[Market Eye] Korean tech giants fall prey to patent trolling

Though the pandemic has driven record-breaking profits for tech firms as demand for at-home leisure and communication hardware rises, it has also stoked a growing threat coming from patent trolls.

Companies specializing in exploiting patent rights have been buying up intellectual property from firms struggling amid the pandemic and using it as ammunition against Korean firms.

The approach is often seen as a “file-and-settle” strategy, as their targets would often prefer to avoid fighting a time-consuming court battle and the associated costs, even if they are likely to win the case.

As a result, they are settling an increasing number of patent suits at an early stage of court proceedings, particularly in the United States, where the tech market is largest.

Of 809 patent suits closed over five years involving South Korean companies until March 2021, under which most of them were defendants, 72 percent were settled before or during pretrial procedures like discovery. Only 4 percent made it all the way to a court verdict, according to data compiled by the Korean Intellectual Property Office and the Korea Intellectual Property Protection Agency.

And an increasing number of suits are being filed by nonperforming entities, which hold patents but do not use them to make products, instead seeking profit from others’ use of them.

The cost of going all out and losing the litigation could be immense for tech companies here, and that is before considering the damage to their image. LG Electronics was ordered to pay $45 million, the largest jury award in the past five years, to nonperforming entity Mondis Technology.

In the six verdicts during the five-year period against Korean firms, they were ordered to pay an average of $15 million, according to government data.

“Nonperforming entities rarely file a patent complaint against companies that suffer a business slowdown,” said Chung Yeun-dek, a professor at Konkuk University Law School.

“Defendants with abundant cash will likely end up paying a settlement to nonperforming entities, while few plaintiffs are likely to go to greater lengths to make it to trial or reach a verdict.”

But settling the disputes with cash has its own problems, as it encourages more file-and-settle attempts targeting similar payouts, known colloquially as “patent trolling.”

Even former executives are joining forces with patent trolls to seek profit from such activities. Last week, ex-Samsung patent head Ahn Seung-ho was revealed to have worked with Staton Techiya, a US-based nonperforming entity, to file a complaint against Samsung. According to the complaint filed in November 2021, Synergy IP, founded by Ahn in 2020, has the exclusive right to sublicense 10 patents owned by Staton Techiya.

Earlier this week, Ahn reportedly described the upcoming patent litigation as “a duty I’m tasked with.”

More patent disputes with onset of pandemic

Experts claim the COVID-19 pandemic acted as a catalyst for patent trolling activities as profits soar and trolls scoop up patents from distressed firms.

Since 2020, large Korean companies -- defined as those with over 5 trillion won ($4.2 billion) in assets -- were more likely to fall prey to patent suits from nonperforming entities, according to data from Korean authorities.

From January to September last year, there were 153 patent cases where large companies like Samsung or LG were defendants in the patent filings, accounting for over 90 percent of all cases filed against Korean entities. The figure approached that of the full year of 2020, at 160, and far outpaced 2019’s 112.

Also, during the first half of 2021, 86 percent of patent complaints against large Korean companies were filed by nonperforming entities, up from 75 percent in 2020 and 77 percent in 2019, state data showed.

In particular, Samsung was the most-targeted defendant for US patent disputes in district courts during 2021, according to an estimate by risk management organization Unified Patents earlier this month.

“Large companies with active exports to the US and a considerable amount of income from the US market will be likely targeted by industry competitors and NPEs,” read a report compiled jointly by the Korean Intellectual Property Office and the Korea Intellectual Property Protection Agency.

And Korean firms involved in semiconductors, computers and mobile communications are particularly heavily targeted.

The number of nonperforming entities’ patent complaints in the field of electronics and wireless communication technologies rose over 40 percent year-on-year to 102 in 2020. Also, nearly 80 percent of all complaints against Korean firms from January to September 2021 went to those dedicated to such fields.

Chung of Konkuk University Law School said Korean firms find the electronics and communications market “more lucrative in the US, driven by the impact of the COVID-19 pandemic.”

On the other hand, more companies have suffered financial strain due to COVID-19 uncertainties, forcing them to divest of their patents as they were on the brink of collapse or failed to survive.

Manufacturers that do business based on patents for their inventions sold off patent rights to secure their balance sheets as the COVID-19 pandemic took its toll.

The companies tend to offload patents to nonperforming entities, which have the wherewithal to make legal claims based on those patents.

This continued into the fourth quarter, allowing these entities to launch more attacks against Korean firms.

Samsung in December was sued over the rights of three wireless communication patents by Spier Technologies, a nonperforming entity, as the patent ownership was transferred from US defense technology firm L3Harris to Spier Technologies, according to risk management firm RPX.

“The fourth quarter (of 2021) also saw a steady flow of patent divestments from operating companies to NPEs, including some linked to familiar and prolific litigants,” a report by RPX noted last week.

By Son Ji-hyoung (consnow@heraldcorp.com)