Patent trolls take a toll on Korean IT companies

Two former mobile phone giants, Nokia and Ericsson, have become among the world’s biggest “patent trolls,” using their past licenses in telecommunication and mobile phone source technologies to make a profit.

They profit by making contracts with phone manufacturers for their patents and suing phone giants like Samsung Electronics and Apple, saying they are infringing their technologies.

Local analysts say this trend severely affects Korea. More than half of Korean companies that have lawsuits filed against them from overseas-based patent management firms are small or midsized. The patent managers are called non-practicing entities (NPEs).

NPEs, often called patent trolls, don’t produce products or services, but profit by practicing patent owners’ rights after buying the rights from individuals or small technology developers.

Nokia, the Finland-based cell phone manufacturer, owns more than 16,000 patents in the United States and has filed applications for 4,500 new ones. Industry sources say the company has more than 20,000 patents in other countries.

According to local law firm Barun IP and Law, Nokia makes an annual profit of 500 million euros just from patent royalties.

The average term of validity for all patents owned by Nokia is about 13.8 years, from which the company can profit about 4 billion euros before they expire.

This is why Nokia decided not to part with its patents when it sold its mobile device unit to Microsoft in April. Instead, Nokia agreed to give Microsoft a license to use some of the patents at cost of 1.65 billion euros for the next 10 years.

Nokia used to be the world’s No. 1 mobile phone maker, holding about 60 percent of the market in 2007 before Apple and Samsung gained popularity. Nokia was the Samsung of Finland, accounting for 20 percent of the country’s total exports and 23 percent of its annual taxation.

But after the iPhone and the Galaxy series arrived on the scene, Nokia’s share shrank to 36 percent in 2010, losing its lead in the market forever. The company reacted quickly and shifted its main source of income to patents.

Nokia sued Apple in 2009 for infringing intellectual properties on technology such as wireless standards. The lawsuit brought the company compensation of $600 million two years later and a contract saying that the iPhone-maker will continue to pay to use the patents.

In 2012, Nokia sued Taiwan-based smartphone maker HTC for infringing 50 patents. Samsung Electronics was no exception.

In April 2013, Samsung paid Nokia to extend its patent licenses from the company through 2018.

The European Union published a statement in December last year expressing concern over patent trolls.

“Nokia would be tempted to behave like a patent troll or ? to use a more polite phrase ? a patent assertion entity,” wrote Joaquin Almunia, the vice president of the European Commission responsible for Competition Policy. “Whatever the name, these organizations whose only commercial activity consists of licensing and enforcing patents … are a growing concern.”

He said their business activities are problematic because 40 to 60 percent of all patent lawsuits in the United States are initiated by NPEs.

The release said the E.U. fair competition authority will monitor the patent trolls along with the U.S. Federal Trade Commission.

Sohn Sang-young, a senior researcher at the Korea Information Society Development Institute, said Nokia’s lawsuit against Apple over wireless technology in 2009 was the beginning of the smartphone patent war.

Another major NPE is Sweden’s Ericsson. The company held 40 percent of the mobile phone market in 1997 but after being acquired by Sony in 2012, it also started to focus on patents as its main cash flow.

Ericsson owns more than 35,000 patents in wireless technology and licenses them to more than 90 IT companies worldwide.

In November 2012, Ericsson sued Samsung Electronics for infringing its voice transmission, smartphone touchscreen and wireless network patents. Samsung was ordered in January to pay $640 million in royalties and make a licensing contract worth $500 million to continue using the technology.

Korea, is one of the main targets of NPEs because the local IT industry, including conglomerates and small companies, hasn’t produced much source technology and must license them.

And the cases of lawsuits and the ensuing financial damage are worse for small and midsize companies.

Of the 23 Korean companies sued by NPEs, 11 were SMEs, according to a report about patent usage last year by theKorean Intellectual Property Office and Korea Intellectual Property Protection Association.

Most of the damage is caused when essential patents, which are recognized by international standard organizations, are violated.

The smaller NPEs are purchasing more of them because it is easier to prove infringement of an essential patent in court by referring to international standards.

“Some patent trolls have already established offices in Korea for two purposes: to acquire Korean technology patents and to target consumers of technologies they own,” said Sohn.

To prepare for potential lawsuits in Korea, the Korea Fair Trade Commission announced in July that by the end of this year it will prepare guidelines for local courts about unfair lawsuits by patent trolls and a fair trade law.

BY CHOI JOON-HO, KIM JI-YOON [jiyoon.kim@joongang.co.kr]