Patent Trolls Causing Serious Problems For Startups

from the this-is-a-big-issue dept

While it’s the “big” patent lawsuits that seem to get most of the attention in the press — the Samsung/Apples and the Oracle/Googles — those cases involve “equal” companies who can afford to throw a few million into expensive lawyers to fight the fight. But there’s a growing and really dangerous aspect in the patent world these days: how patent trolls are increasingly going after startups. That’s a big deal when startups are the biggest creators of new jobs (and great innovations), but the impact of patent trolls on smaller companies just doesn’t get that much attention. Thankfully, law professor Colleen Chien has been doing a lot work here and has just released an excellent new paper all about how startups are hurt by patent trolls (though she now uses the latest favored term for patent trolls: PAEs or “Patent Assertion Entities”).

I find that although large companies tend to dominate patent headlines, most unique defendants to troll suits are small. Companies with less than $100M annual revenue represent at least 66% of unique defendants and 55% of unique defendants in PAE suits make under $10M per year. Suing small companies appears distinguish PAEs from operating companies, who sued companies with less than $10M per year of revenue only 16% of the time, based on unique defendants. Based on survey responses, the smaller the company, the more likely it was to report a significant operational impact. A large percentage of responders reported a “significant operational impact”: delayed hiring or achievement of another milestone, change in the product, a pivot in business strategy, shutting down a business line or the entire business, and/or lost valuation. To the extent patent demands tax innovation, then, they appear to do so regressively, with small companies targeted more as unique defendants , and paying more in time, money and operational impact, relative to their size, than large firms.

The following chart from the report more or less speaks for itself: the smaller you are, the much higher the likelihood that a demand from a patent troll (even beyond just a lawsuit) had a “significant” operational impact. This may not be surprising, but it is really telling:

The whole report is a worthwhile read. One thing that I like is that it even spends a bit of time talking about the emotional impact getting sued by a patent troll. Getting sued (or even threatened with a lawsuit) is a deeply scary moment, and that kind of pressure can tear apart good startups.

Patent demands can exact a personal toll: as responders remarked, demands have “invoked rage over the waste of time,” made a target “very very angry,” “ruined family friends” and caused “stress” and “ill-will generation [sic].” As several survey respondents put it,

“It was agonizing to hand over all the money we had earned from a product we had invented and created ourselves to a firm that invents nothing and creates nothing. Our founder has since lost his house, car [sic] all his assets.”

“They sued my startup for infringement on a group of insanely broad software patents. While many much larger companies are fighting we do not have the resources to do so. It is the single most frustrating experiences I’ve had professionally. Extortion, pure and simple. The troll even admitted his model was to sue everyone, get settlement dollars because fighting was too expensive.”

“We wasted about 50k of hard earned money on litigations :-/ [sic]”

As defense lawyers who work with a large number of large and small companies put it, some small companies are “much more likely to take it personally” and threats can “send them over the edge,” inflicting considerable emotional distress.

That emotional impact is really really powerful and can cause otherwise good startups to completely collapse under the pressure. It’s good to see that the report attempts to account for some of that, even if it’s not the focus of the report.

And, of course, the damage isn’t just to the companies, but to innovation itself, as people just give up due to being restricted in what they can do — including having some companies give up on the US market entirely:

Among those who had not received a demand, some reported significant impacts from watching others receive them. Numerous respondents who had not received a demand said they used open source software in order to avoid liability. Others reported being very conscious of patent threats. Said one small software company, for example: “[w]e have limited ourselves to the UK & European markets, simply because the mere threat of Patent Litigation if we enter the US market, is a WHEN not IF question.” Another said “I used to develop software for retail and on spec for publishing by other companies. But we’ve quit that because the risk of patent litigation.”

Hopefully as we start to see more data like this, policymakers will realize that the system is very, very broken.

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Comments on “Patent Trolls Causing Serious Problems For Startups”

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44 Comments
Anonymous Anonymous Coward says:

Policy Makers

So long as the lobbyist’s continue to dominate the attention of Congress and other elected officials there will be continued erosion of individual and corporate (not the same thing (Supreme Court take note)) rights. Doing things for the almighty dollar (or other currency) is not the correct objective. The almighty dollar should be an ancillary effect of a correct policy. If the correct policy is targeted, the almighty dollar will follow, and by the proverbial truckload.

I am currently re-reading Musashi by Eiji Yoshikawa which is the story of the greatest swordsman of the Japanese samurai tradition. Of note, during Musashi’s self educational development, he realized that swordsmanship or the Way of swordsmanship in and of itself was not the correct goal. The same ideals, the Way, applied to many other aspects of life, including the political environments (politics referring to governance rather than the slimy shenanigans that we think of today). This is what made him unbeatable. This is what Corporations and their ancillary lobbyists (along with their lawyers) do not ken.

I think that maybe Shakespeare had it right. “First kill all the lawyers”. Lets begin with those in Congress and other elected offices. (Dear FBI, this is rhetorical. The ‘kill’ referred to here is not about corporeal existence, but to elected life).

Anonymous Coward says:

“Hopefully as we start to see more data like this, policymakers will realize that the system is very, very broken.”

I think that this is sort of misleading data (the researcher seems by her writing to be anti-patent). First off, it’s a sample of companies that felt they got hurt by patent trolls, so it’s self selecting. It doesn’t really indicate all the companies who didn’t self select. So the numbers right away are a little off.

Further, there is no indication of what type of “patent trolling” applied in these cases. Was it a real troll, or was it a case of a startup trying to use someone else’s technology and getting caught – and getting pissed off about it?

Sorry Mike, but a self-selecting study won’t impress anyone in congress.

Anonymous Anonymous Coward says:

Re: Re:

So, you feel that something is misleading, and take the entire article to task. Yet there is more evidence of the cost of patents that you ignore, either implicitly or passively:

http://www.techdirt.com/articles/20120626/10452719493/29-billion-spent-dealing-with-patent-trolls-us-alone-last-year.shtml

The funny thing is that this kind of evidence does not impress Congress either. It would get in the way of that check the lobbyist is waving at them.

Anonymous Coward says:

Re: Re: Re:

I hate to tell ya, but pointing at a Techdirt article and trying to make Mike’s opinion into fact doesn’t work out well. The numbers are meaningless, it’s the same sort of thing he trashes the **AA’s all the time for, made up numbers. But he is happy to run them. But it’s not fact, it’s his opinion. If you want to link to something with facts in it, you might have some hope.

Anonymous Coward says:

Re: Re: Re:2 Re:

“see? big difference.”

Not really a big difference. The guy above me is more than willing to point at a Techdirt post as fact. Mike doesn’t do a very good job at times of defining the difference between facts and his opinion on facts. He often even plays the game of writing opinion pieces that quote other opinion pieces as “almost facts”, and then later uses that to build more “near facts”.

Anonymous Anonymous Coward fell for it. I wonder how many other people here have as well.

Anonymous Coward says:

Re: Re: Re:4 Re:

How about I just read the whole damn internet?

If the “facts” are not on Techdirt, why link to techdirt? that’s like linking to an op-ed piece to get the news.

How stupid is that?

Still doesn’t take away from the fact that this story is written by sampling people who came forward feeling they were hit by patent trolls, but few that were not were even talked to.

Seems one sided, and rather misleading. Sort of like the writer started with the conclusion and worked to find data to fit.

Anonymous Coward says:

Re: Re: Re:6 Re:

You still failed because you linked to the BBC story, which is just an interpretation of the original report.

However, since James Bessen is pretty much against patents, it’s kind of hard to take the report too seriously.

Further, he does the same poor math that Mike tends to do: “The direct costs of NPE patent assertions are substantial, totaling about $29 billion accrued cost in 2011, including the costs of non-litigated assertions.” – playing with accrued costs is a nice way to move money around to puff a number up.

Further, he doesn’t seem to separate out the true patent trolls from just plain licensing entities just trying to collect a normal license fee. Many small companies run afoul of patents, and litigation often happens as a result. Because he doesn’t seem to want to break this out, nor does he seem to want to address a decent breakdown of “non-litigated assertions”, it’s hard to tell how much NPEs actually “cost”.

Further, let’s be clear here. “Cost” isn’t even properly explained. As soon as they start playing with accruing the numbers from various years, it’s hard to judge what is really going on.

Can you simply tell me how many dollars of litigation cost was related to LITIGATED actions from NPEs that are not generally acceptable licensing companies (an example of this sort of company might be something like THX).

Thanks for understanding.

Anonymous Coward says:

Re: Re: Re:8 Re:

Richard, actually, I am not pro-patent. I am pro-law. I think that the law of the land, once passed (and challenged in court, with is the American way, I guess) is the law of the land. If you want to change the law of the land, then do so.

The real issue isn’t the patent system, the real issue is the legal system, which requires an incredible amount of money and time to work with. Filing a lawsuit costs a ton, answering it cost a ton to the other side as well. Lawyers make piles of money, making frivolous motions, filing requests for information they don’t need, and generally dragging the process out.

Due process, the thing Mike screams for over and over again like a baby denied a cookie, is incredibly expensive in the US system, and that will not change.

Patent lawsuits, even from NPE at not the issue here – the real issue is the cost to meet those challenges. Perhaps you guys could spend your time railing to get the legal system fixed, that would solve way more problems than trying to write snappy new laws to try to block off the legal business of holding patents and enforcing them.

Ninja (profile) says:

Re: Re: Re:7 Re:

Read the damn linked articles if you want to start making assertions that Mike is this or that, that the author is this or that. You reach new levels of ridicule when you admit you won’t read but you still criticize Mike for something you didn’t and won’t read. Seriously, if you have nothing to add just fuck off.

Anonymous Coward says:

Re: Re: Re:8 Re:

Ninja, please.

I read it just fine. However, I won’t let someone use an opinion piece and try to pass it off as fact.

Why link to an opinion or a review of something, when you could have just linked to the source material? Most people do that when they are trying to get the opinion treated as fact, and to keep people from bothering to look at the underlying source material.

In this case, the underlying source materialappears slanted, coming from people who are determined to knock the patent system. When you get down to it, the techdirt article links, the bbc news article linked… they are slanted by their source.

“Seriously, if you have nothing to add just fuck off.”

Should I die too?

Another score for the home team, right?

Ninja (profile) says:

Re: Re: Re:9 Re:

Should I die too?

If you feel the urge I’m all supportive.

In this case, the underlying source materialappears slanted, coming from people who are determined to knock the patent system. When you get down to it, the techdirt article links, the bbc news article linked… they are slanted by their source.

Hypocrite, look at your own MAFIAA bosses before complaining about that 😉
And by MAFIAA I include every IP-maximalist organization out there.

Prisoner 201 says:

Re: Re:

“First off, it’s a sample of companies that felt they got hurt by patent trolls.”

Citation please? As far as I can see it’s a survey to companies in general, trying to find out how many have been hurt by patents.

That 59% of the companies said they were not hurt at all by patent trolls support my view.

What have you got?

Anonymous Coward says:

Re: Re:

You don’t like the output of the study so you attack on its credibility in very vague terms.

Maybe the patent troll victims are over-represented in the sample -that’s a mere assertion of yours without a deeper look into the methodology is required to give it substance.

This remains an impressive collection of testimonies of legit smaller companies being hurt by patent trolls mobster-like extortion tactics and plain denial to justice to them that is not being addressed by patent law.

PAEs need to be cracked-down on as they bring no value to society.

silverscarcat says:

Re: Re: Re:

No,no no…

You see, this is how his mind works.

Start at the conclusion “patents/copyright are/is good, anything that says otherwise is bad” and then cram facts in to support your conclusion, ignoring anything that says otherwise.

Rather than, have a theory, look at facts, and then change your theory based on what facts are presented.

Michael says:

An idea isn’t even a tangible product and yet our government has put a system in place which allows people to *own* them. Think about that for a moment: you can literally place an idea under lock and key, then go around suing or extorting money from others for using same/similar idea. This effectively criminalizes the use of ideas held under patent. Completely ludicrous.

Simple Mind (profile) says:

Re: Re:

The broken patent system has put a huge drag on both economic and technology advancement. Consider, if we as a society were to totally disallow the ownership of technology. There are basically 2 cases I can see. (This is just a brain dump as I consider my own position on this subject.)

case 1. Two almost equally sized companies working on the same product(s). Seems fine. Let them compete on execution. The one to think of it first has a head start already, they don’t need to be granted exclusive rights.

case 2. Smaller company tech is reverse engineered by large company and then out competed in the marketplace by the larger company with more resources. This case is the only one patents help with and should cover.

It seems like we do need to allow some sort of limited ownership of tech to prevent case 2 from stifling startups. So for patents to work as a benefit to society, they need to operate as follows.

1. Startup company files a patent to give them exclusive right to develop a new product they thought up first. Patent includes deliverables and development timelines. Company pays a yearly fee along with updates to the timelines. If timelines are missed by more than 1 year on each update, patent is invalidated. (This to make sure progress to market is actually being made.) Company is given 1-5 years exclusive market rights after the product is delivered (depending on the product) to recoup costs and establish a market.

2. An established company (one with at least one product on the market and revenue) can file a patent only to keep (1) from preventing them from developing a product. That is, since (1) allows startups to block an established company from entering a market for a period, if the established company thinks of an idea first they need a way to keep that from happening. Patents from an established company do not require a development timeline since they cannot be used to prevent anyone from developing the patented technology.

As far as I can tell, this scheme would fix the patents system to be beneficial to everyone that actually does something. (ie. not lawyers or politicians). There is room for the non-practicing inventor to file a patent (without development timeline) and then sell it within one year, either to a big company, or to a startup (that then needs to add a timeline to it and refile.) See any holes in it? Why wouldn’t this work?

EF says:

This happening is disheartening

“Hopefully as we start to see more data like this, policymakers will realize that the system is very, very broken.”
This statement implies innocence on the part of “policymakers” — not so fast. Abuse this blatant, this corrupt, this damaging, is most surely intentional. As an aside, “hope” is NOT a strategy, although the current administration is doing its best to convince us otherwise.

The Amazing Sammy (profile) says:

There are ways around it.

It’s like I said on Slashdot. There are ways to build corporate entities that shield you from this kind of nonsense. Or, at the very least, make it a lot more difficult and expensive to do. People like this are going after the cheap score. The minute you introduce a Holding Company/Trading Company/Operating Company structure into it, they give up. And well they should. Do it properly, and it’ll be ten years before they even get your name.

Simple Mind (profile) says:

Re: There are ways around it.

So you need to hire lawyers to set up your company structure in an obfuscated way so that other lawyers will have a hard time attacking it? Ok. But it sounds like a symptom of the problem to me. I just want to create technology. Why do lawyers (whether they belong to me or not) have to stick their noses all up in my business for me to get anything done?

Kevin (profile) says:

Break the patent law

As long as those accused of patent infringement are kept separate the trolls will continue to operate. All entities who have either been sued or threatened need to unite and fight the whole system as a collective group. Pool resources, hire as many lawyers as the opponent and tackle the problem head on. United we stand, divided we fall

SuggestionBox says:

Why not use an idea of separation between powers? Larger tech companies can easily squash their smaller counterparts with this current patent system. Disallow the ability for smaller companies to enter into patent litigation period. If the mere threat of litigation is enough to end a small company, then the clear solution is to make it impossible for litigation to be used against a small company. This way the non practicing entities can’t make money off of their stupid patents by suing or threatening to sue the little guys.

The non-practicing entities who insist on continuing their business model would need to take on the Microsofts and Apples in the world. I have no doubts that the non-practicing entities would find themselves summarily crushed.

Carpark Martian says:

Re:

The underlying math appears to be in the increase in patent litigation – up 500%. That would not be explainable in terms of a status quo.
The process is a proven vehicle for lawyers to make money. A lot of money. Lawyers have less empathy than the average and they take a certain pride in their own way on that trait.
That results in a runaway train.

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