Is Big Tech Failing at Business?

Google's Legal Setback and the Rising Cost of IP Infringement

In August, Google encountered a significant legal challenge in its dispute with Sonos, as a U.S. International Trade Commission judge determined that Google had violated five of Sonos’ patents related to audio technology. Should this judgment be affirmed, Google could be liable for payments totaling hundreds of millions of dollars and potentially face import restrictions on products ranging from Pixel smartphones to Nest speakers.

A Growing Trend of IP Disputes

This outcome represents a noteworthy development, marking the latest instance in a series of legal actions and complaints aimed at curbing the practice of large technology companies appropriating intellectual property (IP) from smaller entities.

Over the past several years, major technology corporations have increasingly been accused of infringing upon the IP rights of their smaller competitors. These smaller firms are now actively challenging such practices, potentially leading to substantial financial burdens for the largest tech companies in the form of court-ordered damages and legal expenses.

The Financial and Reputational Risks

Continued reckless infringement by Big Tech executives could result in significant and lasting financial and reputational harm to their companies. The act of stealing rivals’ IP is not only ethically questionable but also a demonstrably poor business strategy, potentially constituting a failure of fiduciary responsibility to shareholders.

For a considerable period, large technology companies, such as Apple, operated under the assumption that they could freely exploit smaller competitors lacking the resources to mount a successful legal defense. However, this dynamic is shifting.

Victories for Smaller Firms

Smaller firms are now finding that pursuing legal action is a worthwhile investment, and they are achieving significant victories in court. In the last year alone, juries have awarded over $1 billion to smaller companies in just three cases.

For instance, in August, Apple was ordered to pay PanOptis $300 million due to infringement of 4G technology. Previously, in the prior year, a court mandated Apple to pay $1 billion in damages to VirnetX, a patent holder specializing in VPN technology.

Beyond Apple: Cisco's Case

The issue extends beyond Apple. Last October, a federal court required Cisco to pay nearly $2 billion to Centripetal Networks, a cybersecurity and software company. The judge presiding over the case characterized Cisco’s conduct as “an egregious case of willful misconduct beyond typical infringement.”

Impact on Bottom Lines

IP theft has the capacity to substantially impact the profitability of Big Tech companies. While these companies possess market capitalizations in the hundreds of billions, or even trillions, of dollars, substantial court-ordered payouts are unwelcome.

To illustrate, Cisco’s payout represented 4% of its annual revenue. Apple recently reached a settlement with a Japanese company to avoid another billion-dollar damages payment. Furthermore, the company even considered withdrawing from the United Kingdom to evade a $7 billion patent-infringement fee in British courts.

Reputational Damage

Even if large firms can absorb the financial penalties associated with IP theft, the resulting damage to their reputations is substantial.

Executives from major technology companies are frequently summoned before U.S. congressional committees to address concerns regarding antitrust violations and privacy breaches. Public perception of companies like Facebook, Google, Apple, and Amazon is increasingly negative. If the public and policymakers discover that these companies’ profits are built on persistent patent theft, their reputations will suffer further.

Fiduciary Duty and Shareholder Accountability

Big Tech executives have a legal obligation to act in the best interests of their shareholders. Executives who disregard the risks associated with patent litigation – exposing their firms to significant legal and reputational vulnerabilities – may ultimately see their decisions reflected in declining share prices.

Shareholders, employees, and other stakeholders should hold executives accountable. It is in the best interest of large institutional investors to encourage Apple and other companies to resolve pending cases and establish licensing agreements with smaller vendors.

The Path to Sustainable Success

If Big Tech companies operate within the framework of IP law, they will foster a climate conducive to long-term success throughout the sector.

As Peruvian economist Hernando de Soto argues in his influential work, “The Mystery of Capital,” a society’s economic prosperity is heavily reliant on the protection and enforcement of property rights, including intellectual property rights.

The Importance of Property Rights

Strong property rights protections incentivize investment in new ideas. Conversely, weak protections discourage investment and stifle innovation.

The U.S. technology sector is no exception. Both consumers and shareholders should desire the success of both small and large firms. Smaller firms often develop the foundational software, applications, and hardware that ultimately appear in consumer products.

However, when larger companies exploit the innovations of smaller firms without proper compensation, it diminishes the incentive for those smaller firms to continue innovating.

It is imperative that Big Tech cease the practice of patent theft.