 An OECD
survey shows that 24 percent of firms in Europe de-
clare having patents that they would be willing to li-
cense out but could not. Some factors mentioned were
the complexity and cost of drafting and negotiating
contracts, the low royalty rates offered and the diffi-
culty of identifying partners.24
Moreover, monitoring infringement, negotiating li-
censing deals and drafting contracts might require an
investment of EUR 2 million to 3 million.25 Added to
that, licensing negotiations might break down, bringing
21. “Small Business Standards, Best Practices on Small
and Medium-sized Enterprises in Standardisation,” (2015).
http://www.sbs-sme.eu/sites/default/files/publications/Best%20
practices%20towards%20SMEs_with%20footer.pdf.
22. Ibid.
23. ECORYS and Eindhoven University of Technology,
“Patents and Standards: A Modern Framework for IPR-
based Standardization,” Study carried out for the European
Commission, Ref. Ares 917720 - 25/03/2014, 66, (2014).
http://ec.europa.eu/DocsRoom/documents/4843/attachments/1/
translations/en/renditions/native.
24. Pluvia Zuniga and Dominique Guellec, “Who Licenses
out Patents and Why?: Lessons from a Business Survey,” OECD
Science, Technology and Industry Working Papers, 2009/05,
(2009). http://dx.doi.org/10.1787/224447241101.
25. ECORYS and Eindhoven University of Technology,
“Patents and Standards,” 112.

high litigation costs, possibly in many jurisdictions, into
the picture.26 Despite widespread perceptions that own-
ership of SEPs automatically confers the opportunity to
reap supra-competitive rents by holding up implement-
ers,27 when transaction costs are taken into account it
becomes apparent that patent holders with insufficient
resources often struggle to license their technologies
and earn a return on their investment.28 for the end product, an SME first needs to determine
B. Recommendations
To begin with, it is crucial that SMEs achieve adequate
IP protection for their technologies. It is important that
promising ideas be protected by well-drafted, strong
patents that can provide value in subsequent licensing
negotiations. Most SMEs lack dedicated employees
that could manage in-house patent development and
portfolio building. When contacting external patent
lawyers, SMEs should identify those experienced in
the technology field they wish to protect. Otherwise
the SME may not be able to show infringement of its
patent by some products that, if well drafted, its patent
could have covered.
Secondly, SMEs could contact SME associations
specialised in standardisation and their SDO repres-
entatives to inform themselves of the benefits that
they can enjoy by participating in a standard develop-
ment process.
Thirdly, SMEs would also need support in the com-
mercialisation phase of their technologies. They typ-
ically lack the experience of larger corporations in
complex and resource-draining negotiations, monitor-
ing and enforcement of their IPRs. Since access to pri-
vate-sector professional services is expensive, it would
be advisable to aim for additional financial support. For
instance, Fractus, a Spanish company specialised in op-
timised antennas, raised as a start-up a total of EURO
20 million in venture capital investment, part of which
it reinvested in licensing and enforcement, leading to
26. “Making Intellectual Property Rights Work for Small and
Medium-size Enterprises—Preparation and Enforcement,” IPR
Enforcement Expert Group (2009) 25.
27. Marc Lemley and Carl Shapiro, Patent Holdup and
Royalty Stacking, Texas Law Review 85, 2006: 1991; Joseph
Farrell, John Hayes, Carl Shapiro and Theresa Sullivan, Standard
Setting, Patents, and hold-up, Antitrust Law Journal 74.3, 2007,
603-670.
28. Thus, it is not surprising that an empirical study on
patents declared to some of the world’s most significant SDOs
found that for a substantial 30 percent of the sample, the patent
owners failed to pay the renewal fees and their declared patents
were left to lapse. See ECORYS and Eindhoven University of
Technology, Patents and Standards, 263.
29. Joff Wild, “Fractus Proves the Power of Patents to
Deliver Sustained, Game-changing Success to Tech Start-
ups (March 2017). http://www.iam-media.com/blog/detail.
aspx?g=8b79a108-0a83-4610-b906-ac4f89a17811
Internet Of Things
cumulative payments of well over $100 million.29
Fourthly, an SME undertaking a FRAND commit-
ment should offer access on FRAND terms. For that
it should establish a mechanism to determine FRAND
accurately. Otherwise an SME patent holder risks not
obtaining an injunction against an infringer from a
court. To determine the value that its technology has
a reasonable cumulative royalty rate. This can be done
by looking at former declarations made by main con-
tributors of the standardisation,30 as well as at studies
that estimate the cumulative rates by analysing pub-
lished declared rates, companies’ annual reports and
other reliable data (such as information disclosed in
court cases and rates published by patent pools.)31
However, SMEs should view with scepticism studies
based on purely theoretical models which are often far
from marketplace realities.32 As a next step the patent
holder needs to determine which is the proportion of
that cumulative rate that it is entitled to. Some ques-
tions when determining the value of the contribution
are the following: Does my contribution belong to the
core of the standard, or is it an option that need not be
implemented? Who else has contributed to the stand-
ard, and how much? How much is their understanding
of their proportional share and which is the method
applied for such determinations?
30. For instance, major contributors in standardization,
Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia,
Nokia Siemens Networks and Sony Ericsson supported publicly
in 2008 that a reasonable maximum aggregate royalty level for
LTE essential IPR in handsets should be a single-digit percentage
of the sales price. See Wireless Industry Leaders commit to
framework for LTE technology IPR licensing (April 2008). https://
www.ericsson.com/en/press-releases/2008/4/1209031-wireless-
industry-leaders-commit-to-framework-for-lte-technology-ipr-
licensing. See also Ericsson’s FRAND licensing terms for 5G/NR
in 3GPP Release 15 at https://www.etsi.org/about/how-we-work/
intellectual-property-rights-iprs/ex-ante-disclosures/list-of-ex-
ante-disclosures qualified by deputy chief judge of IP division at
Shanghai High People’s Court Ding Wenlian as a possible signal
of a reform of the mechanism for licensing SEPs. See MLEX,
Ericsson’s FRAND offer on 5G network welcomed by senior
Chinese antitrust judge (May 2017).
31. Alexander Galetovic, Stephen Haber, Lew Zaretzki, “A
new Dataset on Mobile Phone Patent License Royalties,” IP²
Working Paper No. 16011 (2016).
32. See e.g. Mallinson criticising estimated cumulative rate
of 120 USD on a hypothetical 400 USD smartphone. Keith
Mallinson, “WiseHarbor, on cumulative mobile-SEP royalties,”
For IP Finance, (August 2015). http://www.ip.finance/2015/08/
cumulative-mobile-sep-royalty-payments.html http://www.
wiseharbor.com/pdfs/Mallinson%20on%20cumulative%20
mobile%20SEP%20royalties%20for%20IP%20Finance%20
2015Aug19.pdf ; Ann Armstrong, Joseph J. Mueller, and Timothy
D. Syrett, “The Smartphone Royalty Stack: Surveying Royalty
Demands for the Components Within Modern Smartphones.”
September 2017 173
 Internet Of Things
Fifthly, it would be advisable for SMEs to prepare claim
charts to demonstrate the essentiality of the patent.
C. Effective patent protection
For SMEs contributing to standards development it
is very important to know they can rely on an effective
patent system that adequately protects their contribu-
tions and allows them to earn a fair return on their in-
vestment in R&D.33 The operation of the patent system
in the standards-setting context has been a subject of
controversy in the past decade. Several commentators
allege that ownership of SEPs and the threat of injunct-
ive relief against implementers of standards results in
patent hold-up, raising the cost of commercialisation
of technology and increasing prices for consumers.34
It is not the subject of the present article to assess in
detail the merits and shortcomings of the patent hold-
up theory.35 However, to the extent it influences public
policy in the EU and abroad it is useful to stress the
value of an effective patent system to contributors to
standards and in particular to SMEs.
A weakening of patent protection and in particular a
prohibitive rule on injunctions for SEPs does not only
diminish the return on investment on R&D for con-
tributors by unfavourably skewing bargaining power,36
it also diminishes incentives to share one’s own tech-
nologies and contribute to standards in the first place.
An effective patent system is all the more important to
SMEs contributing to standards. For SMEs and start-
ups in particular, strong IPR protection is crucial for
attracting funding by venture capitalists and banks.37
Often IPRs are the most valuable business asset SMEs
hold.38 Moreover, patent monetisation is a valuable
source of income for SMEs, with which they can fund
33. “Making enforcement rules fit for innovative SMEs.” IP
Europe, http://www.iptalks.eu.
34. Le Gall and Prager, “Participation of SMEs,” 8.
35. For a critical view on the patent hold-up theory see
among many: Gregory Sidak, “Holdup, Royalty Stacking, and
the Presumption of Injunctive Relief for Patent Infringement: A
Reply to Lemley and Shapiro, Minn. L. Rev. 92 (2007): 714. See
also Damien Geradin, and Miguel Rato, “Can Standard-setting
Lead to Exploitative Abuse? A Dissonant View on Patent Hold-
up, Royalty Stacking and the Meaning of FRAND,” European
Competition Journal 3.1 (2007): 101-161; Einer Elhauge, “Do
Patent Holdup and Royalty Stacking Lead to Systematically
Excessive Royalties?,” Journal of Competition Law and
Economics 4.3, 2008, 535-570.
36. Zuniga and Guellec, “Who Licenses Out,” 8.
37. Sabattini and Mosca, “Standard Development,” 50. Zuniga
and Guellec, “Who Licenses Out,” 22. ECORYS and Eindhoven
University of Technology, “Patents and Standards, “65.
38. European Commission, “Thinking Big for SMEs,” 16.
39. Small Business Standards, “SBS Answers to Public
Consultation on Patents and Standards,” (2015). http://www.
sbs-sme.eu/publication/sbs-answers-public-consultation-patents-
and-standards
174 les Nouvelles
their R&D and standardisation activities.39
In the EU a strong commitment to patent protection
is enshrined in EU law, in Member States’ national pat-
ent laws and it is also part of the Union’s international
obligations under the WTO TRIPS Agreement. The
Enforcement Directive establishes the framework for
IP protection in the EU, and in particular IPR holders’
rights to preliminary and injunctive relief.40, 41 The right
to injunctive relief is also established under articles 28
and 44 of the TRIPS Agreement to which the EU and
its members are parties. Patent protection in the EU is
further streamlined and enhanced by the formation of
a single market for IPRs and in particular by the estab-
lishment of the unitary patent and the unified patent
court system.42 The unitary patent may substantially
improve the accessibility and affordability of the patent
system in the EU to SMEs;43 it is estimated that today
the cost of patent protection for the whole duration of
the right in all EU Member States is EUR 200,000.44
Moreover, the unified patent court has the potential to
provide for more legal certainty, in allowing for a more
harmonised patent protection throughout the EU.45
To the extent injunctive relief for SEPs confers mar-
ket power to patent holders, enforcement of SEPs is
also relevant from an EU competition law perspec-
tive and Article 102 TFEU on abuse of a dominant
position.46 In its recent landmark ruling in Huawei v
ZTE, the Court of Justice of the EU (CJEU) provided
a balanced, market-oriented framework for licensing
negotiations for SEPs.47 Specifically, the CJEU set out
40. Ibid.
41. Directive 2004/48/EC of the European Parliament and of
the Council of 29 April 2004 on the enforcement of intellectual
property rights [2004] OJ L 157/45, Article 11.
42. See all relevant documents of the Unified Patent
Court and the Unitary Patent at About the Unified Patent
Court, https://www.unified-patent-court.org/about. See also
Communication from the European Commission, “A Single
Market for Intellectual Property Rights Boosting Creativity and
Innovation to Provide Economic Growth, High Quality Jobs and
First Class Products and Services in Europe,” COM (2011) 287
final (2011): 7.
43. Small Business Standards, “SBS Answers.”
44. See also Communication from the European Commission,
“A Single Market for IPRs.”
45. Ibid, 8.
46. It should be noted that ownership of SEPs does not
automatically infer a dominant position. See Case C170/13,
Huawei v. ZTE [2014], Opinion of the AG Wathelet, paras 57-
58; for a detailed discussion of the issue of dominance and
SEPs ownership see Unwired Planet Ltd v. Huawei Technologies
[2017] EWHC 711 (Pat), paras 630-670.
47. Case C-170/13 Huawei v. ZTE [2015] . For a summary of
the court cases post Huawei interpreting the CJEU ruling see
http://www.4ipcouncil.com/search/case-law.

the conditions under which pursuit of injunctive relief
from an SEP holder against a potential licensee willing
to conclude a licence on FRAND terms might amount
to an abuse of dominant position. Under exceptional
circumstances, the exercise of an SEP holder’s other-
wise legitimate rights to injunctive relief might breach
Article 102 TFEU if the patent holder has failed to
alert the alleged infringer of his infringement of spe-
cific SEPs and to submit a detailed, written licence
offer on FRAND terms.48
On the other side, the prospective licensee must es-
tablish his willingness by replying to the offer in due
time, without delaying tactics, and if the initial offer is
considered non-FRAND to submit a FRAND counterof-
fer, whilst providing appropriate security.49 The CJEU
Huawei ruling provides clarity to parties to SEP licens-
ing negotiations, and establishes a fair and predictable
framework within which the patent holder is immune
from competition law liability and the implementer is
safe from injunctions. The Huawei ruling also provides
strong incentives for both parties to engage in good-
faith licensing negotiations.50
IV. SMEs as implementers of standards
A. Costs
The majority of SMEs with an active interest in stand-
ardisation are users of standards: small firms that build
innovative products on top of standards. However, they
too face significant constraints in the effective imple-
mentation of standards. A first hurdle is substantial
information costs to trace and implement a relevant
standard.51 Many SMEs find it particularly challenging
to navigate through the abundance of standards pro-
duced by SDOs.
To the extent standards cover complex technologi-
cal platforms including a multitude of essential IPRs,
the transaction costs of licensing might be substan-
tial. Moreover, SMEs might find it difficult to assess
whether a licensing offer presented to them by an SEP
holder is compliant with FRAND. SEP licensing negoti-
ations are typically confidential and third parties have
no access to agreed terms by competitors in similar
situations.52 An SME with no experience in licensing
negotiations might have a hard time in evaluating an
offer and coming back with a FRAND counteroffer.
48. Case C-170/13 Huawei v. ZTE [2015], paras 61 and 63.
49. For example by providing bank guarantee or depositing
an appropriate amount in escrow. Ibid., paras 65-66.
50. Haris Tsilikas, “Huawei v. ZTE in Context - EU
Competition Policy and Collaborative Standardisation in
Wireless Telecommunications,” IIC 48(2): 151-178 (2017).
51. De Vries et al, SMEs Access, 12.
52. AVANCI, “Accelerating IoT Connectivity,” White Paper
(2017) 5, http://avanci.com/wp-content/uploads/2017/01/2016-
Avanci-WP-Final-_-Jan-24.pdf
Internet Of Things
It should be noted that the issue of IPR licensing
might not be as troubling as it appears at first sight.53
IPRs enforcement entails substantial transaction costs.
Monitoring costs for infringement by SMEs are par-
ticularly high. Moreover, even large firms’ licensing
department capacities are constrained and they typi-
cally target large competitors first.54 Many SMEs stay
below the SEP holders’ radar and make unlicensed use
of essential IPRs.55 For many SEP holders it might also
make more business sense to allow SMEs and start-ups
some breathing space in the early stages of their devel-
opment and allow them first to succeed and establish a
more durable market presence and later reap licensing
rewards. In the end these high investments in stand-
ardisation belong to a long-term project where SEP
holders benefit from their future licensees’ success in
implementing the standardised technology.
B. Recommendations
Firstly, SMEs could benefit from the expert advice
provided for by their industry associations, but they
would benefit even more from access to a pool of ex-
perts. Professionals with experience in SEP licensing
agreements might prove particularly helpful for both
determining essentiality in an SEP portfolio and for as-
sessing a technology’s actual merit and contribution to
a standard, and hence the compliance of a licensing
offer with FRAND.
Secondly, SMEs should reject any FRAND determ-
ination based exclusively on SDO databases of patents
declared as potentially essential. Since SDOs publish
voluntary declarations of essential IPRs (without any
assessment of the actual essentiality of declared IPRs)56
this may create confusion to SMEs. SMEs need to be
aware that a database is not a list of all essential pat-
ents for a standard but rather a commitment that any
of those patents, if they become essential, will be ac-
cessible on FRAND terms.57
Thirdly, SME implementers should also have an un-
derstanding of what is an appropriate reasonable rate
to which an SEP holder is entitled. For this purpose,
the same recommendations as mentioned above for
the SME contributors apply.
Fourthly, SME implementers should identify the
most important patent holders in the relevant stand-
ardisation field and, in parallel, negotiate a FRAND li-
53. An empirical survey of SME users of standards reports
that the costs of IPRs licensing is a deterring factor for only
the 25 percent of correspondents. See Le Gall and Prager,
“Participation of SMEs,” 9.
54. ECORYS and Eindhoven University of Technology,
“Patents and Standards,” 66-67.
55. Ibid.
56. Ibid, 114.
57. Usually FRAND commitments are made provided there is
reciprocity from the side of the licensee.
September 2017 175
 Internet Of Things
cense. This would allow them to recognise reasonable
negotiation practices and FRAND terms. To identify
the key players in a standard, SMEs can consult reports
from agencies such as Signals Research Group or ABI
Research, or alternatively extract the information from
the 3GPP website, showing which companies have
made the most approved contributions to a standard.
Although not offering one-to-one accuracy in identifi-
cation of SEPs, approved contributions provide an in-
formative picture of the most important contributors
and thus the strongest patent portfolios.
Fifthly, SMEs should request claim charts to have a
better understanding of the essentiality of the techno-
logy which is to be negotiated.
Sixthly, the SME implementer should understand its
rights and obligations established in the CJEU ruling
Huawei v ZTE mentioned above.
V. SMEs in the Internet of Things
Although a Digital Single Market consolidating al-
most 30 national markets into one is expected to
contribute EURO 415 billion per year to our economy
and create hundreds of thousands of new jobs in Eu-
rope, concerns have been raised on whether existing
licensing models in standardisation are still efficient or
even relevant in the Internet of Things (IoT).58 Wire-
less connectivity will enable billions of products, smart
meters, connected cars, remote surgery equipment,
etc. to build the IoT. These products incorporating ICT
standards will have one thing in common: their pri-
mary function will not be connectivity. Nevertheless,
they will all benefit from wireless connectivity devel-
oped in standards.
As mentioned above, in determining FRAND the
SEP holder must ensure that FRAND terms reflect
the value of its standardised technology to the end
product. However, this could be highly challenging
when product use and capability differ. For instance,
fully autonomous vehicles require consistent and
high-bandwidth coverage, where data transfers occur
in milliseconds (i.e. low latency). The quality of service
in terms of speed and volume needs to be very high.
However, other vertical uses and devices like smart
meters are far less demanding.
Taking into account the different uses of connectivity
in IoT there was a need to initiate a new licensing plat-
form as the first marketplace for licensing patented cel-
lular technology to the Internet of Things. An independ-
ent platform, AVANCI, provides a forum for SEP holders
to share their innovations, and for IoT companies one-
stop-shop access to those connectivity-enabling technol-
ogies for a flat per-unit rate consistent with FRAND.59
58. On the role of standardisation for the success of the
Digital Single Market, see Claudia Tapia, “Securing a Competitive
Future in Europe,” The Patent Lawyer, (January/February 2016).
59. See more about AVANCI at http://avanci.com.
176 les Nouvelles
The goal is to provide access to the vast majority of the
standard-essential cellular patents and to enable compa-
nies to innovate faster. Licensors and licensees benefit
from reduced licensing costs allowing discounts on roy-
alty fees. Some of the considerations in determining the
value of a licence for a particular application include the
need for wide-area connectivity and mobility, the fre-
quency of use, and the required bandwidth.
Since the platform has attracted strong portfolios60
SME implementers could also use the AVANCI rate as
a benchmark in their FRAND determination when ap-
proached by unreasonable licensors.61 Moreover, mak-
ing a counteroffer using as AVANCI rates as a benchmark
would protect SMEs from the threat of an injunction.
For SME licensors using AVANCI could also be a great
alternative to bilateral and costly licensing negotiations.
VI. Conclusion
Standardisation would benefit greatly from increased
and more meaningful SME participation and contribu-
tion. SMEs can offer disruptive and targeted innova-
tions that bring substantial value to consumers. SMEs
on their behalf would also benefit from increased
involvement in standards development. Standards
provide the opportunity to SMEs to compete with lar-
ger firms in an open innovation market emphasising the
merits and qualities of proposed technologies. SMEs
also internalise significant benefits from implement-
ing standards in their products, including economies
of scale, better access to large international markets,
reduction in compliance costs and increased consumer
demand for standard compliant products.
In order to obtain the fruits of its participation
in standardisation (as contributors and/or as im-
plementers), SMEs need to develop an efficient IP
strategy. Recognising the multiple challenges that
SMEs face on both sides of the negotiating table, in
the present article we have provided some guidance
for SMEs to engage in licensing negotiation of standard
essential patents (as licensor and/or licensees) in an
efficient manner.
For the Internet of Things where billions of devices
will be interconnected, new licensing models, such as
AVANCI, will be critical. Only then will we achieve a suc-
cessful networked society, where everyone, everything
and everywhere will be connected in real time. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009039
60. Currently the companies in the AVANCI marketplace are
Sharp, Qualcomm, Ericsson, InterDigital, Panoptis, KPN, Sony,
Unwired Planet, and ZTE.
61. The cumulative rate can only be used as a benchmark
since royalty rates resulting from bilateral negotiations of
AVANCI patents will likely be higher. The benchmark applies
then to products where the value of the standardised technology
is similar.

SMEs In France
By Emmanuelle Fortune
T
o encourage the protection of IP (industrial prop-
erty) rights in small and medium enterprises
(SMEs), an array of public policies has been imple-
mented in France during the last few years. The French
Patent and Trademark Office (INPI)1 has developed
its role of supporting sustained growth among SMEs
through IP. These public policies consist of subsidised
coaching, support, financial aids and tax incentives.
The first type of public policy to encourage the pro-
tection of industrial property rights by SMEs comprises
coaching sessions proposed by the French Patent and
Trademark Office. The first of these, called the “IP
Booster,” is a free pre-diagnosis of the SME’s industrial
property2 which provides a list of recommendations
in response to the company’s specific needs based on
the risks, costs and stakeholders associated with the
enterprise’s industrial property. The “IP Booster” de-
termines possible courses of action and identifies the
company’s in-house skills for the implementation of
an industrial property policy. Nicolas MILLE, head of
GASTON MILLE, explains that he “used the IP Booster
report as a guideline for implementing recommenda-
tions on how to combat patent infringement, on know-
how and on ownership of inventions.”3
After the pre-diagnosis has been carried out, SMEs
looking to implement an industrial property policy can
ask to enroll in the “IP Pass” coaching sessions. They
are given access of up to three sessions proposed by the
INPI at minimal cost thanks to 50 percent funding by
the INPI.4 The “IP Pass” consists of a wide spectrum of
services ranging from patent monitoring and document-
ary research, joint industrial property contracts and con-
tractual support to strategies, protection and pre-litiga-
tion export analyses relating to patents and trademarks.
To take their industrial property strategy a step fur-
ther, the head of an SME can ask the INPI for a third
type of coaching session called the “IP Master Class.”5
This consists in providing industrial property support
for six months including six days of training, the help
1. The French Patent and Trademark Office, https://www.inpi.
fr/fr.
2. For more information: https://www.inpi.fr/fr/booster-pi.
3. See https://www.inpi.fr/fr/valoriser-vos-actifs/le-mag/gaston-
mille-un-chausseur-sachant-innover.
4. The three sessions can cost up to 10,000 euro, half of
which is funded by the INPI. See https://www.inpi.fr/fr/pass-pi.
5. See https://www.inpi.fr/fr/services-et-prestations/master-
class-pi.
SMEs In France
of an INPI tutor, an IP specialist from a major French
company and experts including patent attorneys, law-
yers and corporate IP spe-
cialists. Coaching compris- ■ Emmanuelle Fortune PhD,
es collective workshops, a
Institut National de la Pro-
personalised diagnosis and
four individual coaching priété Industrielle (INPI) and
sessions designed to help Observatoire de la Propriété
the SME set up an indus- Intellectuelle (OPI),
trial property strategy. To Lille, France
quote Jacques Wolff, head
of SEWOZY, “After the E-mail: efortune@inpi.fr
Master Class, we set up
an in-house patent monitoring system and we currently
manage all French trademarks.”
After the coaching described above, a second type
of public policy supports SMEs in their industrial
property actions. If the “IP Master Class” detects an
international development need, assistance abroad
may be proposed by Business France and funded by
the INPI.6 Since April 2017, SMEs receiving export
assistance from Business France have been given eas-
ier access to the dedicated business advisory servic-
es set up in forty-two regional customs departments
across France. The customs department thus offers
SMEs assisted by Business France personalised help
and advice free of charge and simplified and appropri-
ate customs procedures.7 To provide better support to
SMEs looking to export, INPI experts are present in
10 French embassies abroad.8
The third type of public policy designed to encourage
the protection of industrial property in SMEs concerns
financial aid. The INPI offers subsidies to SMEs when
filing their first patent, via Bpifrance, the public invest-
ment bank,9 which can cover up to 80 percent of patent
attorney fees. The grant is paid directly to the patent
attorney. The INPI also offers SMEs a 50 percent re-
duction in its main patent procedure and renewal fees,
6. The purpose of the Business France agency is to
promote the international development and success of French
companies abroad and foreign companies in France: http://www.
businessfrance.fr.
7. See http://www.douane.gouv.fr/articles/a13278-signature-
d-un-accord-inedit-avec-business-france-pour-l-accompagnement-
des-entreprises.
8. INPI experts are present at the French embassies in China,
Brazil, Morocco, the United Arab Emirates, the United States,
Korea, Singapore, Turkey, Russia, and India.
9. The public investment bank: http://www.bpifrance.fr.
September 2017 177
 SMEs In France
in order to encourage innovation in SMEs.10
In addition to financial aid for initial patent
applications and follow-ups, Bpifrance’s “in-
novation loan” is an unsecured loan available
to SMEs who can provide proof of a patent
application filed, significant R&D expend-
iture, recent RDI (research, development
and innovation) aid or a research tax credit.
The aim is to finance the industrial property
protection expenditure in France and abroad
needed to launch a new product or service on
the market.11 As Christophe Camperi-Genest-
et, one of the founders of Sunwaterlife, ex-
plains, Bpifrance’s innovation loan “meant we
could develop the cases [portable, self-stand-
ing cases that convert contaminated water
into drinking water] and file our two patent
applications.”12
The fourth type of public policy relates to
industrial property taxation.13 Like any other
company, an SME that invests in R&D can
obtain a tax credit on its corporate tax. R&D
expenditure includes patent application, re-
newal and defence fees, in addition to depre-
ciation charges for patents acquired to car-
ry out research. In the case of an SME that
does not have a taxable income, the research
tax credit is refunded the year following the
actual expenditure and not after the three-
year period that applies to other companies.
Thanks to Bpifrance, SMEs that are more
than three years old and have benefited at tion of industrial property by SMEs have enabled the
least once from a research tax credit can have the tax percentage of SMEs in corporate patent applications
credit pre-financed starting in the year in which the to be maintained at the same level since 2011. The
industrial property expenditure was actually incurred. same is true with regard to extending patents to other
This measure is aimed at boosting the cash flow of territories such as those of the European Patent Office
SMEs during the year in which the expenditure is dis- and the Patent Cooperation Treaty. And, since 2011,
bursed without waiting until the research tax credit is the average number of patent applications per SME
declared and refunded the following year. has been a steady 1.4.
In France, despite the latent economic instability In 2015, SMEs, which represent the majority of
that has existed since the last financial crisis, these dif- private sector companies incorporated in France (67
ferent public policies designed to support the protec- percent), filed 2,592 patent applications published
by the INPI. The percentage of SMEs having filed
patent applications remains stable at 22 percent of
10. See https://www.inpi.fr/fr/services-et-prestations/aides- total applications made by French legal entities. In
aux-pme-et-aux-centres-de-recherche. the same year, SMEs are specialised in medical tech-
11. The unsecured loan is available to SMEs that are more nology, handling, furniture and games, and civil engi-
than three years old and are developing or marketing a new neering.14 ■
product, process or service for which they can prove that they
have filed a patent application. The loan can be anywhere
between 50,000 euro and 5,000,000 euro. See http://www. Available at Social Science Research Network (SSRN):
bpifrance.fr/Toutes-nos-solutions/Prets/Prets-sans-garantie/Pret- https://ssrn.com/abstract=3009269
Innovation-FEI.
12. See http://www.bpifrance.fr/A-la-une/Actualites/ 14. For more information, see Emmanuelle Fortune, Mickaël
Environnement-de-l-eau-potable-partout-grace-aux-valises- Chion, “Les PME, ETI et Grandes Entreprises Déposantes
Sunwaterlife-31601. de Brevet”, ANALYSES INPI, 2016-5, (November 2016).
13. See https://www.inpi.fr/sites/default/files/fiscalite_de_la_ https://www.inpi.fr/sites/default/files/inpianalyses_pme_
propriete_industrielle.pdf. eti2015_161122_0.pdf.

178 les Nouvelles

 SMEs And The Patent Challenge

SMEs And The Patent Challenge

By Tobias Wuttke

After the Pre-diagnosis Has Been Carried Out ing to protect their R&D results by patents for the first

I
n Germany, SMEs have an increasing patent aware-
ness. This is due to the fact that Germany is the
most important venue for patent litigation in the
EU. Many landmark patent litigation cases attract the
attention of the media so that the patent world is no
longer a hidden world for most SMEs. The main driver
for the increasing patent awareness is risk management,
whereas securing exclusivity for generated innovation
comes second.
II. “WIPANO”—A New Governmental Policy
Since January 1, 2016
The German Ministry for Economy and Technology
paved the way for a new governmental patent policy for
SMEs. This policy was launched under the brand “WIPA-
NO” (=Knowledge and Technology Transfer through
Patents and Standards) and became effective on January
1, 2016. The underlying rationale of WIPANO is to ena-
ble SMEs to gain a strategic understanding of the patent
system and to increase patent awareness.
The WIPANO policy is directed at SMEs, i.e. any
company having an establishment or factory in Ger-
many with a maximum of 250 employees and a max-
imum yearly turnover of EUR 50 million or a yearly
balance sheet of no more than EUR 43 million in total.
These ceilings apply to the figures for individual firms
only. A firm that is part of larger group may need to
include staff headcount/turnover/balance sheet data
of said group too. The definition of SME as used by
WIPANO corresponds to the official EU definition (cf.
Recommendation 2003/361/EC).
WIPANO only supports “first-timers.” This means
that only such SMEs are eligible for promotion intend-
time ever. Eligibility under the program is, however,
also given if the last pat-
ent filing dates back more ■ Tobias Wuttke, PhD,
than five years. Under the
Meissner Bolte
WIPANO program the en-
tire process of a patent Partnerschaft mbB,
filing is sponsored, that Certified IP Lawyer, Partner,
is from the discussion of Munich, Germany
the idea until its moneti- E-mail: wu@mb.de
zation provided, however,
that third party provid-
ers are retained (in particular patent attorney, attor-
ney-at-law). Each milestone during such process can be
sponsored up to the maximum levels in Table 1.
It is very important to note that the WIPANO pro-
gram is not available with retroactive effect. Hence,
the request for sponsoring (and its subsequent approv-
al) must precede any patent filing. The filing of the
request for sponsoring can be made online with the
average duration for the approval process being four
weeks.
III. The situation at the German Patent and
Trademark Office and the German Patent Act
The German Patent and Trademark Office (“GPTO”)
does not have any specific provisions regarding SMEs.
However, the GPTO—with its three service locations
Munich, Berlin and Jena—together with the 22 na-
tional “patent information centers” (Patentinforma-
tionszentren) offers support directed to the needs and
requirements of SMEs. In this respect, the cost-free
“first advice for inventors” (Erfindererstberatung) is
noteworthy. This institution is organized by the Cham-
ber of the German Patent Attorneys (Patentanwalt-

Table 1. Patent Milestone Sponsorship Levels

Package 1 Rough review of the invention EUR 375

Package 2 Detailed review of the invention: EUR 1.200
Part A: Comprehensive review of the invention over the prior art
Part B: Cost-benefit-analysis (inter alia review of the potential for com-
mercialization)
Package 3 Strategy - advice and coordination of patent filing (first filing and one EUR 2.000
further filing)
Package 4 Patent filing (official fees + fees for patent attorneys) EUR 10.000
Package 5 Activities concerning monetization EUR 3.000

September 2017 179

 SMEs and the Patent Challenge
skammer) in cooperation with the national patent in-
formation centers on a regular–at least monthly–basis.
Under the framework of the first advice for inventors,
patent attorneys educate inventors free of charge on
general principles of the patent landscape.
The German Patent Act contains the following provi-
sions which are of interest to SMEs:
In the first place, the principle of “procedural aid”
(sections 129 et seq. German Patent Act in connection
with sections 114 et seq. German Procedural Code)
is to be mentioned. If the relevant statutory require-
ments of this principle are met, the official patent of-
fice fees and the fees of the patent attorney in charge
are paid by the state treasury. The principle of proce-
dural aid is available for examination, opposition, lim-
itation and revocation proceedings, as well as annuity
payments. An SME is eligible for procedural aid if (i)
it cannot afford the costs due to its financial situation
and (ii) if there is a sufficient probability for success. In
practise, however, in particular the first requirement
proves to be a very high hurdle which is difficult to
overcome for SMEs.
In addition, Section 23 German Patent Act offers a
fee reduction for annual fees of 50 percent if the ap-
plicant/patentee files a corresponding written “License
of Rights-declaration” (Lizenzbereitschaftserklärung)
with the GPTO. This License of Rights-declaration en-
tails that the applicant/patentee must license its pat-
ent application/granted patent against payment of a
reasonable royalty to anyone who is interested in using
the technology for which protection is sought for. Of
course, the available discount of 50 percent comes at
a high price for SMEs, since they lose the exclusivity
of their innovation which is oftentimes the key driver
for their commercial success. It is thus not surprising
that SMEs do not often make use of such instrument
(which in practice is mostly used by industries where
the patent litigation activity is still conceived as low).
Last, but not least, it is important to mention the
“German Utility Model” system in the context of SMEs.
The German utility model is available as a (cheap) al-
ternative to the patent system. A German utility model
is an unexamined exclusivity right for technical teach-
ings having the same protection requirements as pat-
ents. However, it is not available for method claims
and has a limited term of protection of 10 years. The
official fees for filing a German utility model are very
affordable, namely EUR 40 for traditional and EUR 30
for e-filing. From an enforcement perspective, the Ger-
man utility model is a sharp weapon affording the same
remedies to its owner as a German patent. In prac-
tice, it is oftentimes recommendable to combine both
systems, since it is possible to protect one invention
with one patent and one (or even more) utility models.
Thus, there is no prohibition rule of double protection
180 les Nouvelles
for patents and utility models.
IV. How Do SMEs Use IP in Germany?
The way the patent system is used by SMEs in Ger-
many is changing. In former times, SMEs used the pat-
ent system mostly to ensure their freedom to operate.
Nowadays, SMEs are also interested in conveying a
twofold message to the market with their patent filing:
firstly, such filing shall signal to the market that this
company is able to break new ground and secondly, that
such new ground is exclusively protected (deterrent
effect). Ultimately, many SMEs are financed by inves-
tors. Insofar, building investor value is a further aim of
the patent filing. In this respect, the above-mentioned
German Utility Model system plays an important role.
In light of the low filing and annuity fees it is possible
to build up a large portfolio at a very reasonable price.
V. SMEs and Patent Enforcement
SMEs are still rarely seen in court proceedings re-
lating to patent matters. This is due to the fact that
such proceedings are still too expensive for SMEs.
Under the German bifurcated system, proceedings for
infringement on the one hand and invalidity on the
other hand are separated. This entails that for most
patent disputes two proceedings are conducted in par-
allel, also meaning a duplication of costs. Theoretically,
the German Patent Act offers some relief in section
144. This rule relates to the amount of the “value in
dispute” (Streitwert). Under German procedural law,
the value in dispute is used to determine the statutory
court fees and the statutory attorney fees. Pursuant
to section 144 German Patent Act, a party which due
to its economic situation is not able to pay the court
fees and its attorney fees based on the actual value in
dispute may request that the value in dispute be low-
ered for this party (not for the adverse party.) Under
the governing case law it is, however, very difficult to
obtain such reduction of the value in dispute under
section 144 German Patent Act. Consequently, this
rule has more textbook character and no real practical
scope of application.
VI. Conclusion
Germany supports SMEs in various aspects of their
journey through the patent jungle. However, what is
missing is a provision in the German Patent Act ad-
dressed specifically to the situation and needs of SMEs.
Such provision should provide a fixed discount on all
official fees and a fixed discount for patent enforce-
ment (= guaranteed reduction of the value in dispute)
with a clearly foreseeable cost risk. If such provision
were to be introduced, it would be easy to predict that
the patent awareness of SMEs and their use of the
patent system would dramatically increase. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009272

SMEs In Italy
By Mattia Dalla Costa*
Introduction
T
he fourth Industrial Revolution, currently expe-
rienced by global economy, displays a melting-
pot of a wide range of new technologies com-
bined with one another, impacting on every aspect of
economy, industry and society by progressively blur-
ring the borders of the physical, digital and biological
spheres.
The growth of robotics, of artificial and virtual in-
telligence, of connectivity among objects and of the
latter with humans, are contributing to strengthening
the virtual side of economy, made of its intangible as-
sets. Even trade is tending more and more towards a
trade of intellectual property rights rather than trade
of physical objects.
In such a scenario, protection of intellectual property
is becoming increasingly important: the value of innov-
ation embedded in any product is likely to increase as
compared to the value of the physical object itself. In
other words, protection of intellectual property could
significantly affect economic growth and trade and
shall necessarily go forward as the economy becomes
more and more virtual.
Future growth of the 4.0 economy depends on main-
taining policies that, on one hand allow connectivity
among millions of objects and, on the other, provide for
strong patent protection mechanisms, thus, encouraging
large and risky investments in technology innovation.
Are SMEs, which represent the beating heart of the
Italian economy, ready for all this? Has Italy adopted
any policy aimed at boosting innovation and the relev-
ant protection for SMEs?
After more than four years since the launch of the
Startup Act1, Italian legislation confirms being among
the most internationally advanced programs for in-
novative business support strategies. If we look at the
Startup Manifesto Policy Tracker2 (a manifesto for
entrepreneurship and innovation to power growth in
the European Union), published in March 2016, Italy
is in second place among the 28 EU Member States,
in terms of the take up rate of recommendations made
by the European Commission on the innovative entre-
preneurship issue.
The Annual Report to Parliament on the implemen-
tation of legislation in support of innovative start-ups
*The author would like to thank the contributions and support
of Barbara Sartori, and Matteo Roiz.
SMEs In Italy
and SMEs3 (Edition 2016)
confirms the results of the
■ Mattia dalla Costa,
Startup Manifesto Policy
Tracker: Italian ecosystem has CBA Studio Legale e
grown in terms of number of Tributario,
start-ups recorded (+41 per- Founding Partner,
cent on the previous year),
Padova, Italy
of human resources involved
(+47.5 percent,) of average E-mail: mattia.dallacosta@
value of production (+33 per- cbalex.com
cent) and, finally, of funding
raising (+128 percent, con-
sidering access to credit via the SME Guarantee Fund).
This growth is the outcome of both the inventiveness
and the attention to innovation that have always charac-
terized Italian entrepreneurs, as well as of the progress
made by Italian legislation over the past years: changes
were introduced in order to boost the national system
for business start-ups and, in some cases, to promote
innovative entrepreneurship as a whole.
Adopted measures include, for example: the imple-
menting of Ministerial decrees on tax credits for R&D
investments; the ITA Service Card for innovative SMEs,
the multimedia, bilingual online platform #ItalyFron-
tiers (the aim of which is to promote capital investment
and encourage open innovation projects involving in-
novative Italian businesses); Italia Startup Visa and Ita-
lia Startup Hub (the renewal, under the 2016 Decree
on Immigration Flows, of a preferential procedure for
the granting of visas and the conversion of permits to
stay for self-employed for non-EU citizens wanting to
move to Italy or remain there to start up an innovative
enterprise); the launch of a new simplified online com-
pany incorporation procedure that enables innovative
start-ups to be opened as limited liability companies,
granting significant time and cost reductions; the ex-
tension (until 2016) and the reinforcement of fiscal in-
centives available for investment in innovative start-ups;
finally, the extension of the free, simplified access to
the Guarantee Fund to include innovative SMEs in or-
der to make it easier for them to obtain credit.
The Importance of Intellectual Property in
the Modern Economy
A national policy that has a target of incentivizing
the use of Intellectual Property is a policy that will
have beneficial effects on the entire national (and in-
ternational) economy.
Proof of this are the results of the studies carried
September 2017 181
 SMEs In Italy
out by the European Observatory on Infringements of
Intellectual Property Rights and the European Patent
Office (EPO) on the contribution of intellectual prop-
erty rights (IPR) on the EU economy 4.
The study analyzed the effects of intellectual prop-
erty on the EU in terms of gross domestic production,
occupation, wages and trade. Here are some of the
most interesting data:
• 42 percent of the total economic activity in the EU
(approximately EUR 5.7 trillion) and 38 percent of
occupation (approximately 82 million workplaces)
is attributable to IPR-intensive industries;
• IPR-intensive industries pay significantly higher
wages than other industries, with a wage premium
of 46 percent;
• IPR-intensive industries tend to be more resilient
against the economic crisis;
• IPR-intensive industries account for about 90 per-
cent of EU trade with the rest of the world, genera-
ting a trade surplus for the EU of EUR 96 billion;
• About 40 percent of large companies own IPRs.
The data gathered by this study should raise social
and political awareness as to the importance of stimu-
lating not only large companies, SMEs and start-ups in
general, but also those which use intellectual property.
The Innovation Criteria
An interesting measure that is showing good results
in relation to the dissemination of IPR companies in
Italy is the introduction, thanks to the Startup Act, of
the concept of innovative start-up.
The Startup Act provides facilitating measures (e.g.:
incorporation and following statutory modifications by
means of a standard model with digital signature, cuts
to red tape and fees, flexible corporate management,
extension of terms for covering losses, exemption from
regulations on dummy companies, exemption from the
duty to affix the compliance visa for compensation of
VAT credit) applicable to companies which have, as
well as other requirements, at least one of the follow-
ing requirements:
• At least 15 percent of the company’s expenses can
be attributed to R&D activities;
• At least one-third of the total workforce are PhD
students, the holders of a PhD or researchers; or, al-
ternatively, two-thirds of the total workforce must
hold a Master’s degree;
• The enterprise is the holder, depositary or licensee
of a registered patent (industrial property), or the
owner and author of a registered software.
The Startup Act is still having positive effects on the
start-ups demographic trends. As a matter of fact, during
the first six months of 2016 there has been a growth rate
of 15.5 percent in the number of registered companies.
182 les Nouvelles
The success of the Startup Act brought the Italian
legislator to extend with the Investment Compact5
most of the benefits provided for innovative start-ups
also to innovative SMEs.
By the Investment Compact the Italian Government
recognized that innovative start-ups and innovative
SMEs represent two sequential stages of the same
continuous and coherent growth path. In a context as
the Italian one, dominated by SMEs, it is fundamental
to strengthen this kind of enterprises.
The measures in question apply only to SMEs, as de-
fined by the European Commission Recommendation
361/2003 (companies with less than 250 employees
and with a total turnover that does not exceed €43
million), which have, as well as other requirements, at
least two of the following requirements:
• At least 3 percent of either the company’s expenses
or its turnover (the largest value is considered) can
be attributed to R&D activities;
• At least one-fifth of the total workforce are PhD
students, PhD holders or researchers; alternatively,
one-third of the total workforce must hold a Mas-
ter’s degree;
• The enterprise is the holder, depositary or licensee of
a registered patent (industrial property) or the owner
of a program for original registered computers.
Unfortunately, to this day, the Investment Compact
has not produced the expected results: on one hand,
there is a problem connected to the not well-defined
concept of “innovative SMEs,” differently from what
happened with start-ups; on the other hand, there are
structural shortcomings in the communication of gov-
ernment incentives: these communication issues are
particularly significant if we consider that the policy on
innovative SMEs is a series of self-selecting, non-auto-
matic incentives.
Patent Box
Another important measure related to the IP exploit-
ation is the Patent Box, the optional tax rule applicable
to income derived from the exploitation of intellectual
property rights.
The Patent Box rules were introduced by the 2015
Stability Act 6 and give to businesses, from 2015 on-
wards, the option of tax-exempting up to 50 percent
of the income derived from the commercial exploita-
tion of software protected by copyright, industrial pat-
ents for inventions, utility models and complementary
protection certificates, designs, models, company in-
formation and technical/industrial know-how, provid-
ed that they can be protected as secret information
according to the Italian Code of Industrial Property:
meaning patented intangibles or assets that have been
registered and are awaiting a patent.

Originally, the exploitation of trademarks also al-
lowed entrepreneurs to choose the Patent Box optional
tax rule, but a very recent Decree 7 erased that provi-
sion by excluding trademarks from the Patent Box re-
gime. This exclusion has just been introduced in order
to align the Italian Patent Box to the prescriptions of
the Organization for Economy Co-operation and De-
velopment (OECD).
Said policy has a dual purpose: on one hand, it seeks
to encourage Italian entrepreneurs to develop, protect
and use intellectual property; on the other hand, it in-
tends to make the Italian market more attractive for na-
tional and foreign long-term investment, while protect-
ing the Italian tax base. The incentive encourages the
placement, and preservation in Italy, of intangibles that
are currently held abroad by Italian or foreign compan-
ies and also fosters investments in R&D.
The Patent Box is certainly of great importance for
Italian economy and has relevant merits, but it can be
further improved. During the convention held on the
8th of May 2017 in Milan entitled “Fiscal levers for
business development: the patent box example,” or-
ganized by Indicam, the institute for fighting against
counterfeiting established by Centromarca, it was
highlighted that one aspect to improve is that of the
Patent Box’s appeal to SMEs: there is a need for this
policy, which was thought mainly for large companies,
to be really effective. One solution, proposed by the
Vice-Minister of Finance and Economy Luigi Casero,
guest of the convention, is to “introduce some statis-
tical clusters, a kind of sector studies, an intervention
of analysis and evaluation of the fiscal indicators of a
specific type of company.”
The Unified Patent Court
The last matter that deserves to be mentioned is
that of the Unified Patent Court: Italy has ratified the
United Patent Court Agreement on February 10, 2017.
As it is known, in order to start its operations the
Unified Patent Court needs the ratification also of the
United Kingdom. Moreover, one of UPC’s central di-
visions should be located in London in addition to the
ones in Paris and Munich. After Brexit, this maintain-
ing of the London Court appears inappropriate both
under a juridical and an EU opportunistic point of view.
As provided for by the UPC Convention, a section
of the central division should be in Italy because it is
the fourth EU member state (after France, Germany
and the UK) as to the number of validated European
patents in its territory: the London Court should be
therefore relocated to Milan.
Moreover, Italy is one of the main countries in the
EU applying for not only European patents but also
trademarks and designs (and so contributes substantial
fees) yet it does not host any European IP institutions.
SMEs In Italy
An Italian section of the UPC would certainly bring
a higher awareness, also of smaller enterprises, in rela-
tion to the importance of IP protection.
Conclusion
A disruptive and unprecedented transformation is
taking place involving industry, economy and society,
with its main driver being the relentless ascent of its
intangible component.
What we have to do, as a society, is follow this trans-
formation by changing our way of thinking and work-
ing, abandoning the old paradigms of the analogic era.
Policy measures as the Startup Act, the Investment
Compact and the Patent Box are surely important ini-
tial steps that are bringing certain positive effects, but
they are not enough and they have not yet achieved
the maximum results.
As pointed out by the #StartupSurvey, the first
national statistical survey of innovative start-ups,
launched by the Italian National Institute of Statistics
and the Ministry of Economic Development (the data
were gathered by a mass mailing to all the innovative
start-ups listed in the special section on December 31,
2015), the majority of Italian start-ups and SMEs (52.3
percent) have not adopted any formal mechanism, as
the ownership of an industrial patent, to protect their
innovation. Only 16.1 percent of the respondents
owned a patent and only 11.8 percent owned a regis-
tered software.
Among the reasons that bring start-ups to not adopt
protection mechanisms, the majority of the entrepre-
neurs (48.4 percent) claimed to be convinced that the
innovation of their enterprise could not be taken away
by third parties. On the other hand, a considerable
number (25.5 percent) said that they were not aware
of the necessary strategies.
The data gathered by the survey confirm that there
is a communication and information issue, as noted in
the paragraph above, to be solved.
An interesting initiative relating to this problem is
the new questionnaire realized by the Head Office
for the fight against counterfeiting of the Ministry of
Economic Development. This new and free service has
been conceived, in particular, for start-ups and SMEs,
allowing them to carry out an online self-assessment in
relation to intellectual property.
The aim of the questionnaire is to make the
enterprises aware of their intellectual property
range and to direct them towards the adoption of ap-
propriate strategies for the valorization of their intan-
gible assets. ■
Available at Social Science Research Network
(SSRN):https://ssrn.com/abstract=3009273
September 2017 183
 IP Manager For SMEs?
IP Manager For SMEs? An Italian Contribution
By Ercole Bonini
A
lthough SME companies do not lack the will to
innovate their products, they seem to have no
awareness of the importance of exploiting their
own innovations, first by setting up a patent portfo-
lio and then by the implementation of in-licensing or
out-licensing strategies.
The result of this lack of protection is that some
companies, without realizing it, give away their innov-
ations to their competitors. This is particularly true in
the design field. Italian design is appreciated all over
the world, both in the East and West.
Unfortunately, it often happens that after the first
supplies arrive abroad, a copy made by a local company
arrives on the market. Normally, these counterfeits are
offered at prices reduced by up to 30 percent or 40
percent and you can’t claim their property without an
adequate protection strategy. Entrepreneurs and man-
agers must be aware that it is important for them not
only to protect innovations, but also their exploitation,
which inevitably goes through the creation of IP assets.
Creating and growing a good portfolio of patents,
and implementing licensing, provides companies with
the opportunity to acquire and manage the finance re-
sources necessary to grow their business. This will also
allow them to gather the necessary capital to invest in
qualified people and adequate manufacturing facilities.
Unfortunately, most Italian SMEs know very little
about patents and even less about licensing. So how
can we activate this virtuous circle?
I believe that the direction we have begun to take as
Executive Committee of LES Italy is the right one.
We delivered very successful training courses for IP
Managers. The courses were held in various parts of
Italy such as Milan, Turin, Florence, and Rome.
Before starting the course we gathered some in-
dustry decision makers in the trade associations, ex-
plaining to them the need to give IP the proper atten-
tion. Let’s keep in mind that these small and medi-
um-sized companies export to about 30/50 countries
around the world, especially outside Europe. Then,
we asked every decision maker to identify, within the
company, the person to be trained on the various in-
dustrial property assets, such as patents, trademarks
and design. In this way, the company management can
understand that IP assets are not just costs but rep-
resent an investment in the future of the company. In
fact, often, IP assets go up in value over time and cre-
184 les Nouvelles
ate capital entry opportunities stimulating the growth
of the company.
Meanwhile, what are the main features of an IP
Manager or Innovation Manager?
Usually, an SME has between 20 and 50 employees
who are always very busy.
An IP Manager certainly cannot be a person com-
pletely dedicated to this new task, both for the costs
that this would imply, and because this person could
not devote full-time to this activity.
In my opinion, an IP Manager should be a person
already working in the company with specific tasks,
possibly in the commercial sector or even in marketing
or technical departments.
This person should be trained in everything con-
cerning Intellectual Property. From our tests, we real-
ized that in order to understand what patents, brands
and designs are all about, a two-day course can suffice.
These first concepts can also help the IP Manager to
understand when an appropriate protection strategy is
recommended for a new product and to talk about it
with the company’s management and call on their ded-
icated company expert/dedicated expert consultant to
handle the case. So, the safer way to face the market
for a company is to understand if and how to activate a
protection package for a new product.
What personal characteristics should an IP Manager
have?
I think the first and most important characteristic is
curiosity. If an IP Manager is not curious he will never
be able to think forward enough into the future. In oth-
er words, one of the essential tasks of an IP Manager
is to constantly look for what’s new in the competition
and he cannot do it simply through the participation in
the Trade Fairs. He has to constantly consult the pat-
ents databases. Through this information he can see
what is going to enter the market, he can look at the
technical designs and then see the solutions adopted
by his competitors; he can see what can and cannot be
done. Above all, an IP Manager can alert the compa-
ny’s management of where the competition is going,
so to prevent technical people from designing obsolete
and useless things or, worse, things in conflict with
the rights of other companies. In this way, they will
be able to take advantage of competitors’ experience
an research.
The second characteristic required of an IP Manager

is to have good knowledge of the English language. The
patent databases are in English and consultation of da-
tabases must be at least on a weekly basis. Patent DBs
are the main and most valuable source to understand
what’s going on in the world. If an IP Manager notes
that in a certain country there are few patents on the
product that the company wants to promote, maybe it
will be easier for him to find a licensee interested in
taking an exclusive license in that country.
A very useful and detailed database is ESPACENET,
the database developed by the European Patent Office
(EPO). It is free of charge, and there you can find all
the patents of the most industrialized countries, such
as South Korea, Japan, China, etc. whose descriptions
can also be read in English through the automatic
translating machine.
As you can see, patent databases do not show only
who does what. An IP Manager looking for more in-
formation can find out both what can be done and what
cannot be done, towards which markets the company
can target its new products, and who can potentially
be its partner for selling or licensing its new products.
Consulting the patent databases comprises a funda-
mental part of an IP Manager’s role, but this cannot
take more than 2-3 hours per week, the other tasks are
occasional. As a matter of fact, it is not easy to design
a new product or to know who should be consulted to
acquire a license.
Another characteristic of an IP Manager is the ability
to create strong relationships with his colleagues and
associates: an IP Manager is a pro-active person ready
to break new ground, he sees opportunities where
others see troubles. He is always in touch with the
management, but also with the marketing, the tech-
nical office and the commercial offices and, last but not
least, with the IP consultant with whom he develops
the best protection and licensing strategy.
IP Manager For SMEs?
From what we have just said, another quality of an IP
Manager is to be authoritative and thus credible, but
not authoritarian.
So far, we have seen the IP Manager in his out-licens-
ing business, which is perhaps what all companies wish.
There is still another
very important aspect
that an IP Manager can ■ Ercole Bonini,
detect: he can Identify President,
interesting products for Studio Bonini SRL,
the company that are Vicenza, Italy
patented by other com-
E-mail: e.bonini@ipbonini.com
panies and may possibly
be subject to licensing. For
example, a Japanese or an American company that has
a European patent, might wish to find a company in the
same industry with which to forge mutually beneficial
business relationships.
An IP Manager is the most suitable person to identi-
fy innovations patented by competitors that cannot be
produced or sold unless licensed, and a company that
produces and sells under license can increase its sales
volumes and gain respectability on the market. Why
not try it? Nobody can be so powerful as to produce
and sell everywhere without the help of local compa-
nies. Therefore, an IP Manager is a professional who
gradually acquires the right sensitivity to do company
business with IP assets. He will always work closely
with the company’s management and the Patent At-
torney, and, at the same time, he can gain ever greater
confidence in proposing the most convenient solu-
tions. Basically, with an IP Manager, SMEs can only
“risk” to grow in size and finance. So why not try it? ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009285
September 2017 185
 IP Services For SMEs In The UK
Intellectual Property Services For SMEs In The UK
By Christi Mitchell and Robert Looker
T
he UK Government recognises the importance
of innovation and IP protection to the SME busi-
ness community. Government has, for many
years, offered a variety of schemes that aim to support
and enhance the spirit of invention and its protection.
These support systems do fluctuate as governments
and their priorities and budgets change. Although we
find ourselves in a positive climate today, there are
many navigational challenges that must be faced by the
average SME.
In the UK the Department for Business, Innovation
and Skills (BIS) and the Department of Energy and
Climate Change (DECC) have merged to form the De-
partment for Business, Energy and Industrial Strategy
(BEIS). This department today works with 46 agencies
and public bodies and those of relevance to innovation
and IP protection for SMEs includes The Intellectual
Property Office (IPO) and Innovate UK.1
BEIS is also responsible for the strategy develop-
ment, budget, funding and implementation of business
support from start-ups through to high growth com-
panies. Given the current government’s policies, the
structure and level of business support has radically
changed in the last decade.
The Regional Development Agencies and the Busi-
ness Link service in England have been abolished and
disbanded in England.
Under the devolved governments and assemblies
in Scotland and Wales, provision has been made for
the encouragement of IP learning and practice within
the SME business community. The IP Wales model of
business support serves the needs of the regional eco-
nomy by providing Welsh SMEs with the knowledge
and financial means to commercialise their IP assets.
The threefold mission of IP Wales can be viewed on the
WIPO website.2 Scotland offers a number of IP services
for SMEs; these can be viewed at Enterprise Europe
Network3 and Scottish Enterprise.4
In England, business support is principally delivered
through the Local Enterprise Partnerships (LEPs).
1. https://www.gov.uk/government/organisations#department
-for-business-energy-and-industrial- strategy
2. http://www.wipo.int/sme/en/best_practices/ip_wales.htm.
3. http://www.enterprise-europe-scotland.com.
4. https://www.scottish-enterprise.com.
186 les Nouvelles
There are 39 LEPs. They vary widely in size, capability
and level of funding and resources. Levels of support
equally vary considerably with each LEP and their de-
termination of the needs in their individual areas.5
Equally, universities (“encouraged” by the Dowling
Review) seek to be more active in business engage-
ment and support. Often they work in partnership
with the LEPs but can also have access to independ-
ent funding through funding streams from HEFCE6
and EU funds/projects.7,8
Other provision is fragmented through some provi-
sion from local authorities, some remaining independ-
ent enterprise agencies and thereafter the advice and
support comes from the private sector providers.
The Enterprise Europe Network continues to oper-
ate and is managed by Innovate UK—the intention is
to make service provision more joined up.9
The provision of education, training and support on
IP therefore mirrors the rather fragmented structure
and provision above. It is dependent upon the avail-
ability of business advisors and their expertise and
experience in IP. More often than not businesses will
be signposted to the IPO website and the information
and support available through the IPO and its staff and
services or local commercial providers.
Dependent on funding and bids, there can be pro-
grammes and projects that will specifically include IP
advice and support. These vary from one region to
the next.
The IPO Corporate Plan 2017-202010 has an introduc-
tion by Jo Johnson, Minister of State for Universities,
Science, Research and Innovation. The report indicates
continued support for UK business with an emphasis
on education and providing support to enable business
to understand, manage and protect their IP. With refer-
ence to SMEs the report says, “Even a modest increase
5. http://www.lepnetwork.net/the-network-of-leps.
6. http://www.hefce.ac.uk.
7. http://www.raeng.org.uk/policy/dowling-review/the-dowling
-review-of-business-university-research.
8. https://www.gov.uk/government/publications/local-enterprise-
partnerships-map.
9. https://www.gov.uk/government/organisations/innovate-uk.
10. https://www.gov.uk/government/publications/intellectual-
property-office-corporate-plan-2017-2020.
 IP Services For SMEs In The UK
in the registration, protection and exploitation of IP the service on April 6, 2018 (the common commence-
would contribute to UK jobs and growth.” This report ment date). The new service will give UK businesses,
identifies areas that have been addressed in 2016: especially SMEs, a simpler and more cost-effective way
• The IPO launched the updated Lambert Toolkit. to register and manage their rights across multiple ju-
This toolkit and model agreements can help users risdictions.
from research and industry to negotiate IP-creating The UK Patent Box ena-
collaborative projects.11 bles companies to apply a
• Business Outreach uses Facebook Live broadcasts. lower rate of Corporation ■ Christi Mitchell,
The first live broadcast looked at IP’s deadly sins Tax to profits earned after 1
IP Director,
and reached over 8,000 people in seven days. April 2013 from their pat-
ented inventions and equiv- Highbury Ltd.,
• IPO approved funding for 250 IP Audits to be deli-
alent forms of intellectual Hitchin, England
vered through their partners. This includes our
company—Highbury Ltd. property. The lower rate of E-mail: christi@highburyltd.com
Corporation Tax under the
• Continued targeting of businesses with IP messages Patent Box is 10 percent.12
to increase the number who better understand how ■ Ercole Bonini,
to manage IP, reaching over 200,000 in 2016. • In 2013-14, 700 com- Business Development
panies claimed relief
• Provision of education, advice and specific case sup- under the Patent Box Director,
port to nearly 5,500 UK businesses during 2016, with a total value of Highbury Ltd.,
helping them in their export activity. £342.9 million. Hitchin, England
Ensuring IP Rights are Respected and Appro- • Just under one-third of E-mail: robert.looker1@
priately Enforced: the companies (225 or googlemail.com
• Practice sets out agreed targets for reducing the 32.1 percent of total)
prominence of infringing links in search results, as were large and togeth-
well as specifying other areas such as autocomplete er they claimed £327.2 million of relief under the
and domain hopping. Patent Box (95.4 percent of the total).
• As part of the IPO Enforcement Outreach program, Research and Development (R&D) Tax Credits and
it held an IP awareness and education workshop the Patent Box relief are designed to encourage great-
with 20 representatives from the IP Crime Group. er Research and Development spending by companies,
The workshop identified the awareness and educa- greater investment in innovation and exploitation of
tion was being undertaken by members, through intellectual property (IP) in the UK.
messages, guidance and campaigns, as well as areas R&D tax credits reduce a company’s tax bill by an
where members and the IPO can collaborate/sup- amount equal to a percentage of the company’s allow-
port. able R&D expenditure. A company can only claim R&D
Under the plan, the IPO has key targets that rein- tax credits if it is liable for Corporation Tax. There are
force the commitment to innovation and increasing three schemes for claiming relief: The Small or Medi-
knowledge and maximisation of IP and its growth val- um-sized Enterprise (SME) Scheme; The Large Com-
ue. The key targets are: pany Scheme; and Research and Development Expend-
• Promoting UK growth through IP policy iture Credits. An SME can claim a higher rate of relief
• Delivering high quality rights than a large company. Also, an SME which has no tax
bill to reduce is able to claim a cash payment instead.
• Ensuring IP rights are respected and appropriately
R&D tax credits were introduced for SMEs in 2000
enforced
and extended to large companies from 2002.
• Educating and enabling businesses to understand,
R&D Tax Credits; claims may include:
manage and protect their IP
• Subcontractor costs
• The other targets are focused on developing the IPOs
people, skills and efficiency and quality of services • R&D employee salaries
The IPO will have ratified the Geneva Act of the • Testing
Hague Agreement for international registration of de- • Prototype materials
signs by March 31, 2018 and be in a position to launch • Software licenses

11. https://www.gov.uk/guidance/university-and-business- 12. https://www.gov.uk/guidance/corporation-tax-the-

collaboration-agreements-lambert-toolkit patent-box

September 2017 187

 IP Services For SMEs In The UK
R&D here includes:
• Advancing the field of science and technology
• Developing a new product or service
• Improving existing product or service
• Improving efficiency of processes
By the end of 2014-15, 39,360 different companies
had made claims under SME scheme since it began in
2000-01.
The total amount of R&D support claimed grew to
£2.45bn in 2014-15—an increase of £675m (38 per-
cent) from the previous year. During this period the
cost of support for the SME scheme increased by
£325m to just over £1bn.13
13. https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/577859/160914_R_D_publication_
commentary_v1-1.pdf
188 les Nouvelles
There is a clear commitment and desire from Govern-
ment to promote, increase awareness and strengthen
protection of IP and thereby enable UK businesses to
maximise their intellectual capital and assets. There is
a clear recognition of the need and value of innovation
both for resilience, especially in the light of Brexit, and
growth. No system of education, training and support
is perfect, and there is undoubtedly room for develop-
ment, but businesses can gain some initial advice and
guidance and in certain areas funding and provision
permits more specialist support for businesses. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009302
 SMEs And Patents In The U.S.

SMEs And Patents In The United States

By John Cabeca and Ivan Chaperot

Executive Summary Economic Working Paper, The

W
ithin the U.S. economy, many small and Bright Side of Patents, bridges
■ John Cabeca,
medium-sized enterprises (SMEs) are in- the gap between the large cul-
tural assumptions listed above West Coast Region,
tensely aware of the need to protect intel-
lectual property (IP) and to incorporate IP strategy and solid statistical evidence Director,
into their business growth and development plans. that supports these assump- San Jose, CA, USA
Due to the expense, complexities, and laborious tions. The paper suggests: E-mail: john.cabeca@
process, unfortunately, many SMEs do not effec- “Our analysis shows that uspto.gov
tively build out a baseline IP strategy early enough. patent approvals have a
With the rise of global competition and a more inter- substantial and long-lasting ■ Ivan Chaperot,
connected economy, IP rights are critical assets for impact on start-ups: firms
that receive their first pat- Novalto Capital,
SMEs to compete effectively.
ent create more jobs, enjoy Co-Founder and
The good news is there are many resources across
the innovation ecosystem to support SMEs, enhance higher sales growth, inno- Managing Director,
IP awareness and foster innovation. From incubators, vate more, and are more Palo Alto, CA, USA
accelerators, venture capitalists (VCs), and the United likely to go public or be E-mail: ivan@
States Patent and Trademark Office (USPTO), SMEs acquired. These positive
novaltocap.com
have access to mechanisms to effectively participate effects of patent rights ap-
in the IP economy, thereby enabling sustained growth pear to be due to their role
and long-term investment in R&D. in facilitating start-ups’ access to capital which helps
them turn ideas into products and products into
SMEs Need to Be Aware of the Importance of revenues. Our findings further suggest that the fa-
Patents and More Broadly of IP cilitating role of patents is strongest for early-stage
Patents were early recognized as such a significant firms, for start-ups founded by inexperienced entre-
part of the nation’s economic landscape that the power preneurs, and for firms in the IT sector. Thus, we
to grant them was enshrined in the U.S. Constitution. conclude that patent rights help overcome informa-
During the over 225 year history of a patent system tion frictions between start-ups and financiers.”2
in the United States, their importance has steadily
The USPTO, now with its expanded reach through
grown in the world economy. In fact, the Intellectual
its regional offices, works closely with trade organiza-
Property and the U.S. Economy: 2016 Update report
tions, industry groups, and inventor associations to fo-
demonstrates “that IP-intensive industries supported
cus on educating small businesses and start-ups on the
45.5 million jobs and contributed $6.6 trillion in value
potential advantages and pitfalls of pursuing, or choos-
added in 2014, equivalent to 38.2 percent of U.S. GDP.
ing not to pursue, an IP strategy as a significant part of
In addition, the current report reinforces the earlier
their business development and strategy. For instance,
finding that IP use permeates all aspects of the econo-
the United Inventors Association of America (UIA) re-
my with increasing intensity and extends to all parts of
cently coordinated the Inventors Spotlight pavilion at
the U.S.”1 Often, securing patent rights are considered
the National Hardware Show which took place from
a hallmark of success. Further, the success of broad
May 9–11 in Las Vegas, Nevada. The Inventors Spot-
cultural influencers, such as the television show Shark
light afforded start-ups and small businesses emerging
Tank, have served to underscore the essential nature
in the marketplace the opportunity to showcase their
of protecting one’s intellectual property when starting
products alongside established exhibitors at the show.
a new business and the important role patents play in
The UIA also hosted an educational forum focused on
securing the venture capital needed to commercialize
helping start-ups and small businesses succeed in com-
an invention.
mercializing their ideas. The USPTO participated exten-
A recent United States Patent and Trademark Office sively at the Inventors Spotlight through hands-on IP

1. https://www.uspto.gov/sites/default/files/documents/ 2. Ibid.
IPandtheUSEconomySept2016.pdf, 30.

September 2017 189

 SMEs And Patents In The U.S.
assistance and information sessions highlighting USPTO
resources designed to help innovators and SMEs.
Private sector views about the propensity to file pat-
ents differ by industry. Pharmaceutical and biotech
SMEs are generally more IP savvy and thus prone to
file patent applications in earlier stages of development
than similarly sized software based companies. Anoth-
er factor in the awareness of patents is the general
knowledge of the executive management team. For
instance, a CEO who had direct exposure in his or her
career with patent litigation will emphasize the need
for patent protection, which will result in enhanced
IP awareness and more patent filings for the company.
The USPTO Offers SMEs Mechanisms to
Effectively Participate in the IP Economy
One of the USPTO’s priorities is to provide train-
ing and education about the United States’ IP system
and the importance of developing strong IP protection.
Independent inventors and SMEs sometimes struggle
with how to file for and obtain IP protection for their
innovations due to a lack of financial resources.
Through no-cost programs, reduced fees and inter-
national assistance for U.S. companies protecting their
intellectual property abroad, the USPTO is committed
to helping these innovators as they serve a vital role in
the future economic development of the United States.
For instance, under-resourced independent inventors
and small businesses may secure free legal representa-
tion through Patent Pro Bono Programs across the
country. Another way for small businesses to secure
free legal services is through the Law School Clinic
Certification Program, where law students help inno-
vators with either the patent or trademark prosecution
process under the supervision of law school faculty.
Further, many independent inventors and small busi-
nesses file patent applications without the assistance
of a registered patent attorney or agent—also known
as “pro se” filing. Through the Pro Se Assistance Pro-
gram, the USPTO has tools to assist pro se applicants
and employs a dedicated team that is available to an-
swer filing questions and help simplify the process. To
help keep costs low, the USPTO offers independent
inventors and small businesses reduced patent filing
fees, where under-resourced inventors can receive up
to a 75 percent discount on the USPTO’s fees.
Competing globally can be challenging, particularly
for U.S. businesses that lack the in-house resources
and expertise they need to deal with foreign IP reg-
ulations and protect their IP abroad. To help navigate
the global IP landscape, the USPTO has IP Attachés
stationed around the world, working directly with U.S.
businesses on IP issues—including helping to stop
190 les Nouvelles
counterfeiting and piracy—while supporting U.S. ef-
forts to improve IP laws internationally.
The Recently USPTO Opened Regional Offic-
es to Serve as Hubs of Education, Outreach,
and Innovation
In pursuit of its mission to foster innovation, com-
petitiveness and economic growth, the USPTO recent-
ly opened regional offices in Detroit, Michigan; Den-
ver, Colorado; Dallas, Texas; and San Jose, California
in Silicon Valley. These regional offices work in con-
cert with USPTO headquarters in Alexandria, Virginia,
and serve as hubs of education, outreach, and innova-
tion. In this way, the USPTO is more effectively able
to reach a wide spectrum of communities, including
SMEs, emerging enterprises, independent inventors,
intellectual property practitioners, and to further
its Science, Technology, Engineering, Mathematics
(STEM) education and outreach efforts to students
and educators. The regional offices also provide educa-
tion programs, hands-on information and easier access
to USPTO resources and services for under-resourced
independent inventors and SMEs. By strengthening
relationships with communities across the country,
the USPTO, through its regional offices, now can more
nimbly tailor its resources and programs to better
serve the needs of the these communities to overcome
their unique challenges.
For instance, since the Silicon Valley Regional Office
opened in October of 2015, SMEs have been taking
advantage of outreach and education programs held
both in the regional office and throughout the Pacific
region. Through the efforts of the Silicon Valley USP-
TO last year alone, the regional office reached over
15,000 participants, most of which were independ-
ent inventors, start-ups, and small business owners.
These programs continue to grow in popularity and
cover a wide spectrum of intellectual property top-
ics. They also highlight USPTO resources available to
help entrepreneurs successfully navigate the process
and obtain intellectual property rights. In addition to
outreach and educational programs, the regional office
routinely offers in-person services, such as one-on-one
consultations with a patent examiner, search training
on USPTO patent and trademark databases, and patent
examiner interviews to help patent applicants resolve
issues during prosecution.
SMEs Use Patents to Ensure Freedom to Op-
erate, Licence Their Inventions and to Build
Investor Value
For SMEs, securing patent protection is attractive
for a variety of reasons and is often a core aspect of
a successful business strategy. For example, patents
 SMEs And Patents In The U.S.
serve to attract investors and buyers, deter infringe-
ment, increase leveraging power and add value to a
company’s assets. Patents can also be used to help gain
entry in and deter others from a market. They are also
useful as a marketing tool to promote unique aspects
of a product and to generate a revenue stream through
the licensing of patented technology. The USPTO fre-
quently delivers outreach and education programs on
securing patent protection, and partners with organ-
izations on ways to leverage the variety of uses and
benefits of the patent system for SMEs.
From an SME perspective, patents are used to devel-
op a culture of innovation, clarify ownership of intel-
lectual property rights with employees and play a stra-
tegic role in joint-venture, partnership and acquisition
discussions. Many companies of all sizes incentivise
disclosure through patent filings for their employees
to encourage product evolution and company security.
By disclosing their work, potential later conflicts can
be avoided if an employee moves on to a competitor.
For investors, and particular VC investors, good busi-
ness practices around patents is a sign of good business
practices in general. A prominent VC investor coined
the expression “IP hygiene” when referring to possible
reasons to file patents for a company. Indeed, for most
VC investors, the patent situation in early stage compa-
nies is a reflection of the team’s strength and ability to
carry their mission forward and build a business.
During an exit, patents are an important consider-
ation. A prominent VC firm reported that a wireless
mesh-networking company was about to be acquired
by a larger company when a red flag was raised around
the ownership of patents. The acquisition target only li-
censed its technology from a third party but didn’t own
the patent rights, thus reducing the value of the acqui-
sition. Patents also protect investors against downside
risks. For companies who are not going to be the next
unicorns, there is an exit known as “acqui-hire” where
a small company is acquired by a larger company for
its team and its assets. In the event of an “acqui-hire,”
the company’s patents enable investors to recoup all or
some of their investment.
Patent Litigation is Particularly Challenging
for SMEs
Patent litigation, either as a defendant or a plaintiff,
is challenging for SMEs as their limited financial re-
sources can reduce their possibility of success.
While it is not lost on anyone’s mind that many SMEs
do not have the resources to finance patent litigations
in the U.S., the existence of patent rights in the U.S.
still present a risk that larger competitors take serious-
ly and, as a result, deter them from recklessly infring-
ing known patent rights held by smaller companies.
Some actors prey on SMEs, exploiting the imbalanc-
es in resources. To counter abusive litigation practic-
es, new business models have emerged that can help
start-ups defend themselves against patent litigation.
These models include joint defensive patent litigation
alliances (e.g., Unified Patents), patent pools (e.g., Via
Licensing) and other mechanisms to acquire patents,
which can be used as a deterrent against potential pat-
ent litigation from established players.
To help curb abusive litigation practices for SMEs,
the USPTO launched an online toolkit aimed at em-
powering consumers with answers to common ques-
tions, information about patent suits and details about
patent infringement. The toolkit includes information
and links to services and websites that are designed to
help consumers understand the risks and benefits of
litigation, settlement, and to help them to pick their
best course of action.
The USPTO’s Patent and Trial Appeal Board (PTAB)
hears appeals of examiner decisions in patent appli-
cations and reexamination proceedings, and renders
decisions in interferences. With the implementation
of the Leahy-Smith America Invents Act of 2011 (AIA),
the PTAB now offers administrative trial proceedings,
including inter partes, post-grant, covered business
method reviews and derivation proceedings, where the
validity of a patent may be challenged. These expanded
PTAB proceedings can provide SMEs cheaper and fast-
er alternatives in resolving patent disputes compared
to seeking relief through U.S. court proceedings. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009315
September 2017 191
 SMEs: Patent Challenges In China
SMEs: Patent Challenges And Policies In China
By Qinghong Xu
I
n China, when referring to SMEs, micro-size en-
terprises are also often taken into account. These
businesses play an important role in China’s eco-
nomic development. In 2015, the micro, small, and
medium enterprises accounted for 99 percent of the
total number of enterprises, and their contributions
to national gross domestic product, industrial gross
output value, total sales, taxes, and exports were 58
percent, 74 percent, 59 percent, 48 percent, and 68
percent, respectively.1,2
When it comes to innovation, these enterprises can-
not be overlooked, as they are engaged in the devel-
opment and commercialization of innovations them-
selves, and also are adopters of innovations developed
by other organizations. However, they often face larger
barriers on capital and labor markets than bigger estab-
lished businesses.
Chinese national IP policies have seen the growth of
the micro, small, and medium enterprises, and IP-fo-
cused businesses in particular, as a route to improve
the state of national economy. For example, see “Opin-
ions on Further Support of Healthy Development of
Micro and Small Enterprises” the State Council, GuoFa
[2012] No. 14; and “Outline of the National Intellec-
tual Property Strategy” the State Council, June 5, 2008.
What Are SMEs in China?
The definitions of micro, small, and medium enter-
prises are provided by the National Bureau of Statistics
[2011] No. 75,3 effective September 2, 2011, which
is in accordance with the regulation of “Notice on Defi-
nitions of Small and Medium Enterprises” [2011] No.
3004 jointly issued by Ministry of Industry and Infor-
mation Technology, by the National Bureau of Statis-
tics, the National Development and Reform Commis-
sion, and the Ministry of Finance.
1. “Empirical Study on the Intellectual Property Policy for
Micro, Small, and Medium Enterprises,” National Intellectual-
Property Strategy, (June 3, 2015). http://www.nipso.cn/onews.
asp?id=26273.
2. In 2011, SMEs accounted for over 97.2 percent of Chinese
industrial enterprises in total, producing 58.4 percent of Gross
Industrial Output Value. “Government-Backed Patent Funds in
China,” Tech Monitor, (October-December 2013), 24-30.
3. http://www.stats.gov.cn/statsinfo/auto2073/201310/
t20131031_450691.html.
4. http://www.miit.gov.cn/n1146290/n4388791/c4245959/
content.html (June 18, 2011).
192 les Nouvelles
The definitions are applicable to all legal entities
established in accordance with Chinese law, and set
the designations based on parameters of industry
sector, number of employees, operating income, and
financial assets. See the National Bureau of Statistics
[2011] No. 75.
For example, for entities in agriculture, timber, an-
imal husbandry, and fishing industries, only operating
income will be considered for designations. Entities
with yearly operating income of less than CNY500,000,
between CNY500,000 and CNY5,000,000, and
between CNY5,000,000 and CNY200,000,000 are
respectively qualified as micro, small, and medium en-
terprises. Id.
In another example, for entities in software and in-
formation technology service industry, both the num-
ber of employees and operating income will be consid-
ered while for micro enterprises satisfying one param-
eter would be sufficient and for small and medium en-
terprises, both parameters must be met. Entities with
less than 10 employees or operating income of less
than CNY500,000, 10 to 100 employees and between
CNY500,000 and CNY 10,000,000 income, and 100
to 300 employees and between CNY10,000,000 and
CNY100,000,000 income are respectively qualified as
micro, small, and medium enterprises. Id.
What Are Patent Challenges for SMEs in China?
While SMEs in China have spent more and more in
R&D,5 the patent filings have not kept the pace with
the spending.6 Even worse, according to a survey (the
“Survey”) conducted by the Department and Econom-
ics, Tianjin University, Chinese micro, small, and medi-
um enterprises have done poorly in terms of patenting
technologies. In the Survey, 258 businesses in Tianjin
that were qualified as the national definitions of mi-
cro, small, and medium enterprises were interviewed.
“Empirical Study on the Intellectual Property Policy for
Micro, Small, and Medium Enterprises,” National In-
tellectual-Property Strategy, June 3, 2015.7
The Survey found that among these businesses, 48
5. In 2011, the number of SMEs’ researchers and R&D
expenditure has rapidly grown with a rate of 47.78 percent and
40.30 percent respectively from previous year. “Government-
Backed Patent Funds in China,” Tech Monitor, (October-
December 2013), 24-30.
6. Id.
7. http://www.nipso.cn/onews.asp?id=26273.
 SMEs: Patent Challenges In China
percent of them do not own any granted invention pat-
ents at all and only 12 percent own 10 or more granted
invention patents, and not surprisingly, that over 90
percent of these businesses never had any experiences
in buying, selling, or licensing patents. The Survey also
found that only 43 percent of these businesses have
in-house IP professionals. Id.
In addition to the barriers on capital and labor mar-
kets for SMEs, the Survey also identified the following
difficulties that Chinese SMEs are facing:
(i) Ineffectiveness of intellectual property protection,
which are exemplified by proliferation of infringe-
ment and counterfeits, time-consuming and ex-
pensive enforcement process, all resulting in high
cost and ineffectiveness of enforcement.
(ii) Imperfection in implementing patent support pol-
icies, where enterprises are concerned about, for
example, cumbersome procedures for reimburse-
ment of patent funds, lack of transparency for poli-
cy implementation process, and lengthy patent ex-
amination process.
(iii) Lack of knowledge for intellectual rights acquisi-
tion and enforcement in foreign jurisdictions.
(iv) Lack of understanding and usage of intellectual
property financing and relevant policies on it.
What Innovation Policies in China Relate
to SMEs?
In view of the importance of SMEs to the economic
growth in China, the government has issued series of
policies especially on the support of micro and small
enterprises,8 as they (about 11.7 million) account for
about 77 percent of the total number of enterprises,
and are of great strategic significance to the national
and social development especially in increasing em-
ployment rates, and promoting economic growth and
scientific and technological innovation.
Policies Provided by the State Council
The State Council, on April 19, 2012, published
“Opinions on Further Support of Healthy Develop-
ment of Micro and Small Enterprises” GuoFa [2012]
No. 149 that, the first in history, articulates 10 policy
measures for supporting the development of micro and
small businesses.
The measures include financial support, tax incen-
tives, public service, policy and information intercon-
nection, and other aspects. For example, Article 2 spec-
ifies the increase of the threshold for the value-added
tax and business tax and deduction of business tax for
8. Interpretations of “Opinions on Supporting the Growth
of Micro and Small Enterprises through Intellectual Property
Rights,” (October 23, 2014). http://www.sipo.gov.cn/zcfg/
zcjd/201410/t20141022_1023740.html.
9. http://www.gov.cn/zwgk/2012-04/26/content_2123937.htm.
enterprises with small profits. Article 4 details the es-
tablishment of a national SME Development Fund, to
which the central government funds CNY 15 billion,
five years in place, together with other resources such
as donations and fund income. Id.
To promote the micro
and small enterprises’
innovation and develop- ■ Qinghong Xu,
ment, Article 12 specifies Lung Tin Intellectual Property
an increase in the central Agent Ltd.,
government budget for
micro and small enterpris- Partner,
es to support innovation Beijing, China
and technology transfor- E-mail: LTBJ@lungtin.com
mation, and Article 13
lays out the tax deduction
policy for the research and development costs. Id.
Since then, many government agencies have pub-
lished various polices to implement these measures
from different aspects. The State Intellectual Property
Office (“SIPO”) issued policies for supporting innova-
tion and improving intellectual property related ser-
vices for micro and small enterprises.
Policies Provided by the State Intellectual Prop-
erty Office (“SIPO”)
SIPO issued “Opinions on Supporting the Growth of
Micro and Small Enterprises through Intellectual Prop-
erty Rights” [2014], No. 57,10 on October 8, 2014, for
the purpose of implementing the IPR protection poli-
cies set forth in “Outline of the National Medium-and
Long-Term Human Resources Development Planning”
(2010-2020), stimulating the innovations of micro and
small enterprises, and fully supporting the entrepre-
neurship and innovative development of micro and
small enterprises.
The SIPO Opinions provide the following major
policies:
(i) Enhancing the core competitiveness by acquiring
patents in a timely manner. SIPO specifies a pri-
oritized process for core patent applications from
micro and small business applicants, and supports
projects for acquiring overseas patents via fast
tracks.
(ii) Reducing the cost of patenting by increasing finan-
cial support for patent applications from micro and
small enterprises;11 for example, a reward given to
the first granted invention patent.
10. http://www.sipo.gov.cn/tz/gz/201410/t20141011_
1020001.html.
11. Since the establishment of patent law system, China
adopts a preferential policy that allows patent applicants
or patentees, who are, indeed, in financial difficulties, to
pay official fees at a reduced amount (a reduction of 70-85
percent depending on whether the applicant is an individual or
enterprise) or at a delayed payment.
September 2017 193
 SMEs: Patent Challenges In China
Figure 1. Patent Application Filings
4,000,000
3,500,000
3,000,000
4,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2009 2010 2011 2012 2013 2014
total applications
invention utility model design
(iii) Easing the financing difficulties by establishing
a demand investigation system for intellectual
property financing.
(iv) Improving the self-development capability by en-
couraging micro and small enterprises to imple-
ment the national standard of “Enterprise Intel-
lectual Property Management.”
(v) Encouraging innovation by guiding universities
and research institutions to collaborate with
micro and small enterprises for developing tech-
nologies, encouraging state-owned corporations
to license and transfer patents, and guiding in-
tellectual property model enterprises to license
patents with minimal royalties.
(vi) Supporting the business growth by providing in-
tellectual property services.
(vii) Implementing a service network by establishing
an intellectual property service system at provin-
cial, municipal and county levels and promoting
government purchase services.
(viii) Strengthening the intellectual property protec-
tion by accelerating the establishment of a fast-
track mediation mechanism for patent infringe-
ment disputes.
What Are Our Observations?
Given all policies provided by the Chinese govern-
ment, in particular “Outline of the National Intellec-
tual Property Strategy” issued by the State Council on
June 5, 200812 which made the intellectual property
issue as one of the basic national strategies for Chi-
na’s overall social and economic development, we have
observed Chinese patent application filings have been
continually surging these years. See Figure 1.
12. The State Council of China, Doc. No. 18 [2008].
194 les Nouvelles
In 2015, the total number of invention
patent applications, utility models and de-
signs filings reached 2,798,500, among
which China’s patent office received
1,101,864 filings for patent applications
for inventions, making it the first office to
receive more than a million applications in
a single year—including both filings from
residents in China (968,251), as well as
from overseas innovators seeking patent
protection inside China (133,613). This
totalled almost as many applications as the
three major offices combined: the U.S.
(589,410), Japan (318,721) and the Re-
2015 2016 public of Korea (213,694).13 In 2016, the
filings continued to grow. The total number
arrived at 3,464,824 and both filings for in-
vention patent applications and utility mod-
els surpassed one million.
Turning to Chinese SMEs who play an important role
in China’s economic development, they are regarded
as a main contributor to the patenting activities, es-
pecially to the growth of patent filings.14 However, as
discussed above, they face larger barriers than bigger
established businesses. Undoubtedly, current govern-
ment policies will help SMEs to focus more on inno-
vations and technology developments, and encourage
them to file more patent applications, which will drive
Chinese patent filings continually to surge.
In conclusion, Chinese government policies indeed
have great positive impacts on promoting innovations
for SMEs in China, which we will be able to observe in
many years to come. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009319
13. “Global Patent Applications Rose to 2.9 Million in 2015
on Strong Growth from China; Demand Also Increased for
Other Intellectual Property Rights,” WIPO, (Geneva, November
23, 2016). http://www.wipo.int/pressroom/en/articles/2016/
article_0017.html.
14. In 2011, the share of SMEs‘ patent filings accounted for
58.8 percent of the total filings. However, due to the different
definitions for SMEs since September 2, 2011, the share may
be different and decrease. “Government-Backed Patent Funds
in China” Tech Monitor, (October-December 2013), 24-30.
 SMEs In ASEAN And Singapore
SMEs In ASEAN And Singapore—IP Perspectives
By Audrey Yap
S
mall medium-sized enterprises, or SMEs, form
the backbone of most economies but are particu-
larly important in Asia where the majority of busi-
nesses still lack the scale and reach of their western
counterparts in developed economies as multination-
als. SMEs across Asia Pacific contribute 20-50 percent
of their respective nation’s gross domestic product, ac-
count for 97 percent of all enterprises and employ half
the workforce across Asia.
It follows that the significance of Intellectual Proper-
ty (IP) to business as a whole in Asia requires an assess-
ment of how this community perceives the subject.
ASEAN
A significant landmark event for the 10 countries
that form the Association of Southeast Asian Natives
ASEAN was the implementation of the ASEAN Eco-
nomics Community (AEC) 2015 Blueprint, which in-
cludes, inter alia, standardizing economic regulations
covering trade, capital market regulatory frameworks
and protection of intellectual property rights. The ob-
jective of the 10 member states of Singapore, Malay-
sia, Thailand, Indonesia, Brunei, Philippines, Vietnam,
Cambodia, Laos and Myanmar, when ASEAN was first
established in 1967, was to forge an independent bloc
in Southeast Asia and to ensure peace and stability in
the region. Fast forward, today ASEAN collectively is
the third largest market in the world with a popula-
tion of over 625 million people. World Bank projects
that ASEAN will be the largest economy in the world
by 2050. The top five trading partners of ASEAN are
China, Japan, EU, U.S.A. and South Korea. For SMEs in
the region therefore, appreciating and harnessing the
AEC has become an activity that is increasingly central
to business growth and accordingly awareness of IP as
well, given it was identified as a pillar in the AEC 2015
action plan. It now appears for the first time in history
that Asia is leading the world in terms of patent and
trademark filings. WIPO Statistics show a significant
rise in the past five years.
Singapore
Singapore is a successful free market economy, open,
highly developed with a GDP per capita compatible
with leading European nations. Businesses, particularly
SMEs in Singapore, are acutely concerned about their
vulnerabilities and opportunities in ASEAN and Asia.
The Government of Singapore actively promotes
innovation and IP and have launched a strategy map
to promote Singapore as an IP
hub for Asia which includes
■ Audrey Yap,
developing stronger reasons
for both SMEs and MNCs Yusarn Audrey,
(Multi National Companies) Co-Founder and
to file IP in Singapore, as Managing Partner,
well as creating a vibrant IP Singapore, Thailand,
marketplace and facilitate IP
transactions. The IP office of Malaysia.
Singapore (IPOS) has been a E-mail: audrey@yusarn.com
significant driver of the trans-
formation process. The transi-
tion has not been easy to educate and inform SMEs,
but increasingly enterprises in Singapore, and across
ASEAN, are beginning to embrace IP as an important
tool for protection and for business value. Indeed as
the companies become more sophisticated in their
understanding, the approach has moved from purely
protection of IP for IP’s sake to looking at monetization
and commercialization of IP. In a recent press release
in May 2017 by IPOS and the Ministry of Law, new
initiatives were announced to help IP-rich companies
scale up and use the same to leverage international
growth. This includes enhancing an existing IP Finan-
cing Scheme that is already in place for patents as col-
lateral for debt financing by banks, to expand to all
other forms of IP such as trademarks and copyright.
Singapore’s IP Financing Scheme was rolled out to
help IP-rich companies monetize their IP for business
growth and expansion and S$ 100-million was set aside
by the Government to partially underwrite the loans
by participating financial institutions, which includes
AFC Merchant Bank, DBS Bank Ltd., United Overseas
Bank and Oversea Chinese Banking Corporation. IPOS
has seen its role in this evolving landscape, transfor-
ming from pure registry and regulator to becoming an
innovation agency.
SMEs are assisted based on stage of development
(start-ups, midsize, listed company) and/or industry seg-
ment (manufacturing, oil & gas, pharmaceuticals, elec-
tronics). The Ministry of Trade & Industry through its
various agencies launched several initiatives including
that which promotes innovation and commercialization
of new technologies and IP such as “SG­—innovate” to
connect and match start-ups, researchers and innova-
tors with potential investors, mentors and to facilitate
access to new markets. There are also various policies
and grants schemes to encourage SMEs to adopt E-Com-
September 2017 195
 SMEs In ASEAN And Singapore
merce and to acquire and manage IP. For example, a
tax deduction allowance is made for IP expenses or IP
purchased/acquired by SMEs.
The SME in Singapore that exemplifies a local enter-
prise that is IP focused is the award winning company
Innosparks. Their key product is an adjustable mask
with attachable micro fan and smart valve, protected
by a slew of patents, trademarks and design registra-
tions. By ring fencing their IP, Innosparks was able to
establish a monopoly and leverage its IP for licensing
and joint venture into a key market like China with the
former Reckitt Benckiser now renamed RB-Dettol.
Singapore’s initiative to promote patent and tech-
nology transfer includes recognizing the role of IP
intermediaries and professionals in providing spe-
cialised support services that help SMEs understand
the business, products and services and translate
innovation objectives into specific IP and technology
requirements. Government funded IP Intermediary
(IPI) Network provides search, sourcing and matching
based on IP needed by SMEs.
Summary
ASEAN is a fast changing landscape and IP aware-
ness is rising but not at the same rate across Southeast
Asia. Unlike in the Western developed economies,
196 les Nouvelles
government incentives and policies are shaping how
IP is viewed, protected and used by SMEs particularly
under the ASEAN Economic Community agreements.
Singapore is leading the race in IP monetization in
the region, drawing from its central location and open
business environment, as well as reputation as a finan-
cial hub. SMEs in Singapore are no longer just filing
IP for protection but leveraging innovation and IP as a
business tool and enterprise value.
An IP marketplace is slowly but surely emerging
in Singapore, and IPOS, IP intermediaries and pro-
fessionals are playing a role in pushing the agenda of
growing the business of licensing and sale of IP, as well
as collateralization of patents and trademark portfolios
for IP financing by banks, private equity players and
venture funds. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009338
Useful References
ASEAN­—www.asean.org
Special ASEAN Issues—www.iseas.edu.sg
Economic Data—www.worldbank.org
History of ASEAN—www.aunsec.org
IP Office of Singapore—www.ipos.gov.sg
 Patent And SMEs In India

Patent And SMEs In India

By Sunita K. Sreedharan

SMEs in India items, which are being man-

T
he Ministry of Micro, Small and Medium En- ufactured by the small enter-
■ Sunita K. Sreedharan,
terprises (M/o MSME) set up on May 9, 2007 prises in India. After agricul-
ture, the MSE sector provides SKS Law Associates,
by the merging of two ministries i.e. erstwhile
Ministry of Small Scale Industries and the Ministry of the maximum opportunities Founder & CEO,
Agro and Rural Industries, has been on the forefront to for both self-employment and New Delhi, India
creaste awareness of IPR among the MSMEs in differ- jobs in the country. E-mail: sunita@skslaw.org
ent parts of India. The MSMEs in manufacturing and The promotion of innova-
service sectors have been defined on the basis of their tion among the MSME sector
investments as follows:1 has received additional filip under the present Govern-
ment. Elected into power in May 2014,
the present Government shifted focus on
Definition of MSMEs in India “innovation” by creating the Ministry of
Skill Development and Entrepreneur-
ship on November 9, 2014 to coordinate
Manufacturing Enterprises – Investment in Plant & all skill development efforts across the
Machinery country with programmes such as “Skill In-
Description INR USD($) dia” and “Make in India.” Industrial train-
ing and apprenticeship as well as other
Micro up to Rs. 25Lakh up to $ 62,500 skill development responsibilities in exist-
Enterprises
ing jobs as well as potential new jobs were
Small above Rs. 25 Lakh & above $ 62,500 & up transferred from the Ministry of Labour
Enterprises up to Rs. 5 Crore to $ 1.25 million and Employment on April 16, 2015 with
Medium above Rs. 5 Crore & above $ 1.25 million & an aim:
Enterprises up to Rs. 10 Crore up to $ 2.5 million • To remove disconnect between demand
and supply of skilled manpower;
Service Enterprises – Investment in Equipments
• To build the new skills and;
Description INR USD($) • To develop innovative thinking.
Micro up to Rs. 10 Lakh up to $ 25,000 The Start-up India Initiative:
Enterprises
In early 2015, the “Start-up India” ini-
Small above Rs. 10 Lakh & above $ 25,000 & up tiative was notified2 where new entities
Enterprises up to Rs. 2 Crore to $ 0.5 million
would have tax benefits. According to the
Medium above Rs. 2 Crore & above $ 0.5 million & Government Notification, an entity will be
Enterprises up to Rs. 5 Crore up to $ 1.5 million identified as a “Start-up.”
1. Till up to five years from the date of its
Contribution of MSME: incorporation/registration;
According to a recent WIPO Study, the MSME sector 2. If its turnover for any of the financial year does not
in India is estimated at about 12.8 million units (over exceed INR 25 crores (approx 3,873,567 USD @
90 percent of total industrial units) employing nearly 64.54 INR to one U.S. dollar) in the said five years,
31 million people. This sector contributes nearly 39 and;
percent of the total industrial production and accounts 3. It is working towards innovation, development, de-
for approximately 33 percent of the total exports. This ployment, and commercialisation of new products,
sector has consistently registered a higher growth rate processes, or services driven by technology or intel-
than the rest of the industrial sector. There are over lectual property.
6500 products ranging from traditional to high-tech
2. http://dipp.nic.in/English/Investor/startupindia/Definition_
1. http://www.smechamberofindia.com/about_msmes.aspx. Startup_GazetteNotification.pdf, 3.

September 2017 197

 Patent And SMEs In India
To obtain tax benefits a start-up must obtain a certif-
icate of an eligible business from the lnter-Ministerial
Board of Certification consisting of Joint Secretary, De-
partment of Industrial Policy and Promotion, as well as
one Representative each of Department of Science and
Technology, and Department of Biotechnology.
The National IPR Policy:
That the Government was serious in shifting focus
from mere improvement in manufacturing capacity to
innovation was highlighted when the National IPR Pol-
icy was adopted by the present Government in May
2016. The National IPR Policy unveiled seven objec-
tives which includes:
• “IPR Awareness: Outreach and Promotion” with a
focus on creating public awareness about the eco-
nomic, social and cultural benefits of IPRs among all
sections of society and;
• “Human Capital Development” to strengthen and
expand human resources, institutions and capaci-
ties for teaching, training, research and skill build-
ing in IPR.
The IPR Policy also lists “Commercialization of
3. http://www.ipindia.nic.in/writereaddata/Portal/IPORule/1_
42_1_Patent__Amendment_Rules_2016_16May2016.pdf
198 les Nouvelles
IPR” as well as “Enforcement and Adjudication” as
top priority to ensure that the focus on IPR creation
is followed through with adequate enforcement and
protection mechanism.
In Conclusion:
Accordingly the Patent Rules were amended3 to add
a category of “Start-ups” as “Applicants” to the exist-
ing three tiers of applicants who pay differentiated
fees namely the “Natural Person(s),” “Small Entity”
and “Not a Small Entity.” The Start-up can be in any
of the three categories including an individual, pro-
vided it is registered as a Start-up with the Ministry
of Commerce.
While there is no exact information on the total ap-
plications filed by SMEs in the Official Patent Office
Annual Report,4 the RTI Applications filed under the
Right to Information Act 2017 reveal that all in all about
33 patent applications and 30 trademark applications
have been filed by the Start-ups under the Start-Ups
Intellectual Property Protection Scheme (SIPP). ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009323
4. http://www.ipindia.nic.in/writereaddata/Portal/IPOAnnual
Report/1_71_1_Annual_Report_2015-16_English__2_.pdf
 Patent And SMEs In Brazil

Patent And SMEs In Latin America: Brazil

By Cândida Caffé and Mariana Vicentini

SMEs in Brazil these companies’ administrative, tax, social security

T
he participation of Micro and Small Enterprises and credit obligations should be simplified or sub-
(SMEs) in the Brazilian economy is significant stantially reduced.
and growing: in 1985 SMEs represented 21% of Although various laws ■ Cândida Caffé,
Brazil’s GDP, having increased to 23.2 percent in the were edited to deal with
Dannemann Siemsen,
year of 2001 and to 27 percent in the year of 2011.1 the legal treatment of small
In February 2017, SMEs were responsible for 54 thou- enterprises, they are cur- Partner,
sand new hires, against approximately 26 thousand dis- rently regulated by Com- Rio de Janeiro, Brazil
charges by medium-sized and large companies.2 plementary Law No. 123, E-mail: ccaffe@
In accordance with statistics published in bullet- of 2006, also known as the dannemann.com.br
ins of the Brazilian Micro and Small Business Support “General SMEs Law.”
Service—SEBRAE (a broadly known and respected The General SMEs Law ■ Mariana Vicentini,
non-profit private entity with a mission to promote establishes a series of
simplified and beneficial
Souto, Correa, Cesa, Lummertz
the sustainable and competitive development of small
businesses in Brazil), in 2011,3 SMEs corresponded to treatment for SMEs, in- & Amaral Advogados,
98.2 percent of Brazilian private entities and 59.4 per- cluding a specific tax reg- Senior Associate,
cent of the exporting companies of Brazil, representing imen—with lower taxes Rio de Janeiro, Brazil
52.1 percent of formal jobs in the country. In the same and facilitated procedures E-mail: mariana.vicentini@
year, SMEs were responsible for 4.2 million of rural for tax calculation and col-
lection—the reduction of soutocorrea.com.br
producers and 17 million of formal employees.
bureaucracy for the estab-
SMEs’ participation in the economy increased and in
lishment and maintenance of SMEs; and for labor re-
2015,4 they corresponded to 98.5 percent of Brazilian
lated procedures; the possibility of filing court actions
private entities and 61 percent of the exporting com-
before Small Claim Courts and favorable treatment in
panies of Brazil, representing 54 percent of formal jobs
public bids, such as assurance of preferred rights as a
in the country. Still in 2015, SMEs were responsible
tie-breaking criteria.
for 4.7 million of rural producers and 17.1 million of
formal employees. In general terms, a company will be deemed as a
micro or a small enterprise depending on its gross
The first law regulating the differentiated treatment revenue. Further to the General SMEs Law, duly re-
rendered to small entities in Brazil was Law No. 7.256, gistered limited liability companies or individual entre-
edited in 1984. preneurs may be framed as Micro or Small entities,
Given their importance in Brazilian economy and depending on their annual gross revenue, as follows:
seeking to contribute for the development and com- (a) Individual Entrepreneurs are duly registered
petitiveness of SMEs in the market, they are assured self-employed individuals that do not participate
a differentiated judicial treatment by the Brazilian in any entities neither as partner nor manager who
Federal Constitution of 1988, which determines that have up to one employee and an annual gross rev-
enue of up to R$ 60.000,00 (sixty thousand Bra-
zilian reais) until December 31, 2017 or up to R$
1. Available at https://www.sebrae.com.br/Sebrae/Portal%20 81.000,00 (eighty-one thousand Brazilian reais) as
Sebrae/Estudos%20e%20Pesquisas/Participacao%20das%20 from January 1, 2018;
micro%20e%20pequenas%20empresas.pdf.
(b) Micro Enterprises are those companies with
2. Available at https://www.sebrae.com.br/Sebrae/Portal%20
Sebrae/Anexos/caged-fevereiro-2017.pdf.
an annual gross revenue of up to R$ 360.000,00
(three hundred and sixty Brazilian reais);
3. “Study and Research Bulletin of January 2016,” SEBRAE,
https://www.sebrae.com.br/Sebrae/Portal%20Sebrae/Anexos/ (c) Small Enterprises are those companies with an
boletim%20estudos%20e%20pesquisas%20jan%202016.pdf. annual gross revenue higher than R$ 360.000,00
4. “Study and Research Bulletin of February 2017, SEBRAE, (three hundred and sixty Brazilian reais) and low-
https://www.sebrae.com.br/Sebrae/Portal%20Sebrae/Anexos/ er than or equal to R$ 3.600.000,00 (three million
BEP%20fev%202017.pdf. and six hundred thousand Brazilian reais) until
September 2017 199
 Patent And SMEs In Brazil
December 31, 2017 or to R$ 4.800.000,00 (four
million and eight hundred thousand Brazilian reais)
as from January 01, 2018.
Moreover, the General SMEs Law provides that com-
panies with the characteristics listed below cannot be
framed as SMEs, not being, therefore, qualified to
enjoy the special treatment rendered to such kind of
enterprise:
(a) Companies having legal entities in their
shareholder composition;
(b) Brazilian branches, subsidiaries, agencies or rep-
resentations of foreign entities;
(c) Companies whose individual shareholders are reg-
istered as individual entrepreneurs or who are
shareholders of other SMEs, if their global annual
gross revenue exceeds the limits for being framed
as SMEs;
(d) Companies whose shareholders have equity partic-
ipation exceeding 10 percent in other companies
that are not framed as SMEs, if their global annual
gross revenue exceeds the limits for being framed
as SMEs;
(e) Companies whose shareholders are managers of
or hold an equivalent position in other entities,
provided that their global annual gross revenue
exceeds the limits for being framed as SMEs;
(f) Cooperatives, except if a consumer cooperative;
(g) Companies holding equity participation in other com-
panies;
(h) Companies that conduct banking, investment, fi-
nancial or insurance related activities;
(i) Companies resulting from spin-offs or other split
operations in the preceding five years; and
(j) Joint-stock companies.
Patents and SMEs
Since owners of patents are vested in exclusive rights
of exploitation of their subject matter, the obtainment
of such protection is an effective measure adopted by
many companies, including SMEs, in the pursuit of a
stronger position in the market. This is due to the fact
that the obtainment of patent protection may, for ex-
ample, aid SMEs in achieving competitive advantage;
receiving additional income resulting from licensing or
assignment of rights; entering in new markets upon
licensing; accessing different technologies via cross li-
censing and attracting investments from third parties.
Although there is awareness of the importance
and value of patents and their potential for business
development of SMEs, the majority of patent filings
are made by medium-sized and large companies, as
shown in statistics published by the INPI.5 Regard-
5. Available at http://www.inpi.gov.br/sobre/estatisticas/
estatisticas-preliminares-2013-a-partir-de-2013.
200 les Nouvelles
less, SMEs patent filings have been increasing year
after year, whilst medium and large companies’ filings
have been decreasing:
Chart 1: Patent Filing Comparison
1523
1600 1442
1400 1322
1200
1000 800 824
736
800
600
400
200
0
Medium & Large Companies SMEs
2014 2015 2016
As an incentive for the development of SMEs and for
the due protection of their industrial property rights
and assets, the official fees of the services offered by
the National Institute of Industrial Property (INPI) to
such company category—including patent filing and
recordal of transfer of technology agreements—con-
template discounts of up to 60 percent of the regular
fees. These discounts are also extended to coopera-
tives, educational institutions, non-profit organizations
and public entities.
In 2016, an additional initiative was adopted by the
INPI to encourage patent filings and support innova-
tion of SMEs in Brazil: the launching of Phase I of the
“Patents SMEs,” a new pilot program for fast track
examination of patent applications filed by Micro and
Small Enterprises. With the launching of the Patents
SMEs program, the INPI expected to reduce the nega-
tive impacts associated with their delay in the analysis
of patent applications, which is a very sensitive aspect
considered by patent applicants and which, many
times, discourages patent filings, especially by SMEs.
It is worth mentioning that, in addition to the Pat-
ents SMEs, the INPI currently has five fast track ex-
amination programs, which are eligible for patent
applications: (i) filed by the elderly, the physical or
mentally disabled, the patients of serious diseases; in
cases when the grant of the patent is a condition for
obtainment of financial resources from official credit
institutions; in cases when the subject matter of a pat-
ent application is being reproduced by unauthorized
third parties; in cases when third parties are accused
by a patent applicant of unauthorized reproduction
of the application’s subject matter (in this case, the
fast track examination may be requested by the third
party); (ii) covering green inventions; (iii) related to
pharmaceutical products and processes, as well as to
equipment and materials relevant to public health; (iv)
filed through the Patent Prosecution Highway—PPH,
according to the collaborative agreement signed be-

tween the Brazilian PTO and United States Patent and
Trademark Office—USPTO and the Japanese Patent
and Trademark Office; and (v) from a family of patents
initiated at the INPI.
The Patents SMEs Program is currently in its Phase
II. Phase I of the Program was regulated by Resolu-
tion No. 160 of the INPI, published in February 2016
and, after the assessment of its positive results, the
INPI issued Resolution No. 181 to regulate Program’s
Phase II, commencing on March 1, 2017 and valid for
a period of one year or until 150 fast track requests are
accepted; whichever occurs first.
The main requirements contained in Resolution No.
181 for a patent application to be included in Phase II
of the Pilot Patents SMEs are summarized below:
• The application was filed with the INPI at any date;
• The application related to an invention or an utility
model;
• The application was filed in the name of an SME,
as defined in Complementary Law 123/2006. In the
event of multi applicant applications, all applicants
are SMEs;
• The application does not lie within the industrial
fields of “Performing Operations; Transport” (sec-
tion B) or “Mechanical Engineering; Lighting; Heat-
ing; Weapons; Blasting” (section F) of the Interna-
tional Patent Classification;
• The application has already been published in the
Brazilian Industrial Property Journal or, in the case
of PCT applications, it has been accepted as eligible
for examination in the national phase;
• Examination of the application has been accepted;
• Examination of the application has not been sus-
pended awaiting compliance with a requirement
previously issued by the INPI;
• No annuity fee payment is pending;
• The application is not sub judice (under trial or be-
ing considered by a judge).
SMEs may request the fast track examination of pat-
ent applications attending to the above requirements
Chart 2: Tech Transfer Agreements
10000 1452 1227
1000 803
100
42 38
25
10
0
Medium & Large Companies SMEs
2014 2015 2016
Patent And SMEs In Brazil
of the Pilot Program upon filing an electronic petition
before the INPI. Differently from other patent fast
track programs offered by the INPI, no official fees are
charged for a patent application to be examined under
the Patents SMEs.
Statistics conducted by the INPI6 demonstrate that
the Patents SMEs Program is, so far, successfully
achieving its goal: while the INPI currently takes about
eight years to render decisions on patent applications
not eligible for fast track examination, patent appli-
cations analyzed under the Pilot Program have been
decided within approximately eight months from the
request of their acceptance into the Program.
Transfer of Technology Agreements and SMEs
Technology transfer agreements comprise patent,
trademark and industrial design licenses, technology
transfer, technical assistance services and franchise
agreements. Thus, transfer of technology agreements
may be an excellent tool for SMEs to either earn roy-
alties or to expand to new markets via licensing or
even franchising.
Transfer of technology agreements are valid and
enforceable between contracting parties against one
another regardless recordal at the INPI, which is indis-
pensable only for the following purposes:
(a) To make the agreement effective against third par-
ties (such as to, if set forth in the agreement, allow
licensee to act in defense of the licensed IP assets
and assure exclusivity of use of the IP assets by
licensee);
(b) To allow remittance of payments to the foreign li-
censor; and
(c) To qualify local licensee for tax deductions, if the
local licensee adopts the actual profit tax regime,
which is not applicable for SMEs, whose taxes are
accrued upon the simplified regime established in
the General SMEs Law, and does not provide for
deductibility.
Therefore, although SMEs frequently enter into
transfer of technology agreements (especially for IP
licensing and franchising), practice shows that these
agreements are rarely submitted to the INPI for re-
cordal. This cannot be avoided when it is necessary
to remit royalties abroad though. The fact that such
agreements are generally entered in a private fashion,
somewhat hinders the assessment of how frequently
they are in fact adopted by SMEs. Regardless, statis-
tics published by the INPI demonstrate a decrease
in the transfer of technology agreements of Medium
and Large Companies in 2016 (as a reflection of the
economic situation), against an increase of the same
agreements of SMEs. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009329
6. Available at http://www.inpi.gov.br/menu-servicos/patente/
exame-prioritario-me-epp.
September 2017 201
 Patent And SMEs In Chili
Patent And SMEs In Latin America: Chili
By Felipe Claro
The Patent Awareness of SMEs
M
any Chilean SMEs have good ideas that never
see the market, either because they don’t know
how to use the patent system in their favor
or because they do not have access to good commercial
partners. Sometimes, prospective partners simply copy
the non-protected solutions and replicate them as their
own. There is also a lack of local IPR (Intellectual Property
Rights) management organizations that buy up idle pat-
ents and try to commercialize them among SMEs.
In spite of the above, more and more SMEs are realiz-
ing that patents, and more broadly IP, are really important
to their commercial success. It should be considered that
less than 4,000 patent applications are filed in the coun-
try every year, so the vast majority of worldwide patent
filings (millions) directly go into the prior art zone, thus
encouraging Chilean SMEs to take advantage of this valu-
able public domain subject matter instead of paying high
royalties for few top of the art technologies that are not so
useful to them. In Chile, depending on the field of tech-
nology, even a 25 or 30-year-old technology can be very
valuable if correctly implemented. SMEs are reluctant or
simply can’t afford to pay high royalties.
WIPO should make an extra effort to provide complete
information about PCT (Patent Cooperation Treaty) ap-
plications that don’t enter the national phase, to permit
SMEs to freely access those not so old non-patented tech-
nologies and use them in their favor to make an impact in
the local market. These databases would give certainty to
SMEs, who don’t want to lose money by infringing IPRs.
That information is crucial for SMEs in developing coun-
tries to discern how to navigate in the vast patent ocean.
The Government Policy to Promote Use of
Patent by SMEs
The Government is educating SMEs about the con-
venience of using IPRs, and especially patents as part
of their businesses. Generally speaking, the Govern-
ment promotes patents through the following actions:
• It encourages people interested in developing
non-conventional businesses.
• It drives companies to take risks and think of new
ways to face challenges. To this end, it helps them to
finance the creation and protection of new products,
services or processes, or substantially improve those
already under development. It is also concerned with
the development of innovation projects.
• It seeks to support companies, so that through
co-financing of projects and tax rebates, they
can improve their management and innovation
practices, to improve their productivity and facil-
itate their internationalization.
• It provides solutions to improve the access to financ-
202 les Nouvelles
ing of investment,
innovation, entre- ■ Felipe Claro,
preneurship and
development of Claro & Cia.,
Partner,
companies of dif-
ferent sizes, deep- Santiago, Chile
ening and develop-
ing more competi- E-mail: felipe@claro.cl
tive markets.
• It seeks to improve the competitiveness of the
economy by strengthening human capital, in-
novation and productivity, in order to solve coor-
dination failures and remove obstacles in strate-
gic productive sectors.
• It promotes collaborative programs that connect
companies, universities and technology centers.
How do SMEs use patents?
SMEs do not use patents as much as large companies
do. Normally, they cannot afford costly investigation and
instead of that they mostly adapt existing technology
to meet new market requirements. Their approach to
patents is more informal and have more flexibility to ex-
plore new solutions, which mostly lead to petty patents
and industrial designs, where only novelty is required.
SMEs are more on the side of paying royalties than
collecting them from third parties. When they realize
about the importance of having their own IPRs and using
them effectively, they can narrow the distance between
status quo and commercial success, and also increase
the company value. Proper legal advice is crucial to de-
fine if there is freedom to operate in the local market.
SMEs and Patent litigation
The limited resources of SMEs normally leads to af-
fect their ability to enforce and litigate their rights in
front of big entities. Many times they prefer trade se-
crets to patenting for this reason. They don’t like being
dragged by big companies into endless legal battles. In
Chile there is not a patent litigation insurance scheme
to give a hand to the SMEs as it normally happens in
the Northern Hemisphere.
SMEs are mainly involved in patent litigation as de-
fendants, trying to get rid of complainants accusing
them of using patented material. This is especially com-
mon in the pharmaceutical industry, an area where im-
portant patent litigation takes place in Chile, regardless
of the very low magnitude of patent litigation overall.
The patent culture is changing and younger entre-
preneurs are more inclined to protect their IPRs, thus
increasing the possibility of being involved in patent liti-
gation not only as defendants, but also as patent owners
seeking to protect and enforce their own IP assets. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009330
 Patent And SMEs In Colombia
Patent And SMEs In Latin America: Colombia
By Fernando Triana Soto and Marcela Gómez Rubio
T
he “Promotion of technological development
and innovation” is one of the policies set by the
Colombian Government for the growth of the
country’s economy with the objective of strengthening
the national business sector through innovation.
About 10 years ago, a comprehensive overview of
the status of innovation in Colombia showed low in-
vestment in the activities of science, technology and
innovation (hereinafter STI) in addition to the low
participation of Colombian nationals in the Industrial
Property System, namely the protection through pat-
ents of invention.1 It was found that the tax benefits
introduced since the 90’s were not stimulating invest-
ment in STI, and the main cause was the lack of know-
ledge of nationals about how the Intellectual Property
System operates in our country.
Thus, in 2008, public policies aimed at strength-
ening Intellectual Property began to be introduced,
notably Conpes 3533 of 20082 which recommended
the implementation of training activities, manuals,
bulletins to disseminate knowledge about the Intellec-
tual Property System between these nationals, it also
recommended the strengthening of the institutions
responsible for administrating the system, to make its
work more efficiently.
Following similar lines, Conpes 3834 of 2015 estab-
lished the need to introduce tax deductions and im-
prove the conditions and alternatives for access to tax
benefits. In addition, it was recommended to enable
early stage companies and SMEs to make deductions
when they invest in STI. Although presently they do
not generate net incomes, they will be able to deduct
1. Report of the “Superintendence of Industry and
Commerce” published in Industrial Property 2020, according
to WIPO, in developed countries more than 50 percent of the
patent applications are filed by residents of the country. For
instance, in Spain more than 90 percent of patent applications
have been filed by nationals in recent years. On the other hand,
in emerging economies WIPO suggests that this figure is around
20 percent. In Brazil and Argentina, the participation has been
close to 20 percent, while in Chile it has been around 10
percent in recent years. Unfortunately, in Colombia that figure
has not reached even eight percent.
2. The National Council for Economic and Social Policy, known
by its acronym CONPES, is the highest planning authority and
serves as an advisory body to the Government in all aspects
related to the economic and social development of the country
and it also coordinates the related agencies for decisions on
economic and social policy (For additional reference, please
consult https://www.dnp.gov.co/CONPES/Paginas/conpes.aspx).
investments in innovation in the future when they
must pay income tax. However, this benefit is only
applicable within the following four taxable periods
according to Law No. 1819 of 2016.
In addition, in the National Development Plan3 for
2014 to 2018 approved by Law No. 1753 of June 9,
2015, it was established within the Government pol-
icies: “To promote technological development and in-
novation as an engine of business growth and entre-
preneurship” with the objective of increasing the use
of the Industrial Property System for innovation activ-
ities, aiming to increase the number of patent applica-
tions filed by nationals, and leaving the Government
agency Colciencias the task of developing programs
to support patentability procedures in companies,
universities, research and technological development
centers, as well as citizens. In addition, it was set as a
goal that investment in STI would reach one percent of
GDP by 2018, starting from an estimated investment
in 2014 of 0.5 percent of GDP.
Consequently, new changes were introduced to im-
plement the public policies, among which we consider
necessary to emphasize the following:
1. Regarding the Superintendence of Industry and
Commerce (hereinafter SIC) which is the entity
in charge of administering the Industrial Property
System:
1.1 Reorientation of the entity’s mission; in addition
to being the authority in charge of granting in-
dustrial property rights, it also has a pedagogical
objective of promoting knowledge about the In-
dustrial Property matters, for which the following
programs have been developed:
• Creation of the Intellectual Property Academy
(IPA) in 2011, which organizes training activities
for the promotion and generation of a culture of
protection, use and utilization of the Intellectual
Property system. The micro and small companies
that attend the courses of IPA have a discount of
25 percent in the official fees for the industrial
property proceedings.
3. The National Development Plan is the plan that the
President of the Republic presents to Congress at the beginning
of his term with the guidelines of the Government. The topics
should include political, economic, social and security issues of
the country. Once Congress approves the Plan, the President
and his work team must begin to develop the policies that lead
to compliance with it. (For additional reference, please consult
http://www.banrepcultural.org/blaavirtual/ayudadetareas/
politica/plan_nacional_de_desarrollo).
September 2017 203
 Patent And SMEs In Colombia
• Creation of the SIC Móvil project in 2011, whereby
officials of the entity travel to various cities in the
country in order to promote the services provided
by the entity in the field of Industrial Property.
• Granting jurisdictional functions to the SIC through
Law No. 1564 of 2012, creating a judge special-
ized in Industrial Property issues. These kinds of
functions were also granted to the National Direc-
tion of Copyrights. Thus, these specialized judges
encourage protection, as it strengthens the system
of enforcement in relation to acquired rights.
1.2 Greater efficiency in the administration of the In-
dustrial Property System, for which a new tech-
nological platform was implemented and began
operating on July 18, 2016 and allows the online
filing of Industrial Property proceedings, including
patent applications, with the purpose of facilitat-
ing such procedures for the users. An estimated
discount of 18 percent in official fees is applicable
for the online filings this year.
An online filing platform was also implemented in
the National Direction of Copyrights.
1.3 Micro, small and medium-sized enterprises have
an additional 25 percent discount on official fees
for the filings of industrial designs and layout
designs for integrated circuit applications and the
petitions of the patentability exam for patents of
invention and utility models.
It is necessary to note that the fees for the filing of
patent applications have been reduced since 2013. In
2012, the filing fee for a patent application was USD
$205.00, and in 2013 the fee was USD $174.00. The
big decrease was in 2016 when the rate was reduced
to USD $28.00, and in 2017 the rate is still quite low
at USD $31.00.
1.4 In addition, SIC is part of several programs to en-
courage STI such as:
• Technology and Innovation Support Center Pro-
gram (hereinafter TISC), which comes from WIPO
to facilitate access to information and technolo-
gy services. Currently, these centers are located
in Bogotá, Palmira, Barranquilla, Ibagué, Neiva,
Quibdó, Medellín, Pereira, Popayán, Cali, Cartage-
na, Bucaramanga, Rionegro and Manizales. During
2016, 3,909 consultations on Industrial Property
were handled, 305 projects were identified as eli-
gible for protection, and 143 patent applications,
four industrial design applications and 344 trade-
marks were filed through this program.4
• The Inventor Assistance Program (hereinafter IAP),
which is a project that comes from WIPO and WEF
(the World Economic Forum), has the purpose of
putting in contact inventors and small business-
es with limited financial resources with attor-
4. Figures taken from the TISC report for the year 2016
which was provided by the CIGEPI.
204 les Nouvelles
neys specialized in Intellectual Property matters
to receive legal advice during the prosecution of
their patent applications without any charge. The
program in Colombia is coordinated through the
TISC and the Center of Technological Information
and Support of the management of the Industrial
Property (hereinafter
CIGEPI), which is a
unit within the SIC ■ Fernando Triana Soto,
in charge of providing Triana, Uribe & Michelsen,
technological infor- Partner and the Head of
mation services and
specialized guidance the Litigation and Patent
on Industrial Property Department,
issues and Technology Bogotá, D.C., Colombia
and Innovation Sup-
E-mail: tum@tumnet.com
port Center Program
(TISC).
■ Marcela Gómez Rubio,
Since the end of 2015,
22 projects have partici- Triana, Uribe & Michelsen,
pated, 11 have been se- Partner,
lected, seven were already Bogotá, D.C., Colombia
filed as patent applications E-mail: tum@tumnet.com
and the other four inven-
tions are still in drafting to
be filed as patents shortly.5
In fact, TRIANA, URIBE & MICHELSEN’s team,
through its partner Fernando Triana accepted by WIPO
to be part of the legal advisors offered by the program
in Colombia, advised a natural person with the drafting
of the patent application, the application was then filed
and the firm handled the prosecution of the patent ap-
plication without any charge for professional fees. The
only expenses taken on by the inventor relates to the
official fees, which have had significant discounts as
previously noted.
2. Strengthening of Colciencias, which through
Law No. 1286 of 2009 is the National Admin-
istrative Department of Science, Technology
and Innovation, having its own budget, and ex-
ecuting public policies for the promotion of sci-
ence, technology and innovation including the
alliance with diverse sectors to promote areas
of knowledge that are essential to the develop-
ment of the country. Currently, Colciencias is
leading the following programs:
• Patents Brigade, began in the third quarter of 2015
with the purpose of finding innovation projects
and co-financing the protection of such projects
as patent applications, mainly working through
universities, research centers, technology devel-
opment centers, companies and independent in-
ventors. However, it only operates in five cities
(Bogotá, Medellín, Cali, Barranquilla and Bucara-
manga), therefore, it was necessary to carry out
5. Figures submitted by the CIGEPI.
 Patent And SMEs In Colombia
an operation covering the national territory, which
is intended to be covered by the Strategy National
Convention for the Protection of Inventions.
• National Strategy for Protection of Inventions, be-
ing a program led by Colciencias, SIC and INNpul-
sa Colombia (Business Growth Management Unit
of the National Government, created in February
2012 to promote entrepreneurship, innovation
and productivity). The purpose is to increase the
number of patent applications in the country, with
the main attraction of financing up to 90 percent
of the total costs of the patent application. In the
first phase, 29 patent applications will be filed be-
fore SIC in the first half of 2017, and in the sec-
ond phase, they intend to cooperate with at least
36 additional patent applications.6
The public policies will be measured in 2019, to
analyze their effectiveness from 2014 to 2018, how-
ever, please note what the statistics show us up to
this moment.
According to information available in the SIC,7 in
2008 the number of patent applications was 2,031 of
which 125 were filed by residents, while 1,906 were
filed by non-residents, which means that only six per-
cent of applications were filed by Colombian residents.
In 2016, the number of patent applications was
2,2038 of which 545 were filed by residents and 1,658
were filed by non-residents. In other words, the per-
centage of patents filed by residents was 25 percent,
which shows an increase in the participation of res-
idents in the Industrial Property System, concerning
patent applications. Such an increase, of course, has
been possible due to the measures taken by the Gov-
ernment to promote the knowledge and the use of the
System of Industrial Property, including the increase of
investing in STI.
In 2006, the investment in STI as a percentage of
GDP was 0.401 percent, a figure that timidly grew year
after year until it eventually reached 0.711 percent by
2016. The investment in research and development, as
a percentage of GDP, was slightly increasing by 0.149
percent per year and reached 0.271 percent in 2016.
After reviewing the origin of the investments with-
in the period 2006–2016,9 53.67 percent came from
6. Figures included in the statement of the Director of
Colciencias, Mr. Alejando Olaya, available at https://www.
innpulsacolombia.com/es/entrada/en-marcha-segunda-fase-de-la-
estrategia-nacional-para-proteccion-de-invenciones.
7. Statistics from OCyT (Colombian Observatory of Science and
Technology,) http://ocyt.org.co/es-es/InformeAnualIndicadores.
8. Statistics from SIC, http://www.sic.gov.co/sites/default/
files/files/Propiedad%20Industrial/Estadisticas/PATENTES-2016-
Ver-2017-01-14.pdf.
9. Statistics from OCyT (Colombian Observatory of Science and
Technology,) http://ocyt.org.co/es-es/InformeAnualIndicadores.
the public sector, 44.53 percent came from the private
sector and 1.80 percent came from international re-
sources, increasing the investment in the head of the
private sector, since in 2006 the average investment
was 41.93 percent, a figure that has been progressively
increasing until 2016 with an investment percentage
of 53.22 percent.
In addition, if we focus on R&D activities, while in
2006 the private sector investment was calculated at
41.93 percent, the figures increased to 53.22 percent
in 2016, however, a statistic is not found that allows
us to determine how much of that private investment
corresponds to small, medium or large companies.
Speaking to one of the legal advisors of the Colom-
bian Association of Micro, Small and Medium Enter-
prises in Bogotá (ACOPI), Mr. Pedro Alarcón, said that
the insight from the association is that the small and
medium enterprises do not know the System of Indus-
trial Property yet; the sector just until now is giving
importance to the trademarks and in general speaking
to distinctive signs, and concerning innovation, this
matter is seen as a something only achievable for large
companies. In fact, according to the experience of this
entity, they do not receive doubts or concerns about
technology or innovation issues that their partners
take to the association to receive guidance.
In addition, small and medium enterprises struggle
every day to meet with all the regulations imposed to
have formalized businesses and to see how their prod-
ucts and/or services can be sold, therefore, they don’t
have the time to even think about innovation.
The aforementioned allows us to conclude that even
when there are public policies, and indeed measures,
that have been taken to create a consciousness about
the importance of innovation for entrepreneurs and in
general for the citizens, for now, it seems that small
and medium enterprises are still far from receiving the
message since many of them still ignore the Industrial
Property System, and do not even consider what kind
of technology is available in the relevant sector and
much less are in a position to innovate since they are
dealing with the urgent things of each day, putting
aside important things like innovation as key not just
for expanding but even for maintaining the businesses
in the market.
Therefore, the pedagogical activities have not yet
properly reached the SMEs, detecting that there still
exists a lack of knowledge and dissemination about the
Industrial Property System, and that entrepreneurs in-
deed learn about all the programs developed for STI
and its benefits, without ignoring the efforts that have
been made to-date, but unfortunately such programs
are not being effectively used, namely by small and me-
dium-sized enterprises. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009345
September 2017 205
 Patent And SMEs In Mexico

Patent And SMEs In Latin America: Mexico

By Roxana Aispuro and Hector Chagoya

About SMEs in Mexico occupied population and generate incomes equivalent

S
mall and Medium Enterprises (SMEs) have par- to 52 percent of the gross domestic product (GDP).
ticular importance in the Mexican economy. Mexican SMEs, of
This is not only because of their contribution course have available the ■ Karla Roxana Aispuro Castro,
to economic growth, but also their potential for jobs Intellectual Property sys- Becerril, Coca & Becerril, S.C.,
creation and innovation. SMEs generally represent a tem at large in Mexico,
vehicle to boost regional and local economic develop- where the relevant author- IP Value Extraction Engineer,
ment in Mexico. ities such as the Mexican México City, Mexico
The status of SMEs is defined in Mexico by law, par- Institute of Industrial Prop- E-mail: kaispuro@bcb.com.mx
ticularly in the Law for the Development of Competi- erty (IMPI, by its Spanish
acronym), the National ■ Hector Elias Chagoya Cortes,
tiveness of the Micro, Small and Medium Enterprises of
2002. According to this law, a small and medium-sized Institute for Copyrights Becerril, Coca & Becerril, S.C.,
enterprise is defined according to the number of em- (INDAUTOR, by its Span- Partner,
ployees as one that as: ish acronym), the National México City, Mexico
Service for the Inspection
• Up to 250 employees for enterprises focusing on and Certification of Seeds, E-mail: hchagoya@bcb.com.mx
industrial activities, or and even an Intellectual
• Up to 100 employees for enterprises focusing on Property Specialized Bench at the Federal Court for Ad-
commercial or service activities ministrative Justice, together conform a suitable system
In addition, under the rules of the Economy Sec- for intellectual property prosecution and enforcement.
retariat for the recognition of SMEs for government However, the awareness that the use of and respect to
benefits specifically directed to them, enterprises are intellectual property rights will enhance their competi-
classified as follows according to their size in employ- tiveness and business standing still needs to enhance.
ees and amount of sales. See Table 1. Furthermore, even when the SMEs to be enhanced
According to the National Institute of Statistics and are the base of Mexican economy, often they do not
Geography in Mexico (INEGI, by its Spanish acronym) have the management and financial resources neces-
SMEs represent approximately 80 percent of all com- sary for them to develop in a full way, particularly when
panies in Mexico. They employ 75.4 percent of the it comes to their innovation capacity and intellectual

Table 1. Enterprises Classified According To Their Size In Employees

And Amount Of Sales
Micro Enterprise Small Enterprise Medium Enterprise

Sector Empl. Sales1 MCC2 Empl. Sales1 MCC2 Empl. Sales1 MCC2

Industry 0-10 ≤ $4 4.6 11-50 $4-$100 95 51-250 $100-$250 250

Commerce 0-10 ≤ $4 4.6 11-30 $4-$100 93 31-100 $100-$250 235

Services 0-10 ≤ $4 4.6 11-50 $4-$100 95 51-100 $100-$250 235

1. Annual Sales in Millions of Mexican Pesos (MXN)

2. Maximum Combined Cap (MCC)=(Employees)x0.1+(Sales)x0.9

206 les Nouvelles

 Patent And SMEs In Mexico
property (IP) protection strategies as the investment
community in Mexico does not consider intellectual
property as a key asset when investing in SMEs.
SMEs innovation in Mexico is not technology driven
but driven by marketing strategies. This is why it is not
surprising that trademarks are the most widely used
intellectual property right among the SMEs, because
of the basic need of identification in the market from
competitors, the franchising model is one of the pre-
ferred mechanisms for growth amongst SMEs, and also
because the dynamics for domain names leads many
times to the need of having a trademark in order to
defend a domain name as webpages are of the essence
for marketing and increasingly for distribution and in-
ternet sales. Trademarks are registered before IMPI and
constitute the only industrial property right where the
majority of the rights are owned by Mexican residents.
On the technology side, information is scarce and,
unfortunately, patents are not the best indicator of in-
novation activities because of a lack of patenting cul-
ture amongst Mexican companies, even for the larger
corporations. One of the sources of information of
innovation activities in Mexico is an informatics plat-
form and database that identifies and contains relevant
information about entities that, among their activities,
conduct R&D. The National Registry of Technological
and Scientific Institutions and Companies (RENIECyT,
by its Spanish acronym) identifies companies, research
centers, public administration dependencies, natural
persons, not-for-profit private institutions and higher
education institutions. Among the companies with RE-
NIECyT registry, 48.4 percent are considered SMEs.
Nevertheless, no information about IP protection and
innovation activities in these SMEs can be found easily
but only for those that receive government funding for
R&D projects.
Government Policies Promoting Use of Intel-
lectual Property by SMEs
Even though there is not much available informa-
tion related to IP protection or innovation activities of
SMEs in Mexico, the Government has implemented
several programs to promote the creation and use of
the IP as an essential tool for SMEs’ growth.
IMPI is the entity in charge of the registration of pat-
ents, utility models, industrial designs and all kinds of
trademarks; while INDAUTOR is in charge of the reg-
istration of the copyrights. Both entities are linked and
validated by several governmental institutions which
try to promote the IP protection among the SMEs. As
for SNICS, because in addition to the function of pros-
ecuting and granting Breeder’s Rights for plant varie-
ties this entity has a seed certification function, SNICS
is able to reach agricultural SMEs relatively easy to
promote Breeder’s Rights Titles.
One of the strategies of the Mexican government is
developing information for SMEs. The IMPI, togeth-
er with the Secretariat of Economy in Mexico, have
developed a database (the Database of Patent Technol-
ogies for SMEs, PYMETEC, by its Spanish acronym)
that helps SMEs to identify those technologies that are
public domain in Mexico. This is made by identifying
if an international patent application under the Patent
Cooperation Treaty (PCT) has been filed in Mexico at
the national stage, and to determine if said application
can be considered as free to use in the country. This
information is useful for the SMEs because they can
define their technology strategy based on what is al-
ready developed by third parties and what is lawfully
available for use in Mexico.
The financial aids for innovation in SMEs are han-
dled by two different entities as explained below:
For Scientific and Technology projects, the National
Council for Science and Technology in Mexico (CONA-
CyT, by its Spanish acronym) is the institution in charge
of promoting the research and development activities
among the enterprises and institutions in Mexico.
Since its creation, CONACyT has been the main in-
stitution in Mexico that provides economic support to
people both physically and morally, as long as they have
the RENIECyT registry, in order to develop innovative
processes, products or services. Every year CONACyT
publishes several calls for grants, addressed mainly to
SMEs, in order to receive projects requesting money
not only to develop an innovation but also to protect
the knowledge resulting from the projects submitted.
In fact, the projects that consider the protection of IP
generated during the activities of the project are now-
adays the most supported by these calls.
This is possibly one of the main drivers for growth in
the number of patents of Mexican residents in recent
years, because before year 2006, intellectual property
rights were not eligible as expense for use of the funds
granted by CONACyT.
It should be considered that CONACyT is an insti-
tution with national reach and its calls for grants can
be exploited by entities all over the country. However,
CONACyT also works closely with the governments of
the Mexican states to develop programs focused in one
specific region or State in Mexico, along with a local
authority that mirrors CONACyT functions at a State
level (State Councils for Science and Technology). One
example of these programs is the State Council of Sci-
ence and Technology of the State of Jalisco (COECyT-
Jal, by its Spanish acronym) that supports only projects
from institutions located in the State of Jalisco.
Regarding commercial innovation and scale-up of
projects that have been financed already by CONACyT,
the National Institute of the Entrepreneur (INADEM,
by its Spanish acronym) is a public organism decentral-
ized from the Secretariat of Economy created in 2013
September 2017 207
 Patent And SMEs In Mexico
specially to provide economic supports to the entre-
preneurs and SMEs in Mexico. INADEM develops na-
tional programs and publishes calls for grants for pro-
jects mainly focused in further stages of development
of technology projects, with the aim of promoting in-
novative processes or services within SMEs.
In fact, the focus of the Economy Secretariat and IN-
ADEM regarding IP-based models and grants for SMEs
is franchising, which in fact is a very important and
dynamic market in Mexico and a driver for both, trade-
mark registrations and business models.
Intellectual Property as a Tool for Attracting
Investors and Enhancing Competitiveness
in SMEs
For Mexican SMEs IP protection should be very im-
portant to attract investors. Since they typically do not
have enough money to increase their productivity and
installed capacity for expansion, they need to search
for investors who have the economic capability to sup-
port them. However, the awareness of SME executives
and Mexican investors about IP protection as a tool
for enhancing competitiveness is scarce but increas-
ing because of the international awareness and the
franchising model popularity, which requires at least a
trademark register.
There are, however, a lot of opportunities for SMEs'
growth through the use of IP based on the popularity
of the franchising model.
One of them is the understanding of the concept
of IP portfolios. Current franchises can enhance their
ability to enforce their rights against underperform-
ing or non-ethical franchisees by adding to their IP
portfolio trademarks for specific products or services
provided in the franchise, industrial designs and copy-
rights for trade-dress elements such as unique designs
of furniture, gadgets or fixtures, architectural works,
and, of course, patents and utility models for specific
operational processes or machinery that is relevant for
the operation of the franchise.
Trade secrets management is also an area of oppor-
tunity for Mexican SMEs, considering that the better
managed the information, the better opportunity for
enforcement, and typically the management of confid-
ential information is limited to confidentiality clauses in
the franchising contract, but not related to the system-
atic management of the information in order to ensure
that a trade secret remains secret within the franchise.
SMEs in Mexico are not taking advantage of IP for
international growth through licensing. Mexican com-
panies are missing the opportunity that implies obtain-
ing intellectual property in other jurisdictions where
there is a market but they do not have enough invest-
ment resources to grow. Particularly for patents this
208 les Nouvelles
implies a long-term planning vision, and the skill to
include the investment for obtaining IP in the available
government funding programs, for which such invest-
ments are increasingly eligible for the use of such gov-
ernment funding.
IP Culture Challenges for Mexican SMEs
Many SMEs are initially founded by young entrepre-
neurs coming out of universities and colleges; com-
munities where intellectual property has been misun-
derstood as a tool designed for “big companies” that
want to keep control over markets and that have much
money for controlling innovation and jeopardizing the
creative processes required for innovation. This senti-
ment is stronger in communities related to informa-
tion technologies where open-source and freeware are
seen almost as the only viable form of open innovation,
and feel that knowledge should be freely shared with-
out constraints and therefore tend not to respect IP
rights themselves.
This vision is so deeply present among Mexican en-
trepreneurs that when they face the reality of plagia-
rism, unlawful competition and sense the need to have
some protection to their competitive advantages, in-
cluding the challenges imposed by fierce competition
from companies far larger than theirs, they are still
hesitant to use in full the intellectual property system,
and typically they have limited or wrong information
about its effects, use and management.
Therefore, the main challenge is to educate young
entrepreneurs on the role of IP as a tool that protects
the economically and organizationally weakest, through
the power that IP represents, in favour of creators and
inventors, not only in Mexico but worldwide. The edu-
cation must comprise both, the role of IP as a protection
tool and the importance of the tool for open innovation
communities and even open-source business models,
where respect for intellectual property, regardless of
whether it represents or not a source of revenue, is of
the essence for the growth of the business.
Conclusion
SMEs are very important for the Mexican economy
and public policy and IP authorities have been focusing
efforts towards the promotion of intellectual property
rights as a tool for enhanced competitiveness, particu-
larly for SMEs. The impact of franchising as a business
model is very good for the intellectual property system
and has promoted awareness of IP rights in general.
The main challenge is towards a better understanding
of the effects and benefits of the IP system and a more
intensive use of other IP tools beyond trademarks. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009397

Patent And SMEs In Latin America: Peru
By Renzo Scavia
The Patent Awareness of SMEs in Peru
I
n general, Peruvian legal and individual persons are
not aware of the importance of patents at the desired
level. Furthermore, most of the Peruvian companies
which seek protection of their patents before INDECO-
PI,1 the national authority competent for patent matters,
are not SMEs.
According to a report issued by the Intelligence Unit of
The Economist, national patent applications in our coun-
try show a “weak level of innovation.”2 Furthermore,
such a report concludes that “the number of national pat-
ent applications have increased since 2007, but the vast
majority of them pertain to non-resident applicants.”3
One of the reasons for the low level of innovation in
our country is that scientific research has not had ad-
equate economical support from the government. In
fact, the Ministry of Economy states that our country
has “only 0.24 full-time researchers per each 1,000 par-
ticipants of the economically active population.”4 Anoth-
er reason is the low investment in scientific research
education making our human capital not even aware of
the importance of patent protection. Some public insti-
tutions that received money from the Ministry of Econo-
my returned US $450 million dollars between 2004 and
2012, because they lacked scientists and had no way to
invest the money.5
The Government Policy to Promote Patent for
SMEs
The government has a twofold policy to promote in-
novation in SMEs. One of them is the creation of edu-
cational programs and platforms to foster the culture of
innovation, such as Patente Rápida, Innovate Perú, Em-
prendedor Peruano: Oportunidades Para El Crecimiento
Empresarial, Start-Up Perú, and Pattem, etc.
Patente Rápida is one of the most important education-
al programs for inventors. This program allows inventors
to learn the legal framework of patent proceedings, to
know the formal requirements of the proceedings and
to adequately prepare the technical document to avoid
office actions and delays. This program also renders
1. INDECOPI stands for The National Institute for the Defense
of Free Competition and the Protection of Intellectual Property.
2. Intelligence Unit of The Economist. “Situación de los
Derechos de Propiedad Intelectual en el Peru.” http://posgrado.
pucp.edu.pe/wp-content/uploads/2014/10/EIU-MS-Peru-IP-
Environment-2014.pdf.
3. Intelligence Unit of The Economist, 12.
4. “Ciencia en Perú: ¿Cuáles son las causas de su baja
performance y cómo impulsarla?” Universia News http://noticias.
universia.edu.pe/ciencia-nn-tt/noticia/2014/07/25/1101155/ciencia-
peru-cuales-causas-baja-performance-como-impulsarla.html.
5. Universia News.
Patent And SMEs In Peru
technical advice to
the inventors. ■ Renzo Scavia,
Another aspect Scavia & Scavia Abogados,
of the policy in-
volves a legal fo- Principal,
cus having Law Lima, Perú
N° 30309, “Law E-mail: rscavia@scavialaw.com
which promotes
scientific research,
technological de-
velopment and innovation” as the main example. Such
a law grants tax incentives to companies which invest in re-
search, even if the specific corporate purpose of companies
does not comprise scientific research.
How do SMEs Use Patents?
Firstly, it shall be clarified that 72 percent of the na-
tional patent applications are individual persons, 24 per-
cent are companies (big and SMES) and four percent are
represented by universities and other entities.6
Additionally, according to a ranking published in 2015,
the individual and legal persons which have filed most
patent applications for inventions in our country be-
tween 1973 and 2004 are Grupo Famesa, an explosives
factory (26 applications), Pontificia Universidad Catolica
del Perú (PUCP) and Universidad Nacional Mayor de
San Marcos, two of the most important universities in
Peru with 25 and 17 applications, respectively, and Al-
fredo Valois Chincha Pajuelo, an independent researcher
with 21 applications.7
What this ranking shows is that SMEs do not use their
own inventions. They may probably obtain inventions
through licenses granted by independent researchers,
but we do not have official data to affirm this.
SMEs and Patent Litigation
Statistics of the competent authority indicate that
only 0.56 percent of the proceedings commenced be-
fore the Peruvian Patent Office between May 2014 and
April 2015 corresponds to 14 infringement actions.
Moreover, seven nullity actions initiated in the same
period represent only 0.28 percent.8 These are global
statistics meaning that said proceedings are commenced
either by national or non-resident companies.
Such previously referred infringement and nullity
actions are brought by pharmaceutical laboratories,
i.e., big companies. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009404
6.. “Historia de las Patentes e Invenciones en el Perú.”
INDECOPI, (2015) 32. https://www.indecopi.gob.pe/documents/
20791/203175/01.-Historiadelaspatentesweb.pdf/ee9da00e-ae8d-
4fbf-a451-8b103dbc0d01.
7. Ibid., 32.
8. INDECOPI’s Monthly Report, (April 2015) 40. https://www.
indecopi.gob.pe/documents/20182/143803/Abril2015.pdf.
June 2017 209
 A South African Perspective
SMEs — A South African Perspective
By Madelein Kleyn
Introduction
S
outh Africa does not invest in procuring accurate
statistics on small businesses in South Africa,
making it difficult to find the exact number of
companies that operate in the country. SEDA (Small En-
terprise Development Agency) issued a broad statistical
overview of the SMEs of South Africa1 in January 2016
Table 1: Statistical Overview of SMEs
KEY INDICATORS
Number of SMEs 2,251,821
Number of formal SMEs
Number of informal SMEs 1,497,860
SME owners as % of total employment
% operating in trade & accommodation
% operating in community services
% operating in construction
% operating in financial & business services
% contribution to GVA*
% black owned formal SMEs
% operated by income group < R30k pa
Source: BER, StatsSA *GDP before taxes and subsidies
and presented the following indicators.
According to the Banking Association of South Af-
rica2 in South Africa, small and medium-sized enter-
prises make up 91 percent of formalised businesses,
provide employment to about 60 percent of the labour
force and total economic output accounts for roughly
34 percent of GDP.
Although there is no exact definition for SMEs, the
National Small Business Act (102 of 1996) defined small
business as medium, small, very small and micro enter-
prises based on certain characteristics. The Act aims to
provide for the “establishment of the Advisory Body and
the Enterprise Promotion Agency; to provide guidelines
for organs of State to promote small business in the
Republic; and to provide for matters incidental there-
to.” The National Small Business Amendment Act (26 of
2003) aims to update and further define business ac-
cording to five categories established by the original act,
1. http://www.seda.org.za/Publications/Publications/The%20
Small,%20Medium%20and%20Micro%20Enterprise%20
Sector%20of%20South%20Africa%20Commissioned%20by%20
Seda.pdf.
2. http://www.banking.org.za/what-we-do/sme.
210 les Nouvelles
namely; standard industrial sector and subsector clas-
sification, size of class, equivalent of paid employees,
turnover and asset value—excluding fixed property.
Government Support of SME Initiatives
Government raised the status of its small business
initiatives with the creation, in 2014, of a department
dedicated to this cause, i.e. the Department of Small
Business Development (DSBD). Public enti-
ties that report to the Minister of DSBD are
the Small Enterprise Development Agency
Q2 2015 (SEDA) established in terms of the National
Small Enterprise Act, 1996 (No.102 of 1996),
667,433
as amended in 2004 and the Small Enterprise
Finance Agency (SEFA) established in terms
of Section 3(d) of the Industrial Development
14% Corporation Act, 1940 (No. 22 of 1940) (IDC
43% Act).
14% SEDA provides non-financial business de-
13% velopment and support services to small
12%
enterprises in partnership with other role
players in the small business development
21%
environment. SEDA’s mission is to develop,
34% support and promote small enterprises to
7% ensure their growth and sustainability. SEFA
provides access to developmental finance to
survivalist, micro, small and medium busi-
nesses throughout South Africa.
Further Government initiatives are provided through
Act No 102 of 1996 in the establishment of the Na-
tional Small Business Council, the Ntsika Enterprise
Promotion Agency (Ntsika), as well as Khula Enterprise
Finance which is charged with helping small and medi-
um-sized enterprises secure finance. This is primarily
through the provision of security on behalf of small
businesses to commercial banks, retail financial insti-
tutions, specialist funds and joint ventures, as well as
offering loans through partner intermediaries.
Main Supporting Entities
There are many agencies and corporate entities that
provide guidance and financial grants to SMEs and en-
trepreneurs, for the relevance of technology protec-
tion and commercialisation of intellectual property.
Specific mention is to be made of THRIP and TIA.
Technology and Human Resources for Indus-
try Programme (THRIP)
THRIP is a project between DTI3 (Department of
3. http://www.thedti.gov.za.

Trade and Industry) and the NRF (National Research
Foundation). This scheme was implemented to in-
crease the high level technical skills for the industry
and improve South Africa’s competitive edge through
the development of technology. This grant is primarily
aimed at engineering graduates. The THRIP fund ca-
pacity is R150 million. THRIP aims to develop these
SMEs into large companies, expanding the networks
and allowing these SMEs access to scientific expertise,
equipment and facilities at partner research entities.
The Technology Innovation Agency (TIA)
TIA is a national public entity related to the DTI. It
serves as the key institutional intervention to bridge
the innovation chasm between research and devel-
opment from higher education institutions, science
councils, public entities, and private sector, and com-
mercialisation. In terms of the Technology Innovation
Act (Act 26 of 2008). The object of TIA is to support
the State in stimulating and intensifying technological
innovation to improve economic growth and the qual-
ity of life of all South Africans by developing and ex-
ploiting technological innovations. TIA has available a
Patent Support Fund5 which is intended to provide the
support mechanisms to assist entrepreneurs and SMEs
with the protection of their IP. The Patent Support
Fund is intended to support the filing, prosecution and
maintenance of patents and/or patent applications in
respect to technological innovations emanating from
entrepreneurs and SMEs. The support is specifically
intended for funding new or improved technologies
which TIA can progress from the applied research
stage to commercial deployment.
Other industrial and financial sectors that support
SMEs through grants, free advice, infrastructure or
networks include the Banking Association of South
Africa. Apart from financial and financial risk assist-
ance, it also facilitates stakeholder engagement of
among others the Gauteng Dept. of Economic Devel-
opment, Industrial Development Corporation, Khula,
Small Enterprise Development Agency, South African
Micro-Finance Apex Fund, Development Finance In-
stitutions, Department of Trade and Industry, and
provides Research and Knowledge Management.
SME South Africa6 is a daily online news portal that
provides strategic business content to enable SMMEs
to unlock their growth potential. They offer a one-stop
shop for SMME-related issues in Africa, providing busi-
ness owners with practical insights, advice and tools
that are essential to running a profitable business. Our
editorial content focuses on key aspects of running a
4. http://www.tia.org.za.
5. http://www.tia.org.za/Funding-Procedure/intellectual-property-
(ip)-fund).
6. http://www.smesouthafrica.co.za.
A South African Perspective
business, such as Business Finance, SMME Laws &
Regulations, Marketing, Technology, Leadership and
Human Capital. They have an online audience reach in
South Africa, Kenya, United States, India and United
Kingdom. SME Toolkit7 aids SMEs to start-up business-
es, advise on funding and include information on IP
protection mechanisms and means for SMEs.8
The National Intellectual Property Manage-
ment Office (NIPMO)
NIPMO9 is an initiative
4
of the Department of Sci- ■ Dr. Madelein Kleyn,
ence and Technology, re- Oro Agri International Ltd;
sponsible for implement- University of Stellenbosch,
ing the Intellectual Prop-
erty Rights from Publicly Director; Legal and Intel-
Financed Research and lectual Property & Research
Development Act (No. 51 Fellow of the Anton Mostert
of 2008). NIPMO ensures Chair of Intellectual Property,
that intellectual property University of Stellenbosch,
emanating from publicly
financed research and de- South Africa,
velopment is identified, Cape Town, South Africa
protected, utilized and E-mail: mkleyn@oroagri.com
commercialized. NIPMO
operates through three
directorates: Regulatory and Compliance (registering
IP created from use of public funds, approving certain
IP transactions, and enforcing the Government’s IP
rights), Advisory and Support (providing legal advice,
and capacity building support in technology transfer),
and Fund Management (providing funds for IP protec-
tion).
The IPR Act provided a new basis for the manage-
ment and commercialization of IP created through
universities and research institutions. It also allowed
access to SMEs and Black Economic Empowered en-
tities, previously not enabled to exploit IP opportuni-
ties. Between 2010 and 2016, over 1,000 invention
disclosures were filed under the new system by South
African institutions, of which seven percent had been
commercialized by the end of this period. Examples
include systems to calibrate TB testing equipment, im-
proving the accuracy of diagnosis to tens of thousands
of individuals, and 3D printing/rapid prototyping meth-
ods, for the creation of replacement facial features for
individuals who not have access to medical funds and
who are undergoing reconstructive facial surgery.
NIPMO provided support to 30 institutions and
regional offices, offering R 106 M of support (which
led to the creation of over 100 specialised technology
7. http://southafrica.smetoolkit.org/sa/en.
8. http://southafrica.smetoolkit.org/sa/en/category/2964/
Intellectual-Property.
9. http://nipmo.org.za.
September 2017 211
 A South African Perspective
The Innovation Hub’s mission is to promote the socio-economic development
and competitiveness of Gauteng through innovation by:

Creating new business Ensuring human capacity Enhancing the synergy

opportunities and adding value to development of critical skills between industry, government
mature companies in technology matching industry needs in and academic and research
and knowledge-based sectors priority sectors institutions

Fostering entrepreneurship Providing attractive spaces for

and incubating new innovative emerging knowledge companies
companies

Source: http://www.theinnovationhub.com

transfer posts), and provided 24 institutions with R 83
M of fund management support for IP protection.10
The Innovation Hub
The Innovation Hub was established by the Gauteng
Provincial Government in 2001 and creates initiatives
that support innovation and enterprise development.
It is in Tshwane, South Africa’s executive capital, and
has become a regional centre of innovation and knowl-
edge creation.
Legislative Framework
The Patents Act 57 of 1978 as amended, governs
the protection of inventions, the Companies and Intel-
lectual Property Commission (CIPC) is the custodian
of all new patent applications that are filed within the
Republic of South Africa. Other than that an individ-
ual can privately file a provisional patent application
(only a patent attorney can file a non-provisional pat-
ent application and assist in drafting the patent spec-
ification), no specific mention is made of any form of
SME and there is no differentiation in filing or filing
fee status that is derived from entity status. For quite
some time there has been international criticism on
the South African patent system and specifically on the
access to medicine protected by patents. In answer to
this, the South African National Draft IP Policy was
published in 2013. It included specific reference to
BEE and SME enterprises in the context of the trade-
marks system with focus on licensing of franchising
activities. The Draft Policy was severely and widely
criticised and in 2016 the DTI issued the National IP
Consultative Framework which replaced the IP Poli-
cy. There was no specific mention made of preferent
treatment of SMEs, the focus was mainly on the phar-
maceutical industry and the introduction of patent
examination and pre- and post-grant oppositions. The
public submissions process into the IP Consultative
Framework has created a platform for IP stakeholders
to once again call for IP law reform in South Africa.
The DTI has not released a list of submitters nor the
submissions themselves. After considering substantial
comments received11 from various sectors in industry,
IP professionals and institutions such as the SAIIPL and
LES, the new IP policy based on the IP Consultative
Framework has been submitted to Cabinet in the first
quarter of 2017. No further announcement has been
made to-date.
SME and Patenting
The securing of Intellectual Property (IP) is an im-
portant aspect in the economic growth strategy for the
knowledge economy. According to a study done by SA-
ICA12, patent propensity is lower in SMEs than in large
organisations (or companies) and patenting as means
for appropriation is of less importance among SMEs.
There are, however, numerous examples of small busi-
nesses that have sufficient talent to produce significant
and bankable innovations and this is confirmed by the
patent statistics for South African inventions as shown
below. SAICA’s research shows that a substantial por-
tion of technology innovations and inventions emanat-
ing from the South African public, and in particular,
entrepreneurs and SMEs have not made their way to
the marketplace because of a lack of support mecha-
nisms, largely financial, for patent protection.

10. Kerry Faul, “Innovation Insights: Entrepreneurial

Ecosystems from Around the World—A South African
Perspective,” 6th International Conference on Managing
Intellectual Property Rights in Universities, (2016) https://view.
officeapps.live.com/op/view.aspx?src=http%3A%2F%2Fwww.
ipconference.boun.edu.tr%2Fipconference-2016%2Fpresentatio
n%2FP6%2Fkerry_faul.pptx; accessed April 2017.
11. https://www.ip-watch.org/2016/10/20/south-african-ip-
framework-comments-action-seen-early-2017.
12. See SAICA (South African Institute of Chartered
accountants –2014/5/6 SMME INSIGHT REPORTS) and BER
“The Small Medium and Micro Enterprise Sector of South
Africa,” commissioned by SEDA Note 1 of 2016.

212 les Nouvelles

 A South African Perspective
South African research group, World Wide Worx has
released its 2016 State of South African Small Busi- Figure 1. Total Patents Per Entity Type
ness report, showing what small business leaders in
the country are facing in the country. On the question
on whether SMEs embrace technology, two-thirds of 300
small business owners said that technology was very
250
important or essential for their business operations,

Number of Patents
with smart devices and apps making their lives and the 200
running of their businesses easier.
It is evident from the statistics that since the imple- 150
mentation of the IP Rights Act in 2010 the patenting
activity of individuals, research institutions and univer- 100
sities has increased significantly.
50
The data13 presented below covers a period of five
years’ patent application activity of the top 100 appli- 0
cants in South Africa which is determined based on 10 2010 2011 2012 2013 2014 2015 2016
or more patent applications per year. There appears to Universities & Research SMEs and Individuals Large Companies
Institutions
be a higher number of patents being filed by SMEs on
total number of patents. On average per year per entity
type, SMEs file less patents than corporations per entity. Figure 2. Average Patent Activity
The data sample in Figure 1 reflects the activity of 17 Re- Per Entity
search institutions, 60 SMEs or individual inventors and
27 large corporations of the top 100 patent applicants in 9
South Africa. This indicates that SMEs are aware of the 8
importance of protecting intellectual property. 7
SME and IP Litigation 6
Legal advice and litigation is expensive. Entrepre- 5
neurs and start-ups are generally unable to afford legal
4
services. Most of the IP litigation of SMEs focus on
3
trademarks rather than patents. Figure 3 is a sum-
2
mary of judgements14 for the period 2010 to 2016.
1
The scope of this article does not allow for further
investigation if the data and the graph below is merely 0
2010 2011 2012 2013 2014 2015 2016
an indicator that SMEs do participate in litigation but
due to budget constraints the activity is lower than for Universities & Research SMEs and Individuals Large Companies
Institutions
larger corporations.
In Conclusion
SMEs in South Africa play an important role in the Figure 3. IP Litigation
growth of the South African economy. Government Year of Judgement 2010-2016
is supporting SME initiatives and their innovation
through various organisations and agencies that fund 70
start-ups and facilitate filing, prosecuting and commer- 60
cialization of inventions. SMEs are generally informed
about IP and the importance of protecting intellectual 50
property but do not always have the funds to ensure 40
freedom to operate, protect and enforce their IP rights.
30
The enactment of the IPR Act in 2010 brought about
a significant changed in the South African IP landscape 20
and it is foreseen that the newly awaited IP Policy will 10
promote patenting by SMEs and freedom to operate
although the initial focus appears to be on the pharma- 0
2010 2011 2012 2013 2014 2015 2016
ceutical industry. ■
Total Nr of cases SME
13. Patent statistics provided courtesy of Adams & Adams
Attorneys http://www.adamsadams.com. Available at Social Science Research Network (SSRN):
14. Extracted from BIP and Juta Law reports https://juta.co.za. https://ssrn.com/abstract=3009379

September 2017 213

 Conclusion—A Different Perspective
Conclusion—A Different Perspective:
Do Not Focus Only On SMEs,
Make The Knowledge Economy Work
By Patrick Terroir
A
ll policies in favor of SMEs have actually lim-
ited effectiveness and have hardly produced
any significant change in the behavior of this
category of enterprises. So, while it may be necessary
to strengthen and improve them, we may consider
whether it is not necessary to transform the “patent
economy” itself.
As we have seen, the SMEs consider that the cur-
rent system is too costly for a limited effectiveness
and is neither accessible nor useful to them. At a time
when innovation is at the heart of our economies,
where SMEs play an increasing role in this regard and
intangible assets represent the core of business value,
this defiance toward patenting challenges the entire
IP system.
Indeed, how can we imagine seriously that the SMEs
will invest time and money—which are extremely rare
for them—to obtain (after three years at best) a patent
title that will not be considered as an asset in their
balance sheet, which cannot be used to obtain a loan
(except recently in a few countries in Asia) and that
cannot be simply and securely sold or licensed.
In such a context it seems highly urgent, to safe-
guard the IP system and truly change the situation of
the SMEs, to open up an international reflection, as it
was done in the past for the TRIPS or the PCT agree-
ments. This reflection should focus on the status and
the role of the patents as regards the main innovat-
ive actors (SMEs and PROs) and take account of the
new technologies and the transformation of the global
value chain.
In particular, two main objectives should be attained
to make the patent system in line with the needs of
the SMEs:
• To recognize the patent as a true asset and a pro-
duction input; and
• To create the full economic mechanisms necessary
to the knowledge economy.
However, the means of achieving these objectives
are diverse and they often involve some profound
transformations which call for in-depth reflection. To
open them, this conclusion aims to present the most
important ones.
214 les Nouvelles
Make the Patent a Robust International Title
In order to adapt the patent system to the reality
of innovation, it is in particular necessary that SMEs
no longer run up against long and complex proce-
dures, which are too different from one country to
another and give no assurance as to the validity of
the issued patents.
The objectives to be attained are therefore to make
the patent procedures more accessible (less expensive,
less complex on the international level) and above all
to make the patent a robust title (e.g. non-contestable
after a certain period of time) at the level of the world
economy. This, of course, presupposes that patent of-
fices meet equivalent quality standards and that com-
munication between them improves—which should
not be a technical problem in these times of digitaliza-
tion, big data and AI (artificial intelligence).
Make the Patent a Recognized Industrial and
Business Asset
SMEs will only be interested in patents if they be-
come a recognized asset in their balance sheet. It
should not be about “accounting contortions” but
putting patents in the same position as other tangible
assets and to recognize them as the result of the R&D
investment made.
The patents have several characteristics that should
contribute to account them as fully-fledged assets: they
are issued through procedures carried out by inde-
pendent entities, they are standardized (incompletely)
at the international level, they are accessible in official
databases… The remaining (and essential) question is
the one about the value of this intangible asset, which
could not be solved without the setting up of a true
“economy” of knowledge.
Rebalance the Function of Patents and Create
a True Economy of Knowledge and Intangible
Assets
The patent can no longer be considered only as a
mean “to prevent a third party”1 and to sue infringers,
even if the defense of property is a necessary condi-
1. TRIPS agreement, article 28.
 Conclusion—A Different Perspective
tion for the working of the IPR system. The process do not accept patents as collateral—which handicaps
of innovation is changing and it rests more and more precisely the SMEs as they rely mostly on their intan-
on cooperation, exchanges and associations between gible assets. As noted in a recent report,2 “Global li-
inventions coming from everywhere. The patents censing activity leaves no doubt that IP is in fact an
are the most suitable vehicle to become the needed immensely valuable, highly tradable and very portable
technology transfer instrument and the valuation and asset class. Current practice simply reflects the fact
transaction asset. that the buyers of IP are
The aim should be to complete the setting up of the immature.”
■ Patrick Terroir,
knowledge economy by giving to every enterprises the When banks will con-
Innovation Legal;
possibility to produce, finance, acquire, exchange, sell sider that patents are ac-
and license intangible assets on the basis of instru- ceptable as collateral, we Sciences Po Paris,
ments and values recognized and accepted. As there may think that it will no Lawyer, Professor,
is no value without a “market” process, the objective longer be necessary to put Paris, France
should be to create the conditions for an easy access, a in place heavy programs E-mail: pterroir@gmail.com
transparent (predictable) and secure frame for patent to convince SMEs of the
exchanges - as such mechanisms exist in all other areas utility of patents. But it
of the economy. The “patent market” fulfills part of is also likely that, without a strong support of public
these functions already between large companies; the money—as is the case in Asia—it will not be possible
goal is to extend it to the SMEs and to get a “regulated to consider the patent as collateral until the previous
market” for intangibles—as it exists (under different objective (create a true patent economy) has not been
forms) in the other domains of the economy. achieved. ■
The conditions and the ways for the implementa- These ending reflections are for the opening of the
tion of such economic market mechanisms are not the debate, and they could be the topic of future issues of
topic of this issue but they can make the subject of a les Nouvelles.
later one.
Make the Patent a Financing Tool Available at Social Science Research Network (SSRN):
The lack of recognition of the value of patents, in the https://ssrn.com/abstract=3009410
absence of an organized IP market, means that banks

2. “Banking on IP? The Role of Intellectual Property and

Intangible Assets in Facilitating Business Finance,” UK IPO,
(2013).

September 2017 215

 The Exhaustion Theory
The Exhaustion Theory Is Not Yet Exhausted:
Part 4
By Erik Verbraeken
I
t has been quite some time that I have not updated
the “Exhaustion Theory Is Not Yet Exhausted”
series. In the latest edition stemming from March
2014, the focus was laid on several U.S. decisions
where the IP right holder contested that he had con-
sented to a “first sale” of the product as a result of
which his IP rights were to be considered as exhausted,
and where as a consequence of such deemed consent
the purchaser considered itself free to use or resell
that product without further restraint from patent law.
This part 4 of the “Exhaustion Theory Is Not Yet Ex-
hausted” series will have a closer look at some recent
national court decisions from within the European Un-
ion where, for several reasons, the IP right holder con-
sidered that he had never authorized the products to
be “put into circulation for the first time” (considered
as the specific subject-matter of an IP rights by the Eu-
ropean Court of Justice as defined in Sterling Drugs vs.
Centrafarm (C15/74) for patent rights and Winthrop
vs. Centrafarm (C16/74) for trademark rights). Such
authorization or consent is an essential condition for
the application of the exhaustion theory and the ab-
sence of such consent will entitle the IP right holder to
pursue the protection of his rights. Consequently, legal
proceedings were opened against either the trader or
the purchaser of those goods by the IP right holder
contending that he never authorized the sale.
Whether or not consent was given by the IP right
holder arose in the following cases: (1) Xerox vs. Impro
Europe (Court of Appeals Brussels, Belgium, decision
of October 20, 2015) regarding the consequences of
a contractual reservation of property on the supply of
ink cartridges to wholesalers and end-customers, (2)
Living Tower vs. DKW (District Court The Hague, The
Netherlands, decision of February 8, 2017) regarding
the consequences of a non-authorized sale by a joint
design right owner, (3) Piloxing vs. California Classic
Cars (District Court The Hague, The Netherlands, de-
cision of March 16, 2016) regarding the consequences
of a letter of intent where goods were made available to
the (potential) licensee, (4) Flynn Pharma vs. Drugsrus
(High Court London, England, decision of October 6,
2015, confirmed by Court of Appeal, decision of April
6, 2017) regarding the consequences of the transfer
of a UK marketing authorization coupled with a con-
tract manufacturing arrangement, (5) A vs. B (District
Court Dusseldorf, Germany, decision of December 12,
216 les Nouvelles
2013) regarding the exhaustion of combination claims
through the sale of individual components, (6) FSEL vs.
Verum (District Court Amsterdam, The Netherlands,
March 10, 2017) regarding the intricacies of the appli-
cation of the exhaustion theory in a software context.
1. Preliminary Comments
Before examining the four above quoted court deci-
sions, it may be helpful to summarize, in several bul-
let points, the applicable law on the exhaustion of IP
rights as the same has been developed by the Europe-
an Court of Justice since its first milestone decision
of 1974 in the Sterling Drug/Winthrop vs. Centrafarm
parallel trade dispute where it had to reconcile on the
one hand the fundamental principle of the free move-
ment of goods within the European Union (as laid
down in article 34 of the EU Treaty) and on the other
hand the protection of industrial property rights as a
legitimate exception to such free movement of goods
(as laid down in article 36 of the EU Treaty).
• The specific subject matter of the industrial prop-
erty that may be protected under article 36 is the
guarantee that the patentee, to reward the crea-
tive effort of the inventor, has the exclusive right
to use an invention with a view to manufacturing
industrial products and putting them into circu-
lation for the first time, either directly or by the
grant of licences to third parties, as well as the
right to oppose infringements (Sterling Drug/Win-
throp vs. Centrafarm, judgment of October 31,
1974 in cases 15 and 16/74).
• A derogation from the principle of the free move-
ment of goods is not justified where the product
has been put onto the market in a legal manner,
by the patentee himself or with his consent, in the
Member State from which it has been imported,
in particular in the case of a proprietor of parallel
patents (Sterling Drug / Winthrop vs. Centrafarm,
judgment of October 31, 1974 in cases 15 and
16/74).
• The right of first placing a product on the market
enables the patentee, by allowing him a monopoly
in exploiting his product, to obtain the reward for
his creative effort without, however, guaranteeing
that he will obtain such a reward in all circum-
stances (Merck vs. Stephar, judgment of July 14,
1981 in case C-187/80).

• The consent that is implicit in an assignment of
rights is not the consent required for application
of the doctrine of exhaustion of rights. For trade-
marks, consent implies that the owner of the right
in the importing Member State must, directly or
indirectly, be able to determine the products to
which the trade mark may be affixed in the ex-
porting Member State and to control their qual-
ity. That power is lost if, by assignment, control
over the trade mark is surrendered to a third party
having no economic link with the assignor (Ideal
Standard vs. IHT, judgment of June 22, 1994 in
case C-9/93).
• A sale which allows the proprietor to realise the
economic value of his IP rights exhausts the exclu-
sive rights thereof, more particularly the right to
prohibit the acquiring third party from reselling
the goods (Peak Holding vs. Axolin-Elinor, judg-
ment of November 30, 2004 in case 16/03).
• Exhaustion occurs solely by virtue of the putting
on the market in the EU by the proprietor. Any
stipulation, in the act of sale effecting the first
putting on the market in the EEA, of territorial re-
strictions on the right to resell the goods concerns
only the relations between the parties to that act
(Peak Holding vs. Axolin-Elinor, judgment of No-
vember 30, 2004 in case 16/03).
• Where a licensee puts goods bearing the mark on
the market he must, as a rule, be considered to be
doing so with the consent of the proprietor of the
trade mark; but the license agreement does not
constitute the absolute and unconditional consent
of the proprietor of the trade mark to the licensee
putting the goods bearing the trade mark on the
market (Christian Dior vs. COPAD, judgment of
April 23, 2009 in case C-59/08).
• Various regulations adopted by the European
Council codify the exhaustion rule in applicable
legislation, especially in the area of trademark
law (both the Community Trademark Regulation
and the Trademarks Directive provide for the ex-
haustion of the trademark when the trademarked
goods have been released within the EU market by
the proprietor or with his consent).
A key element in the decisions of the European
Court of Justice for the application of the exhaustion
theory is the consent by the proprietor of the intellec-
tual property right to the introduction of the product
on the marketplace. According to the Court’s ruling
in the Christian Dior vs. COPAD case, consent is tan-
tamount to the proprietor’s renunciation of his exclu-
sive right and constitutes the decisive factor in the ex-
tinction of that right. The extent to which contractual
reservations of rights can be considered sufficient to
deny consent have already been dealt with at several
The Exhaustion Theory
occasions by the European Court itself, including, in-
ter alia, in the above mentioned cases of Peak Holding
vs. Axolin-Elinor and Christian Dior vs. COPAD, but
also in the cases of Greenstar vs. Hustin and Goossens,
judgment of October 20, 2011 in case C-140/10 and
Oracle vs. UsedSoft, judgment of July 3, 2012 in case
C 128/11. In these cases,
the court recognized that ■ Erik Verbraeken,
contractual reservations IFP Energies, Nouvelles,
to sales transactions do
Associate Director,
not prevent exhaustion
from occurring, to the Contracts Division,
extent that the transac- Rueil-Malmaison, France
tion allows the proprietor E-mail: erik.verbraeken@
to realise the economic ifpen.org
value of his intellectu-
al property right. Regarding reservations to licensing
transactions, although in principle exhaustion of the
intellectual property right occurs when the goods are
put on the market by a person with economic links
to the proprietor (e.g. a licensee), nevertheless the li-
cense agreement does not constitute the absolute and
unconditional consent of the proprietor of the intellec-
tual property right to the licensee putting the goods
bearing the trade mark on the market; therefore, there
may be situations where the holder of the rights can-
not be deemed to have consented to the introduction
of the product on the market, e.g. when a directive of
the European Union explicitly reserves certain rights to
the intellectual property owner (e.g. the right to pre-
vent damage to the reputation of the mark recognized
under the Trademark Directive) or where the violation
bears on one of the essential features of the intellectu-
al property right (although the Court of Justice did not
indicate, in the above mentioned Greenstar vs. Hustin
and Goossens decision, what should be considered as
essential features of the Community plant variety right).
This fourth article in the series of “Exhaustion The-
ory Is Not Yet Exhausted” chronicle will now focus on
some national court decisions that have had to deal
with non-consent arguments of the intellectual prop-
erty owner regarding the impact of such non-consent
on the exhaustion of rights following the introduction
of the product on the market.
2. Xerox vs. Impro Europe (Court of Appeal Brus-
sels, Belgium, Decision of October 20, 2015)
Impro Europe BVBA has set up a trade in unused
printing accessories such as toners, cassettes and cart-
ridges. It sources those articles from companies that,
following their initial order for such products from the
original manufacturer, find themselves confronted with
overstock or remainder items. Impro Europe acquires
such unused overstock from such companies and then
resells those products mainly over the internet.
Some of those products that are offered for sale by
September 2017 217
 The Exhaustion Theory
Impro Europe originate from Xerox Corporation. The
particular feature at stake in this case was that Xerox
supplied the consumables to its customers under two
different formats: (1) supplies made under a mainten-
ance agreement, where the client pays for the machine
under a “price per page” formula, and where consum-
ables will then be made available by Xerox following
an order from the customer based on the individual
machine’s meter configuration, (2) supplies made in
the absence of a maintenance services agreement,
where Xerox sells the ink cartridges or cassettes on a
“per unit” basis to the customer. The products ordered
under the different formats, although identical in com-
position, can be distinguished by their different pack-
aging and different purchase channels. Xerox did not
contest that its IP rights were effectively exhausted for
all products that it had sold to customers under the
second format; however, Xerox contended that it had
never “put into circulation” the products supplied un-
der the first format because of its reservation of title
to the goods and the contractual obligation to return
unused cartridges to Xerox without compensation.
The Brussels Court of Appeal concurred with Xerox
(and overruled the decision of the lower court who
had retained that, despite these elements of fact, the
IP rights of Xerox to the trademarked products were
exhausted). The Court considered that the products
were merely made available to the customer as part of
the maintenance agreement, and were not sold to the
customer as evidenced by the contractual restrictions
quoted above. Under these circumstances, the goods
cannot be said to have been “put on the market …
by the proprietor or with his consent” which would
have been a ground for exhaustion under article 9 of
the Community Trademark Regulation for the goods
in question.
Impro claimed that irrespective of the contrac-
tual reservations made in the agreements, the Xerox
products were effectively acquired by its clients be-
cause they were paid for through the maintenance fee,
but this argument was dismissed by the court. Like-
wise, the argument that these contractual reservations
were merely a “legal loophole” in order to shield the
market from parallel trade was rejected.
This case provides a good illustration of how the
particular details surrounding the various commercial
transactions within the supply chain for the products
will ultimately determine the navigational direction to
either the “absolute” exhaustion rule defined by the
European Court of Justice in the Peak Holding decision
(where the Court concluded that exhaustion takes
place irrespective of any contractual reservations that
“concern only the relations between the parties to that
act”) or the “relative” exhaustion rule defined by the
European Court of Justice in the Christian Dior de-
218 les Nouvelles
cision (where the Court underscored that the license
agreement does not constitute the absolute and uncon-
ditional consent of the proprietor of the trade mark to
the licensee putting the goods bearing the trade mark
on the market). Unlike the facts in the Peak Holding
decision where the goods were effectively introduced
to the marketplace through a sales transaction (despite
the breach by the intermediate vendor of the resale
restrictions that were agreed with the supplier and
trademark owner), in the Christian Dior case as well
as in the present case, the goods were not sold by the
proprietor to his own clients but made available to the
other party, either through a license to manufacture
and sell the goods under the trademark of the propri-
etor in the Christian Dior case or through a consign-
ment structure where the client orders the cartridges
for future use with his printing machine as part of his
maintenance agreement with the vendor (and owner
of the trademark) in the present case.
The Brussels Court of Appeal’s decision can also be
distinguished from the Oracle vs. UsedSoft decision of
the European Court of Justice (decision of July 3, 2012
in case C-128/11) where the significant difference was
that although the transaction was contractually labeled
as a license, for all economic purposes the transaction
qualified as a sale. “The making available by Oracle of
a copy of its computer program and the conclusion of a
user licence agreement for that copy (were) intended
to make the copy usable by the customer, permanently,
in return for payment of a fee designed to enable the
copyright holder to obtain a remuneration correspond-
ing to the economic value of the copy of the work of
which it is the proprietor.” In that light, the argument
of Impro that the goods were already paid for through
the maintenance fee could have been accepted if the
end-user was indeed authorized to keep the unused
cartridges after they were ordered. However, because
the cartridges were provided under a pro rata pricing
formula based on the annual printing volume with a
price per page, it can be said that the unused cartridges
were not paid for—they were left in consignment with
the customer for future use and only during such fu-
ture use could the consumables be considered to have
been paid for under the maintenance agreement.
3. Flynn Pharma Ltd. vs. Drugsrus Ltd.
(High Court London, UK, Decision of Octo-
ber 6, 2015, Confirmed by Court of Appeal
on April 6, 2017)
This case dealt with the transfer of a marketing au-
thorization in the UK for a drug called phenytoin so-
dium by Pfizer to Flynn Pharma. This transfer came
about because the patent rights of Pfizer had expired
and was no longer considered essential in the product
line of that company. In order to avoid the product
from disappearing altogether from the UK market,

Flynn Pharma took over the marketing authorization
rights. Various agreements were concluded between
the parties in this respect, including an outsourcing
agreement where Flynn Pharma contracted the man-
ufacture and the supply of the drug out to Pfizer from
its German facilities. Pfizer manufactured the products
ordered by Flynn Pharma in accordance with the speci-
fications provided by the latter. Flynn Pharma retained
the marketing responsibility under the UK regulatory
requirements.
Under this set-up, Pfizer continued to manufacture
and sell the phenytoin sodium in all countries except
the UK under its own trade mark Epanutin. Flynn
Pharma sold the same product, as manufactured by
Pfizer under the outsourcing agreement, as Phenytoin
Sodium Flynn in the UK. For all practical purposes, the
respective capsules were the same: they looked the
same, they had the same size and colour, even down to
the word “Epanutin” that figured on the capsule itself
commercialized by Flynn Pharma.
At a certain moment, Drugsrus started to import
into the UK the Epanutin drug that it purchased in
Germany, and that it rebranded as Phenytoin Sodium
Flynn; one of the reasons for doing so was directly re-
lated to the specific situation of the UK prescription
pharmaceutical market, where pharmacies are obliged
to supply to the patient the drug that is prescribed by
the doctor in accordance with the prescription form; in
order to access the market for “directed” prescription
forms (i.e. where the doctor does not merely provide a
generic reference e.g. phenytoin sodium but a specific
reference like, in this case, Phenytoin Sodium Flynn),
Drugsrus therefore decided to proceed to rebranding.
Against the opposition of Flynn Pharma regarding
these rebranding practices, Drugsrus argued that be-
cause of the connection between Flynn Pharma and
Pfizer, the partnership set up by the parties and struc-
tured through several agreements amongst which an
asset sale agreement, an exclusive supply agreement,
a quality agreement and a limited trademark license
agreement from Pfizer to Flynn Pharma, the arrange-
ment resembles an exclusive distributor relationship
between the parties. Since the phenytoin sodium cap-
sules that were sold on the German market by Pfizer
under the Epanutin trademark are strictly identical to
the phenytoin sodium capsules supplied by Pfizer to
Flynn Pharma under the same name (figuring as an
identicode on the capsule shell) where only the pack-
aging material has been branded with the new name
“Phenytoin Sodium Flynn,” the rule formulated by the
European Court of Justice in the Ideal Standard case
should apply that exhaustion occurs when control is in
the hands of a single body, e.g. the manufacturer in the
case of products marketed by the distributor.
The Exhaustion Theory
The High Court however declines to follow this log-
ic; instead of proceeding to a “look alike” exercise in
order to qualify the relationship between the parties,
the court should rather look whether the trademark
owner uses its intellectual property right in order to
get a second bite of the cherry such that the preven-
tion of imports constitutes a disguised restriction on
trade. Hence, the question is whether there is any-
thing arising from the agreements where Flynn Phar-
ma retains the right to exercise control over the qual-
ity of Epanutin sold in other Member States and the
product sold as Phenytoin Sodium Flynn in the UK.
The answer to that question should be negative: the
fact that Flynn Pharma chooses to acquire its supplies
of Phenytoin Sodium Flynn from the same manufactur-
er as makes Epanutin for other Member States, does
not mean that the same entity is responsible for the
quality of the two products for the purpose of applying
the free movement provisions. What matters is wheth-
er there is anything in the suite of agreements which
gives Flynn Pharma power to control the quality of the
Epanutin supplied by Pfizer in other Member States or
anything that entitles Pfizer to control the specification
of the Phenytoin Sodium Flynn supplied in the UK.
Such control is not granted to either company over the
other’s products. Flynn Pharma’s trademark rights in
the name Phenytoin Sodium Flynn are therefore not
exhausted in respect of packages of Epanutin placed
on the market in other Member States by the very
same company that manufactures in parallel, on order
of Flynn Pharma, a corresponding pharmaceutical drug
for the UK market.
The Court of Appeal confirmed the High Court deci-
sion, agreeing that Flynn had no control over the Epa-
nutin sold by Pfizer which Drugsrus sought to import,
and that sales of the imported product were likely to
affect the guarantee of origin (e.g. because any prod-
uct defect might negatively reflect on the Flynn trade-
mark for which Flynn could not be held accountable).
Therefore, although the products in question were
exactly the same, Flynn Pharma’s consent to the out-
sourcing of the manufacturing of the Epanutin drugs
by Pfizer for the purpose of future commercializa-
tion of the same under the Phenytoin Sodium Flynn
trademark in the UK, did not equate to a consent by
Flynn Pharma to the introduction of the same drug
independently by Pfizer in Germany. In parallel with
the Court’s ruling in Ideal Standard: the consent im-
plicit in any outsourcing operation is not the consent
required for the application of the exhaustion theory.
A parallel can also be drawn with the Sebago case (Se-
bago vs. GB-UNIC, judgment of July 1, 1999 in case
C-173/98) where the question was raised whether the
consent of the trademark proprietor to the marketing
in the EU of one batch of goods would exhaust the
September 2017 219
 The Exhaustion Theory
rights conferred by the trade mark as regards the mar-
keting of other batches of these goods coming from
outside the EU if they are identical. The Court an-
swered in the negative: for there to be consent within
the meaning of the exhaustion theory, such consent
must relate to each individual item of the product in
respect of which exhaustion is pleaded. In the absence
of any control of Flynn Pharma regarding the conditions
of manufacturing and sales of the Epanutin drug by
Pfizer in those countries where Pfizer continues to be
an active player, Flynn Pharma cannot be said to have
consented to those drugs being sold on those markets,
and it therefore stop their imports within the UK, even
if those Epanutin drugs are identical to those sold by
Flynn Pharma under the Phenytoin Sodium Flynn label.
Drugsrus has submitted a petition for permission to
appeal to the Supreme Court.
4. Piloxing vs. California Classic Cars (Dis-
trict Court Rotterdam, The Netherlands, De-
cision of March 16, 2016)
Piloxing is a leading fitness company and owner of
the Piloxing trademark. In the course of negotiations
with a Dutch company that showed its interest in the
exploitation of the Piloxing fitness concept, Piloxing
authorized the company to commence the manufac-
ture of merchandise bearing the Piloxing trademark.
However, ultimately the negotiations broke down, and
in order to reduce its losses, the Dutch company sold
the merchandise to a third party, California Classic
Cars (CCC), a company that (in spite of its name) is
also involved in “fitness experience.” Subsequently,
Piloxing introduces a cease-and-desist order against
CCC in order to prohibit further use and sales of these
merchandise articles bearing the Piloxing trademark.
CCC opposes that the products have been legitimately
acquired by it with the consent of Piloxing who had au-
thorized the manufacture of the merchandise articles.
Despite the preliminary consent that Piloxing had
given to the Dutch company to have those merchan-
dise articles manufactured with the purpose for future
introduction on the marketplace as part of a business
relationship that was still in the course of negotiation,
the District Court considers that this consent on be-
half of Piloxing (that it qualifies as a license) is not suf-
ficient in the sense that Piloxing would have, through
this consent, exhausted its trademark right. The mere
granting of a license to have the products manufac-
tured does not (yet) extend to an introduction of those
products on the marketplace under the control of the
trademark owner through which the latter has realized
the economic value of its trademark right, in accord-
ance with the requirements of exhaustion laid down
in the Peak Holding decision of the European Court.
At the time that the sale was made to CCC, Piloxing
and the Dutch company had entered into a transac-
220 les Nouvelles
tion agreement where Piloxing had agreed to buy back
the merchandise articles. On this basis, the District
Court that at the time of sale, Piloxing had acquired
the property of these articles, where the Dutch com-
pany was merely holding these articles for Piloxing.
Consequently, the sale of these articles to CCC was
made without the consent of Piloxing, as legal owner
of these articles, implying that Piloxing had not ex-
hausted its trademark right.
It is probably this breach of the transaction agreement
that triggered the decision of the District Court, since
this transaction agreement ended the license of the
Dutch company regarding the trademarked products.
The case would probably have been more complex if
such transaction agreement had not existed, in which
event the Dutch company would have found itself in
the hybrid situation where on the hand, it had received
the consent from the trademark owner to proceed to
the manufacture of the merchandise articles, but on
the other hand, the parties were still in negotiation
about the set-up of their business relationship. Would
this preliminary consent of the trademark owner re-
garding the manufacture of these products have been
sufficient to consider that the subsequent sale of these
products exhausted the trademark right of Piloxing?
There are some reasons for doubt, since the European
Court mentioned in the Christian Dior vs. COPAD case
that “where a licensee puts goods bearing the mark on
the market he must, as a rule, be considered to be do-
ing so with the consent of the proprietor of the trade
mark” and that “the proprietor of the trade mark can-
not plead that the contract was wrongly implement-
ed in order to invoke, in respect of the licensee, the
rights conferred on him by the trade mark.” Despite
the qualifying comment from the European Court
that “the licence agreement does not constitute the
absolute and unconditional consent of the proprietor
of the trade mark to the licensee putting the goods
bearing the trade mark on the market,” the reserved
rights of the trademark owner were considered limit-
ed to those that are listed as legitimate restrictions in
the Trademark Directive, all of which are related to a
contravention by the licensee of “any provision in his
licensing contract”—which was non-existent in this
case (the license was implied). An implied license may
eventually be considered to amount to deemed con-
sent, where the licensor bears ultimately the business
risk that the licensee exceeds the scope of his license.
Cf. the comment of the European Court in the Peak
Holding case that any contractual limitations in a sales
context concerns only the relations between the par-
ties to that act; this appears to be the case likewise in a
licensing context, unless the breach of the contractual
limitation relates to one of the grounds recognized in
the Trademark Directive.

5. Tower Living vs. De Kleine Winst (District
Court The Hague, The Netherlands, Decision
of February 8, 2017)
The infringement claim in this procedure was
brought at the initiative of the distributor, Tower Liv-
ing, with respect to a furniture collection named “the
Daan collection”; the latter was developed by two indi-
viduals, A and B, who held a joint copyright on the col-
lection. In accordance with the exploitation agreement
between A and B, A had granted the right to distribute
the copyrighted collection in The Netherlands to Tower
Living. The latter complained to A that a competitor,
De Kleine Winst, commercialized the same collection
in The Netherlands; it appeared that De Kleine Winst
had purchased the Daan furniture items from the other
co-owner, B, who (in accordance with the exploitation
agreement) had sold the furniture in the European
Union without having the corresponding contractual
rights to do so, since the commercialization rights for
the European Union were vested in A. Therefore, A
contended that its copyright in the Daan collection in
The Netherlands was not exhausted by the prior sale
that was realized by B, to the extent that B had disreg-
arded the territorial restrictions to which it had agreed
in the exploitation agreement. In addition, even in the
absence of this agreement, under Dutch law the ex-
ploitation of a jointly owned copyright can only occur
with the consent of the joint owners. In the absence of
an authorization by A to the sale of the furniture items
by B to De Kleine Winst, A could not be said to have
consented to the introduction of those products on the
marketplace by B.
The District Court ruled (not unsurprisingly) in fa-
vor of De Kleine Winst, on the basis of the case law
developed by the European Court of Justice in the
Ideal Standard decision: the exhaustion of rights ap-
plies where the owner of the IP right in the importing
State and the owner of the IP right in the exporting
State are the same or where, even if they are separate
persons, they are economically linked. Joint owners of
an IP right are considered to be economically linked
and to exercise a unitary control over their right; con-
sequently, the introduction of the products on the mar-
ketplace by one co-owner can be opposed to the other
co-owner who has given deemed consent thereto. The
limitation of rights agreed in the exploitation agree-
ment between the co-owners cannot be opposed to a
third party under the rules of privity of contract.
6. A vs. B (District Court Dusseldorf, Germany,
Decision of December 12, 2013)
In a case that resembles the U.S. Quanta vs. LG sit-
uation, the patent held by the plaintiff held a claim
directed to a data memory system having two compo-
nents, a data memory and a memory controller, that
The Exhaustion Theory
are incorporated in servers. Although the defendant
had regularly acquired the two distinctive components
from its suppliers, who were authorized by the paten-
tee to bring these products on the market, respective-
ly (in accordance with the terms of the license agree-
ment) as semiconductors and processors, neither the
suppliers nor the defendant had acquired the right to
combine the two components in order to form a sys-
tem as claimed in the patent.
The court considered that in general, there was no
reason to hold that the sale of a component protec-
ted by one patent should lead to the exhaustion of the
rights conferred to by a different patent which is dir-
ected to an overall device comprising that component.
Although the data memories and the memory control-
lers at issue could reasonably only be used for building
the patented memory system, the fact that the sup-
pliers’ licenses extended only to the use of the com-
ponents as semiconductors respectively processors
prevented that an implied consent to use the system
claim of the patent-in-suit could be found. The court
recognized one possible exception though, although it
did not further elaborate on this possibility in the ab-
sence of its application to the case at hand: where the
inventive concept of the respective patents is the same
and is substantially embodied in the components, the
consent of the patent holder to bring the components
on the market might lead to the implied consent of the
patent holder regarding the combination patent.
7. FSEL vs. Verum (District Court Amster-
dam, The Netherlands, Decision of March 10,
2013)
Although the court only expressed a provisory ruling
in this fast-track procedure for a preliminary injunction,
it demonstrates the difficulties of exercising intellec-
tual property rights in an IT environment. The dispute
occurred as a result of a sale of assets by the judicial
administrator following the insolvency of the original
licensee; the assets (including the software licenses)
are transferred to a new so-called “restart” company.
The software in question was an analysis tool named
“FDR” in order to scan computer programs before their
implementation. The original licensee (“Verum 1”) re-
ceived the right to distribute, disclose and modify the
FDR software for such purposes from the proprietor,
FSEL, through a so-called Server License on the one
hand (unlimited user right in consideration of a lump
sum payment) and Client Access Licenses (through
which customers of Verum 1 could proceed to the
analysis of their computer programs) on the other hand
(1-to-1 licenses entitling FSEL to a “per-user” royalty).
Verum 1 developed its own software code, Dezyne,
that authorized its customers to make an internet net-
work connection with FDR that was stored on one of
September 2017 221
 The Exhaustion Theory
the servers of Verum 1. A total of 129 Client Access
Licenses were commercialized by Verum 1.
Following the bankruptcy of Verum 1, a corporate re-
structuring was initiated that resulted in the creation of
Verum 2, to whom the above license rights were then
transferred. FSEL subsequently summoned Verum 2
to cease the use of the software because the license
rights had been transferred without the authorization
of FSEL. Verum 2 considered that FSEL had exhaust-
ed its copyrights on the software through the grant of
the above (paid-up) licences and that consequently,
Verum 1 had the right to transfer the Server License
and the 129 Client Access Licenses to Verum 2.
The question before the court was the UsedSoft de-
cision of the European Court of Justice, where exhaus-
tion was retained in relation with the downloading of
a copy of the software program from the (Oracle) web-
site server to the individual computer, could be extra-
polated to the present circumstances where the FDR
software program was not downloaded but accessed.
Because of the fast-track procedure, the court foes not
provide a straightforward ruling, relying on the com-
plexity of the questions before it. The request for a
preliminary injunction is refused, however, the court
notices that although the intellectual property rights
of FSEL with respect to the Server License are prob-
ably exhausted (which was not contested by FSEL), the
same is not necessarily true for the 129 Client Access
Licences. A procedure on the merits will have to de-
termine if and to what extent the rights of FSEL have
been exhausted or not for this last category.
8. Conclusion
Although there still remains some uncertainty where
the red line between exhaustion and non-exhaustion
of rights resides, the absence of consent in the sense
of the absence of authorization as a result of the breach
of the contractual terms of agreement between the IP
right holder and his counterpart is not, by itself, suffi-
cient to avoid exhaustion. In most cases, the fact that
the IP right holder has entered into an agreement with
another party that is the contractual foundation for
the introduction of his products on the marketplace
will represent as least an implied consent—the terms
of the agreement through which the IP right holder
has authorized the other party to commercialize the
said products do not, in principle, contribute to the
qualification of the consent provided by the IP right
holder, to the extent that a violation of such terms
would negate the consent of the IP right holder. The
222 les Nouvelles
ruling of the European Court of Justice in the Peak
Holding case that any restrictions on the right to re-
sell the goods concerns only the relations between the
parties to that act and cannot therefore be opposed
to third parties has thus found a favorable echo in the
decision of the Dutch District Court regarding the
working of the alleged territorial restrictions agreed
between respective co-owners of a copyright—these
restrictions did not prevent exhaustion to occur as a
result of the first sale made by one of the co-owners
within the European Union.
However, as the list of above national decisions
demonstrate, there are still multiple opportunities
available to the IP right holder to circumvent the ap-
plication of the exhaustion theory through “smart
contracting,” provided that the IP right holder does
not rely on the mere breach of contract terms alone
in order to build its argument for a withholding of con-
sent in the sense of the exhaustion theory; the IP right
holder must show an additional objective element that
supports his claim that the product was introduced on
the market without his consent. Such objective ele-
ments can be:
• The nature of the contract as was the case in Xerox
vs. Impro and Flynn Pharma vs. Drugsrus;
• The cessation of the commercial relationship as
was the case in Piloxing vs. CCC;
• The limited license rights combined with different
patent claims as was the case in A vs. B;
• The limited user access rights with respect to spe-
cific software licenses as was argued in FSEL vs.
Verum;
• The existence of legislative grounds for opposition
as the European Court of Justice recognized in
COPAD vs. Christian Dior.
The next article in this series will address some of
the recent national court decisions regarding another
complicated aspect in the relationship between the
free movement of goods and the protection of intellec-
tual property rights within the European Union: who
has the burden of proof to demonstrate that the goods
have been introduced with or without the consent of
the IP Right holder? ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009415
 Licensing Standards Essential Patents

Licensing Standards Essential Patents

By Joseph A. Alfred

Introduction The fourth generation in-

A. Standards and Patents troduced the convergence of

S
wired and wireless. “4G is an ■ Joseph A. Alfred,
teve Jobs and Apple introduced the iPhone, the
first smartphone, in January 2007, and a waiting all IP-based integrated system Alfred Consulting LLC,
world was introduced to incredible volume both will be capable to provide 100 Founder & General Manager,
in standards and in patents. Global data usage now Mbps for high mobility and Fredericksburg, VA, USA
exceeds one billion gigabytes a month and half of all one Gbps for low mobility,
with end-to-end QoS (quality E-mail: joe@
mobile devices are smartphones. The growth in mo-
bile standards from the first generation in the 1980s to of service) and high security. alfred-consulting.com
the development of the fifth generation today has wit- The user services include IP
nessed an amazing array of technology, one release will telephony, ultra-broadband
capture the public interest only to be replaced within Internet access, gaming services and High Definition
a short span of time by a new technology, more useful, Television (HDTV) streamed multimedia.”2
more ubiquitous than the last one. The key question Work on 2G standards involved more than 886,000
for discussion in today’s world of standards and patents person hours from 200 companies from 13 countries
is how to license the standards essential patents for over 15 years. Work on 4G standards “…is ongoing
the smartphone at a fair price. and has already taken more than nine years, and more
Let’s begin this discussion with standards. The first than a million person hours from participants from
generation of standards included devices such as the more than 320 companies.”3
pager, the cordless telephone and private mobile ra- Work on patents kept pace. Baron and Pohlmann
dio and systems such as the Advanced Mobile Phone found 180,215 declarations of standards essential
System (AMPS) and the Total Access Communication patents (SEPs) essential to ETSI mobile standards in
System (TACS.)1 According to Tondare, Panchal and September 2015. Table 1 shows the number of patent
Kushnure “AMPS was introduced in 1982 providing declarations as it grew year by year.4
bandwidth of 40MHz, offering 832 channels for sub-
scribers with data rate of 10Kbps.” This step forward
required better batteries as did all the generations of Table. 1 Patent Declarations
mobile devices.
Number Of ETSI Patent Declarations
The second generation introduced new techniques, Year
Essential To Mobile Standards
Time Division Multiple Access (TDMA), Code Division
1980 20,000
Multiple Access (CDMA) and roaming. The most widely
used protocol was the Global System for Mobile Com- 2002 40,000
munication (GSM.) The United States used TDMA and 2005 60,000
CDMA while most of the world adopted GSM. 2007 80,000
The third generation increased speed and capac- 2009 100,000
ity adding services such as streaming, mobile inter- 2011 120,000
net access, video calling and internet protocol televi-
2012 140,000
sion (IPTV.) The Third Generation Partnership Project
(3GPP), a standards group with representation from 2013 160,000
standards organizations in the United States, Europe, 2014 180,000
China, Japan and Korea developed the International
Mobile Telecommunications-2000 (IMT-2000) with 2. Ibid.
data rates of 200 kbps. CDMA developed an overlay 3. Boston Consulting Group, “The Mobile Revolution, Jan
that allowed data rates over 300 kbps. 2015,” quoted in les Nouvelles, An Experienced-Based Look At
The Licensing Practices That Drive The Cellular Communications
1. Tondare, S.D. Panchal and D.T. Kushnure, “Evolutionary Industry, Blecker, Sanchez & Stasik (Dec 2016).
Steps From 1G to 4.5G, S.M.,” International Journal of Advanced 4. Justin Baron and Tim Pohlmann, Mapping Standards to
Research in Computer and Communication Engineering, Vol. 3, Patents using Databases of Standards-Essential and Systems of
Issue 4, (April 2014). Technological Classification, (September 2015).

September 2017 223

 Licensing Standards Essential Patents
The number of standards subject to declared SEPS is
2,134. The number subject to more than 10 declared
SEPs is 1,007. The number subject to more than 100
SEPs is 308. The number subject to more than 1,000
declared SEPs is 44 and of these 43 are from ETSI.
Long Term Evolution (LTE) has the largest number of
declarations with 61,831 followed by Universal Mobile
Telecommunication Service (UMTS) with 43,658 and
Universal Terrestrial Radio Access Network UTRAN
with 18,757.5
In 2014, TechIPm found that very few of the patents
claimed as essential to LTE were essential to the Radio
Access Network (RAN) sections of LTE. There are over
490 sections in the LTE standard. A patent essential
to the LTE standard may or may not be essential to
every device that implements the standard. The RAN
sections of the LTE standard that are included in ev-
ery mobile device are less than 70 sections. TechIPm
found only 447 essential RAN patents compared to
the 50,000+ claimed patents essential to the LTE
standard. Assuming this proportion holds there were
roughly 550 patents essential to the RAN sections of
the LTE standard by September 2015.
B. Back To Case Law
A patent is a negative right to exclude others from
making, using or selling one’s invention and it includes
the right to license others to make, use or sell it. A pat-
ent is a grant of some privilege, property or authority,
made by the government or sovereign of a country to
one or more individuals.6 In their book, Cases and Ma-
terials on Patent Law, Martin Adelman and his fellow
authors quote White, Patent Litigation: Procedure and
Tactics and U.S. statutes.
To obtain as damages the profits on sales he would have
made absent the infringement, i.e., the sales made by
the infringer, a patent owner must prove: (1) demand
for the patented product, (2) absence of acceptable
non-infringing substitutes, (3) his manufacturing and
marketing capability to exploit the demand, and (4) the
amount of profit he would have made.
When actual damages, e.g., lost profits, cannot be
proved, the patent owner is entitled to a reasonable
royalty. 35 U.S.C. § 284. A reasonable royalty is an
amount “which a person, desiring to manufacture
and sell a patented article, as a business proposition,
would be willing to pay as a royalty and yet be able to
make and sell the patented article, in the market, at
a reasonable profit.” Goodyear Tire and Rubber Co.
v. Overman Cushion Tire Co., 95 F.2d 978 at 984…7
5. Ibid.
6. Black’s Law Dictionary, sixth edition, (1990) 1,125.
7. Martin J. Adelman, Randall R. Rader, John R. Thomas and
Harold C. Wagner, Cases and Materials on Patent Law, second
edition, (2003) 943-944.
224 les Nouvelles
Given the volume of smartphone sales, a patent
owner of a smartphone SEP would certainly find it easy
to prove (1) demand for the patented product; because
it is covered by standards; (2) absence of acceptable
non-infringing substitutes; (3) his manufacturing and
marketing capability to exploit the demand; (4) the
amount of profit he would have made. Since sales of
smartphones have been brisk and Apple and Samsung
are the only profitable manufacturers, perhaps unless
the complaint was made by Apple or Samsung, this
may be difficult to prove (4). It would be less difficult
to prove (4) for a chip maker.
Many cases make use of the fifteen Georgia-Pacific
Factors to determine reasonable damages.i Fong, Lai
and Liu found, “Using LexisNexus [LexisNexis], we
have identified cases where judges have referenced
the Georgia-Pacific case since 1995. There are 96 cases
cited this case (Appendix 1). After some manual sort-
ing, we have identified those cases where these factors
have been discussed (35 cases out of 96, i.e. 36 per-
cent) and included them in our study. This set of cases
was used to determine the inter-relationship between
the various factors and categorise them to have a struc-
tured approach to use the Georgia-Pacific 15 factors.”8
Fong et al cite a Durie and Lemley 2010 study that
“…have suggested a structured approach to calculate
reasonable royalties based on the 15 factors cited in
Georgia-Pacific case. They suggested that most of the
15 factors essentially answered three questions:
1. What is the marginal contribution of the patented
invention over the prior art?
2. How many other inputs were necessary to achieve
that contribution, and what is their relative value?
and
3. Is there some concrete evidence suggesting that
the market has chosen a number different than the
calculus that results from (1) and (2)?”
Fong et al note in their conclusion, “…it has also
been demonstrated the Georgia-Pacific factors can be
quantified using the Nash bargaining solution. This can
serve as a guideline for expert witnesses to base their
reasonable royalty calculations on. In addition, the so-
lution can also be used in practical licensing negotia-
tions to guide practitioners.”
C. The Smartphone Royalty Stack
Considering item number two of the Georgia-Pacific
factors: “The rates paid by the licensee for the use of
other patents comparable to the patent-in-suit”, the
“rates paid” not only vary widely, but use a different
base on which to compare the patents-in-suit. The
question of royalty based on the price of the device in
8. Hoi Yan Anna Fong, Yuan Ching Lai, Shang Jyh Liu,
Quantified the Georgia-Pacific Factors for Calculating Reasonable
Rates, Review of Integrative Business & Economics Research, vol.
2 (2), (2013) 261-275.
 Licensing Standards Essential Patents
which a standard is practiced or royalty based on the
components that practice the standard is still subject
to cases in court and license practice in the market.
Armstrong, Mueller and Syrett argued that:
The data show that royalty stacking is not merely a
theoretical concern. Indeed, setting aside off-sets
such as “payments” made in the form of cross-li-
censes and patent exhaustion arising from licensed
sales by component suppliers, we estimate potential
patent royalties in excess of $120 on a hypotheti-
cal $400 smartphone—which is almost equal to the
cost of device’s components.9
Just using publicly announced royalty rates, Arm-
strong, Mueller and Syrett found:
Table 4. Smartphone Royalty Stacking
Company Announced LTE Rate
Qualcomm 3.25% of device
Motorola 2.25% of device
Alcatel- Lucent Up to 2% of device
Huawei 1.5% of device
Ericsson 1.5% of device
Nokia 1.5% of device
Nortel 1% of device
ZTE 1% of device
Siemens 0.8% of device
Per Unit Sliding-Scale
Via Licensing Patent Pool Fee Based on Volume
Sisvel Patent Pool 0.99 Euros per device
Vodafone Free
TOTAL
In the table shown above, Armstrong, Mueller and
Syrett identified the companies that have publicly
disclosed royalty rates for their LTE portfolios. For
each company, they then calculated the royalty that
would be applicable to a $400 device based on the
announced rate.10
Nortel filed for bankruptcy and sold their patents to
the Rockstar Consortium including Apple, Microsoft,
Ericsson, Sony, and BlackBerry in July 2011. Google
bought Motorola in May 2012. ZTE joined the Via Li-
censing patent pool in October 2012. Rockstar sold
the Nortel patents to RPX in December 2014. Google
joined the Via Licensing patent pool in April 2015.
Nokia bought Alcatel-Lucent in April 2015.
Note that there are two patent pools listed. Usually
there is only one patent pool per technology so that
licensees may gain the benefit of a license from many
companies without stacking the royalty rates—that is
without adding the rates. In the case of LTE, the patent
pools add to the royalty stack. In 2007, the major LTE
9. Ann Armstrong, Joseph J. Mueller, Timothy D. Syrett,
Wilmer Hale, The Smartphone Royalty Stack: Surveying Royalty
Demands for the Components Within Modern Smartphones,
(2014) 2.
10. Ibid., (13-14).
patent holders said they would publish their rates and
that the combined rate would be a high single digit
number, that is less than 10 percent. The first seven on
this list are at 14 percent royalty, so the publication of
rates approach never quite lived up to its billing.
I. Standards and GATT—The Global Agreement
on Tariffs and Trade
• GATT and WTO—The World Trade Organization
The General Agreement on Tariffs and Trade (GATT)
is a multilateral agreement regulating international
trade. According to its preamble, its purpose was
the “substantial reduction of tariffs and other trade
barriers and the elimination of preferences, on a
reciprocal and mutually advantageous basis.” It was
negotiated during the United Nations
Conference on Trade and Employment
and was the outcome of the failure of
Royalty ($400 Device negotiating governments to create the
$13.00 International Trade Organization (ITO.)
$9.00 GATT was signed by 23 nations in Ge-
$8.00 neva on October 30, 1947 and took
$6.00 effect on January 1, 1948. It lasted
$6.00
$6.00 until the signature by 123 nations in
$4.00 Marrakesh on April 14, 1994 of the
$4.00 Uruguay Round Agreements, which es-
$3.20 tablished the World Trade Organization
$2.10 per unit (sales
over 10M units) (WTO) on January 1, 1995. The original
$1.36 GATT text (GATT 1947) is still in effect
$0.00 under the WTO framework, subject to
$54.30
the modifications of GATT 1994.ii
• Purpose of GATT
Recognizing that their relations in the field of trade
and economic endeavour should be conducted with
a view to raising standards of living, ensuring full
employment and a large and steadily growing vol-
ume of real income and effective demand, develop-
ing the full use of the resources of the world and
expanding the production and exchange of goods…
• Article VIII—Fees and Formalities Connected with
Importation and Exportation
1a. All fees and charges of whatever character
(other than import and export duties and other
than taxes within the purview of Article III) im-
posed by contracting parties on or in connection
with importation or exportation shall be limited in
amount to the approximate cost of services ren-
dered and shall not represent an indirect protec-
tion to domestic products or a taxation of imports
or exports for fiscal purposes.
4. The provisions of this Article shall extend to fees,
charges, formalities and requirements imposed by
governmental authorities in connection with impor-
tation and exportation, including those relating to:
(a) consular transactions, such as consular invoices
and certificates; (b) quantitative restrictions; (c) li-
September 2017 225
 Licensing Standards Essential Patents
censing; (d) exchange control; (e) statistical services;
(f) documents, documentation and certification; (g)
analysis and inspection; and (h) quarantine, sanita-
tion and fumigation.iii
• Financial Incentive
Patents grant exclusive rights that allow owners to
benefit from the property they have created, pro-
viding a financial incentive for the creation of an
investment in intellectual property, and, in case of
patents, pay associated research and development
costs according to Schroeder and Singer.iv However,
Levine and Boldrin dispute the research and devel-
opment justification.
Regardless of justification, there is no argument
as to the growing value of intellectual property. In
2013, the United States Patent & Trademark Office
approximated that the worth of intellectual prop-
erty to the U.S. economy is more than US $5 tril-
lion and creates employment for an estimated 18
million American people. The value of intellectual
property is considered similarly high in other devel-
oped nations, such as those in the European Union.v
The question of financial incentive as it applies to
the licensing rates of standards essential patents is
therefore a GATT question. Are royalty rates lim-
ited to the approximate cost of services? In particu-
lar, do the services include the practice of product
or service functions not covered by the claims of
a patent? Do these services include research and
development costs? What base do we use to value
the royalty rate? Since the international standards
for smartphones have been adopted and practiced
by so many companies and organizations that their
use is considered mandatory, what premium may a
licensing entity reasonably charge? These are key
questions in licensing today.
• The Case Law Surrounding Device Licensing
In Microsoft v. Motorola Inc. and Motorola Mobil-
ity v. Microsoft: This was a breach of contract case.
Microsoft claimed that Motorola had an obligation
to license patents to Microsoft at a reasonable and
non-discriminatory (“RAND”) rate, and that Mo-
torola breached its RAND obligations through two
offer letters. Microsoft sued Motorola for breach
of contract in this court November 2010. The par-
ties disagreed substantially about the meaning of
RAND. Thus, to resolve the dispute, the court held
a bench trial from November 13–20, 2012.
To establish a context for these findings and conclu-
sions, the court outlined the details of Motorola’s
RAND obligation, the patents at issue in this case,
and the nature of the dispute between Microsoft and
Motorola.11
Motorola’s RAND commitment arises out of its re-
lationship with two standards-setting organizations,
226 les Nouvelles
the Institute of Electrical Electronics Engineers
(IEEE) and the International Telecommunications
Union (ITU). The standards in this case involve
wireless communications, commonly known as
WiFi—IEEE Wireless Local Area Network (WLAN)
called the 802.11 standard and video coding—ITU
video coding standard called the H.264 standard.
Both of these standards incorporate patented tech-
nology called standards essential patents—SEPs.
Thus, in order to practice the standard, it is nec-
essary to obtain a license to these SEPs from the
patent owners.
Motorola offered to license its SEPs at what it con-
sidered the RAND rate of 2.25 percent.
• This letter is to confirm Motorola’s offer to grant
Microsoft a world-wide non-exclusive license under
Motorola’s portfolio of patents and pending applica-
tions having claims that may be or become Essential
Patent Claims subject to a grant back license under
802.11 essential patents of Microsoft…for a com-
pliant implementation of IEEE 802.11 Standards…
As per Motorola’s standard terms, the royalty is
calculated based on the price of the end product
(e.g. each Xbox 360 product) and not on component
software (e.g. Windows Mobile Software).
• For an Xbox 360 the royalty range is from $3.83
for a $170 Xbox 360 to $7.43 for a $330 Xbox 360.
Since Microsoft sold an average of 11 million Xbox
360s between 2008 and 2014, Motorola was asking
for a royalty in the range of $274 million to $572
million just for the Xbox 360 product.
• Motorola offered to license its SEPs at what it
considered the RAND rate of 2.25 percent of the
price of Microsoft’s Windows 7 and higher H.264
products.
The U.S. District Court used six factors in its analy-
sis (1.) The court introduced the parties and their rela-
tionship to one another, (2.) The court provided back-
ground on standards, Standards Setting Organizations
(SSOs) and the RAND commitment, (3.) The court
developed a framework for assessing RAND terms,
specifically a modified version of the Georgia-Pacific
factors:
1. The court introduced the parties and their rela-
tionship to one another;
2. The court provided background on standards, Stan-
dards Setting Organizations (SSOs) and the RAND
commitment;
3. The court developed a framework for assessing
RAND terms, specifically a modified version of the
11. Findings of Fact and Conclusions of Law, Case No. C10-
1823JLR, April 25, 2013, 207 pages, United States District
Court Western District of Washington at Seattle, James L.
Robart, presiding judge.
 Licensing Standards Essential Patents
Georgia-Pacific factors;
a. See Georgia-Pacific Corp. v. United States Ply-
woodCorp., 318 F. Supp. 1116 Southern District
New York 1970.
b. The court determines that the parties in a hypo-
thetical negotiation would set RAND royalty rates
by looking at the importance of the SEPs to the
standard and the importance of the standard and
the SEPs to the products at issue.
4. After establishing a framework, the court intro-
duced the H.264 standard and Motorola’s H.264
SEPs, analyzing each patent in turn and setting the
portfolio’s relative importance to the H.264 stan-
dard and to Microsoft’s standards-using products;
5. The court introduced the 802.11 standard and Mo-
torola’s 802.11 SEPs and analyzed each 802.11 pat-
ent using the same framework;
6. The court used all of the foregoing information,
along with comparables suggested by the parties,
to determine an appropriate RAND royalty rate for
Motorola’s SEPs.
The US District Court decided that the royalty rate
and range as follows:
1. The royalty rate for Motorola’s H.264 SEP portfolio
is 0.555 cents per unit.
a. The upper bound is 16.389 cents per unit and
the lower bound is 0.555 cents per unit.
b. This rate and range is applicable to both Micro-
soft Windows and Xbox products.
Key factors cited include:
Section 540: To this end, in the course of a hypotheti-
cal negotiation with a SEP owner, the implement-
er must ask herself as a rational business person,
“What is the most I can pay for a license to this
particular SEP or portfolio of SEPs—knowing that
I might have to license all SEPs in the entire stan-
dard—while still maintaining a viable business?”
The court looked at the Via Licensing 802.11 Li-
censing Pool and the MPEG LA H.264 Licensing
Pool as examples to use in setting a royalty rate and
avoiding royalty stacking.
Section 578: Microsoft uses as an additional compa-
rable … the royalty rate that a third- party company,
Marvel Semiconductor … pays for the intellectual
property in its WiFi chips. The court agrees that
the Marvell rate provides an indicator for 802.11
RAND under Factor 12 of a hypothetical negotia-
tion because the experiences of Marvell, a third
party, tend to establish what is customary in the
business of semiconductor licensing.
Section 580: …the Marvell WiFi chip…enables the
device to use the 802.11 Standard to transmit and
receive information on radio frequency carriers.
Otherwise stated, the WiFi chip uses the 802.11
Standard to communicate wirelessly.
Section 581: In the past Marvell has charged $3.00
to $4.00 per chip for WiFi chips of the kind its sells
to Microsoft. 6. Section 582: Marvell pays a royalty
and licensing fees to ARM Holdings … ARM pro-
vides Marvell with patent licenses and “design and
know-how” Marvell needs to make its 802.11 com-
pliant chips … Marvell pays ARM one percent of
the purchase price of the chip (3-4 cents per chip.)
Section 585: Marvell considers the ARM rate an ap-
propriate benchmark because the rate is based on
the selling price of the chip, not the sale price of
the end-user product into which the chip is embed-
ded. Example testimony: A one percent royalty on a
chip placed in an $80,000 Audi A8 would be $800,
or about 267 times the retail price of the chip.
Another case citing the smallest saleable unit is Cor-
nell University v. Hewlett-Packard Co., 609 F. Supp. 2d
279, 283 (2009.)vi
II. The Way Forward
A. Based on the cases cited above, I disagree with
the concept of whole portfolio—whole device li-
censing. Recent case law does not support whole
device licensing and the definition of damages in
patent law never supported whole portfolio licens-
ing. In patent law, a patent owner may not charge
royalty for claims that he or she does not own.
Even though the license contract may state that
the royalty is only for claims that the infringer is
actually practicing, the alleged infringing party
is doing themselves a disservice if they pay any
amount of royalty for an alleged claim that is not
proved. Similarly, as shown in section 585 of the
Microsoft-Motorola case, chips may be placed
in many devices, not just smartphones that cost
$600. Some large screen TVs cost $9,000. Some
automobiles cost $80,000. Boeing lists the price
of its 737 as between $51.5 million and $87 mil-
lion depending on the model. Once again, the al-
leged infringing party is doing themselves a disser-
vice if they pay any amount of royalty for damages
based on using the device price when the entire
device does not infringe the alleged claim.
There is a case to be made that the component
adds value to the whole device, but this case must
be made in proportion to the device in question –
Does an airline buy a 737 or does a customer buy
a seat on a 737 entirely due to Wi-Fi on the flight?
B. The IEEE has provided a guide, “Understanding Pat-
ent Issues During IEEE Standards Development.”
Section 44 of this guide reads as follows:
i. In discussing Reasonable Rates, what is an ex-
ample of a “smallest saleable Compliant Imple-
mentation that practices the Essential Patent
Claim?”
ii. Determining the smallest saleable Compliant
Implementation that practices the Essential
Patent Claim is a function both of the claims in
September 2017 227
 Licensing Standards Essential Patents
the patent and of the product or products that
implement a standard. For example, assume a
component is a Compliant Implementation of
IEEE 802.11™ and practices the Essential Pat-
ent Claim. That component is then used in an
entertainment system that is then installed into
an airplane. In this example, the component is
the smallest saleable Compliant Implementation
of IEEE 802.11.
C. Conclusion
No one denies that a patent owner should be able
to charge whatever royalty they negotiate for a patent
unrelated to a standard. The key question is whether a
patent owner of a standards essential patent should be
able to charge a premium when much of the value of
the patent is derived from the international standards
organization adopting the patented technology.
In the absence of industry coming together in a pat-
ent pool with the major players assembled to avoid
royalty stacking and seek a reasonable royalty based
on the component practicing the standard, the courts
have done the heavy lifting. The results are not all that
patent owners may desire, but the results do provide
patent owners with reasonable royalty based on patent
law. This royalty may not pay for all research and devel-
opment, but it does provide, considering the volume of
smartphones in the market and yet to enter the market,
a considerable sum for those patent owners willing to
do the serious work of proving their patent claims.
It is time for industry to reclaim the lead from the
courts. Industry, not the courts should determine
reasonable royalty for cellular standards essential pat-
ents by coming together in a single patent pool and
developing a royalty that will stand the test of a court
challenge. ■
References
i. Georgia-Pacific Corp. v. United States Plywood Corp.,
318 F. Supp. 1116, 1119-20 (S.D.N.Y. 1970), modified
and aff’d, 446 F.2d 295 (2d Cir.);
1. The royalties received by the patent owner for the
licensing of the patent-in-suit, proving or tending to
prove an established royalty;
2. The rates paid by the licensee for the use of other
patents comparable to the patent-in-suit;
3. The nature and scope of the license, as exclusive
or non-exclusive, or as restricted or non-restricted
in terms of territory or with respect to whom the
manufactured product may be sold;
4. The licensor’s established policy and marketing pro-
gram to maintain its patent monopoly by not licens-
ing others to use the invention or by granting licens-
es under special conditions designed to preserve
that monopoly;
5. The commercial relationship between the licensor and
the licensee, such as whether they are competitors
in the same territory in the same line of business, or
whether they are inventor and promoter;
228 les Nouvelles
6. The effect of selling the patented specialty in pro-
moting sales of other products of the licensee; the
existing value of the invention to the licensor as a
generator of sales of its non-patented items; and the
extent of such derivative or convoyed sales;
7. The duration of the patent and the term of the li-
cense;
8. The established profitability of the product made un-
der the patent; its commercial success; and its cur-
rent popularity;
9. The utility and advantages of the patent property over
the old modes or devices, if any, that had been used
for working out similar results;
10. The nature of the patented invention; the character
of the commercial embodiment of it as owned and
produced by the licensor; and the benefits to those
who have used the invention;
11. The extent to which the infringer has made use of the
invention, and any evidence probative of the value
of that use;
12. The portion of the profit or of the selling price that
may be customary in the particular business or in
comparable businesses to allow for the use of the
invention or analogous inventions;
13. The portion of the realizable profit that should be
credited to the invention as distinguished from non-
patented elements, the manufacturing process, busi-
ness risks, or significant features or improvements
added by the infringer;
14. The opinion testimony of qualified experts; and
15. The amount that a licensor (such as the patent own-
er) and a licensee (such as the infringer) would have
agreed upon (at the time the infringement began) if
both had been reasonably and voluntarily trying to
reach an agreement; that is, the amount that a prudent
licensee—who desired, as a business proposition, to
obtain a license to manufacture and sell a particular
article embodying the patented invention—would
have been willing to pay as a royalty and yet be able
to make a reasonable profit, and which amount would
have been acceptable by a prudent patent owner who
was willing to grant a license.
ii. WTO Legal Texts, General Agreement on Tariffs and
Trade, (1994).
iii. General Agreement on Tariffs and Trade, Geneva,
(July 1986).
iv. Doris Schroeder and Peter Singer, “Prudential Rea-
sons for IPR Reform,” University of Melbourne,
(2009).
v. Thomas Bollyky, “Why Chemotherapy That Costs
$70,000 in the U.S. Costs $2,500 in India,” The At-
lantic, (2013).
vi. Berkley Technology Law Journal, volume 29, issue 4,
annual review, (2014) 657.
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009417
 Magic Bullet Or Rule Of Thumb

Magic Bullet Or Rule Of Thumb: Determining

Reasonable Royalties With Corporate Discount
Rates Using The Muthoo Model
By Brian Dies and Joel Wacek

Abstract This article discusses

Damages experts in patent litigation have been apply- the Muthoo Model, its in- ■ Brian Dies, CFA, ASA,
ing an economic model based on the work of Dr. Abhinay puts, and potential applic-
ation to determine reas- Hoffman Alvary &
Muthoo1 to determine reasonable royalty rates through
a profit sharing formula based on relative corporate dis- onable royalties in patent Company LLC,
count rates.2 The work of Dr. Muthoo has been oversim- infringement matters. Principal,
plified and misapplied in this context. Attempts to use Ultimately, we conclude Newton, MA, USA
corporate discount rates as the sole determinative meas- that despite attempts to
consider the facts specific
E-mail: bdies@
ure of bargaining power in a hypothetical negotiation for hoffmanalvary.com
a reasonable royalty are fundamentally flawed. This use to the parties, analyses
of the Muthoo Model is nothing more than another un- that rely on discount rates
alone to measure the rel- ■ Joel Wacek,
supported rule of thumb that is unreliable for determin-
ing reasonable royalties in patent infringement matters. ative bargaining strength Hoffman Alvary &
of the parties and calcu- Company LLC,
I. Introduction

O
ver the past decade, the courts have paid
increasingly close attention to the methods
used to determine reasonable royalty rates in
patent infringement litigation. This scrutiny has resul-
ted in a fundamental change in the way many experts
determine royalty rates. “Rules of thumb” or other
generic formula-based approaches have generally been
found to be inadmissible because they are not specific
to the facts of a given case and do not closely reflect
the value or benefit associated with the use of the pat-
ented technology.
Nevertheless, some academics and damages ex-
perts continue to introduce royalty opinions based
on broadly applied formulas derived from aspects of
economic bargaining theory. For a brief period, many
damages experts offered royalty opinions that relied in
part on the Nash Bargaining Solution. More recently,
some damages experts have used a theory based on
the work of Dr. Abhinay Muthoo. Aspects of his work
are similar to the Nash Bargaining Solution, but use
the relative discount rates of the parties to determine
how the parties at the hypothetical negotiation would
negotiate a split of the profits.
1. Muthoo, Abhinay, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999).
2. See for example, “Splitting the Atom: Economic
Methodologies for Profit Sharing in Reasonable Royalty
Analysis,” les Nouvelles, Volume LI No. 2, (June 2016) 70-73.
late how an economic Principal,
surplus would be shared
are nothing more than Newton, MA, USA
another rule of thumb. As E-mail: jwacek@
such, they provide little hoffmanalvary.com
help to courts and juries
in providing a reliable
basis for determining reasonable royalty rates in patent
infringement matters.
II. Reasonable Royalties in Patent Litigation
and Rules of Thumb
In general, a patent holder is entitled to no less than
a reasonable royalty from the infringer of a valid pat-
ent.3 A common approach to determining the amount
of a reasonable royalty is the “hypothetical negoti-
ation” construct established in Georgia-Pacific v. U.S.
Plywood.4 However, Georgia-Pacific (and the cases that
followed) provide no mathematical formula to determ-
ine the final royalty rate.5
In the absence of a clear and accepted formula, ex-
perts have applied professional judgment to the facts
and circumstances of each case to determine the re-
sults of the “hypothetical negotiation.” This subjectiv-
ity has led to sometimes conflicting case law on rea-
sonable royalty issues, as well as numerous Daubert
3. 35 U.S.C. § 284.
4. Georgia-Pacific Corporation v. United States Plywood
Corporation, 318 F Supp. 1116 (S.D.N.Y. 1970).

September 2017 229

 Magic Bullet Or Rule Of Thumb
challenges on the admissibility of expert opinions on
reasonable royalties.
For many years, certain damages experts and their
clients looked for simple mathematical formulas to
apply to every hypothetical negotiation. The 25% Rule
was such a profit splitting formula, and was widely
used by some experts until the Federal Circuit rejected
it as an inappropriately broad rule of thumb in 2011.6
Other economic and financial models have been de-
veloped that attempt to allocate incremental profits
among parties in licensing negotiations. For example,
Granstrand and Holgersson (2012) describe a model
for dealing specifically with standard essential patents
subject to FRAND royalty terms based on each con-
tributor’s relative level of investment in the techno-
logical standard.7 However, this model has not been
frequently applied in the courts and its applicability
in a licensing situation that does not include FRAND
obligations is not explored in the article.
Following the rejection of the 25% Rule, some ex-
perts began to broadly use a 50/50 profit split formula
based on an economic theory developed by John Nash;
the Nash Bargain Solution (NBS.) However, the gen-
eral application of the NBS was similarly rejected as a
rule of thumb in a 2014 ruling by the Federal Circuit.8
Specifically, the Federal Circuit found that absent a de-
tailed showing that the underlying assumptions of the
economic model would apply to the specific facts and
circumstances of the case, the NBS was an unaccept-
able rule of thumb.
5. For example, in Georgia-Pacific, Judge Tenney described
the process of determining a reasonable royalty through the
hypothetical negotiation as “…There [are] a multiplicity of inter-
penetrating factors bearing upon the amount of a reasonable
royalty. But there is no formula by which these factors can
be rated precisely in the order of their relative importance
or by which their economic significance can be automatically
transduced into their pecuniary equivalent. In discharging its
responsibility as fact finder, the Court has attempted to exercise
a discriminating judgment reflecting its ultimate appraisal of all
pertinent factors in the context of the credible evidence.” The
Federal Circuit has also repeatedly “recognized that estimating
a reasonable royalty is not an exact science” and that “all
approximations involve some degree of uncertainty.” See, for
example, Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283,
1299 (Fed. Cir. 2015).
6. USA v. Microsoft Corp., 632 F.3d 1292, 1315 (Fed. Cir.
2011).
7. Granstrand, O. and M. Holgersson, “The 25% Rule Revisited
and a New Investment-Based Method for Determining FRAND
Licensing Royalties.” les Nouvelles (September 2012) 188-195.
8. VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1337 (Fed.
Cir. 2014). The Court did suggest that NBS may be appropriate
in circumstances where the expert can show that the specific
underlying assumptions of the theorem are met in a given case.
230 les Nouvelles
In recent years, some experts have begun using a
different mathematical formula for determining the
profit split that would result from the hypothetical ne-
gotiation. This approach determines the portion of the
profit, or economic surplus to award as a royalty based
on the relative bargaining power of the parties. While
consideration of the relative bargaining power of the
parties has been emphasized by the Federal Circuit in
many decisions, in this model, the parties’ relative bar-
gaining power is based entirely on differences in their
discount rates, and specifically, each entity’s corporate
cost of capital.9
III. The Muthoo Model
The use of discount rates to determine the relat-
ive bargaining strength, and therefore the profit split
between parties to a negotiation is largely based on the
work of Dr. Abhinay Muthoo, an economics professor
at the University of Warwick. In his book, Bargaining
Theory with Applications (1999), Muthoo theorizes
that parties to a negotiation would divide an economic
surplus based on their relative bargaining power. The
relative bargaining power can be measured, accord-
ing to Muthoo, by differences in the parties’ discount
rates.10 This framework of the Muthoo Model has
been discussed and applied in subsequent academic
research.11
In its base form, the Muthoo Model asserts that the
economic surplus would be split between the nego-
tiating parties based only on their relative discount
rates. The model was extended and refined in Bargain-
ing Theory with Applications to include other relevant
factors that may change the outcome of the negoti-
ation from what the base form alone would suggest.
These other factors include the impact of the parties’
relative payoffs and aversions to a breakdown of the
negotiation, changes in the bargaining procedures, the
availability to the parties of other options to negoti-
ation, and information asymmetry at the bargaining
table, among other factors. However, the focus of this
article is on the model in its base form as that is how
it has been applied to determine reasonable royalties
in patent litigation.
9. See, for example, Deere & Co. v. Int’l Harvester Co., 710
F.2d 1551, 1559 (Fed. Cir. 1983), Fujifilm Corp. v. Benun, 605
F.3d 1366, 1372 (Fed. Cir. 2010), VirnetX, Inc. v. Cisco Sys.,
Inc., 767 F.3d 1308, 1331-33 (Fed. Cir. 2014).
10. Muthoo, Abhinay, “Bargaining Theory with Applications.”
Chapter 3. (New York; Cambridge UP, 1999).
11. See for example, Muthoo, Abhinay, “Bargaining Theory
and Royalty Contract Negotiations,” Review of Economic
Research on Copyright Issues, 2006, vol. 3(1), 19-27. For a
listing of academic papers, see Mcduff, Deforest. “Splitting the
Atom: Economic Methodologies for Profit Sharing in Reasonable
Royalty Analysis,” les Nouvelles, Volume LI No. 2, (June 2016)
70-73.
 Magic Bullet Or Rule Of Thumb
The Muthoo Model has been widely studied, and
many scholars have attempted to verify its predicted
outcomes with experiments or by looking at data from
actual negotiations.12 Muthoo has, however, noted that
“this theory cannot be tested by an appeal to experi-
mental or field data.”13 Muthoo concludes that any ex-
perimental data or field data would necessarily involve
other elements outside the model’s parameters, in-
cluding human irrationality. Muthoo’s comments pro-
vide instructive context on the admissibility of expert
testimony based on the model, as one of the hallmark
requirements of admissibility under Daubert and its
progeny is the ability to test and recreate the results
of an analysis.
IV. The Muthoo Model Applied to Patent Dam-
ages
In the past few years, the Muthoo Model has been
receiving increasing attention in the context of de-
termining reasonable royalty damages in patent litiga-
tion. As was the case with the prior mathematical profit
splitting rules, proponents of the Muthoo Model have
written articles in the licensing literature14 and the
model has been identified in seminars as a key trend
in patent damages.15 So far, it has met with mixed suc-
cess in overcoming Daubert challenges in Court16 and
has been used with increasing frequency by damages
experts in patent infringement matters.
It has been argued that the Muthoo Model provides
academic support for a formula to split the incremental
profits earned by the Defendant in proportion to the
parties’ Weighted Average Costs of Capital (“WACC”).
Under the Muthoo Model, each company’s cost of cap-
ital is used as a proxy for its bargaining strength. A
party with higher capital costs has less bargaining pow-
er and would consequently receive a smaller share of
the incremental profits than a party with lower capital
costs. Thus, to the extent the use of patented technol-
ogy results in an economic surplus, that surplus would
be split at a hypothetical negotiation in accordance
with each company’s relative cost of capital.
12. For a list of some of these academic studies, see Deforest
Mcduff, “Splitting the Atom: Economic Methodologies for Profit
Sharing in Reasonable Royalty Analysis,” Convert les Nouvelles,
Volume LI No. 2 (June 2016) 70-73.
13. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) 341.
14. Ibid.
15. Williams, Danielle and Chris Marchese, “Patent Damages
Theories,” Fish & Richardson Webinar, (December 1, 2016).
http://www.fr.com/events/webinar-patent-damages-theories.
16. For example; this approach survived a Daubert challenge
in ContentGuard Holdings, Inc. v. Amazon.com, 2:13-cv-01112-
JRG (E.D. Tex. Aug. 6, 2015) (Doc. No. 825) but failed a Daubert
challenge in Omega Patents, LLC v. CalAmp Corp., 6:13-cv-1950
(M.D. Fla. Dec. 23, 2015) (Doc. No. 117).
It is easiest to see how the Muthoo Model has been
applied to determining reasonable royalties with a
simple example. Assume that Company A is the pat-
ent-owner (Plaintiff) and Company B is the accused
infringer (Defendant). The allegedly infringing product
is sold by Company B at a price of $1,000 per unit and
Company B earns an incremental profit of $200 per
unit on each sale. For simplicity in this example, as-
sume the patent-in-suit is fundamental to the accused
product, and the inclusion of the patented technology
is the underlying driver of its sales and profits.
An application of the simplified Muthoo Model
would suggest that the parties would have reached an
agreement in the hypothetical negotiation to split the
$200 of incremental profit per unit based on their re-
lative WACCs. If Company A is a small, privately-held
company with a WACC of 20 percent while Company
B is a large, well-financed company with a WACC of
10 percent, the model suggests the profit split can be
determined by the following formulas:17
WACCB 10%
Profit Split to Company A= = = 33%
(WACCA + WACCB ) (10% + 20%)
WACCA 20%
Profit Split to Company B= = = 67%
(WACCA + WACCB ) (10% + 20%)
This analysis suggests that Company A would receive
one-third of the incremental profit as a royalty and
Company B would retain two-thirds of the incremental
profit from selling the accused product. The result of
the hypothetical negotiation would be a $67 per unit
royalty (one-third of the $200 incremental profit) paid
by Company B (the infringer) to Company A (the pat-
ent holder.)18
On the surface, this approach to splitting the prof-
its in the hypothetical negotiation looks promising.
Bargaining models can provide a structured approach
for evaluating the economic benefits generated by a
patented technology that would be at issue in a hypo-
thetical negotiation, and properly focus the reasonable
royalty determination on those benefits. The Muthoo
Model also has several enticing features; (1) it provides
a simple, objective formula; (2) it is based on a well
understood and researched economic theory; and (3)
it is tied to information specific to the parties in the
case (the infringer’s incremental profit and the parties’
relative WACCS.) However, reliably determining how
any economic surplus should be split is a critical aspect
of any bargaining model. As explained below, the Mut-
hoo Model falls short in this key area with respect to
determining a reasonable royalty.
17. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) 46.
18. The royalty could also be equivalently expressed as a 6.7
percent of revenue ($67 royalty for each unit with a $1,000
price).
September 2017 231
 Magic Bullet Or Rule Of Thumb
V. Criticisms of Applying the Muthoo Model
to Reasonable Royalty Determinations
Careful consideration of the Muthoo Model and
its application to the analysis of how the incremental
profits associated with a patented technology would be
shared at the hypothetical negotiation identifies many
issues that suggest that it is nothing more than a more
detailed version of the NBS, and its application to pat-
ent damages is another rule of thumb. Muthoo himself
described the base variant of this economic model as
“identical to an asymmetric Nash Bargaining Solution
of an appropriately defined bargaining problem.”19 The
key difference between the previously rejected NBS
and the Muthoo Model is its reliance on the parties’
corporate discount rates to measure each party’s bar-
gaining strength, rather than assuming equal bargain-
ing strength.
The main issues with applying the Muthoo Model (in
its base form) to patent litigation are: (1) the economic
theory does not fit the specific construct of the hypo-
thetical negotiation; (2) the sole reliance on corporate
discount rates to measure relative bargaining strength
is inappropriate; (3) the model ignores many factors
long considered relevant to the determination of reas-
onable royalties; and (4) the model implicitly includes
factors long considered irrelevant to the determination
of reasonable royalties in patent litigation.
A. The Economic Model Does Not Fit the Hypo-
thetical Negotiation Construct
The Muthoo Model is based on many implicit and ex-
plicit assumptions. Many of these assumptions are so
limiting that they do not broadly apply to the construct
of a hypothetical negotiation in a patent litigation, and
are often divergent from real-world licensing negoti-
ations. For example:
• The Muthoo Model assumes a positive economic sur-
plus. In other words, the model assumes that there is
some benefit to both parties from entering the trans-
action. This is not always the case in a hypothetical
negotiation in a patent litigation. For example, there
may be no benefit to be had by a highly-profitable pat-
ent holder licensing a valid patent to a less-profitable
infringer who is a direct competitor. Also, the profits
earned by some infringers may be limited for reas-
ons unrelated to the profit-producing capabilities of
the patented technology. This may cause the size of
the shared economic surplus to be understated. The
Federal Circuit has warned that the profits of an “in-
efficient infringer” need not cap the measure of the
damages caused to the patent holder.20
19. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) 42.
20. See Aqua Shield v. Inter Pool Cover Team, et al., 774 F.3d
766, 770 (Fed. Cir. 2014).
232 les Nouvelles
Additionally, in many cases where the patent is a
small feature of a larger complex product, issues of ap-
portionment can make it difficult to accurately identify
the defendant’s incremental profits from using the
specific patented technology. Such patents may still
have significant value even if incremental profits can-
not be cleanly identified.
• The Muthoo Model implicitly assumes exclusivity.
The bargaining problem is often described as how two
parties will split a cake sitting on the table between
them. The same piece of cake cannot be given to mul-
tiple people—each piece must be exclusively given to
only one person. However, most reasonable royalty
analyses in patent litigation assume the hypothetical
license would be non-exclusive. Unlike a cake, one
could grant many parties non-exclusive licenses to the
same patent. Granting a non-exclusive license to one
player in an industry may impact licensing revenues
the patent holder would receive from prior licensees,
and it may even impact profits that the patent holder
would itself earn on products incorporating the pat-
ented technology. The impact of the non-exclusive
nature of certain intellectual property assets is not
addressed in the Muthoo Model as it has been applied
in reasonable royalty analyses.
• The Muthoo Model accounts for the ability of the
parties not to reach an agreement. Muthoo identifies
that payoffs for the negotiating parties “when (and
if) negotiations breakdown and their respective de-
grees of risk aversion are crucial determinants of the
bargaining outcome.”21 However, in the hypothet-
ical negotiation construct, the parties must reach an
agreement.
• Muthoo extends the model by altering the equations
to account for inside and outside options.22 In patent
litigation, these inside and outside options would be
analogous to the availability of non-infringing altern-
ative technology. The existence of inside and outside
options impacts the negotiation outcome and may
cause the result to differ from the simple relative
weighting of the parties’ relative discount rates. A
profit split based solely on the relative WACC of the
parties inappropriately ignores these complications.
Applying the base form of the Muthoo Model ignores
the impact of non-infringing alternatives at the hypo-
thetical negotiation, unless any such alternatives have
already been accounted for in the economic surplus
being considered by the parties.
• The Muthoo Model is based on a very specific set of
bargaining procedures. In the alternating-offer bidding
21. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) Chapter 4, specifically 73.
22. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) Chapters 5 and 6.
 Magic Bullet Or Rule Of Thumb
procedure, party A makes an offer, and party B then ac-
cepts it or issues a counteroffer.23 In the real-world, bar-
gaining procedures are often ambiguous or ill-defined.
Parties can make offers in any order and parties can
ignore offers without issuing a counter offer.
For example, if party A makes repeated offers and
party B accepts or rejects those offers without coun-
tering, Muthoo indicates that the discount rates of the
parties have no impact whatsoever on the bargaining
outcome.24 Since there is no reason to assume that the
hypothetical negotiation would always perfectly follow
the alternating-offers bidding procedure required for
the Muthoo Model, it is inappropriate to assume it
broadly applies.
For these reasons, the economic theory underlying
the Muthoo Model does not map to the specific cir-
cumstance of a hypothetical negotiation to determine
a reasonable royalty for the use of a patent.
B. Corporate WACCs Are Not Relevant Discount
Rates
The portion of the profit received by the patent
holder as a royalty under the applied Muthoo Model
is largely dependent on the parties’ weighted average
costs of capital. This is a measure of the average cost
of a company’s equity and debt. As such, it is a com-
pany-wide statistic.
1. WACC as a Concept May Not Be Relevant to
All Litigants
The concept of WACC is generally applied in finance
to operating companies. There are many patent lit-
igations that involve parties where the concept of
WACC may not be as applicable. For example, it is
not clear what discount rate one should use in the
Muthoo Model if one of the parties is a non-practic-
ing entitiy (NPE), a not-for-profit research institution
(i.e., a university or a research hospital), or an indi-
vidual inventor.
2. WACC Is Biased by Corporate Financing De-
cisions
In operating companies, WACC is influenced by cor-
porate financing decisions. Generally, the after-tax
cost of debt is less than the cost of equity. A deci-
sion by a company to change its relative level of debt
and equity will likely change the company’s WACC.
Under the Muthoo Model, these corporate financing
decisions would have a direct impact on the final roy-
alty determination that results from the hypothetical
negotiation. Specifically, a company could improve
23. A. Rubinstein, “Perfect Equilibrium in a Bargaining
Model,” Econometrica, 50: 97-110 (1982). The alternating-
offer bidding procedure is referred to as the Rubenstein Model.
24. Abhinay Muthoo, “Bargaining Theory with Applications,”
(New York; Cambridge UP, 1999) Chapter 7, specifically 190.
(or weaken) its bargaining position in the hypothet-
ical negotiation by issuing debt (or equity). There is
no reason to believe that such a corporate financing
decision made by a patent holder or alleged infringer
significantly impacts the “the value of the use of the
patented technology” that the Federal Circuit and
Supreme Court have said “measures the reasonable
royalty.”25
3. Overall Corporate Capital Costs May Not Be
Relevant
The WACC of an entire company is not usually the
metric that would be considered to evaluate an in-
vestment in an individual product or project. This is
because the risk of a specific corporate project dif-
fers from those associated with the operation of an
entire company that may have a diverse product line.
For example, after a corporate acquisition a com-
pany’s overall WACC may change but the risk profile
associated with individual product lines may be un-
affected. Thus, a company-wide WACC may not be
the appropriate measure to evaluate a single project
or product that may be allegedly infringing and the
focus of the hypothetical negotiation.
4. Product Specific Capital Costs May Not Be
Appropriate Either
Product specific costs of capital or discount rates
may be no more appropriate to the analysis of bar-
gaining power than general corporate discount rates.
A company can finance a new product launch from
retained earnings (an equity cost of capital), through
the issuance of new debt (a debt cost of capital) or
some combination of the two (a blended cost of cap-
ital). If a company makes a significant capital invest-
ment to launch an infringing product line, that com-
pany’s bargaining position at the hypothetical nego-
tiation should not be impacted by how the company
financed that product launch. Therefore, it would be
inappropriate to use a product level cost of capital in
the Muthoo Model (even if one was calculable based
on information in the litigation record).
Additionally, when developing new product lines,
many companies perform detailed financial analyses
that may include product specific discount rates ap-
plied to expected future cash flows. These manage-
ment determined discount rates can be hurdle rates
for the entire business, or they can be subjectively
determined for the specific project. There are many
situations where these management determined dis-
count rates may diverge from the corporate costs of
capital. For example, management may set higher
hurdle rates than its cost of capital in situations of
25. Aqua Shield v. Inter Pool Cover Team, et al., 774 F.3d 766
(Fed. Cir. 2014), citing Dowagiac Mfg. Co. v. Minn. Moline Plow
Co. 235 U.S 641 (1915) at 648.
September 2017 233
 Magic Bullet Or Rule Of Thumb
capital scarcity when evaluating competing alternat-
ive projects or to develop more conservative busi-
ness plans. There is no reason to inherently assume
that the product specific discount rates that may be
used by management are related to the company’s
bargaining power in a hypothetical negotiation.
5. Conclusion on Capital Costs
In determining a reasonable royalty, corporate
WACCs have been used in the Muthoo Model as a
proxy for the relative bargaining strength of the par-
ties. In fact, the party-specific nature of these dis-
count rates is one of the primary reasons proponents
of the Muthoo Model argue that it succeeds where
the NBS failed in the eyes of the Federal Circuit:
that it considers and accounts for the specific facts
of a case. However, use of an overall company’s cost
of capital provides little more than a thin veneer
of party-specific facts over the base NBS theorem
whose blind application has been rejected by the
Federal Circuit.
Further, while it is well established that the cost of
capital for individual companies is relevant for financial
valuation, there are many reasons why the cost of capi-
tal of a company may not accurately reflect the bargain-
ing strength of a party in the hypothetical negotiation
construct. For example, corporate level WACCs are
biased by corporate financing decisions and not nec-
essarily related to the bargaining power of a company
at a hypothetical negotiation for rights to a patented
technology. More specific product level costs of capital
or discount rates may also not reflect the bargaining
power of a party to a hypothetical negotiation.
The above demonstrates that there are numerous
external factors which affect a company’s cost of cap-
ital. Many of these factors are unrelated to how a cor-
poration uses the patented technology, or the benefits
that are provided by that use. The patent damages
statute defines a reasonable royalty as reflecting “the
use made of the invention by the infringer.”26 Further,
one of the fundamental requirements that has repeat-
edly been emphasized by the Federal Circuit in recent
years is that royalties “must reflect the value attrib-
utable to the infringing features of the product, and
no more.”27 In fact, the Federal Circuit has cautioned
that “any evidence unrelated to the claimed invention”
should not be given substantive weight in determining
26. 35 U.S.C. § 284 states, “Upon finding for the claimant
the court shall award the claimant damages adequate to
compensate for the infringement, but in no event less than a
reasonable royalty for the use made of the invention by the
infringer, together with interest and costs as fixed by the court.”
27. Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226
(Fed. Cir. 2014).
234 les Nouvelles
a reasonable royalty.28 Accordingly, not only does the
use of relative capital costs likely fail to provide a real-
istic, reliable measure of the parties’ relative bargain-
ing strength, it results in precisely what the Federal
Circuit has warned against: it bases royalties on factors
unrelated to the patented technology.
C. Ignores Relevant Factors
The Muthoo Model ignores other factors that courts
often consider to be important that can influence the
final royalty determination. For example:
• The level of competition between the parties is
ignored in the Muthoo Model as it has been applied.
When the profit split between the parties to the litiga-
tion is based solely on their relative WACCs, whether
the parties are direct competitors is an irrelevant fact.
However, the commercial relationship of the patent
holder and alleged infringer is often considered (see
Georgia-Pacific Factor 5) and it is generally accepted
that, all other things being equal, the presence of dir-
ect competition would increase the final royalty rate.
• The Muthoo Model ignores all licensing indicia,
including the prior licenses for the patent-in-suit, and
licenses for similar technology either by the parties
or in the industry. The licensing history of the parties
and the patent holder’s established licensing policy,
if any, have long been considered relevant facts to
the outcome of a hypothetical negotiation. (see Geor-
gia-Pacific Factors 1, 2, 4 and 12.)
• As discussed above, the Muthoo Model does not
account for the non-exclusive nature of the license as-
sumed in most hypothetical negotiations in patent in-
fringement litigations. (see Georgia-Pacific Factor 3.)
• The time remaining on the patent term is ignored.
A patent that expires soon is likely to garner lower
royalties than a patent with a long remaining life, all
other things being equal. If the patent’s remaining
term is very short, the accused infringer would be
expected to consider waiting out the patent term and
launching the accused product after expiration. (see
Georgia-Pacific Factor 7.)
• The Muthoo Model ignores the profitability of
the product as made by the patent owner. The profits
the patent owner can make in the absence of grant-
ing a license, and relatedly, what fraction of those
profits are put at risk by granting a license, can be
highly relevant to the royalty the patent owner would
be willing to accept from a potential competitor. The
Muthoo Model looks only at the incremental profit of
the infringer as the economic surplus to be divided.
This approach completely ignores the profits made by
the patent owner. (see Georgia-Pacific Factor 8.)
28. ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed.
Cir. 2010).
 Magic Bullet Or Rule Of Thumb
• Again, as discussed above, the base form of the
Muthoo Model ignores the specific technological im-
provements of the patented invention, and the avail-
ability of non-infringing alternatives. The technical
importance of a patented technology and the avail-
ability of acceptable non-infringing alternatives may
have a significant impact on the bargaining strength
and negotiating position of an alleged infringer. (see
Georgia-Pacific Factors 9 & 10.)
Application of the Muthoo Model to determining a
reasonable royalty ignores these factors that have long
been held to be relevant to the hypothetical negoti-
ation. This calls into serious question the applicability
and reliability of the Muthoo Model to the specific ana-
lysis of determining reasonable royalty damages.
D. Includes Irrelevant Factors Implicitly
The Muthoo Model, either directly or indirectly, in-
cludes factors that have been appropriately considered
to be irrelevant in a reasonable royalty analysis. For ex-
ample, in the most common application of the Muthoo
Model, the profit split is determined by the parties’
relative WACCs. However, a company’s WACC is influ-
enced by the risk and profitability of all the company’s
products, not just the patented or infringing product.
It has been long understood that the hypothetical ne-
gotiation in a patent infringement litigation should
not be influenced by the fact that either (or both) the
Plaintiff or Defendant may (or may not) have profitable
products that are completely unrelated to the patent-
in-suit.
In 2006, Muthoo published an article in the Review
of Economic Research on Copyright Issues specifically
discussing the application of his prior work to the
context of royalty negotiations.29 This work has been
cited to support the acceptance of the applicability of
the Muthoo Model to the determination of reasonable
royalties. In this paper, Muthoo uses the example of
a musician named Paul negotiating with a record la-
bel over the rights to a specific song Paul has written.
Muthoo concludes that “the larger Paul’s wealth, the
lower his haggling cost, and thus, the greater his bar-
gaining power.” Muthoo further suggests that if Paul,
the musician, had a second job with a decent source of
income he could improve his relative bargaining power
in negotiations with the record label.30
Applying this analysis to a patent infringement liti-
gation would suggest that the wealthier party should
always make out better in the hypothetical negotiation,
and receive a more favorable damages outcome. This
29. Abhinay Muthoo, “Bargaining Theory and Royalty
Contract Negotiations,” Review of Economic Research on
Copyright Issues, 2006, vol. 3(1), 19-27.
30. Ibid., 23.
may or may not be true in a real-world negotiation sce-
nario, but its application to the hypothetical negotia-
tion construct used to determine damages for infringe-
ment would appear to be inappropriate. For example,
if the record company took Paul’s song and used it to
make millions of dollars, the amount Paul should re-
ceive in damages from that infringement should not
at all be related to whether Paul had a side-job wait-
ing tables. Rather, the damages should be tied to the
value of the property that was taken, and the use that
was made of that property. Thus, there appears to be
normative issues involved with the tension between
the application of the Muthoo Model and public policy
concerns of protecting the property rights of inventors
regardless of their personal or corporate wealth.
VI. Just Another Rule of Thumb
The Muthoo Model is a complex mathematical theo-
ry. That complexity is what some experts may like and,
not coincidentally, is also what makes it difficult for
opposing counsel to challenge effectively. Despite its
complexity, it appears to allow for a reasonable royalty
based on a simple objective calculation based on par-
ty-specific information, not a subjective opinion. Yet,
the application of the model to the determination of
reasonable royalties can result in illogical and unrelia-
ble conclusions.
Proponents of using the Muthoo Model argue that
by using the relative discount rates from the parties
to the litigation, this approach uses enough party-spe-
cific information to succeed where the generalized ap-
plication of the NBS failed in the eyes of the Federal
Circuit. However, just because the formula uses some
information specific to the case should not be enough
to clear the hurdle of admissibility and reliability. To
clear that hurdle, an analysis should appropriately use
all the relevant case-specific data—not just the parties’
discount rates.
Further, there are several problems with the party-
specific discount rates typically used in applying the
Muthoo Model. Several factors affect a company’s cost
of capital, many of which should not weigh heavily in
determining the bargaining strength under the hypo-
thetical negotiation construct. The Muthoo Model also
ignores many types of case-specific information that,
based on long and widely-held belief and case-law
precedent, are likely to influence the determination of
reasonable royalties.
The use of the Muthoo Model to determine reason-
able royalties in patent litigation is nothing more than
a slightly evolved rule of thumb. It should be viewed
with the same level of skepticism as the rules of thumb
that came before it, like the 25% Rule and blind appli-
cation of the NBS. The Muthoo Model fails to provide
September 2017 235
 Magic Bullet Or Rule Of Thumb
a reliable basis for determining a reasonable royalty for
the same reasons set forth by the Federal Circuit with
respect to the NBS and the 25% Rule: the general the-
orem can rarely, if ever, be accurately applied to the
facts of a given case.31
VII. Going Forward
This application of the Muthoo Model is another at-
tempt to find the magic bullet of a simple, universal-
ly applicable mathematical formula for determining a
reasonable royalty rate. Unfortunately, no such magic
bullet exists. Where does the rejection of the Muthoo
Model for determining reasonable royalties leave us?
Economic models based on bargaining theory and
financial models based on other factors are useful
and informative to a reasonable royalty analysis, and
can serve to ground a potentially subjective exercise
in objective reality.32 We welcome the objective, ana-
lytical rigor such models provide to the analysis of a
reasonable royalty. However, no single model has yet
been developed that in all fact patterns, industries and
situations appropriately accounts for the complexity of
the issues in determining a reasonable royalty in a re-
al-world litigation.
The broad application of the Muthoo Model to deter-
mine reasonable royalties is not the magic bullet some
have claimed it to be. In the absence of a one size fits
all approach, professionals must still make determina-
tions based on their experience and the financial and
economic models that best fit the specific facts and
circumstance of the situation being analyzed. This can
be a very challenging exercise that necessarily requires
some level of subjectivity on the part of the expert and
the courts.
While the Muthoo Model fails to provide a reliable
basis from which to discern how parties to a hypo-
thetical negotiation would split an economic surplus,
it does begin with the proper focus: measuring the
incremental profits specifically related to the patent-
ed technology at issue. While some subjectivity may
be unavoidable in determining a reasonable royalty, a
strong opinion should be grounded in the facts of a giv-
en case and well-reasoned, situation specific economic
and financial analysis that determines the “footprint”
of the patented technology in the marketplace.33 ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009421

31. Further, the courts have viewed rules of thumb as

inappropriate starting points for any subjective analysis.
Therefore, it is also not reasonable to use the Muthoo Model
as an appropriate starting point for the hypothetical negotiation
and modify the result up or down to account for factors not
considered directly by the model. This approach was found to be
invalid as prior rules of thumb were found to be inappropriate
starting points for a Georgia-Pacific analysis.
32. The Federal Circuit has noted, perhaps fittingly, that “[d]
etermining a fair and reasonable royalty is often…a difficult
judicial chore, seeming often to involve more the talents of a
conjurer than those of a judge.” See Fromson v. Western Litho. 33. ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir.
Plate and Supply Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988). 2010).

236 les Nouvelles

 Innovation In Artificial Intelligence
A Guide To Commercial Innovation
In Artificial Intelligence
By Deepa Ravindranath
Introduction
T
he artificial intelligence (AI) landscape is grow-
ing quickly. Artificial intelligence start-ups raised
$5B in 2016, a 10-fold increase since 2012.i
Tech giants (Google, Microsoft, IBM) are contribut-
ing heavily to this acceleration, both in academic and
practical pursuits. Google published 218 papers on ma-
chine learning in 2016, nearly double the number of
publications in 2014.ii In December 2016, Microsoft
launched a new venture fund specifically to evaluate
and fund AI start-ups, kicking off the fund with an in-
vestment in Element AI, then acquiring Maluuba just
one month later.iii, iv
For professional advisors in the technology field
(attorneys, investors), AI innovation presents unique
challenges. For one, the fast pace of innovation makes
it challenging to keep one’s knowledge current. This
will only continue. Due to recent advancements in
AI across all dimensions—computational power, al-
gorithms, and data—innovation cycles have shortened
and the cost of innovation is dropping. This is lowering
the barrier to entry, flooding the space with a diverse
group of players. Another unique challenge is that dis-
cussions about AI are unavoidable in business circles
today. AI is at the peak of the “hype cycle,” and know-
ledge in this space is often a way to start conversations
and build credibility.
The authors recognize the scarcity of scholarly ma-
terial on the topic of AI targeted to the licensing com-
munity, specifically, thought leadership that facilitates
a licensing professional’s ability to track innovation in
this space. In this paper, the authors provide a guide
for a licensing professional to evaluate AI innovation
effectively.
In Section 1, the authors propose an AI innovation
framework. This framework contextualizes AI innov-
ation into four distinct archetypes. Breaking up the
landscape into logical parts enables focus, and allows a
licensing professional to build expertise in the areas of
greatest interest to their business.
In Section 2, the authors illustrate the framework
using case studies of five “outlier” companies. Because
of the high intensity of innovation, the authors devel-
oped a series of criteria and techniques to separate the
wheat from the chaff. From a list of 20 companies, the
authors showcase five companies to watch in 2017-
2018 that illustrate the archetypes.
Section 1: AI Innova-
tion Framework ■ Deepa Ravindranath,
AI innovation can be best MaxVal Group,
characterized along two prin-
ciples:
Associate Director,
• Sector specific vs. sector ag-
Los Altos, CA, USA
nostic. Is AI used as a com- E-mail: dkrishna@
petitive advantage for a intellectualassetsinc.com
single industry (e.g., logis-
tics)? Or is the innovation
broad-based and generic, cutting across multiple
industries and platform types (e.g., improvements
in technology such as natural language processing,
image recognition, machine learning).
• Solution type, e.g., “Front-end,”“Back-end,” “End-
to-end.” Does the innovation promote a single AI
technology (e.g., natural language processing, deep
learning), or a combination involving disparate AI
technologies?
When mapping these principles using a Gartner
square, four distinct archetypes become clear. Figure 1.
Key takeaways:
• Tech giants’ activities, i.e., the activities of IBM, Mi-
crosoft, and Google follow Archetype 2: Land Grab-
bers. These companies are investing across several
AI technologies. Their goal is “standards-setting”
upon which further AI innovation is built.
• Archetypes 1, 3, and 4 provide ample opportunity
for non-tech giants to compete, either by:
1. Creating an AI solution tailored to sector-specific
customer needs (ideal for large incumbent com-
panies, e.g., auto manufacturers)—as Pioneers, or
2. Building an improved solution that can either
interface with a sector specific or land-grabber
solution (e.g., an enhanced image recognition
software that can interface with IBM Watson, ap-
plied to law enforcement or counterterrorism)—
as Performance Enhancers or Tech Mavens.
Section 2: Five Identified “Outlier” Companies
The authors recently conducted a study to answer
the question “What are the innovative AI companies
to watch in 2017-2018?” An outlier company was
defined as:
• Not a household name
• Still independent (not recently acquired)
September 2017 237
 Innovation In Artificial Intelligence
Here (formerly Navteq and
Figure 1. Four Archetypes Of AI Innovators Nokia maps) provides digital
mapping, location and satellite
End-to-End navigation services. The company
incorporates real-time traffic and
1 2 road condition data from sensors
Pioneers Land Grabbers on-board Mercedes, BMW, and
Applying AI holistically to
enhance the core business and
Locking down applications Audi vehicles to provide a dynam-
and use cases for future
create net new value monetization ic, up-to-date map to the user.
Sector Sector In December 2015, Here was
Specific Agnostic bought by a consortium of Ger-
3 4 man automakers (Volkswagen,
Performance Enhancers Tech Mavens BMW, Daimler) for $2.8B.vi Since
Harnessing AI to solve acute Enhancing the capabilities of December 2016, Here has gar-
challenges in current operations individual AI technologies
nered the attention of several
investors to further the consor-
tium’s development efforts in
Source: Author’s analysis Focused autonomous vehicles (Tencent,
NavInfo, and Singapore GIC in
December 2016 acquiring a 10 percent stake, and In-
• Upward trajectory (measured by successive rounds tel in January 2017 acquiring a 15 percent stake.)vii, viii
of funding, increasing patenting activity in the past
Here is a prominent example of non-tech giants
three years)
standing their ground against tech giants in “land grab-
• Partnership with a large entity or consortium (if ap- ber” mode. Here was acquired by the German auto-
plicable) makers for the purpose of developing an alternative
From a list of over 1,400 initial results, approxi- to Google maps. Despite the ubiquity and zero cost
mately 20 companies met the definition of an “out- nature of Google Mapsix and Google Local services,
lier company.” The authors selected five of these Here has expanded its footprint beyond its German
companies to showcase: automaker owners, providing mapping solutions to
• HERE: Pioneer Amazon, Microsoft, and other corporate entities.
• SECOND SPECTRUM: Performance Enhancer The company owns over 800 active patent families,
• C3IOT: Performance Enhancer with an accelerating patent filing trend in recent years
(173 families in 2014). Recently published patent doc-
• KNUEDGE: Tech Maven uments include innovations across the AI spectrum:
• EDGE3: Tech Maven data management (comprehensive map data), deep
HERE: Archetype 1, Pioneer learning (image recognition, tailored personal experi-
ences), autonomous driving (nav-
Figure 2. Illustrative Placement Of Companies To igation, positioning, error meas-
urement and correction), and IoT
Watch For In 2017-2018 (sensor detection, fleet manage-
End-to-End ment), to name a few. The com-
pany also continues investing in
1 2 adjacencies, such as indoor map-
+ ping and aerial delivery.
HERE Tech Giants
SECOND SPECTRUM:
Archetype 3, Performance
Sector Sector Enhancer
Specific Agnostic Second Spectrum provides a
3 4 machine intelligence-driven solu-
+ +
C3IoT KNUEDGE tion that enables sports teams to
+ enhance player performance and
SECOND + inform game strategy.x Founded in
SPECTRUM EDGE3
2013 by two members of USC’s
Focused Computational Behavior Group,

238 les Nouvelles

 Innovation In Artificial Intelligence
the company makes available and analyzes thousands
of hours of game footage to extract insights using a
unique combination of rules-based approaches and a
solution that enables easy access to game footage.
Second Spectrum has had a short but productive
history. The company closed a Series A on August 1,
2015.xi In 2016, the company signed a multi-year deal
with the NBA to become the Official Optical Tracking
Provider of the NBA starting in the 2017-2018 season,
providing advanced statistics (e.g., speed, distance,
drives, paint touches, defensive impact.)xii The compa-
ny currently works with two-thirds of NBA teams (in-
cluding all recent NBA champions) as well as the NFL,
NHL, and MLB.
Second Spectrum has filed a single patent family
(US20150248917) to enable capture and analysis of
events from video feeds, including metrics related to
sports performance via automated, machine-based al-
gorithms.
C3IoT: Archetype 3, Performance Enhancer
C3IoT is developing a next generation data analytics
platform that customers can use to build predictive an-
alytics capabilities. The company was founded in 2009
by serial entrepreneur Thomas Siebel of Siebel Systems.
Originally named C3 Energy, the company initially tar-
geted energy companies to establish proof of concept.
The company rebranded in 2016 as C3IoT, embracing
the demand for predictive data analytics capabilities
beyond the energy sector, including healthcare and
banking.xiii On March 2, 2017, C3IoT closed a Series E
financing round valuing the company at $1.4B.xiv
C3IoT markets four products that enable it to meet
any customer at their level and build an IoT predictive
suite of capabilities that best fit the company’s vision.
The company markets both off-the-shelf machine learn-
ing-enabled software applications, as well as a plat-
form-as-a-service option for deploying custom industri-
al-scale IoT applications. To support the PAAS solution
and enhance the predictive capability, C3IoT leverages
sensor data from over 20 industrial-scale deployments
with C3IoT customers (100 million connected IoT
sensors). C3IoT customers include private and govern-
ment customers—in 2016, C3IoT won a $25 million
contract to track energy use by the U.S. State Depart-
ment at more than 22,000 facilities spread globally.xv
C3IoT has approximately five active patent families,
filed in the past two years. Recently published patent
documents include a development platform for enter-
prise IoT applications and trained algorithms for pre-
dictive analytics applied to cybersecurity, forecasting
energy consumption, and forecasting energy billing.
KNUEDGE: Archetype 4, Tech Maven
KnuEdge develops next generation and radical tech-
nologies in voice biometrics and neural computing,
focused on fundamentally altering the way humans
interact with machines.xvi The company was founded
in 2005 by former NASA chief Daniel Goldin as Intel-
lisis, and rebranded in 2016 as KnuEdge.xvii In 2015,
the company announced that it had raised over $100M
over multiple funding rounds.xviii
KnuEdge markets four products to military and cor-
porate customers. The company’s flagship product,
KnuVerse, is a “military grade” voice recognition and
authentication system that remains effective in noisy
environments. The company continues to develop
products based on neural network principles, having
already developed a novel chip technology that sur-
passes industry standards of scalability and latency.
KnuEdge has over 40 active patent families, with
the first filings in 2009. Since then, the company has
accelerated its efforts—filing 14 new patent families
in 2015, up from single digits in years prior. Recently
published patent documents include innovations in
voice enhancement, signal processing for noise reduc-
tion, and latency reduction.
EDGE3: Archetype 4, Tech Maven
EDGE3 provides an advanced vision analytics en-
gine that finds application across several industry ver-
ticals. Founded in 2005 by engineers who built the
Embry Riddle Machine Vision Lab, the company has
developed a vast library of vision stereo algorithms,
including a “depth map” that enables real-time, con-
tinuous measurement. The algorithms enable the use
of low-cost, inexpensive cameras typically found in
consumer electronics, thus making the capability af-
fordable and accessible.
The company has applied the vision analytics engine
to two marketed products, Drive and Gauge.xix Drive
is an in-cabin system that monitors drivers for signs
of distraction (texting, gaze direction, drowsiness) and
can be tailored to the unique traits of each driver via
Edge3’s machine-trained algorithms. Gauge is a mobile
calculation algorithm used to measure size and dis-
tance from an image. The company has found applica-
tion in transportation and logistics (measuring the size
of packages for shipping efficiency) and in healthcare
(tracking the size of wounds and skin abnormalities to
optimize treatment).
The company has been awarded over 40 patents
over the past four years (five active patent families).
The patents are drawn primarily to human-computer
interface algorithms, including context-specific verbal
and gesture-based commands, context identification,
and data classification.
Conclusion
The volume and depth of innovation in AI is much
more than can be made sense of in a single paper. The
authors propose a framework that groups the innovation
September 2017 239
 Innovation In Artificial Intelligence
in AI into four discrete archetypes—Pioneer, Land Grab-
ber, Performance Enhancer, and Tech Maven. This men-
tal model can be a useful “rule of thumb” as licensing
professionals navigate and track AI developments in pur-
suit of solutions that best support their businesses. ■
We welcome readers’ participation in this conver-
sation. How does your organization track AI develop-
ments in-house, and what criteria do you use? What
companies should be recognized as the innovative AI
companies to watch in 2017-2018? Join the conversa-
tion at: http://blog.maxval.com/2017/05/artificial-intelli-
gence-innovation-case-study.
References
i. https://www.cbinsights.com/blog/artificial-intelligence-start-
up-funding.
ii. https://www.technologyreview.com/s/603984/googles-ai-ex-
plosion-in-one-chart.
iii. https://www.bloomberg.com/news/articles/2016-12-12/
microsoft-starts-new-venture-fund-with-investment-in-ben-
gio-s-element-ai.
iv. https://techcrunch.com/2017/01/13/microsoft-acquires
-maluuba-a-startup-focused-on-general-artificial-intelligence.
vi. www.engadget.com/2015/07/13/uber-nokia-here. See
also http://www.reuters.com/article/us-nokia-here-idUSKBN0T-
N1J020151204.
240 les Nouvelles
vii. http://www.reuters.com/article/us-here-equity-idUSK-
BN14G0PY.
viii. http://www.reuters.com/article/us-intel-here-equity-idUSK-
BN14N0RN.
ix. http://fortune.com/2016/04/06/amazon-microsoft-here-map.
x. https://www.secondspectrum.com/aboutus.html.
xi. https://www.crunchbase.com/organization/second-spectrum#/
entity.
xii. http://pr.nba.com/nba-announces-multiyear-partner-
ship-sportradar-second-spectrum.
xiii. https://www.bloomberg.com/news/articles/2016-09-01/tech-bil-
lionaire-s-data-startup-c3-iot-raises-70-million.
xiv. https://www.crunchbase.com/organization/c3#/entity
http://c3iot.com/iot-news.
xv. https://www.bloomberg.com/news/articles/2016-09-01/
tech-billionaire-s-data-startup-c3-iot-raises-70-million.
xvi. https://www.knuedge.com/innovation.
xvii. https://www.crunchbase.com/organization/knuedge#/entity.
xviii. http://www.sandiegouniontribune.com/business/
t e chnology /sdu t -goldin-nasa-k nu e dge -int e llisi s- ca lit-
tirias-2016jun07-stor y.html.
xix. http://www.edge3technologies.com/#Products.
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009423
 Disruption In The IP Services?
Disruption In The IP Services Industry?
By John Walker
T
he theme of the LES (Australia/New Zealand)
Annual Conference in May 2016 was “Creation
to Commercial—Disruption and Opportuni-
ties.” In keeping with that theme, a presentation was
made “Disruption in the IP Services Industry?” The “?”
in this title essentially asks the question “Is There Dis-
ruption in the IP Services Industry?” This paper, based
around that presentation, looks at that question from
the viewpoint of the players or stakeholders in the IP
industry, the IP lifecycle or ecosystem, and the prod-
ucts and/or services being supplied in the IP sector.
Terminology
As a precursor to answering this key question one
needs to understand what is meant by disruption.
One possible definition of disruption is “disturbanc-
es or problems which intercept an event, activity, or
process,” with synonyms such as “interference, upset,
confusion” often being used to describe any disrup-
tion. These definitions all have negative connotations,
and as later described in this paper, the IP services in-
dustry can be considered more in “transition” than as
a disruption. Transition is more a process or period of
change from one state to another, and synonyms like
transformation, adaptation, gradation and evolution—
all with a more positive connotation—are better de-
scriptions, and these certainly more closely reflect the
development—past, current and future—of the IP ser-
vices industry.
In addressing this question, two other terms also
need to be recognized. These are “harmonization” and
“streamlining.” Harmonization can be considered as an
“adjustment of differences and inconsistencies among
different measurements, methods, procedures, sched-
ules, specifications or systems to make them uniform
or mutually compatible.” This is certainly an underlying
state of affairs within the IP sector over many decades.
Streamlining is the “improvement of the efficiency of
a process, business or organization by nullifying or
eliminating unnecessary steps, and using modernizing
techniques.” Accordingly when we consider the IP eco-
system as a whole we can see that harmonization and
streamlining by many of its key stakeholders does in
fact create the environment for the transition or evolu-
tion of the IP services Industry.
The IP Ecosystem—The Stakeholders
Within the IP sector or ecosystem, who are these
key stakeholders? In its simplest form there are the
IP owners themselves (individuals and corporations)
seeking IP rights consistent with their business object-
ives, governments through
their agencies providing the
IP infrastructure to obtain IP ■ John Walker,
rights—at the international, Dennemeyer & Associates,
national and multilateral or Director,
regional levels, and the IP Kew, Australia
service providers. This latter
grouping can be further cat- E-mail: jwalker@
egorized into three: the tra- dennemeyer-law.com
ditional attorney services; the
commoditized type services
(such as renewals); and the management services
(such as outsourcing). Looking at each of these stake-
holders helps one understand and address the issue of
disruption (or transition?)
IP Owners
IP owners are the cornerstone—or ultimate drivers
—of the sector in that they seek, demand and require
IP rights with certainty, they seek the maximum pro-
tection (both in terms of scope and territory,) and
with such rights being provided in the minimum time-
frame (usually,) at minimum cost, but at the same time
without any reduction in quality of service or out-
comes. Whilst these objectives might be considered
aspirational, they nonetheless provide the drivers for
the other two categories of stakeholders.
Governments
From the governmental perspective, and looking at
the international level, attempts to simplify IP systems
have been enacted for over 130 years. Although not an
exhaustive list, notable treaties and conventions in this
evolution include the Paris Convention (1883)—now
177 member states, Madrid Agreement (1892), Hague
Agreement (1925)—with over 60 member states now,
the Patent Cooperation Treaty (1978)—with member-
ship now exceeding 150, Madrid Protocol (1996)—
now comprising almost 100 members, and the Patent
Law Treaty. All of these arrangements between nations
represent attempts at the international level to harmon-
ize and streamline the system(s) for IP owners whilst
at the same time indirectly creating challenges and op-
portunities for the IP Service Industry to maximize the
benefits of such improved systems for IP owners.
Similarly at the regional or multilateral level, treat-
ies, conventions and processes have been developed to
September 2017 241
 Disruption In The IP Services?
simplify systems. Examples include the European Pat-
ent Convention (EPC), ARIPO, OAPI, and the Eurasian
Patent Convention. The EPC is a classic example where
its creation led to the IP Service Industry providing a
commoditized service for European Patent Validations.
Similarly at a multilateral level, the growth of the num-
bers, and members, of Patent Prosecution Highways
(PPH) represent a further example of governmental co-
operation aimed at simplifying (streamlining) systems
for IP owners. In the Asian region, ASPEC (ASEAN Pat-
ent Examination Co-operation) represents nine mem-
ber states cooperating on patent examination.
The patent lifecycle is introduced later in this paper,
but each of the aforementioned international, regional
and multilateral arrangements all aim to harmonize
or streamline the patent filing and/or examination
processes. At the Australian national level in 2015, a
Consultative Report commissioned by IP Australia ex-
pressly identified objectives for the agency of aligning,
improving, and simplifying its practices and processes.
IP Service Providers
Before considering the IP service providers in more
detail it is well worth reviewing the IP lifecycle for the
purpose of broadly categorizing the activities (services
and/or products) performed (and by whom) in a typical
IP lifecycle. The patent lifecycle is used here for illus-
trative purposes, but other registrable IP rights such
as trademarks and industrial designs could equally act
as an illustrative example. The patent lifecycle can be
considered to commence with pre-filing considera-
tions, the most common being the conduct of suitable
patent searches. Following the search activity, the pat-
ent document will be prepared (drafting,) followed by
filing (either as a priority or convention/international
application), next there is the prosecution or examina-
tion stage leading to grant or registration, and finally
concluding with maintenance (e.g. annuities or renew-
als.) It should, however, be recognized that depend-
ing on the jurisdiction, such maintenance fees may be
payable prior to or concurrently with the registration
stage. Although not strictly a linear process, for the
purposes of this example, subsequent commercializa-
tion and/or enforcement can be regarded as the final
stage(s) in this IP lifecycle.
Traditional IP Attorney Service Providers
As already identified, there are essentially three
major groups of players in the IP service providers
sector: the traditional IP attorney services, the com-
modity product/service providers, and IP management
and related outsourcing service providers. Using the
Australian Institute of Patent & Trade Mark Attorneys
(IPTA) website as a reference point, and recognizing
there may be slight deviations between jurisdictions,
the broad traditional services category includes advis-
242 les Nouvelles
ing on IP, helping IP owners register and maintain their
property, applying for and securing IP nationally and
internationally, helping transfer IP, and assisting the IP
owners with their portfolios. Although it is difficult to
put an exact date on changes, it is reasonable to assert
that all elements of the IP lifecycle just described were
once the sole domain of the traditional attorney ser-
vice providers. Perhaps one of the pioneering changes
to this framework was in 1962 when John Dennemeyer
introduced the first computer based patent annuity
payment service. It can certainly be argued this was the
commencement of a new type of service provider—
the commodity service provider. Part of this review will
now look at other areas of the IP lifecycle where com-
modity service (or product) providers have entered,
thereby resulting in increased competition with the
traditional attorney services and/or various models of
collaboration between attorney and commodity service
providers. In any event, such developments over time
have seen government IP agencies “cheering from the
sidelines” as the end result has been improved efficien-
cies, particularly in costs, for IP owners.
Commodity Service Providers
Reverting to the IP lifecycle, the logical commence-
ment point is the searching component. Today, we see
a multitude of searching options provided by the com-
modity services providers to the IP owners (and to the
attorney service providers). These searching solutions
include freely available databases such as PATENT-
SCOPE and espacenet provided by government agen-
cies—either international (WIPO) or national IP offic-
es. Commercial databases are also available (e.g. Del-
phion, Derwent, Micropatent, and Questel) and these
all tend to provide some functionality benefit over and
above the government agency products. It is this dif-
ferentiation of functionality that creates the market-
place for such commodity service providers, such dif-
ferentiation being on the basis of interfacing, detailed
analytics, language translation capability, statistical
analysis, graphical and topographic presentation of re-
sults, citation analysis, and the like. It is therefore not
surprising that searching has been a fertile field for en-
try of commodity service providers as part of their ser-
vice is highly dependent upon information searching
and analysis. To put this in perspective, the number of
patents filed worldwide per year increased three-fold
from 1980 to 2010, and five-fold in the case of trade-
marks. Hard disk drive capacity increased 100,000-fold
in the same period.
Perhaps the two elements in the IP lifecycle that
have most rapidly become commonplace in the IP eco-
system are the maintenance and filing commodity ser-
vices. The nature of each of these elements are read-
ily transferable as a commodity, and in each case the
entry of multiple providers including the pioneers and
 Disruption In The IP Services?
subsequent entrants) provided some initial disruption,
but over time such services have been subsequently
improved and enhanced and become more efficient—
largely due to the aforementioned explosion in inform-
ation technology advances.
The other two pre-registration elements are patent
drafting and patent examination/prosecution. In the
case of drafting, underlying tasks such as identifying
relevant prior art, interaction with the client, evaluat-
ing the scope of an invention etc., cannot be readily
replaced by computers. However, as already identified,
some searching and analytical software can assist the
patent attorney particularly in identifying prior art, and
already there are some purveyors of software tools that
electronically enhance the drafting process. Further, it
can be argued that with the development and use of
more “intelligent” software at the drafting stage where
relevant prior art is identified, it then becomes a logical
extension to transfer these capabilities to government
patent examiners at their examination stage. Although
not necessarily at the “IT level,” government agencies
(international and national) have become drivers for
the examination/prosecution phase to become more
of a commodity. Offices sharing examination reports,
Patent Prosecution Highways, the use of modified ex-
aminations, together with rapidly evolving information
technology capabilities are pushing this aspect more
towards a commodity. As an example, and building on
these developments, the concept of Flat Fee Prosecu-
tion services has been introduced whereby IP owners
can benefit from many of these developments.
At the commercialization stage a number of on-
line platforms have, in more recent times, been pro-
moted—both by government agencies and commer-
cial firms—to enhance the likelihood of successful
commercialization of IP outcomes. Examples include
SourceIP (an IP Australia initiative that provides an on-
line marketplace for public sector technology), PCTxs,
IPNexis, IPMarketplace, IPZone, and IPOPHIL. These
are essentially a random selection of available plat-
forms that assist in the technology transfer process,
but ultimately somewhere in the IP ecosystem the
buyer (licensor) and seller (licensee) need to negotiate
and ultimately “do the deal.” Taking the commercial
deal one step further, software tools are available for
agreement drafting. However, like the stage of pat-
ent drafting, such software can assist but due to the
unique situational circumstances—every deal is differ-
ent—this cannot replace the need for personal profes-
sional input and expertise.
Although the foregoing has deliberately concen-
trated on the individual elements of the IP lifecycle,
many other related products are available at a broader
management level than for a specific aspect of the IP
lifecycle. Again, whilst not exhaustive, the following
list demonstrates the computer based “solutions” that
are available in the marketplace to assist the IP owner
and/or IP attorney in many of the aspects across the
entire IP lifecycle. These tools include IP management
software, discovery and litigation management, law-
suit databases, attorney-client management, knowl-
edge management and document management. The
development of such broader based software solutions
across an IP owners business (particularly those with
large portfolios) provides a convenient segway into the
third group of IP management and related outsourcing
service providers.
IP Management and Related Outsourcing
Service Providers
This review has concentrated on the potential
“outsourcing” of various elements of the IP lifecycle
through the utilization and/or acquisition of cer-
tain products or standalone services that are being
provided by a myriad of product/service providers. In
some cases such products cannot be provided without
some form of additional or related “service,” and
where such “services” can be considered to relate to
either a specified product or where this can lead to a
broader full service arrangement such as outsourced IP
management of an IP portfolio (and most likely using
one or more commoditized IP services). This is essen-
tially the third component of the IP service provider
category—the management services provided through
an outsourcing arrangement.
As indicated above, such outsourced services can be
as narrow or broad as the client requires, but ultimate-
ly the client (IP owner) needs to fully understand its
own workflows so that it can identify what service(s)
can be best outsourced—that is, they are demand driv-
en, not supply driven. Aligned with this consideration
is the question by the IP owner: “what competencies
and processes do we (or should we) keep in-house?”
Ultimately there must be tangible benefits in outsourc-
ing services, and these benefits broadly fit into three
categories—improved services, cost-effective servic-
es, and more efficient services. Further, it should not
be forgotten that outsourcing is a partnership between
two or more parties, and ultimately management, com-
munication and relationship issues (both current and
potential future) need to be openly and transparently
identified and addressed at the outset of any outsourc-
ing partnership.
Disruption?
Having identified the landscape of outsourcing in the
IP ecosystem we need to return to the fundamental
question of whether there is disruption in the IP ser-
vices industry. As a broad overview, and assuming the
consideration of outsourcing is more directed at a com-
mercial entity with a relatively large portfolio, we need
to make the potential disclaimer that all companies
September 2017 243
 Disruption In The IP Services?
are different and use IP services in different ways to
meet their business objectives. For example, does the
IP owner utilize an in-house corporate department? or
does it rely solely on an external supplier(s)? or some
hybrid? Further, where it outsources, does it outsource
“products” and/or “services?” or both?
With this in mind we can draw a few general con-
clusions. First, as has been observed, most outsourced
products and/or services are very information technol-
ogy intensive and therefore, notwithstanding perceived
benefits of the product or service, inappropriate or in-
correct consideration of IT implications can create the
potential for disruption. Secondly, where the IP owner
uses different vendors for products and/or services, and
in association with the “IT issue,” there is again the po-
tential for disruption. Thirdly, it must be noted that the
products and/or services themselves are not necessarily
disruptive, but rather are transitional or evolutionary
being driven by both the consumer (the IP owner) and
governments (as agents.) However, mismanagement or
lack of coordination of these products and/or services
by the consumer can create or lead to disruption.
So, the growth in commoditized IP services has been
largely evolutionary or transitionary, and has been
strongly influenced by developments in information
technology. The IP lifecycle embraces many interrelat-
ed steps, and as identified in this review, IP Service
Providers can supply solutions (and variants thereof)
to virtually all of these steps—either alone or in com-
244 les Nouvelles
bination. The permutations are endless. It is therefore
not so much the products/services themselves that are
disruptive, but rather when such services or solutions
are not provided consistently with the IP owner’s sys-
tem and its needs, that the potential for disruption is
present. Therefore, there are two key messages that
evolve. First, for the IP owner—understand your IP
system and your needs. Secondly, for the IP service
provider—understand where your solution fits in the
broader IP ecosystem and how it interfaces (if at all)
with other elements of the IP lifecycle.
Further, to eliminate such disruption requires open-
ness and transparency by both the IP owner and the
supplier(s) of the product and/or service to ensure the
needs and expectations of the IP owner and the func-
tionality and capabilities of the supplier’s products
and/or services are aligned so there are no misunder-
standings, both in the short and long term, and expec-
tations can be seamlessly met. With this understand-
ing and alignment as the basis of any partnership, the
IP owner can expect to reap the benefits of products
and/or services relevant to its business, and take ad-
vantage of the ongoing related improvements arising
mainly through information technology advances and
which are provided by the IP services suppliers, with-
out any disruption. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009432
 Intangible Asset Market

Intangible Asset Market Value Study?

By Cate M. Elsten and Nick Hill

T
he “Intangible Asset Market Value” (IAMV) This year for the first time we compared certain of its
study conducted by the authors examines the IAMV calculations to Interbrand’s calculation of top
components of market value, and specifically the 100 companies worldwide
role intangible assets play in corporate market capital- by brand value.4 For 39 com- ■ Cate M. Elsten,
izations across a range of indexes around the world.1 panies appearing on both the Ocean Tomo,
We believe IAMV is a strong reflection of innovation in S&P 500 and the Interbrand Managing Director,
the greater economy. This is consistent with a Reuters list, this comparison suggests
article on its list of Top 100 Global Innovators which brand value may represent San Francisco, CA, USA
shows organizations that invest in intangible assets roughly one-fourth or more of E-mail: celsten@
such as patents and research & development (R&D) IAMV on average.5 oceantomo.com
continually outperform the S&P 500.2 As seen in Fig-
Also for the first time this ■ Nick Hill,
ure 1, intangible asset value has continued to grow as
year, we have expanded its
the major component of the S&P 500’s market cap over Ocean Tomo,
IAMV Study beyond the S&P
the past decade.3 500 to explore the compo- Analyst,
While emphasis often falls on technology-driven
nents of value in several key Chicago, IL, USA
intangible assets such as patents and trade secrets,
international markets. Stock E-mail: nhill@
brand value is also an important component of IAMV.
market indexes from Europe, oceantomo.com
China, Japan, and
Figure 1. Components of S&P 500 Market Value South Korea were selected and analyzed
to determine the role intangible assets
play in market value. We selected these
100%
83% 68% 32% 20% 16% four geographies as representing the larg-
est non-U.S. markets for intellectual prop-
80%
80%
84%
erty.6 A summary review of results is as
68%
follows:
60%
S&P Europe 350
40% The S&P Europe 350 index comprises
32%
350 leading blue-chip companies from
20% 16 developed European markets. The
17% authors analyzed the index from 2005
0%
1975 1985 2015
to 2015 to determine how IAMV has
1995 2005
changed over time.
Intangible Assets Tangible Assets
As depicted Figure 2, IAMV was com-
parable at the beginning and end of the
1. “The Intangible Asset Market Value” study is released ten-year period, with a dip in between that may have
annually by Ocean Tomo, LLC, the intellectual capital merchant been due to the global financial crisis that began in
bank™ firm.
late 2007. Compared to other developed regions, Eu-
2. “Innovative Organizations With Intangible Assets Are rope’s overall economy has been slower to recover, as
More Successful Than Counterparts,” Reuters, (October 8,
2013) accessed: http://www.reuters.com/article/us-innovative- euro-zone GDP in the final quarter of 2015 was still
organizations-idUSBRE99707E20131008. below pre-2008 levels. The financial crisis appears
3. We calculate IAMV on a company-by-company basis using
data from publicly available financial statements on Bloomberg. 4. Interbrand Best Global Brands, (2016) 13.
IAMV is determined by subtracting a company’s net tangible 5. Ocean Tomo and Interbrand are unrelated entities and there
asset value from its market cap to determine its net intangible is currently no means of comparing data and methodologies for
asset value. Company data is aggregated for the index, and net the two relevant studies in detail. Therefore, this comparison
intangible asset value is then divided by market cap to determine should be considered approximate rather than precise.
the portion of the index’s value that is derived from intangible
6. “World Intellectual Property Indicators 2015,” World
assets. Companies with insufficient data were excluded from
Intellectual Property Organization, 23.
the calculation.

September 2017 245

 Intangible Asset Market

Figure 2. Components of S&P Shanghai Shenzhen CSI 300

Europe 350 Market Value China’s Shanghai Shenzhen CSI 300 Index is a free-
100% float weighted index comprising 300 A-share stocks
33% 29%
29%
listed on the Shanghai or Shenzhen Stock Exchanges.
80% IAMV for this index is approximately half of that for
71%
the S&P Europe 350 and analysis shows IAMV fell 14
60%
71% 67% percent from 2014 to 2015. Although care must be
exercised when examining limited data points, this
40% downward movement may be linked to China’s slow-
ing economy. According to an article from the New
20% York Times, China’s economic growth for 2015 was the
slowest in 25 years.8
0%
2005 2010
China’s patent office, the State Intellectual Property
2015
Intangible Assets Tangible Assets
Office (SIPO) is still relatively young, as its prede-
cessor (the Patent Office of the People’s Republic of
China) was founded in 1980. This, along with the role
to have had a specific impact on Europe’s innovation of traditional manufacturing in the Chinese economy,
economy. According to a publication from the Euro- could in part explain why intangible asset value is a
pean Commission, Europe has recently lagged behind much smaller percentage of overall market cap than in
countries like Japan and South Korea in terms of in- more established Western markets. As China begins to
novation, but plans to focus on this more heavily in predictably enforce patent rights and reform infringe-
the future to help boost the overall economy.7 Current ment recoveries, and as Chinese companies begin to
innovation activity levels notwithstanding, Europe re- file more patents and buy patents in foreign markets,
mains second only to the U.S. in the relative contri- Chinese IAMV could change dramatically in the future.
bution of intangible assets to market capitalization as Nikkei 225
measured by this study and is still well ahead of the Japan’s Nikkei 225 Stock Average is a price-weighted
major Asian markets. As Europe begins to invests more average of 225 top-rated Japanese companies listed in
in technology and the European patent marketplace, the First Section of the Tokyo Stock Exchange. IAMV
we may see a rise in intangible asset value in the next grew 14 percent in Japan from 2014 to 2015, indicating
several years. At this time, it is too soon to tell how the Japan’s continued recovery from the global financial cri-
Brexit vote may impact this. sis. However, IAMV seems to be a somewhat surprisingly
Asian Markets small portion of the Japanese economy as measured by
The authors also analyzed IAMV for major Asian eq- this study. We believe this could be in part due to Japan’s
uity markets. Due to unavailability of comparable data, loss of tech share to countries such as China and South
we limited its analysis to 2015. Based on the data, Korea, which have become innovation powerhouses in
the past several years with the rise of companies such
IAMV appears to be a much smaller component of over-
as Huawei, ZTE and Samsung. The BBC reported that
all market cap in Asia than in Western economies. The
several Japanese electronics giants have suffered in re-
pie charts below show a breakdown of the components
cent years due to the global shifting of technology from
of market value for three Asian indexes in 2015. complex electrical machines to software-rich devices
that favor new competitors
Kosdaq Composite Index Shanghai Shenzhen CSI 300 Nikkei 225 from South Korea and China.9
Adapting to this “new tech”
will likely be a priority for Jap-
anese companies in the future
35% 31% and may impact future IAMVs.
46% 54%
65% 69%
8. “As China’s Economy Slows,
a Look at What Could Happen,”
The New York Times, (October
18, 2016). http://www.nytimes.
Intangible Asset Value IAMV 2014-2015 IAMV 2014-2015
Growth Rate: -14% Growth Rate: +14%
com/2016/10/19/business/
Intangible Asset Value
inter national/china-economy-
slows-impact.html?_r=0).
7. “Innovation Union: A Pocket Guide on a Europe 2020 9. “What Happened to Japan’s Electronic Giants?,” BBA News,
Initiative,” European Commission, 3. https://ec.europa.eu/eip/ (April 2, 2013). http://www.bbc.com/news/world-asia-21992700.
agriculture/sites/agri-eip/files/innovation-pocket-book_en.pdf.

246 les Nouvelles


Kosdaq Composite Index
Korea’s KOSDAQ Index is a capitalization-weighted
index that measures the performance of the KOSDAQ
market, a collection of South Korean equities. The
data shows an increase in IAMV over the past two
years. An article from German broadcaster Deutsche
Welle commented that “Innovation and technology are
the key factors that have underpinned South Korean
export competitiveness and fueled the country’s re-
markable economic rise over the past decades.”10 In
addition, the 2016 Bloomberg Innovation Index, which
ranks countries based on different categories including
R&D, high-tech companies, manufacturing, research
personnel, patents and education, ranked South Korea
as having the world’s most innovative economy, ahead
of Germany, Sweden, Japan, and Switzerland.11 This
surge in tech activity appears to be reflected in South
Korea’s relatively high IAMV compared to the other
major Asian economies.
Comparing Geographic Regions
As an initial matter, when comparing geographic
regions it is important to bear in mind the impact of
differing accounting standards. For example, Interna-
tional Accounting Standard (IAS) 38, effective March
2004, allows for circumstances in which internally
generated intangible assets can be recognized on the
balance sheet and capitalized over the life of the as-
set, as opposed to being expensed as development
costs.12 Many countries, including South Korea and
some European countries have adopted this stand-
ard.13 In Japan, IAS 38 is currently optional, however,
as of January 2015, 62 companies with over $650 bil-
lion of market cap on the Tokyo Stock Exchange had
adopted IFRS.14 Similar to IAS 38, China’s account-
ing standards call for recognition of internally gen-
erated development costs as intangible assets if they
meet certain requirements.15 The U.S., on the other
hand, follows GAAP which in most cases calls for ex-
10. “Why Innovation is King in South Korea,” DW.com,
(February 10, 2016). http://www.dw.com/en/why-innovation-is-
king-in-south-korea/a-19038625.
11. Ibid.
12. “IAS 38—Intangible Assets,” IASPlus. https://www.
iasplus.com/en/standards/ias/ias38.
13. “Use of IFRS by Jurisdiction,” IASPlus. https://www.
iasplus.com/en/resources/ifrs-topics/use-of-ifrs#Note12.
14. Japan also permits companies to use Japanese Accounting
Standards or US GAAP, both of which call for expensing internally
generated intangible assets as research and development costs
as they incur. “IFRS as Global Standards: A Pocket Guide,”
IFRS Foundation, (2015) 95. http://www.ifrs.org/Use-around-
the-world/Documents/IFRS-as-global-standards-Pocket-Guide-
April-2015.PDF; Ernst & Young, “JGAAP-IFRS Comparison,”
https://www.shinnihon.or.jp/services/ifrs/issue/ifrs-others/other/
pdf/ifrs-jgaap-comparison-v30-E.pdf.
15. “Accounting Standard for Business Enterprises No. 6—
Intangible Assets,” Laws of the People’s Republic of China.
http://www.asianlii.org/cn/legis/cen/laws/asfben6ia630.
Intangible Asset Market
pensing development, maintenance, and restoration
costs of internally generated intangible assets as they
occur16 and limits balance sheet recognition of most
intangible assets to those that are acquired as part of
a purchase or other business combination. In theory
this should have the directional effect of depressing
U.S. IAMV relative to countries allowing more liberal
balance sheet recognition of self-created intangibles.
However, the magnitude of these differences cannot
be readily calculated with currently available data.
Beyond these reporting differences, questions re-
main as to why various geographic regions display their
relative IAMV positions. For example, a study by the
Global Intellectual Property Center (GIPC), which is
similar to the 2016 Bloomberg Innovation Index study
but with some difference in criteria, ranks countries
based on a variety of categories related to IP to de-
termine each country’s overall IP score.17 Consistent
with the IAMV calculations prepared by the authors,
the GIPC study ranks the U.S., UK and France as the
top three countries with the strongest IP environment.
Japan is ranked sixth by the GIPC, which notes that
Japan has “significant weaknesses in its participation
in international IP treaties.”18 However, China ranks
much lower on the GIPC list, nearly 12 points behind
Japan. The GIPC study states that while China has
made some improvements in recent years in patent
rights, enforcement and rapid movement of counter-
feiting still remain challenges.19 These results appear
at odds with the IAMV analysis. As more comparable
data points become available, the underlying reasons
for the relative IAMV positions of different economies
will be studied in more depth.
In conclusion, data spanning more than a quar-
ter century for the U.S. make it clear the economy
is inverting from one where value was measured by
“touch” to one where value is driven by thought. This
change has been no less significant than the industrial
revolution more than a century ago. Although a sim-
ilar time series of data is not available for European
and Asian markets, simple observation of the nature
of companies that increasingly dominate these econ-
omies suggest something of the same nature has oc-
curred and is likely continuing to occur there. Further
data and analysis will be available as time progresses,
and are required to more fully understand and predict
innovation trends. ■
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009783
16. “Goodwill and Other Intangible Assets—Key Differences
Between U.S. GAAP and IFRSs,” USGAAPPlus. https://www.
iasplus.com/en-us/standards/ifrs-usgaap/goodwill.
17. “Charting the Course,” Global Intellectual Property
Center, Second Edition (January 2014) 29.
18. Ibid.
19. Ibid., 30.
September 2017 247
 Software IPR Valuation Model
Software IPR Valuation Model
By Dr. Santosh Mohanty and Kaushik Gala
Abstract
The hyper-connected world we live in is fundamental-
ly altering our lives. Digital technologies are challenging
long-held norms. Inventions and their related intellec-
tual property rights (IPR) are crucial for enterprises to
differentiate themselves in a highly competitive global
market. Software enterprises, in particular, are at risk
of rapid obsolescence unless they capture, protect and
leverage their innovation ecosystem and IPR portfolio.
Intellectual property (IP) is hotly contested in an
industry that innovates fast and where technological
and design advantages can result in large opportunities.
New companies have emerged whose sole activity is to
create and lease IP. There are companies that disrupted
the business models and displaced the titans. Whereas
few others have achieved the zenith and then disappea-
red from the scene as a result of market dynamics.
Software inventions are inherently different from
those in physical sciences, hardware, and such. Evalua-
ting them requires a novel approach, given the variety
of ways in which software intellectual property can be
developed, protected, regulated, productized, mone-
tized and infringed. Traditional approaches to IPR valua-
tion such as market-based, cost-based and income-based
may be irrelevant or cumbersome, given the dynamic
nature of the software industry. Software IPR valuation
is highly contextual and hence, providing relevant input
for traditional valuation models becomes prohibitively
time-consuming, especially for valuation exercises at a
portfolio level. Digital transformation of all industries
makes software IPR exponentially more valuable.
To enable global enterprises to quickly and systema-
tically evaluate their software IP, we introduce a model
called Invention Valuation and Scoring System (IVSS).
The model relies on two primary dimensions:
1. Sustainability “S” of an invention i.e. how futu-
ristic, agile, resource-efficient and adaptable is the
software by design; and
2. Commercial Viability “C” of an invention i.e.
how well it can be operationalized, made relevant to
customers, and profitably delivered to a large/fast-
growing market.
Each dimension has four attributes, thus resulting
in a “4Sx4C” matrix with 16 cells, each cell of which
can be assigned a value. Since this model is to be used
by a commercial enterprise driven by profit/revenue
growth targets and shareholder value creation, the 16
248 les Nouvelles
cell values are, in turn, linked to business outcomes e.g.
strategy, defensibility, market coverage, and customer
value. These 16 weighted values, along with simple
inputs related to commercial pricing, then result in a
systematic valuation of the invention, while accounting
for changes in the estimated valuation over a period of
time.
The IVSS model thus provides a systematic, tech-
no-commercial methodology to evaluate a portfolio
of software IPR assets, in the context of enterprise
software IPR management. We illustrate a specific use-
case of IVSS to evaluate software IPR related to a mo-
bile-first agricultural services delivery platform for rural
farmers in India.
Introduction
A
patented invention requires novel, inventive
steps towards technical and process advance-
ments, as well as, utility for commercialization.
Such inventions usually constitute the IP assets of soft-
ware enterprises. While mining and protecting such
inventions, IP managers seek to determine the tangi-
ble value attached to each intangible asset, so as to en-
able the enterprise’s decision on creating, maintaining
and monetizing IPR assets. Significant challenges exist
for efficient and effective valuation of software inven-
tions. These include rapid technology change and ob-
solescence, new go-to-market models, globalization of
software creation and use, dynamic pricing strategies
enabled by software, ease of infringement and theft
of software IP, uncertainty in regulatory protection for
software IP, etc.
Software IP can be formally protected via Copy-
rights, Trademarks, Patents, Industrial Designs, etc.
From an enterprise perspective, each invention is an
IP asset only if the value it delivers exceeds its asso-
ciated costs. Thus, each invention must be evaluated
throughout its life cycle viz., from ideation to patent
drafting to territorial protections, and finally commer-
cialization and patent maintenance. Since IPR such as
patents have a defined expiration date, the valuation
model must also account for changes over time. Each
invention should ideally be evaluated against others
within the portfolio, so as to support managerial deci-
sions on IPR maintenance, go-to-market strategy (e.g.,
product licensing vs. IP licensing vs. IP sale), etc. Final-
ly, an ideal IP valuation model should be comprehen-
sive, systematic, quick, and intuitive; it should require
minimal, simple human inputs.
 Software IPR Valuation Model
Traditional Models of IP Valuation value creation possibility via network effects, “winner-
Three common approaches to IP valuation have i take-all” effects and the likes. The difficulty in enforce-
traditionally been: cost-based, market-based and in- ment of software IP rights greatly affect its valuation.viii
come-based. Furthermore, the choice of market and path to market
can lead to substantially different “realized” valuesix of
Each approach requires a set of inputs based on
software IP (e.g., Pets.com vs. Amazon.com). It has also
past experience and expert judgment. For example,
been arguedx that software IP can serve as a tax by
the cost-based approach requires the evaluator to as-
larger companies on smaller companies.
sess what a similar IP asset might cost to develop or
acquire. The market-approach requires the value at IVSS Model
■ Dr. Santosh Mohanty,
which similar IP assets have been recently sold in the In a B2B software en-
market. The income-approach requires an estimate of terprise, the IP assets and Tata Consultancy Services
future cash flows from monetization of the asset, and a IPR that are developed are Limited, Vice President
discount rate to compute the net present value. usually consumed by the and Head Component
These approaches are, of course, subject to errors products, platforms and Engineering Group,
due to incorrect inputs, lack of availability of relevant solutions that are offered
Mumbai, India
data, human biases, insufficient expertise on part of to customers. This implies
that the IP valuation mod- E-mail: santosh.mohanty@
the evaluator, incorrect definition of the IP asset, etc. tcs.com
Given the commercial sensitivity of IP assets, public- el used by such enterpris-
ly-available data is often limited or less reliable. More- es accounts for the wide ■ Kaushik Gala,
over, since there are numerous ways to commercialize variety of IP assets (from
Tata Consultancy Services
an IP asset, its value is intricately tied to the context snippets of code to stand-
in which it is marketed. Qualitative methods are also alone products to large Limited, Manager,
sometimes used for patent valuations. These rely on at- software platforms) in the IP Ecosystem Strategy
tributes such as number of independent claims, num- portfolio. Moreover, the Mumbai, India
ber of forward citations, age of the patent, geograph- volume of IP assets and E-mail: k.gala@tcs.com
ic coverage, breadth of portfolio, etc. However, such IPR expected to be cre-
methods remain peripheral in counting business and ated in a large software
market factors, and remain exposed to human biases. business necessitates a systematic approach to IP val-
Despite these limitations, IP managers continue to uation. In fact, an enterprise that offers both software
use, and refine, the above methods to compute IP valu- services and software products requires a sharp dis-
ations, usually by triaging the valuation estimatesii made tinction between its IP assets and those of its custom-
using independent methods, and explicitly noting the ers. This boundary can keep changing over time and
assumptions in the model. The importance of contextiii based on the nature of customer engagements.
has become apparent—the value of a patent may dif- The above requirements, unique to software IP, led
fer by orders of magnitude depending on whether it’s us to refine an earlier, proprietary modelxi for inven-
being sold, licensed, infringed, contributed to a stand- tion valuation and rationalization that accounts for
ards pool, or found to be invalid. Needless to say, there both technical and commercial aspects, their dynamic
are numerous alternative modelsiv being used that ac- nature, and the mapping of IPR to business outcomes.
count for factors such as brand, liquidation value, auc- Sustainability “S” Attributes:
tion value, real options value, etc. In fact, IP valuation Our model seeks to evaluate each software IP on
is further challenged by the fact that it may be done
four dimensions, related to its innovativeness and sus-
as part of in-kind arrangements, fire sales, academic
tenance of the corresponding competitive advantage.
collaborations, etc.v—these in turn require valuation
These are as follows:
inputs and models different from typical licensing/
sales. Given that a majority of patents expire without 1. “Anticipative”—does the invention anticipate
a worth, while a small fraction are worth millions,vi a future needs of market, technology, etc. and create
robust need exists for patent buy/sell transaction data ‘novelty’ at the present time to address it? Will it sus-
as a reliable input to IP valuation models. tain despite the changing nature of market forces?
Software IP Valuation 2. “Agile”—can the “inventive steps” in the inven-
tion sense the current needs and provide a responsive
Valuation of software IP offers an entirely new chal-
lenge, given the variety of ways in which software solution, via a fast track process to transform the IP
inventions can be created, protected, monetized and into products or service offerings?
its enforcement through contracts. Income-based val- 3. “Efficient”—will the invention, when reduced
uation models seem to be more relevantvii given the to practice, allow “doing more with less” in terms
intangible nature of software IP and the non-linear of lower cost, minimum infrastructural modification,

September 2017 249

 Software IPR Valuation Model
time reduction, better quality, less effort, etc.?
4. “Adaptable”—is the invention flexible and resili-
ence to change, i.e., are the inventive steps applicable,
with minimal change, to similar scenarios or problems?
Does it balance personalization with mechanization?
Commercializability “C” Attributes:
Our model also seeks to evaluate each software IP
on four other, orthogonal dimensions, related to its op-
erational and marketable strength as an asset. These
are as follows:
1. “Technology”—does the invention utilize or cre-
ate state-of-the-art technology, and its associated pro-
cesses and on-demand, elastic infrastructure, to deliv-
er maximum customer value?
2. “Context”—does the invention
leverage the enterprise’s contextual
knowledge of customers, industry play- Weight (W)
ers, business domain, white spaces and Table
market dynamics?
3. “GTM”—does the invention ena- Anticipative
ble new, disruptive go-to-market (GTM) Agile
strategies, scaling, distribution channels
or revenue models for the enterprise? Efficient
4. “Outcome”—will the invention Adaptable
have a meaningfully positive outcome for
the business and its stakeholders?
The first three attributes are “lead” attributes in
the sense that these capabilities are pre-requisites for
the IP to be monetized. The fourth attribute is a “lag”
measure of the invention’s impact. Also, the technol-
ogy and the associated rate of change is becoming key
for a software enterprise to grow sustainability—much
more than process or infrastructure. Being able to de-
liver context-specific value to the customer, and take
inventions to market is the key to success in this digital
age of mass customization.
4Sx4C Matrix:
We capture these 4 “S” and 4 “C” attributes of each
invention via a 4x4 matrix, as below in Table 1:
Weighted 4Sx4C Matrix:
Table 1
Table Outcome GTM Context Technology
Anticipative
Agile
Efficient
Adaptable
As a commercial enterprise, the business outcomes
of an IP asset or IPR are most critical in the valuation.
250 les Nouvelles
Also, given the incredibly dynamic nature of the soft-
ware industry, and the ease of “bypassing” software
IPR, we seek to give greater emphasis on the “anticipa-
tive” aspects of invention and the realization of “out-
come.” Hence, we choose to weight the 16 cells in the
above 4x4 matrix as follows:
• Base weight of “1” for each cell
• Double the base weight for the cells under “Out-
come” column or “Anticipative” row (Hence, the base
weight of the cell under “Outcome” column and ‘An-
ticipative’ row is multiplied by a factor of “4”)
The Weight Table is presented below as Table 2:
Note that the total weight across the 16 cells is 25.
Table 2
Outcome GTM Context Technology
W:4 W:2 W:2 W:2
W:2 W:1 W:1 W:1
W:2 W:1 W:1 W:1
W:2 W:1 W:1 W:1
Inventions in a software enterprise are driven by
a current or anticipated business opportunity. Inven-
tors are aligned with requirements from development
teams, inputs from sales and marketing teams, and the
need of the customers. Each patentable/patented in-
vention is hence expected to have the following char-
acteristics:
a) Align to business strategy, operations and initia-
tives (“Aligned”)—at a granular level, can the patent
be mapped to specific products that the enterprise in-
tends to sell, leveraging its market and customer dis-
covery efforts?
b) Be difficult for other industry players to repro-
duce (“Unique”) quickly—is the invention incremen-
tal (and hence likely to be imitated easily) or disruptive
(and hence, difficult to reproduce)?
c) Cover a broad and rapidly growing customer base,
across geographies (“Broad”)—is the total/addressa-
ble market and target market share large enough in the
context of the enterprise’s revenue and profit goals?
Will the invention enable broad market coverage, de-
spite the varying ability and willingness of different
countries to enforce patent protections?
d) Drive value creation, and thus strengthen en-
terprise brand, in the mind of the customer (“Valua-
ble”)—does the invention enable a competitive moat,
as demonstrated in value to the customer, that helps
maintain/boost profit margins?
 Software IPR Valuation Model
These four factors can then be added to the 4Sx4C
matrix to evaluate a particular invention. While all the
four characteristics are associated with each cell in
the 16-cell matrix, we have identified the most influ-
encing characteristic associated with each cell in the
4Sx4C matrix. This is especially true as we focus on
enterprise software inventions, and seek to promote
the IVSS model amongst a large number of users/in-
ventors, each of whom is expected to provide inputs
to the valuation model. We have mapped the relevant
characteristic to each cell, as shown in Table 3.
These questions help provide a Boolean (i.e. 0 or 1)
value for the relevant characteristics (Aligned/Unique/
Broad/Valuable) for a particular cell.
Thus, an invention’s score is computed in two
steps as follows:
i. Determining the weighted score of each cell by
multiplying the respective characteristic’s Boolean
value with the cell weight; and
ii. Computing the total score by adding the weighted
scores of all 16 cells.
Note that the maximum Invention Score (IS) for any
particular invention is 25—while the minimum can
be zero.
Each invention in an IPR portfolio can thus be in-
dividually scored by inventors and IP managers. They
only need to provide a set of 16 Boolean inputs, based
on the relevant degree of product, domain and cus-
tomer insights. It can be argued that absent these in-
sights, it wouldn’t be possible for inventors to develop
a patentable invention anyways! The next step is to
convert the IS into a numerical valuation estimate.

Table 3
IVSS Table Outcome GTM Context Technology

Broad: Will the invention Unique: Will the invention Valuable: Does the Aligned: Does the
enable us to target anchor lead to competitively invention use our customer invention leverage our
Anticipative customers in new, high- advantageous GTM insights to anticipate technology investments
growth markets? strategies? future, unmet needs? and human capital?

Unique: Will the invention Broad: Will the invention

Aligned: Will the invention
Valuable: Does the invention help us gain new customer enable us to compete
allow us to rapidly capture
Agile market share in high-
allow us to quickly scale our insights, not easily despite/because-
marketing and sales? available to other industry of rapidly evolving
growth lines of business?
players? technologies?

Unique: Will the invention Valuable: Does the

Aligned: Does the invention Broad: Can the invention
enable us to improve invention leverage/
introduce operational cater to both price-
Efficient and sustain higher profit
efficiencies in marketing conscious and premium
create technology to
margins, and avoid offer a compelling value
and sales? customers?
commoditization? proposition?

Unique: Will the

Broad: Does the invention
Valuable: Does the Aligned: Will the invention invention allow us to
enable us to market and
Adaptable invention allow us to mass-
sell to a wider variety of
easily evolve with changing serve customers that
customize our offerings? customer requirements? other industry players
customers?
cannot?

Table 4
IVSS Table Outcome GTM Context Technology
Broad (0/1) Unique (0/1) Valuable (0/1) Aligned (0/1)
* * * *
Anticipative
W:4 W:2 W:2 W:2

Aligned (0/1) Valuable (0/1) Unique (0/1) Broad (0/1)

* * * *
Agile
W:2 W:1 W:1 W:1

Unique (0/1) Aligned (0/1) Broad (0/1) Valuable (0/1)

* * * *
Efficient
W:2 W:1 W:1 W:1

Valuable (0/1) Broad (0/1) Aligned (0/1) Unique (0/1)

* * * *
Adaptable W:2 W:1 W:1 W:1

September 2017 251

 Software IPR Valuation Model
Initial and Time-dependent Valuation:
B2B enterprises, by definition, market their software
products, platforms and solutions to business users,
not (mass market) consumers. Commercial imple-
mentation of inventions are thus expected to be con-
sumed by users such as corporate employees, middle
management, executives, CXOs, etc. Thus, invention
creation in an enterprise is usually contextual, driven
by a business case, with a reasonable idea of the target
customer and the corresponding product or platform
or solution that will consume the invention. As soft-
ware gets more consumerized and personalized, B2B
enterprises have to act in B2B2C mode, by anticipating
and adapting to the needs of the consumers. In fact,
the border between pure B2B and pure B2C will con-
tinue to thin out, as digital technologies will transform
the consumption pattern.
Thus, a ballpark estimate can be made in many cases
by the product management on
• Sale price per an unique user, called Value per Unit
Sale (VUS).
• Number of annual “sales” expected in steady state,
in-line with annual revenue targeted in the business
case, called Number of Unit Sales (NUS).
VUS is expected to be in the currency relevant to
the target market (US$, by default.) This can be con-
verted to another currency using an adjustment factor
such as the Purchasing Power Index (PPI).
Furthermore, each invention either may be contrib-
uted by a team of inventors associated with a software
development team or may get attributed to a software
as a part of periodic patent-product mapping exercise
to mine enterprise’s invention portfolio.
We thus introduce the Contribution-Attribution
Factor (CAF) that is simply a function of the total num-
ber of inventions associated with the same software
as the one targeted by a given invention, computed as
follows:
CAF = 1 / Total relevant inventions
The CAF calculation thus nudges the product man-
ager to consciously search the enterprise patent portfo-
lio for relevant patents, thus broadening the product’s
IP footprint. This is driven systematically by a collab-
orative invention mining (CIM) strategyxii intended to
unearth related inventions from within the existing
portfolio. In fact, the Digital IP Genome setxii allows
rapid portfolio mining, using claim elements as the
core search criteria. This is crucial in a large enterprise
where inventors across multiple R&D labs, business
units, operations and infrastructure groups create IPR
assets whose claims happen to cover same invention
subject areas.
Finally, we account for the fact that IP rights contrib-
ute only a certain fraction to the overall commercial of-
252 les Nouvelles
fering. One proxy for this is the royalty rates that an IP
license can command, if the invention was licensed to
another enterprise, which then productizes and com-
mercializes the invention. Based on our professional
knowledge, we have estimated royalty rate, if licensed
(RRIL) in the context of a variety of software offer-
ings that include Components; Frameworks; Proof-of-
Concept, Proof-of-Technology, and Demos; Products;
Platforms; and Solutions. We use this factor (RRIL) to
further modulate the invention valuation. RRIL can
vary from 0.5 percent to 20 percent.
We are now able to compute initial (base) valuation
of each invention as a function of the market it targets
(via revenue estimates of the corresponding product),
and the degree of its contribution and/or attribution to
a commercial outcome.
Base Valuation
The Base Valuation of an Invention (BVI) is defined
as its value on the first year and computed as follows:
BVI = NUS * VUS * CAF * RRIL
Alternate Base Valuation
Alternatively, there may be cases where either the
inventor has reasonably good benchmark data for
the value of similar inventions or the invention is of
“fundamental” nature and not yet mapped to a specif-
ic product. In such cases, the IVSS model allows the
inventor to directly provide an initial estimate of BVI.
Over time, as the invention is mapped to a commercial
offering, the BVI will be revised using the formula de-
veloped above.
Valuation Over Time
The valuation of software IP assets and IPR will neces-
sarily change over time, given the inherently dynamic
nature of technology, industry and market. Rapid com-
moditization of software technology, combined with
exponential pace of innovation, implies that the value
of the majority of software inventions may drastically
reduce in a relatively short time span. Digital trans-
formation, of and via software, introduces significant
variations in how fast, or slow, a given invention will
lose its differentiator to commercial success.
We seek to model this by computing a time-depend-
ent invention valuation (IV) as follows:
Wherein, “t” is the year, N is the maximum possi-
ble Invention Score (IS) (i.e. 25) and α is defined as
a “smoothing parameter” ( ≥α≥1). The “smoothing
parameter” α depends on t and is driven by factors
such as changes in technology, target market growth,
competitive intensity, life cycle of the invention, crea-
tion of adjacent inventions, change in business strate-
gy, etc. By default, α =1.
 Software IPR Valuation Model
Note that the valuation of an invention in the first
year equates to BVI itself, i.e. IV(1)=BVI. If the calcu-
lated shelf-life for a patent
IS is “t~,” then IV (t~) > 0.1
N
percent * IV (0).
Lifetime Valuation of an Invention (LVI):
We compute the Lifetime Valuation of the Invention
(LVI) as a sum of its yearly valuations over a specified
period “n”:
• Number of annual “sales” expected in steady
statexv i.e. Number of Unit Sales (NUS) = 50,000
• CAF = 1/11 (there are eleven inventions that con-
tribute to this commercial offering)
• RRIL = 7.5 percent
Thus, BVI = VUS * NUS * CAF * RRIL ~ INR
340,000.
The illustration can also be extended to compute a
lifetime valuation estimate, using:

Wherein n=20 by default, since the lifetime of a

patent is ~20 years, ignoring patent term adjustments
across jurisdictions and starting the time period from
the date of filing of the Complete Specification. LVI
estimates the total revenue that an invention might
generate over its life-cycle.
Example: Patented Agro Service Delivery
Platform
Multiple inventions were developed and protected
as part of the creation of a personalized, mobile-first,
agricultural services delivery platformxiii for rural farm-
ers across India. It is also applicable for fisheries and
cattle management. Services delivered over the plat-
form include site-specific agro advisory, pest control,
best practices, food grain price alerts, weather fore-
casts, farm produce procurement, local language train-
ing, information about loans, etc. One such invention
is Indian Patent No. 271147—“A mobile-based adviso-
ry system.”xiv
We illustrate the valuation exercise for this invention
by scoring it as shown in Table 5.
Thus, the weighted Invention Score (IS) works out
to 16.
We then convert the IS to a numerical base valuation
estimate, with these inputs:
• Sale price per an unique user i.e. Value per Unit
Sale (VUS) = INR 1000 subscription per year
For α =1.5, and n=20, the LVI works out to ~ INR
900,000.
Summary
The rise of software-driven enterprises highlights
the increasing importance of software IP and IPR (par-
ticularly patents) for sustainable growth. As they en-
gage in continuous software innovation, global tech-
nology businesses need to systematically evaluate their
software IP. A portfolio-wide estimate of the market
value of software IP assets is key to strategic R&D in-
vestments, IP filings and go-to-market initiatives.
To support this, we introduce a model called Inven-
tion Valuation and Scoring System (IVSS) for compre-
hensive valuation of software IPR by business manag-
ers. The model first captures sustainability and com-
mercial viability aspects of an invention in a “4Sx4C”
matrix with 16 cells. Each cell is then assigned a
Boolean value, linked to business outcomes e.g. strate-
gy, defensibility, market coverage, and customer value.
These 16 weighted values, along with simple inputs
related to commercial pricing, enable systematic valu-
ation of an invention, while accounting for changes in
the estimated valuation over a period of time. We have
the illustration of IVSS through a patent in a subject
area of “mobile-first agricultural services delivery plat-
form for rural farmers.”

Table 5
IVSS Table Outcome GTM Context Technology
Broad (1) Unique (1) Valuable (1) Aligned (1)
* * * *
Anticipative
W:4 W:2 W:2 W:2

Aligned (0) Valuable (0) Unique (0) Broad (1)

* * * *
Agile
W:2 W:1 W:1 W:1

Unique (0) Aligned (0) Broad (1) Valuable (1)

* * * *
Efficient
W:2 W:1 W:1 W:1

Valuable (1) Broad (0) Aligned (1) Unique (0)

* * * *
Adaptable W:2 W:1 W:1 W:1

September 2017 253

 Software IPR Valuation Model
We intend to further refine the model over time,
with finer estimates of inputs such as royalty rates, his-
torical estimates of the smoothing parameter “α”, and
development of similar models for software and other
IP assets. ■
©2017, Tata Consultancy Services Limited. All Rights Reserved.
References
i. “Methods of Intellectual Property Valuation,”
Darden, University of Virginia, (2000).
• https://faculty.darden.virginia.edu/chaplin-
skys/PEPortal/Documents/IP%20Valuation%20
F-1401%20_watermark_.pdf.
ii.. “IP Valuation, Exploitation and Finance,” WIPO-
PwC Workshop, (2011).
• http://www.wipo.int/edocs/mdocs/sme/en/wipo_
smes_tlv_11/wipo_smes_tlv_11_ref_t15.pdf.
iii. “Final Report from the Expert Group on Intel-
lectual Property Valuation,” European Commission,
(2013).
• https://ec.europa.eu/research/innovation-union/
pdf/Expert_Group_Report_on_Intellectual_Proper-
ty_Valuation_IP_web_2.pdf.
iv. Weston Anson, “Alternate Approaches to the Val-
uation of Intellectual Property,” IP Watchdog, (2015).
• http://www.ipwatchdog.com/2015/02/11/alter-
nate-approaches-to-the-valuation-of-intellectual-prop-
erty/id=54651.
v. “A Practical Guide for Valuing Intangible Assets
in Research and Development Institutions,” WIPO,
(2016).
• http://www.wipo.int/edocs/mdocs/mdocs/en/
cdip_17/cdip_17_inf_2.pdf.
vi. Hayes & Soloway, “Patent Valuation,” (2016).
• http://www.hayes-soloway.com/patent-valuation.
vii. Gio Wiederhold, “What is Your Software
Worth?,” Stanford University, (2007).
• http://ilpubs.stanford.edu:8090/862/1/worth43.pdf.
254 les Nouvelles
viii. Susanna Hult, “Valuation of Intellectual Proper-
ties,” KTH, Sweden, (2012).
• https://www.nada.kth.se/utbildning/grukth/exjobb/
rapportlistor/2012/rapporter12/hult_susanna_12060.pdf.
ix. “State of Practice in Software Valuation,” Intel-
lectual Asset Management, 2013.
• http://www.iam-media.com/Magazine/Issue/59/
Features/State-of-practice-in-software-valuation.
x. Colleen Chien, “The Market for Software Innova-
tion Through the Lens of Patent Licenses and Sales,”
Santa Clara University School of Law, 2017.
• http://digitalcommons.law.scu.edu/facpubs/943.
xi. Santosh Kumar Mohanty, “Invention Valuation
and Scoring System,” US20130166459A1, Tata Con-
sultancy Services Limited, (2013).
• https://www.google.com/patents/US20130166459.
xii. Santosh Kumar Mohanty, “Managing Sustaina-
ble Intellectual Property Portfolio of an Enterprise,”
US9633403B2, Tata Consultancy Services Limited,
(2013).
• https://www.google.com/patents/US9633403
XIII. “mKRISHI—Connecting India’s Rural Farm-
ers,” TCS Innovation Labs, (Mumbai, 2017).
• https://www.tcs.com/mkrishi-connecting-india-ru-
ral-farmers.
XIV. “A Mobile-based Advisory System,” Indian Pat-
ent No. 271147, Tata Consultancy Services, 2016.
• http://www.allindianpatents.com/pat-
ents/271147-a-mobile-based-advilsory-system.
xv. “Evolution of mKRISHI®: A Technology Platform
for Indian Farmers,” Business Innovation Facility,
2013.
• http://www.inclusivebusinesshub.org/wp-content/
uploads/2016/05/Deepdive_mKRISHI_HUB-14.pdf.
Available at Social Science Research Network (SSRN):
https://ssrn.com/abstract=3009919
 Recent U.S. Decisions

Recent U.S. Court Decisions And Developments

Affecting Licensing
By John Paul and D. Brian Kacedon

1. Taxation of Patent Transfer 2. Patent Litigation Settlement Agreements

Obtaining favorable capital gains taxation treat- May Be Used to Support Reasonable Royalty
ment on payments for transferring patent rights. Damages in Later Litigation
2. Reasonable Royalty Litigation settlement
Using patent litigation settlement agreements to sup- agreements can be submit- ■ John C. Paul,
port reasonable royalty damages in later litigation. ted as evidence to establish
Finnegan, Henderson, Farabow,
3. Infringement by Offers for Sale the amount of reasonable
royalty damages and are Garrett & Dunner, LLP,
Avoiding liability for patent infringement when
listing infringing products of third-party sellers on more likely to be admit- Attorney,
a website. ted into evidence when Washington, D.C., USA
4. Litigation Bars by Collateral Estoppel they occur at a later stage E-mail: john.paul@finnegan.com
Using a summary affirmance by the Federal Circuit to of the litigation, if the use
prevent infringement issues from being re-litigated. of the patented technology ■ D. Brian Kacedon,
by the party that settled is Finnegan, Henderson, Farabow,
5. Standing to Sue similar to the use made by
Challenging a litigation agent’s standing to sue for the accused infringer, and Garrett & Dunner, LLP,
infringement and attempting to cure standing by if there are no enhanced Partner,
joining the patent owner. damages at issue in the set- Washington, D.C., USA
6. Patent Marking tled litigation. E-mail: brian.kacedon@
Attempting to avoid patent marking requirements 3. eBay Not Liable
by a retroactive disclaimer. finnegan.com
for Listing Infringing
7. Willful Infringement Products of Third-Par-
Attempting to establish willful infringement based ty Sellers—Not an Offer to Sell by eBay
on activities by an infringer after it is sued for pat- An Alabama court granted eBay’s motion for sum-
ent infringement. mary judgment, finding that eBay’s hosting of a listing
8. Injunctions created by a third party does not constitute an “offer
Losing the opportunity for injunctive relief by li- to sell,” and thus, eBay could not be liable for patent
censing patents to competitors. infringement as a matter of law.
9. Venue for Suit 4. A Summary Affirmance by the Federal Cir-
Dealing with new restrictions on where patent cuit Can Bar Re-Litigation of Infringement
owners may sue for patent infringement. Claims
  The Federal Circuit held that the doctrine of col-
Below are abstracts, for the full articles go to: lateral estoppel could bar a patent owner from re-lit-
LES Global News—September 2017 at LESI.org igating issues even when the prior decision on those
issues was only summarily affirmed by the Federal Cir-
1. Favorable Capital Gains Taxation Rates Ap- cuit without opinion.
ply to Payments for Transfer of All Substantial 5. Litigation Agent’s Lack of Standing to Sue
Rights in Patents for Infringement Cannot be Cured by Joining
A patent holder may treat payments from the sale or Patent Owner
exchange of a patent as long-term capital gain under A California court ruled that an exclusive patent li-
IRC 1235, which taxes such gains at a lower rate than censee acting simply as the licensor’s litigation agent
ordinary income. In January 2017 the IRS considered lacked standing to sue on its own for infringement be-
whether the individual partners in a partnership could cause the licensor had not transferred all substantial
count a portion of a termination payment under an rights in the patents to the licensee, and that adding
agreement between a partnership and a company as the patent owner would not cure the standing defi-
transferring all substantial rights in a patent as long- ciency because the licensee had no proprietary inter-
term capital gain under § 1235. est or exclusive license in the patents and therefore

September 2017 255

 Recent U.S. Decisions
did not suffer any injury in fact traceable to infringe-
ment of the patents.
6. Patent Marking Requirements Cannot Be
Avoided by Retroactive Disclaimer
Although a disclaimer of rights to patent claims sur-
renders any rights the patent owner may have, the Fed-
eral Circuit held that disclaimer does not relinquish the
rights of the public. Therefore, using a disclaimer after
the fact will not remedy a failure to mark products and
will not revive pre-notice damages.
7. Activities by an Infringer Occurring After
it is Sued for Patent Infringement May Not
Support a Finding of Willful Infringement
A Georgia court did not allow a patent owner to
amend its complaint to allege willful infringement
based solely on knowledge and conduct of the accused
infringer occurring after the original complaint was
filed.
8. Licensing Patents to Competitors Could
Weigh Against Granting an Injunction
The Federal Circuit refused to grant a permanent
injunction, reasoning that the injunction was not ne-
cessary to protect the patent holder from irreparable
harm, in part because it had previously licensed sev-
eral of its competitors.
9. Supreme Court Restricts Where Patent
Owners May Sue for Patent Infringement
The United States Supreme Court recently restric-
ted where patent owners may file suits for patent in-
fringement against domestic corporations, reversing
the Federal Circuit by finding that domestic corpora-
tions reside only in their State of incorporation. The
Court’s decision, however, leaves open the question
of what constitutes a defendant’s “regular and estab-
lished place of business” for purposes of venue in pat-
ent suits. ■

256 les Nouvelles

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of individual members who are engaged in the profession Patrick Pierre Margarita Divina Henry Ward
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asp#submission Philippines Maria Trinidad P. VILLAREAL Reefia MITRA-VENTANILLA
Copyright ©2017 Licensing Executives Society International. Poland Alicja ROGOZINSKA Jakub MROZOWSKI
DEADLINES FOR les Nouvelles: Copy for publication Russia Sergey DOROFEEV Velery MEDVEDEV
Scandinavia Per ERICSSON Olli PEKONEN
in les Nouvelles should be received by the Editor-in-Chief George HWANG
Singapore Suresh SACHI
as far as possible in advance of the final deadlines, Janu- South Africa Darren MARGO
ary 1, April 1, July 1 and October 1. Articles for the Alessia DEL BIANCO
Spain & Portugal Susana Bayon PLAZA José Miguel LISSÉN
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cally in either MS Word or Text Only format. USA & Canada Brian O’SHAUGHNESSY Arthur ROSE
September 2017
LES International
LESI Management Committees
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Property Organizations Meetings Audit Ted Cross
Awards Kevin Nachtrab
For more information on LESI Meetings, go to www.lesi.org
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LES Scandinavia Annual LESI Winter
Conference 2017 Planning Meeting Investment Jim Sobieraj
Copenhagen, Denmark Vienna, Austria IP Maintenance Rinaldo Plebani
Michael Lechter
September 15-16 February 15-17
Legal Russell Levine
5th Pan-European The 2018 IP100
Kwang Jun Kim
LESI YMC Event Executive Forum
Budapest, Hungary Arizona Biltmore, Long-Range Planning Sherry Rollo
Phoenix, AZ U.S.A. Meetings Hayley French
October 22–25 Laura MacDonald
LES (USA & Canada) March 21-23
2017 Annual Meeting LES ANZ Annual Membership Heinz Goddar
Chicago, Illinois U.S.A. Conference 2018 Yorikatsu Hohokabe
Adelaide, SA Nominations Patricia A.O. Bunye
October 26
Australia
Certified Licensing Publications Hector Chagoya
Professional (CLP) Exam April 27–May 02 Rodolfo Martinez
Review Course at LESI 2018 Spring
Annual Meeting
Chicago, Illinois U.S.A.
Annual Meeting LESI Industry, Professional &
Grand Hyatt Manchester Regional Committees
November 13-14 San Diego, CA
LES Benelux
Licensing Course October 14-17 Industry
Faculty Club LES (USA & Canada) Consumer Products Junko Sugimura
Leuven, Belgium 2018 Annual Meeting
Boston, Massachusetts U.S.A. EEMC Rush Khan
Tanja Sovic
2019 High Tech Keith Lutsch
October 20–23 Alfred Yip
LES 2019 Annual Meeting Sonja London
Marriott Desert Ridge IUGT Laura MacDonald
Resort & Spa
Phoenix, AZ U.S.A. Life Sciences Gary Keller

Professional
Copyright Licensing Ken McKay
International Past-Presidents Abraham Alegria
1974 J. Gay 1988 D. Ryan 2002 T. Sueur Dispute Resolution Tilman Müller-Stoy
1975 M. Finnegan 1989 K. Payne 2003 M. Jager Patent & Tech Licensing Patrick Terroir
1976 B. Hedberg 1990 J. Portier 2004 J. Gulliksson
Trademarks, Designs
1977 M. Okano 1991 F. Noetinger 2005 W. Manfroy
and Merchandising Stefan Völker
2006 P. Chrocziel
1978 D. Smith 1992 A. Mifune 2007 R. Grudziecki IP Valuation (Vacant)
1979 J. Gaudin 1993 L. Evans 2008 C. Fukuda
1980 J. Stonier 1994 O. Axster 2009 A. Liberman Regional
1981 S. Heijn 1995 N. Jacobs 2010 P. O’Reilley Americas Veronica Canese
1982 W. Poms 1996 J. Brown 2011 A. Lewis Asia-Pacific Yu Sarn Chiew
1983 H. Hodding 1997 S. Layton Jr. 2012 J. Malackowski Ningling Wang
1984 F. Pombo 1998 R. DeBoos 2013 K. Nachtrab
2014 Y. Chua European Jose Miguel Lissen
1985 M. Ariga 1999 P. Mandros Emmanuel Gougé
2015 A. Michel
1986 L. Mackey 2000 H. Goddar 2016 J. Sobieraj
1987 P. Hug 2001 E. Shalloway 2017 P. Bunye Ad Hoc Committees
Global Technology
Impact Forum Mark Wilson
Young Members Congress Natalie Raffoul

les Nouvelles
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les Nouvelles
JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL
JOURNAL OF
les Nouvelles
THE LICENS
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Volume L No.
3

Seven Some
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Advertise With LESI’s les Nouvelles

EZ COHEN
Ten Comm — Page 127
on Mistakes
In IP Valua
DAVID DREW
tion/Damages
Downgrad S — Page 129 Reports
e To “Neu tral”:
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In Reasonab Of The Geor g Role
RYAN SULLIV le Royalty gia-Pacific
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Analyses Factors
Standing Of FF AND JUSTIN
Licensees SKINNER —
To Sue For Page 134
PETER HALLE IP Infringeme
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A Comprehen fer Proce ss
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les Nouvelles is the professional journal of the Licensing Executives Society

Market Dyna tion As Reflected By
141
mics And The Market Trans
Impact Of actions:
JACK LU — AIA And Alice
Computer Page 147
Assis ted Gene
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WILLIAM BIRD n Document
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 les Nouvelles

September 2017
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IP E E JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

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55

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Volume LII No. 3 September 2017

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LES NOUVELLES
• The IP Gr Advancing the Business of Intellectual Property Globally
Patent Challenge Around The World For Small And Medium Entities (SMEs)
Introduction—SMEs And The Patent Challenge Patent And SMEs In Latin America: Chili
PATRICK TERROIR — Page 139 FELIPE CLARO — Page 202

SMEs And Patent Valorization Patent And SMEs In Latin America: Colombia
JOSEP MARIA PUJALS — Page149 FERNANDO TRIANA SOTO & MARCELA GÓMEZ RUBIO — Page 204

JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

Subject 2.2 SMEs And Open Innovation (OI)
Patent And SMEs In Latin America: Mexico
PAUL GERMERAAD — Page 156
ROXANA AISPURO & HECTOR CHAGOYA — Page 207
SMEs & Patent Litigation: European Perspective
Patent And SMEs In Latin America: Peru

55 years of Dennemeyer
EMMANUEL GOUGÉ & VALICHA TORRECILLA — Page 162
RENZO SCAVIA — Page 210
Creating SEPs­— A Risky Business For SMEs
MENNO TREFFERS, MATTEO SABATTINI & SMEs—A South African Perspective
ALESSANDRA MOSCA — Page 167 MADELEIN KLEYN — Page 211

SMEs & SEPS: Licensing Efficiently In IoT Conclusion—A Different Perspective: Not Only

Thanks for 55 years

HARRIS TSILIKAS & CLAUDIA TAPIA — Page 170 SMEs, Make The Knowledge Economy Work
SMEs In France PATRICK TERROIR — Page 216
EMMANUELLE FORTUNE — Page 177
The Exhaustion Theory Is Not Yet Exhausted: Part 4
SMEs And The Patent Challenge

of entrusting your IP
ERIK VERBRAEKEN — Page 218
TOBIAS WUTTKE — Page 179
Licensing Standards Essential Patents
SMEs In Italy JOSEPH A. ALFRED — Page 225
MATTIA DALLA COSTA & BARBARA SARTORI — Page 181
Magic Bullet: Determining Royalties With Corporate

to Dennemeyer.
IP Manager For SMEs? An Italian Contribution
ERCOLE BONINI — Page 184
Intellectual Property Services For SMEs In The UK
CHRISTI MITCHELL & ROBERT LOOKER — Page 186
SMEs And Patents In The United States
JOHN CABECA & IVAN CHAPEROT — Page 189
SMEs: Patent Challenges And Policies in China
QINGHONG XU — Page 192
• Client-oriented • Self-funded • Owner-managed • Global SMEs In ASEAN & Singapore—IP Perspectives
AUDREY YAP — Page 195
Patent And SMEs In India
SUNITA K. SREEDHARAN — Page 197
Discounts Rates Using Muthoo Model
BRIAN DIES & JOEL WACEK — Page 230
A Guide To Commercial Innovation
In Artificial Intelligence
DEEPA RAVINDRANATH — Page 239
Disruption In The IP Services Industry?
JOHN WALKER — Page 243
Intangible Asset Market Value Study?
CATE M. ELSTEN & NICK HILL — Page 245
Software IPR Valuation Model
SANTOSH MOHANTY & KAUSHIK GALA — Page 248

Patent And SMEs In Latin America: Brazil Recent U.S. Decisions Affecting Licensing
CÂNDIDA CAFFÉ & MARIANA VICENTINI — Page199 JOHN PAUL & BRIAN KACEDON — Page 255
$62.50/Issue