How One Startup Used Patents To Kill A (Better) Competitor

from the sad dept

Teck points us to an all too typical, but still disappointing, story of a startup, (which previously was Riya), and how it allegedly killed off a better competitor with patents. In a strategically timed move, it sued the competitor, Modista, just days before it was going to close funding:
The lawsuit caused investors including Kumar to drop out, for fear of dealing with an expensive lawsuit that could cost more than they had even planned to invest. Because Modista had no money to defend the suit in court, the company later shut down.
This sort of story is more common than you might imagine. I recently had a conversation with a serial entrepreneur who told a similar story. One of his previous companies had been quite successful, and was on the verge of being acquired for upwards of $70 million. Days before the deal was to be closed, one of their competitors got wind of the deal, and filed a patent infringement lawsuit against them, leading the acquirer to drop the deal. Without the funds to fight the lawsuit, the entrepreneur had no other option but to sell his company to the company who sued him for less than $5 million.

Ask around, and you discover that this happens all the time -- patent holders using patents not to innovate, but to block and kill other companies -- especially when those companies really are more innovative and have a better product.

Filed Under: competition, image recognition, patents
Companies:, modista, riya

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  1. identicon
    Willton, 4 May 2011 @ 12:42pm

    Re: Re:

    The story is absolutely true, though I can't name names. I can confirm that it is absolutely true. If you think that it makes sense to tie up a tech your acquiring in court for 5 or more years to defend what you believe to be a frivolous lawsuit... well... you haven't worked in many tech businesses.

    If the lawsuit was indeed frivolous, then it would likely not take 5+ years to be resolved. Indeed, if it was truly frivolous, there would be multiple opportunities to dispose of the case well before the costs of litigation begin to mount to a significant level. Furthermore, the costs of defending against a "frivolous" lawsuit, while not trivial, are certainly not within sniffing distance of a $70M acquisition price. The cost of losing a patent infringement lawsuit, however, would be substantial, especially if the value of the company's business was worthy of a $70M bid from a buyer.

    My guess is that the buyer backed out because it was actually afraid of losing, not just defending the lawsuit. In such circumstances, the idea that the patent infringement claim was frivolous begins to lack merit.

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