What Young Innovative Companies Want: Formulating Bottom-Up Patent Policy for the Internet of Things

By Roya Ghafele*

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I. The New Paradigms of the Internet of Things

The next wave of internet usage will disrupt a host of
different industries, while at the same time opening up so far unknown
opportunities to those ready to seize them. Devices and components with an
internet address will be joined to each other allowing for large-scale
communication embedded in gigantic sensing systems.[1] In this sense, the
Internet of Things (IoT) can be understood as a means
to connect objects, machines and humans in large-scale communication networks.[2] The IoT merges physical and virtual worlds by interconnecting
people and objects through communication networks, sending status updates, and
reporting on the surrounding environment. Applications will become more
sophisticated, allowing for the emergence of services and product offerings
that are beyond our imagination: IoT based toys will
accompany children from early age until adulthood, IoT
driven medical devices will save the lives of those suffering from a sudden
stroke, and clothing with IoT technology built in
will allow everything from our shirts to our shoes to customize according to
daily fashion trends. Smart homes, smart cities, and even smart countries will
become the norm; reducing energy wastage to a minimum. The commercial
opportunities associated with the IoT will be
substantial. Markets will expand into areas we have not even conceived of,
thereby creating new jobs and fostering further competition between the various
regions of the world.

Against this background, the European Union has recognized
the need to identify a governance framework that will enable it to take
advantage of the promising opportunities associated with the IoT, while mitigating risks and adverse effects to the best
extent possible. An important aspect of a European IoT
strategy consists of adequately addressing the interplay between competition
and intellectual property law. Consequently, the European Commission itself
considers it necessary to formulate policy guidelines on fair, reasonable, and
non-discriminatory (FRAND) licensing. In order to accomplish this, the European
Commission (E.C.) launched a series of stakeholder consultations, workshops and
published two in-depth reports addressing the potentially anticompetitive
effects that standard essential patents could have for the Internet of Things.[3] With the goal
of offering further clarity on the licensing conditions for patents that read
on standards, the E.C. issued guidelines on FRAND licensing[4] on the 29th of November
2017.[5] While these guidelines are non-binding,
the E.C. will nonetheless take advantage of soft law mechanisms so to offer a
transparent framework for FRAND licensing. This appears justified given the
major patent wars[6] that the
licensing of standard essential patents triggered in the telecommunications
sector. For a quantitative analysis of the imminent rise in patent litigation
in the area of speech recognition, an area closely related to IoT, see for example the below analysis by iRunway; showing a sharp increase in patent litigation
since 2011.[7]

Figure
1: Patent Litigation Trend in Speech Recognition Domain (Source: iRunway analysis based on patent data from USPTO and
litigation data from RPX)

(Source: iRunway analysis based on patent data from USPTO and litigation data from RPX)

While it is laudable that the E.C. is taking ownership of a
key policy area that will make or break the success of the IoT,
it is regrettable that the process preceding policy formulation has been
primarily driven by interaction with large corporations and industry
associations having significant experience with FRAND licensing. The views,
experiences and opinions of European young innovative companies, YICs, are
largely missing from the policy development process. Given that young
innovative companies are seeking to advance the IoT,
the European Commission is hence likely to have missed out on input from those
companies, who are doing their best to move the IoT
forward. To fill this gap, this study undertook a series of thirty in-depth
interviews with young innovative companies active in
the European IoT space. In doing so, it hopes to
counter policy formulation that lacks grass roots linkages and takes
insufficient consideration of the needs of YICs. In doing so, this study is
pleased to report that the suggestions made hereby were reflected in the E.C.
Guidelines on FRAND.[8]

The study is structured in two main parts. The first part is
dedicated to discussing key features of the IoT from
an IP and competition policy perspective. The second part presents the findings
from the field study undertaken in the summer of 2016. It concludes by urging
policy makers to include young innovative companies in the policy process as it
finds that there is quite a significant gap between the theoretical
conceptualisation of the topic and the practical experiences of YICs.

A. Defining
the Internet of Things

Identifying a working definition for the Internet of Things
is complicated by the fact that the IoT is an
umbrella term encapsulating a variety of different technologies. The IoT has been described as “a concept that interconnects
uniquely identifiable embedded computing devices, expected to offer
Human-to-Machine (H2M) communication replacing the existing model of Machine-to-Machine
communication.”[9]
It has also been labelled as “[I]nternet-enabled
applications based on physical objects and the environment seamlessly
integrating into the information network.”[10] More narrowly, the OECD
defined the IoT as “Machine to Machine communication
(M2M)”[11] and the
European Commission describes the IoT simply as
something that “merges physical and virtual worlds… where objects and people
are interconnected through communication networks and report about their status
and/or the surrounding environment.”[12] All of these definitions
are fairly vague and it is probably for that reason that they encapsulate the
gist of the IoT so well. The IoT
constitutes a high growth business opportunity as its application is vast and
it bears the potential to transform virtually every sector of the economy. In
current IoT markets, it is not yet clear what type of
business models will succeed and who will emerge as a market leader. As such,
the IoT space has been described as being quite
dispersed and driven to a large extent by small early stage companies.[13]

II. The Internet of Things is exposed to Network Effects
…

The IoT is a network-based
technology, which thrives on multilateral exchange. Similar to
telecommunications networks, it constitutes an interconnected eco-system. Such systems
can be associated with “network effects.” Network effects are “defined as a
change in the benefit, or surplus, that an agent derives from a good when the
number of other agents consuming the same kind of good changes.”[14] The more
the peculiar software solution of one firm becomes adopted, the more it will
benefit this specific firm, making it more difficult for new entrants to see
their technological solutions adopted in the market; even if they are of higher
technological quality. Network effects enable large-scale access to an
interoperable software solution, whose value thrives with additional adoption.[15] The more
the IoT solution is in use, the more it becomes known
and even more additional users will be attracted to it. At the same time,
existing users are less and less inclined to switch to another service
provider.[16] Some
scholars consequently associate networks with “increasing returns” to “path
dependence.”[17] The
initial success of one specific IoT solution is often
owed to small, random events; yet once it establishes a strong position in the
market, it will remain in use, even if better technological solutions are
identified. This is because users cannot afford to switch, as they would have
to give up the interconnectivity provided by the existing network. Thus the overall effect is to discourage technological innovations
as incumbents entrench themselves through network size and technological
compatibility rather than technological sophistication.[18]

Once critical mass is reached, usage of the service will
grow quasi-automatically and this comes often to the detriment of other service
offerings.[19]
Furthermore, critical mass allows incumbents to gain significant cost
advantages over new entrants who undoubtedly will face significant upfront
costs because IoT solutions are complex to design,
costly to deliver to the market, and accessibility to the needed know-how is
often protected through patents or trade secrets. In addition, incumbents will
be in a position to offer complementary services, extensions, add-ons and
customer support to further strengthen their dominance in the market, making it
more difficult for new entrants. Hence, network effects can reasonably be
understood as the “tendency for that
which is ahead to get further ahead, for that which loses advantage to lose
further advantage.”[20]
Consequently, network effects can distort competition and adversely affect
consumers.

III. Which can trigger Anticompetitive Licensing
Behaviour

Adverse implications of network effects can be even more
pronounced if interoperability is achieved through standardization and market
participants leverage patents to protect their inventions. Standards are
dynamic, in the sense that their main function is to ensure a collaborative
technology development. Standards do evolve over time. However, the status quo
of a technological solution does exist for a given period of time, at least
until a new standard is adopted by the market that addresses the same
technological challenge.

Patent protections on theses standards,
particularly if held by a wide range of market participants, can incite anticompetitive
behaviour. To mitigate the kind anticompetitive licensing behaviour that
standard essential patents can trigger, the FRAND agreement was introduced. The
“FRAND promise is construed according
to its core function as an irrevocable waiver of extraordinary remedies” and
hence seeks to counterbalance the exclusionary aspects of patent law.[21] Because of the FRAND or RAND (in the
U.S.A.) commitment, companies are obliged to license patents on a standard on
fair (Europe only), reasonable and non-discriminatory terms, following the IP
policies of the relevant standard setting organizations. Hence, the FRAND
concept seeks to offer a governance framework for the licensing of standard
essential patents. Because these patents can accrue market power to their owner
and hence potentially provoke anticompetitive licensing behaviour, it is
believed that standard essential patents are warranted different licensing
pathway than other patents — namely, they must be licensed in a way that
comports with the FRAND framework. Exactly how such a FRAND framework should be
applied, and whether the scope of the application should be narrow or broad, is
currently subject to international IP policy formulation. If the FRAND
agreement offers adequate means to mitigate against risks associated with
widely dispersed patent ownership, that will also deserve further policy
attention.

A new entrant may need to hack through a host of patents
held by many different IP owners, which can lead to an undesired anti-commons
effect, whereby existing patents stifle rather than promote innovation and the
very purpose of the patent system is undermined.[22] While it is important to
note that the IoT does not yet dispose of any
prominent standards, nor depend on any particular technology protected through
patents, it is quite unlikely that this will remain that way. If the IoT is to evolve from its current state of infancy to a
more mature technology field, it will be necessary to establish widely used
standards. At this point, contributors to those standards will undoubtedly want
to leverage their IP for licensing, sales purposes or blocking third party
entry. Although these may be legitimate usages of IP, the licensing of standard
essential patents has also been associated with an undesired behaviour known as “holdup.”

The impact of holdup can be particularly pronounced where
firms benefit from first mover advantage or where firms have the necessary
innovation capacity to capture the patent landscape. It is, however, incorrect
to assume that patent holdup would only be an issue concerning “important”
patent owners. In fact, each and every standard essential patent owner (SEP
owner) could theoretically engage in holdup because its position as a
gatekeeper to the standard allows him or her to do so. It is alleged that these
patent holders — having claimed an important position in the patent landscape —
can charge abnormally high licensing rates to standard essential patent licensees.[23]

By charging these high licencing
rates, the patent holders are engaging in the practice of what is commonly
called patent holdup. For instance, it has been stated that the holdup problem
is particularly severe with mobile telecoms standards because the standards
that are adopted are used for a long time and the costs that are associated
with switching to an alternative standard are high.[24] Further it has been argued
that standards holdup is both a private problem facing industry participants
and a public policy problem. Privately, those who will implement the standard
(notably manufacturers of standard-compliant equipment) do not want to be
overcharged by patent holders. But standards hold-up is also a public policy
concern because downstream consumers are harmed when excessive royalties are
passed on to them.[25] Given
that the IoT can be associated with network effects,
it is likely that such adverse effects could occur within the context of the IoT as well.

Adverse licensing behaviour
could also occur if licensees stall payment, refuse a licensing agreement all
together, or take a license below the fair rate. Such holdout constitutes an
equally problematic market practice as it leads to free riding problems
associated with technology used. Licensees may also simply engage in a series
of offers and counteroffers to further stall negotiations. Such strategic
behaviour can erode the incentive to invest in R&D. Both patent holdup[26] and holdout[27] are
possible in the IoT context and both can constitute
undesired strategic behaviour.[28]

IV. . . . that can particularly affect Young Innovative
Companies

Young innovative companies (YICs) can be particularly
vulnerable to adverse licensing behaviour. YICs, which have come to be
understood as small, young and highly engaged in innovation, aim “to exploit a
newly found concept, stimulating in that way technological change, which is an
important determinant of long run productivity.”[29] While it would appear that
the very process that drives YICs would quite naturally be associated with
patent protection, it has been observed that micro enterprises and SME lack IP
awareness.[30]

YICs’ fear above all are the costs associated with patent
protection and patent enforcement. From the perspective of YICs, IP is primarily
a cost factor that diverts time and attention away from doing business. Studies
undertaken by the UKIPO,[31] the IPR
Helpdesk of the European Commission,[32] as well as WIPO[33] show that
such firms associate IP protection with a tedious, laborious and time-consuming
endeavour that offers only moderate support to business because costs
associated with enforcement are often unaffordable. For the same reasons, these
firms tend to be reluctant to enforce their own patents against infringers,
leaving this group of firms with questionable patent proposition. This has led
several observers to the conclusion that “deterred by high costs and
complicated procedures, YICs tends to lack the necessary skills to take any
particular advantage of the patent system.”[34] The UK Government’s
Hargreaves Review “IP and Growth,” further highlighted that strategic advice
would be needed to help fill this gap stating that “many SMEs have only limited
knowledge of IP and the impact it may have on their businesses; they lack
strategic, commercially based IP advice; have difficulties identifying the
right source of advice and IP management is made impossible due to too high
costs.”[35] Hence,
cost and time constraints tend to discourage YICs from taking ownership of the
patent system. With respect to the particular challenges associated with
standard essential patents, it is very likely that the overarching lack of IP
competence will overshadow any potential experiences there may be with standard
essential patents. Arguably, the lack of IP skills will make YICs more prone to
unreasonable licensing requests, while at the same time making them more likely
to inadequately respond to licensing requests themselves. Hence, lack of
knowledge will risk exposing YICs to anticompetitive IP requests, while at the
same time making them more likely to stall licensing engagement payments.

V. Methodology

Is there a gap between the way European policy makers and
YICs are conceptualising the role of IP in the IoT?
To gain further insight into that question, a series of thirty-one in-depth
interviews were undertaken with YICs during the course of 2016. In addition,
four contextual interviews were carried out. Interviewees were asked to reply
to a set of open ended questions, allowing them to discuss their experiences
with patents and standards, present their licensing practices and the extent to
which they were (if at all) exposed to licensing requests. They were also asked
if they feared patent wars similar to those in telecom could occur in the IoT space and what they would expect the European policy
maker to do to counter potentially anticompetitive usage of IP, while helping
them to take advantage of standards and patents. The issue of software patents
was deliberately excluded from the conversations as this was subject to
historical policy formulation and not that of current policy thinking. Given
the stance taken on software patents in the E.U., the market participants
interviewed here would simply not have been in a position to comment on their
experience with software patents in the E.U.[36]

The technique applied is known in social sciences as a “semi
structured interviewing” process.[37] The
techniques give the interviewees space to express their own perspectives and
mitigates against biased research results. This approach is somewhat comparable
to a study based on focus groups. Such a qualitative research method was
considered suitable as it allows us to theorize about what public policy
formulation could look like in an emerging field of technology, where policy
guidelines are yet to be identified. In addition, this specific research
approach offers the necessary insights for a bottom-up approach to public
policy formulation.

The target group was identified via LinkedIn. The firms
interviewed usually had no specialized lawyer dedicated to IP issues, so the
most senior person in the company was interviewed. This was usually the Chief
Executive Office, Chief Technology Officer, Chief Operating Office or sometimes
one of the investors in the firm. The vast majority of the firms interviewed
were early stage firms or start-ups. Only Italian firm ‘S.’ has been acquired
by a major technology company. In addition to interviewing a core group of
young innovative companies, we also undertook contextual interviews with a
financial analyst, a few management consultants specialized in the IoT space, as well as a patent analyst with whom we
discussed patent landscapes. Of the 350 people we reached out to, we obtained
thirty-five interviews — yielding a response rate of 10%. A sample of
thirty-one in-depth interviews with Young Innovative Companies and four
contextual interviews is usually considered sufficient to provide meaningful
insights.[38] It is
recognized, however, that such a qualitative research method, cannot offer
“hard facts,” but only views, opinions and impressions.[39] Yet, it is precisely this
web of views and opinions that is key in politics. Language is a constitutive
element of politics, shedding light on the language of those otherwise
marginalized in the political process, which is conducive towards the
democratic process. The FRAND debate forms no exception to that.

Table 1 offers an anonymized overview of the interview
process. In order to shield the interviewees from potential exposure to patent assertion
entities, it was decided not to disclose their identities publicly. The
detailed transcripts of the interviews are available only in my private
archive.[40]

A. Trends in Internet of Things
Markets

Of the 31 firms we interviewed, no two firms had the same
business proposition or sought to apply the IoT in
the same manner. The firms interviewed seek to apply the IoT
in areas as vast as fashion, toys, lighting, smart cities, health care, automotive
and even social housing. In regards to technology,
cloud services, big data, and platforms appear key to many of these early stage
businesses. Social Innovation and lean management were other concepts, which
were often combined with the usage of the IoT. It was
surprising to hear that the majority of the firms interviewed had fairly little
start-up capital. In many instances, EU grants were considered too complicated
to obtain and if obtained at all, then regional funds were used. Some sought
funding in the U.S., as they thought there was more capital available there.

Interviewees confirmed that the IoT
was a mesmerizing and also somewhat confusing term: “The IoT
is a buzz word just like big data, the market is still very early stage, but I
have a feeling that we may be not far away from a break-through in the market.”
(K.) This makes it quite difficult to describe the state of the market or
capture industry trends. “The IoT market is still in
search for adequate applications . . . many solutions are quite simple and they
could just as well function without the IoT.” (J.) Overall,
interviewees agreed that the market is still very early stage, with many firms
still looking for an adequate business model. “The main problem is how to
establish the business model around the technology . . . the market is still in
a trial and error stage.” (M.) Yet, in spite of the various uncertainties
surrounding the IoT, it is seen as a “mega trend”
with substantial growth opportunities: “The Iot? I
think it is going to happen . . . in up to five years we will be able to talk
about billions.” (I.)

Overall, interviewees were sceptical
about the prospects for European markets. According to them, the markets for IoT will take off in the U.S. and Europe will eventually
follow. “I think we are behind the US with its Silicon Valley and its big tech
firms that lead the tech industry.” (A.) “The IoT
market in Europe is imagined.” (L.) “The IoT market
is something we believe in, but it is not yet established in Europe.” (G.) This
should be a wake-up call for policy makers in the EU and set them thinking
about what can be done to promote the IoT in Europe.

B. Standardization,
Patents and Standard Essential Patents Experiences

The YICs interviewed were not able to formulate particularly
nuanced views on SEPs, standards, patents or licensing markets. With respect to
standard essential patents they were entirely ignorant on the topic and were
also not involved in the regulation processes of any of the standardisation
organizations. Their experience with patents mainly pertained to difficulties
associated with obtaining patents, facing high filing costs, feeling
overwhelmed by legal costs and finding information on prior art. “Our patent
attorney is ripping us off . . . and we don’t even know if it is really worth
it.” (S.)

Alarmingly, many YICs we talked to even doubted that the
patent system mattered at all for them. “The technology in this area is moving
so fast that by the time you have the patent the technology is outdated. I am
not sure patents are really helpful, it is only expensive for a small firm . .
.” (S.) It was lead-time advantage
and open source software that mattered, rather than proprietary innovation. “When
you are in the Savanna and you don’t know if you are the antelope or the lion,
what do you do? You run! With IP it is the same. We
care about first mover advantage. The IP is so hard to enforce and so costly
that we feel we are better off without it.” (F.) Equally, defensive mechanisms associated with IP were entirely
ignored. The reason given was that a defence would be too expensive. There was heavy doubt that the
patents had a business proposition at all. Also, there was a sense that the
value proposition of the firm was to deliver customer solutions or products and
there, so many agreed, IP had not really any particular meaning for them. It
was products they offered that were valuable, not IP protection. “We have filed a few patents in the US
and through the PCT, but we have no business usage for them.” (M.) These
findings are commensurate with what
has been reported in the literature and underline the need to combine overall
IP measures geared towards YICs with the overarching SEPs debate.

Some of the firms we interviewed went as far as to state
their discontent with the patent system openly. “In general
we don’t like patents . . . we think they are very bad . . . the original idea
of the patent was to protect an invention, but in the software space patents have
been abused for a long time . . . just look at the patent trolls.” (W.) Patents
were also mentioned as a means to slow down businesses and as leaving YICs
exposed to threats of litigation. “I don’t like the IP part . . . patents slow
things down . . . I would prefer never to file patents. I believe in building a
lot of brand capital.” (H.) Even those
firms who considered developing a patent strategy, found that costs associated
with patent ownership prevented them from taking advantage of the patent
system. For example, a Partner at V. presented plans for a patent strategy, but
was not able to execute it because of cost constraints. “Patents are expensive
and there is no point in patenting if you don’t have the money to defend your
patents . . . [s]o, we are waiting.” (H.)

C. Licensing
Experiences in the Internet of Things Spac

The YIC’s knowledge of European patent ameliorating efforts
was no better. When asked about FRAND licensing, they were also completely
uninformed and key terms had to be explained first. Following that, firms
generally did not feel competent enough to comment. Similarly, the consequences
they could be facing in case of patent infringement were unknown to them.

The YICs talked to were not involved in patent licensing and
they generally denied having been exposed to patent licensing. If, at all, it
was copyright licensing they used. This was however called by all the interviewees
“software licensing,” maybe because they were not very IP savvy. This was seen
as a fairly straightforward process and nobody found there was a need to
discuss this at length. “Software licensing is our business strategy, not
patent licensing… our business is to sell the usage of the platform.” (S.) However, interviewees were not exactly
sure what the question meant. Only two firms had experience with patent
licensing. N. told us that he had been exposed to licensing in another firm he
worked for and there they used the out-licensing of patents as a means to
manage competition. “Licensing no, not in this firm no, but in another firm, we
used patent law suits to slow down our competitors.” (B.) Furthermore, the IoT sector was not
considered an industry where patent licenses were needed. “In our industry nobody would want to take a license.” (T.)

The role of patents was however seen in a different light by
more established firms. Here, costs mattered less and measures such as
licensing did play a role. Both inbound and outbound licensing was critically
reflected upon. Such firms were also often part of industry associations such
as the IP Europe Alliance[41] or the Fair
Standards Alliance.[42] These
firms are, however, not directly engaged in the IoT
space and hence their input is probably less of relevance here.

Some firms, like the Spanish University spin-off we talked
to, had moved their business from producing parts of an Antenna to pursuing an
active IP licensing program. They found this strategy more lucrative. (I.)
Similarly, the CEO of a Danish software firm confirmed that his company is “now
slowly moving from a mere defensive approach to IP to a more aggressive way of
managing its IP.” In particular, this firm is interested in establishing a
systematic licensing program targeting potential infringers.

However, even those who have an active licensing program in
place do not find it an easy business. For example, one Danish inventor explained
that it took him nearly ten years to obtain a patent family and that he also
attracted significant investments so to obtain licensing revenues from firms
that infringed on his patents, but he overall found it to be a very long,
complicated and so far not particularly lucrative
process. He concluded that “the patent system was a bit ridiculous . . . and
that the return on investments in patents is not very good . . . you always
have to use a lawyer, but these guys [the firms he was trying to get a license
from], they shut down their business and then they open up a new one and you
get to start all over again with suing them . . .” (J.) The CTO of the spin-out
from the Spanish University was the only one we talked to who felt that the
patents the firm had were truly beneficial to their business. His only concern
was that licensees can deploy delay tactics and that can become difficult.
Otherwise he considered patents an important instrument of monetization.

Additionally, the senior
representatives of three SMEs were interviewed. These firms had been approached
for taking a license but all of them found the process unhelpful. One firm, for
example, criticised that licensing requests were not supported by adequate
documentation. Many licensors do not even send claim charts or send them only
very late, in an effort to pass on costs from licensor to the licensee. Also,
they complained it was very common to receive unrealistically short deadlines
for a legally binding reply. This situation is made even more complicated as it
is a lengthy and costly procedure to determine whether some patents claimed to
be standard essential, really are standard essential: “what is a standard essential patent and what not is essentially
gut feeling.” (L.) According to them, it is also very costly and time consuming
to negotiate licensing rates. Many times they are forced
to accept a license rate simply because costs to counter the argument would be
too high. They argued that it is also difficult to determine what an adequate
royalty rate is in the absence of an adequately defined framework for licensing
standard essential patents.

D. The Threat of Patent Wars and
Lack of Defence Mechanisms

There was a general sense among interviewees that patent
wars as seen in the telecom space could repeat themselves in the IoT space. “Definitely, definitely . . . I think the IoT space is a classic example . . . I would not be
surprised if in 2019/2020 we would see these things.” (R.) The only reason, in
their view, why this had not happened yet, was because the IoT
sector was still too immature. Still, the potential emergence of patent wars is
seen in a negative light. Once more, interviewees underlined that the patent
system is not equally accessible to small and big players: “it is a downward
spinning circle. The more cases you have, the more people will shy away from
the IoT because patent litigation is really expensive
. . . and then the IoT will only be for the super big
ones.” (B.) Nobody expected such patent confrontations to occur any time soon,
though: “Maybe in the future, when the markets are more mature, but I don’t
think we will see much trolling in the next five years.” (M.)

If patent confrontations were to occur in the IoT space, it is my impression that it would leave most
interviewees unprepared. Some even thought that they could not face any patent
litigation because they had no patents themselves. “Probably it will happen.
But I don’t think about it, but now that you say it . . . yes . . . but since
we don’t have an IP for end customers or big scale use, we will not be attacked
by trolls.” (A.) Some did not even know what the patent war was or thought that
it would not concern them: “What is that? I have never heard of that.” (M.)
YICs also felt quite powerless and that they had little to defend themselves
with against potential litigation. “They are so big and if they want to break
you, they can do that. As a small firm you have no
chance to defend yourself.” (N.) The
only firm in our sample that was not concerned with patent wars was the Spanish
firm that had an active licensing program.

E. What Role
for European Policy?

Many of the firms interviewed felt that the patent system
would require a radical reform. Under a particularly critical light were the
activities of patent assertion entities. “Patents do not help SMEs, the best
would be to get rid of them . . . if that is not possible, then we would need a
complete reform of the patent systems . . .” (S.) For interviewees making the patent system accessible to YICs meant
also making patent enforcement accessible to them. Helping young firms obtain
patents, but leaving them without the necessary financial means to protect
themselves from litigation, was, according to the interviews, not of great
help. “The EC should support smaller firms in enforcement and in a way that
they have the right to have a patent and also a right to enforce it.” (J.) Small firms should somehow have a
chance to defend themselves and the Government should provide some means to do
that. “Any policy reform that helps assure that the patent system is actually
used in a way to promote genuine innovation and not in a predatory way . . . that
one guy invents something great and a patent troll just buys the patent to sue
other people . . . the government should do something to prevent that.” (H.) In
that respect, the E.C. was called upon to identify policies that would counter the
inequalities between parties, something that would enable small players to level
the playing field with large firms. “It would be good to make legislation that
would help avoid situations where big companies use patents as a means to shield
competition from small firms.” (K.) On a more practical level, there could be
more information made available on the role of IP and standards in the context
of the IoT.

Interviewees expressed that educational material, websites,
really anything that would help to get more acquainted with the issues at stake
would be very welcomed and the E.C. should do more in that respect. “What would
help is to allow small firms to learn about patents . . . Are there educational
materials, websites . . . we could get to learn more about IP?” (T.)

There was also a general sense in the community that open
source software should be promoted and that the standard essential patents
regime was not particularly fit for the IoT space.
Their policy suggestion was to promote awareness about open source software and
the role it can play in an IoT driven business. “Patenting
software is dead and that is good . . . I would suggest that they spend more
time explaining Open Source Software to common people and to business . . . they
should find the European version of Open Source Software licensing, make it
more common, teach about it and sponsor work to formulate Open Source Software
licenses.” (B.)

In that respect it was proposed
that the E.C. could identify stimulation funds, however these should be made
available with as little administrative burden as possible. “Promote Open
Source Software . . . maybe also subsidies for stimulation funds, but in the end it is mainly the established firms that get that and the
true innovation comes from the small ones and they don’t access these funds
because it is too bureaucratic to get these funds.” (A.) Equally, more training on Open Source could be an alternative to
the traditional standard essential patent regime. “Anything the Government can
do to assure firms win by conquering markets and not by paying expensive
lawyers . . . I would suggest spending more resources in explaining Open Source
Software and focus much more on training firms in Open Source Software.” (B.)

Conclusions

The E.C. is eager to approach the role of SEPs in the IoT through the lens of the FRAND agreement. Through this
process the E.C.’s goals is provide further clarity of
what the FRAND commitment entails. While very important, this aspect is not
entirely reflective of the issues raised by the interviewees of this survey.
Hence, an additional section was added to the FRAND Guidelines that address the
need to raise awareness among SMEs (small and medium sized enterprises) on
standard essential patents and the role of the FRAND commitment. This is
entirely commensurate with the findings of this study.

Like the findings of Pikethly, Talvela and Nikzad,[43] the
survey showed that young innovative firms lack IP awareness and do not
understand the role that IP management could play for their firm. A good
illustration of this issue is that respondents showed two apparent
contradictory views on the IP system. On the one hand side
they lacked awareness on IP, on the other hand, they felt that the patent system
should be urgently reformed. This suggests that the senior managers in YICs
have, at best, a layperson’s understanding of the IP system and it underlines
the need for further IP awareness-building campaigns.

The interviewees also
had a minimal understanding of standard essential patents and the accompanying
FRAND debate, especially the early stage firms. This leaves them exposed to
unexpected licensing requests, while depriving them of the opportunity to
pursue their own licensing programs. Certainly, standard essential patent
owners focus their licensing programs on companies with significant revenues,
which is usually not the case of YICs. However, once YICs obtain critical mass,
they could be hampered in their growth due to licensing requests they did not
expect. If they do reach such a level, these licensing issues will require further
policy attention and there will be a need to raise awareness among YICs about
FRAND.

Against this backdrop, the FRAND guidelines will very likely
be accompanied by tailored awareness-raising measures that allow YICs to
adequately familiarize themselves with the peculiar challenges associated with
standard essential patents. The nature of the FRAND agreement deserves further
policy attention, but so does its practical applicability. This aspect was
given adequate consideration in the FRAND guidelines.[44]
If young innovative companies have not even heard of FRAND or standards
essential patents before, it is highly unlikely that they will be prepared to
formulate smart strategies as licensees or licensors. Nowhere are these concerns
included in the current policy debate. The European Commission and even
National Patent Offices are actively working towards raising IP awareness and
enhancing the understanding of IP among young innovative companies. However, so
far this has not been approached from a FRAND perspective. Adaptations are
sorely needed in light of the risk of patent wars[45] spreading to the IoT.

Lastly, there is a dire need to assume governance responsibilities
and identify a mediating structure between the inherent tensions prevailing
between the exclusionary features of patent law and the open, collaborative
nature of the Internet of Things. The interviews showed that the patent system
cannot be viewed in isolation and the benefits of other innovation strategies,
such as the promotion of open source software, need to be weighed against the
further advancement of the patent system. Many of the firms we talked to found
an open source strategy more effective than a patent strategy. They also
thought that the open architecture enabled by open source was more befitting of
the nature of the IoT.

Certainly, such statements need to be read with care, but at
present too much policy formulation is occurring in isolation. What the IoT needs is a cross-functional, horizontal policy
formulation, rather than policies developed in vertical silos. This can only be
achieved by bringing all actors in the IoT space into
the debate. Therefore, I urge policy makers to study further how IP can be
promoted as a tool to promote openness rather than as a means of segregation.

Annex: Table 1 – Overview of Interviewees