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.

Filed Under: patent trolls, patents, research, startups