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 @ 3:51pm

    Re: Re: Re: Re:

    Ha! You can't be serious. How long did the RIM patent lawsuit last?

    Longer than it needed to last. RIM could have settled the case long ago for far less than the final judgment levied against it. It chose to roll the dice in court and lost in a big, big way.

    Furthermore, you are citing only one very public example. There are thousands of other cases that did not result in the lengthy, costly dispute that RIM decided to undertake. Your opinion here suffers from a small sample size problem.

    In my opinion, RIM handled its case very poorly.

    No one said that it did. But you are now adding millions to the $70M purchase price, plus uncertainty, plus the potential that the $70M might go towards nothing. That's crazy costly.

    True, it could be costly. But if all those things could have happened, then perhaps the suit was not as frivolous as you claim it to be.

    It makes no logical sense to compare the cost of the lawsuit to the cost of acquisition. The two are independent.

    I'm not comparing the costs of acquisition to the costs of litigation. I am saying that the cost of litigation must be priced into the buyer's offer.

    You can cry about the uncertainty of litigation and all, but you already put forth the assumption that the lawsuit was frivolous. That phrase imparts the belief of a high probability that the case will be dismissed or ruled in favor of the defendant. In such circumstances, the only costs to the defendant are time and legal fees, and a $3M legal expense for patent litigation (which is a generous estimate and assumes that the lawsuit is indeed frivolous) is not enough to entirely eviscerate the value of a $70M deal.

    Your guess is wrong. The buyer backed out because this added significant costs to an acquisition it reasonably valued at $70M.

    That's it? Then why didn't the buyer just lower the bid price? Increased costs is reason to lower the bid price, not back out of a deal.

    And what was so insidious about this was the timing of the lawsuit. The two products had co-existed in the marketplace for about five years. It was only when the one company got wind of the acquisition that it filed the lawsuit.

    Then perhaps the parties involved should have been more tight-lipped about the transaction. If all the competitor wanted to do was kill the deal, the competitor did not have to use patents to do it. If the deal fell apart because the competitor got wind of the deal, then I would be pointing the finger at the parties who had the duty to keep information confidential, not at the competitor legitimately exercising its patent rights.

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