How startups are being damaged by patent trolls–and turning the tables

click to enlargeIn February and for a few months, this Editor was on a tear about the quaintly dubbed patent trolls–primarily (but not always) non-practicing entities (NPEs) which don’t create or market products, but buy up other people’s/companies’ patents and then seek out opportunities to license them. These NPEs target and challenge vulnerable startups and early-stage companies to defend their patents and systems; the suit for royalties, the financial threat, the papers filed, the attorneys called, the money spent and the eventual settlement (or licensing) is in reality just a form of what’s called in Latin America la mordida. It becomes cheaper to settle than to fight–and the cost can be six or seven figures. 

The shots over the bow were in 2012: Bosch’s February lawsuits against Waldo Health, ExpressMD/Authentidate and MedApps (now Alere Connect) [TTA 16 Feb 2012] and then the strange practice of PHR developer/patent accumulator MMRGlobal [TTA 23 Oct 2012] in sending hundreds, perhaps thousands, of letters out to EHR/EMR users to advise them of possible patent violations and demanding licensing. This Editor observed then and during the spring this year that it was only a matter of time that NPEs would pounce on healthcare tech as investment action accelerated. Yet discussions by this Editor with companies in some public venues indicated a certain level of obliviousness to the threat–that there were not enough assets to go after, thus healthcare startups made poor targets–though side conversations with IP specialist attorneys indicated otherwise.

Well, the trolls have reared their fuzzy heads again, uglier than ever, in this drama-laced article in Wired. A study published by the New America Foundation’s Open Technology Institute surveying 300 VCs and VC-backed startups details the sometimes disastrous impact for early-stage IT, biotech, pharma and medical devices when hit with patent infringement actions:

  • 75 percent of the VCs said their portfolios had received patent actions from NPEs–there have even been cross-portfolio attacks by NPEs buying patents out of a sold company
  • 20 percent were reported by individual startups

Compared to IT, bio/medical devices/pharma were far less frequent targets with 13 percent of VCs and 5 percent of companies receiving NPE demands.

Yet the stories cited are not theoretical–they detail the job killing effects of these actions beyond dry numbers:

“The second suit we were hit with also was so completely different than what we were doing. That hurt when they sued us. But it didn’t have a huge effect. They hadn’t gotten an injunction. But then they went on to sue our customers. So these are people like American Express and American Airlines, and General Motors. The company in question employed 70 people. We were doing about $10 million in annual revenue, and when they sued our customers, this was a nice to have, not a need to have, it was a marketing program for the customers. The suits cut our revenue in half in three months. And so we couldn’t sustain the 70 people that we had on the payroll, and so we had to cut the company in half.” (page 16)

But the tables turn here. Four to five percent of companies are turning around and monetizing their patents in an interesting process. Under what Santa Clara Law Prof. Colleen Chien terms ‘The Positive Impacts of NPEs for Some Startups’, she describes how they sell their patents to NPEs either for a lump sum or sharing in the proceeds. In an extreme case in Wired, an early-stage company made an equity deal with a patent troll to fund the company defense against a major company. Yet the downsides are many in selling off company property and VCs are wary of the unintended consequences. From a private equity investor:

“But then—this is going to sound like prostitution—they (the company) realized this was an opportunity to bring more resources into the company… Since the first sale, they have periodically looked at their portfolio, and sold groups of patents to different litigation entities. Another lawsuit the company had was actually from a NPE that acquired a patent from another one of our portfolio companies. I learned this while in the due diligence process while investing in the company that sold. The person who sold that patent recently told me he regrets selling it, and the company has made a point of not pursuing any additional patent licensing.” (page 20)

Whether this leads to patent reform per the Congressional study of “patent assertions brought by non-practicing entities (NPEs)…as part of the America Invents Act” is anyone’s guess. Big company threats against smaller ones are still more significant, and point to the need for an overhaul at the USPTO.  Patent Trolls Are Killing Startups — Except When They’re Saving Them (Wired). The Open Technology Institute’s Report makes for weekend reading (link to PDF, 24 pages)

Related TTA articles are numerous: search on ‘patent troll’, ‘MMRGlobal’ and ‘patent infringement’.

 

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