Background and context

Measures are required to enable European micro, small and medium-sized enterprises to protect their R&D investments and enforce their Intellectual Property Rights. Strong IPR protections for such entities is critical for their development, to attract additional venture capital funding to fuel growth, to protect innovations when dealing with larger corporations to attract proof-of-concept funding, and when demonstrating their innovations to prospective customers without those innovations being co-opted by customers without compensation to the SME. The benefits of IPR protection cannot be fully achieved without fostering an environment for growth – and without the realistic ability of SMEs to enforce their IPRs as and when that is necessary. On a broader canvas, the success of innovative SMEs is crucial to underpin Europe’s role in the emerging digital global economy.

A1. Innovative SMEs: Driving Europe’s Digital Economy

SMEs contribute to more than half of the total added value created by businesses in the EU and “are responsible for the majority of new jobs created in Europe”. Primary drivers of economic growth and prosperity, “their capacity for innovation and flexibility in a changing business environment makes them crucial for Europe’s success in the global economy”.[1] The European Union Intellectual Property Office (EUIPO) and the European Patent Office (EPO) have stated that IPR-intensive SMEs have almost 32% higher revenue per employee than other SMEs. This October 2016 joint study also found that more than 42% of total economic activity in the EU (some €5.7 trillion annually) was generated by IPR-intensive industries, with approximately 38% of all employment in the EU (82 million jobs) stemming from such industries with a higher than average use of IPRs. Patent portfolios are a powerful predictor of the probability of the success of start-ups: these companies are 3-4 times more likely to be acquired, merged or listed in the next six years if they own patents. This effect is even stronger in the Software and Biotechnology sectors for pre-investment patents (Source: MINES Paris Tech, 2015, Sampling 869 start-ups in France).

[1] Source: ETSI

A2. Barriers to Justice

The central tenet of this manifesto is facilitating access to justice for innovative SMEs covering IPRs. Evidence from the courts and other sources show that while the cost of filing court proceedings to enforce IPRs, and in particular patents, is relatively low, the total cost of those proceedings is out of reach for many SMEs. Yet, it is becoming almost standard business practice by some large companies to force SMEs and small inventors to litigate to prevent the continued infringement of their technologies. They know that, in most cases, the SME will not have the financial means to sustain litigation costs, and even less to post the multimillion euro bonds that may be required to obtain preliminary injunctions against infringements. This problem is exacerbated since the SME may have to litigate in multiple jurisdictions to protect against infringement of their technologies: “Rights which are unenforceable are as bad as no rights at all” (Lord Neuberger, a UK Supreme Court judge, 26/08/14)

We live in a world in which certain international corporations can and do, publicly and without embarrassment, state they will only pay for licenses that have been shown to be both valid and infringed. In other words, they will simply await an infringement action and decision, knowing that they have the advantage of time and resources. As only judges can ultimately make a binding determination on the validity and infringement of a patent, this means a complainant faces the prospect of going to court every instance of infringement by those corporations. (Source: comments made publicly at European Commission event, 25/01/2017). In the case where an SME intends to license a portfolio of patents, which is an accepted commercial norm for multiple sectors and technological groups, such an approach can potentially become hugely costly and time-consuming from both a business and societal perspective.

Providing access to justice – A fair deal

Ensuring a fair and robust system for investments in R&D will only be fully realised if innovative SMEs can protect their IPR and valuable patent portfolios and challenge large companies who willingly infringe their patents and profit from their inventions. Key areas to be addressed include:

B1. Court fees discount and reimbursement for SMEs – existing Unified Patent Court (UPC) rules provide that Courts have the discretion to reimburse fully or partially court fees which would otherwise threaten the economic existence of an entity. As with the UPC, all Courts in Europe should have discretion to lower court fees or provide reimbursements, especially for micro-enterprise and SMEs.

B2. Supporting measures to pay for lawyer’s cost – unlike in the USA and in the UK, where lawyers may enter into conditional fee arrangements and be remunerated with success fees, such arrangements in many European countries are not possible and high legal costs and high Court fees mean that a case in Germany, the main litigation venue for patents, can sometimes exceed EUR 1m.

B3. Lowering the ‘loser pays ceiling’ for SMEs – the UPC gives SMEs and micro-enterprises the possibility to solicit a lower recovery costs from the Court, if the level of recoverable costs of representation to be awarded to the successful party threatens the economic existence of the losing party and. All Courts should apply this rule.

B4. Guarantees/bonds required from SMEs seeking provisional measures such as injunctions – guarantees and bonds required from practicing SMEs seeking provisional measures, such as preliminary injunctions, can be prohibitive. Few SMEs can afford posting multimillion-euro bonds, which means they can be deprived from access to provisional measures when they litigate against larger infringers. The latter can continue infringing patents and potentially drive an SME out of business by the time a final decision is taken after all appeals are heard. As with the UPC, all courts in Europe should have discretion to determine bonds or guarantees that do not deprive SMEs and micro-enterprises from seeking provisional measures.

Access to IPR finance and R&D Incentives/tax credit

Under InnovFin and SMEG financial instruments, the EU provides guarantees and counter-guarantees on debt financing of up to EUR 7.5m and EUR 50m respectively for SMEs (499 employees) and MidCAP (3000 employees) in order to improve access to loan finance for innovative small and medium-sized enterprises and small midcaps. Under InnovFin SME Guarantee, financial intermediaries are guaranteed or counter-guaranteed against a portion of their potential losses by the EIF. Currently, these guaranties can be of up to 50% of the loans provided by local financial intermediaries and banks. These guaranties should be increased to up to 80% of the loans for innovative companies.

Helping the most innovative SMEs to qualify for EU funding and loan guaranties can be achieved by developing recognised valuation methods – for example, in the form of an Innovation and Patent Quality Index – to assess IP assets held by organisations that seek funding from local intermediaries under InnovFin and SMEG instruments. This Index needs to be developed in partnership with key stakeholders that include the European Investment Bank, innovative SMEs themselves, venture capitalists and business experts in patents licensing.

In addition, the European Commission should promote Innovation incentives and R&D tax credits best practices based on successful national schemes. These best practices should include a deduction of R&D expenses – an equivalent tax break for every euro invested in R&D – but only in cases of genuine innovation by European small and medium-sized enterprises, and preventing abuse by large corporations who have used such incentives as a tax optimization tool: applied to, say, online marketing platforms rather than genuinely innovative R&D. Proper support works. In this environment, for example, France’s Crédit Impôt Recherche (CIR) has been described as “the lifeline” for innovative French SMEs. Additional support and services provided to SMEs should include advice from experts on patents licensing, how to file patents, participating in research programmes to unlock further incentives/access grants, and so on.

Putting intellectual property at the service of SMEs to foster innovation and growth

A key theme of this European Commission Staff Working Paper (22/11/2016)[1] is facilitating the use and enforcement of IP, putting forward “policy actions to support access to and use of intellectual property (IP)” by innovative and creative small- and medium-sized enterprises (SMEs). The paper states, “The key role of IP in the success of start-ups and innovative SMEs has long been recognised: it allows innovative businesses to appropriate the results of their creativity, inventiveness and R&D investments, and creates an incentive for further investment in innovation.” The paper covers a number of important suggestions and recommendations, including:

• IP pre-diagnostic services – helping SMEs to access and use IP; some EU member states already provide “individualised advice on the IP potential of a firm’s intellectual assets within its specific market context”
• Recognising that “pre-grant costs and patent attorney fees represent an important barrier for SMEs”, the communication describes a pilot project to “to finance innovative SMEs requesting and being granted patents… subsidies will cover 50 % of the pre-grant costs”
• In terms of transnational co-ordination, EU IP schemes should “complement and develop with national offerings. This requires coordination and sharing of best practice”

[1] European Commission Staff Working Document 22/11/2016, 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 final}