The Government of Canada last month introduced the 2015 federal budget, part of which included plans to modernize Canada’s intellectual property (IP) regime by amending the Patent Act, Trade-marks Act, and Industrial Design Act.
The new proposal brings IP back into the public spotlight. As we often see in the U.S. more so than at home, patent trolls – or more formally known as patent assertion entities (PAEs)– are feared because of their litigious, aggressive business strategies. As the Canadian government reforms IP, we must keep in mind the impacts of patent trolls before they begin attacking Canadian companies in court.
Patent trolls are non-creating companies whose business model focuses exclusively on using patents to garner settlements and licensing royalties (i.e. profits) from unsuspecting creating companies. The term “troll” may construe an image of a greedy mythical goblin that preys on businesses; however the reality may be even more ominous. A few familiar brands that once developed and manufactured products are now using their patents as weapons in court while simultaneously licensing innovators out of business through massive fee demands for dated technology.
These recognizable, household names are transforming their practices from producers to litigators – at the cost of tech companies and consumers, and in the case of British Columbia, jobs.
For example, in 2014 Nokia sold its handset manufacturing but kept its patent portfolio, which includes some standard essential patents (SEPs) that are required for smartphone devices. Analysts have observed that this shift in business model “might allow the company to negotiate better royalty rates, potentially making it costlier […] to manufacture handsets (Trefis, 3/26/14).” Assertive patent rates will put pressure on smartphone manufacturers, especially in smaller and emerging markets, and ultimately result in higher costs for consumers, fewer options, and an unhealthy reduction in market competition.
Impacts in Vancouver
The Financial Times has called Vancouver the “Canadian west coast powerhouse.” The area formed 250 tech companies in 2012 alone, and big players like Sony and Amazon have established roots in the city. British Columbia, more broadly, is home to 9,000 tech companies that generate more than $15 billion in sales, salaries, and exports – this number is a sign of growth potential for the region.
Our smaller and startup tech companies face the biggest risk from PAEs, particularly former manufacturers, because these companies know exactly which patents in their arsenal they can exploit for excessive fees. This practice is commonly called “patent hold-up,” and in addition to the potential patent licensee, innovation is negatively impacted and thus, the economy.
Nokia had significant ties to Vancouver, where it supported hundreds of jobs and researched some of its most innovative smartphone technologies. In 2009 the company shuttered its Burnaby hardware division; in 2012 Nokia closed its B.C. software research facility entirely. The Burnaby location originally employed over 400 people; the 2012 closure resulted in job losses for 200 people.
In true Canadian spirit, a Vancouver-Helsinki team of the laid-off former Nokia employees took their experience and creativity to the market and created a smartphone fit for adrenaline seekers. Their story highlights the innovative nature of small Vancouver tech companies, and acts as a strong foil to Nokia. Many of us are left questioning how a company such as Nokia, that once had a positive influence in British Columbia, can completely shift its business model from R&D to trolling.
Businesses and Consumers
In its new role, Nokia threatens businesses of all sizes, but small and startup businesses are particularly vulnerable because they lack negotiating power and legal resources. Ironically, the company that once employed some of Vancouver’s brightest has since laid them off, may come back to sue them should they not pay their patent licensing demands. In return the licensee will have access to antiquated Nokia technology, often developed by other companies that Nokia acquired along the way.
IP laws are valuable as a shield to incentivize innovation and promote balance between creators and new innovators seeking to further develop protected technology– IP cannot become a sword to extract profits without a good faith commitment to innovate. To allow Nokia and other companies to troll vulnerable Canadian companies violates this balance and threatens Vancouver’s future. Small businesses grow into bigger businesses, and offer more and high paying jobs. One of our current start-ups may even be the next Nokia… back when Nokia produced more than lawsuits.
The smartphone industry directly impacts many citizens. According to the Smartphone Insights Report, nearly 86% of British Columbians own a smartphone and are used an average of 13.75 hours per week. That’s more time spent on a smartphone than on a laptop or tablet, and nearly reaches average time spent watching TV. A study by Intel and WilmerHale LLC shows that royalties can tack on an additional $120 in per smartphone costs. That’s direct costs to consumers through higher-priced devices. Patent trolls do not have a vested interest in potential consumer and industry criticism since they’re no longer manufacturing phones.
But they do impact British Columbia businesses, the Vancouver tech sector, and ultimately, the consumer. The Government of Canada must seriously consider threats from trolls before Canadian companies are faced with frivolous litigation and forced to shutter operations rather than spend millions in legal battles.