Patents don't help startups like they used to
Startups must think hard about how to craft an intellectual property strategy
From IP Strategy Advisor to Venture Capital Investor - the challenges with the US patent system still apply
Throughout the past 20 years, my patent analytics and IP strategy firm, IP Checkups advised dozens of startups and smaller technology companies on how to build a robust IP estate. Beginning around 2006, patent law underwent significant changes due to a variety of factors. These included the outcomes of several Supreme Court decisions, passage of the America Invents Act, and the emergence (and subsequent market reaction) of the non-practicing entity (NPE) or an entity that doesn’t commercialize its own products but uses patents as a means to earn revenue from third parties using the technology.
As an aside, early on the term, Patent Troll was used to describe egregious behavior from non-practicing entities with patents, that have arguably frivolous claims, who assert their patents against larger operating companies. Overtime, this derogatory term has been adopted by Big Tech who spread the idea to the mainstream media to describe any NPE. This includes Universities, Research Labs, or individuals that have patented novel ideas. As soon as these NPE’s make an attempt to recoup revenue through licensing or litigation (which is often necessary if they want to be compensated for their work) from large tech companies that use the NPE’s technology without permission, they are labelled a patent troll.
With these changes to the patent system, it became clear that simply advising a startup to get a patent wasn’t enough for them to succeed in a market, especially one where they would compete with larger, deep pocketed players. Over the years running our advisory firm, we’ve painstakingly watched the slow and steady push by large technology firms in the US to “defang” the patent system which has resulted in a very difficult and imbalanced innovation system for startups.
More and more, as a consultant advising smaller tech companies, we recommended that startups deploy a multifaceted IP strategy that incorporates traditional forms of IP (copyrights patents, trademarks, trade secrets), while also establishing other technology and market-based control positions.
Now, working as an investor at Future Frontier Capital, I am faced with a new challenge: how to think about creating a defensible position for startups that we write checks to. It’s one thing to advise a start-up with a limited budget that has hired us on a work-for-hire contract basis to “help” them establish an IP strategy. It’s quite another to invest capital and be tied to the startups success (or failures). In either case we provide our best advice and work hard to ensure the startup is well positioned for success. I am acutely aware of the challenges and pressure the current (weakened) patent system puts on startups to differentiate themselves and create defensible control positions. It is difficult for them to force larger entities to take a license (without the threat of litigation) it is very expensive and time consuming to litigate, and often, even if they do litigate, they are likely to lose.
Additional data points on the current state of the patent system
Two of my trusted colleagues, Eb Bright and Bruce Berman recently posted two separate articles that when combined, summarize my current thoughts about the state of the US Patent System and its impact on startups.
First, Eb Bright Exploramed, a successful medical device incubator, posted an article from RealClear Policy entitled “Big Tech Has Eviscerated America's Patent System”. The article, written by Nick Matich describes how “Big Tech”, with the help of their allies in Washington, have weakened patent protections. These weakened protections prevent a new generation of startups from climbing the ladder and make it extremely difficult for startups to use patents to challenge the Big Tech incumbents. Ultimately, over the long term, this trend will result in making the US economy less dynamic.
Matich writes: “In any industry, a new entrant faces off against established players that possess numerous advantages, including an established customer base, government connections, and lots of cash. Patent laws help even the playing field by allowing smaller companies the exclusive right to their innovations. In fact, Google and all of America's giant technology companies were once upstarts themselves, during an era that featured strong patent rights.
But the U.S. patent system has changed dramatically since then, and not coincidentally, just as "Big Tech" started to dominate the technology industry.”
Matich goes on to explain how staring in 2014, patent law suits argued at the US Supreme Court resulted in decisions that have led to a weakened patent system. I would argue it started before that.
Around 2006, the US Supreme Court heard the following cases:
Broadly speaking, the decisions from these cases have impacted patent law and practice in the following ways:
KSR v. Teleflex muddied the definition of obviousness of patent claims, making it easier to invalidate patents
Ebay v. MercExchange limited the ability of non-practicing entities to get an injunction against operating infringers,
Medimmune v. Genentech necessitates that a licensor assert patents in court in order to be taken seriously by licensees.
In addition, Matich points to the Alice Corp v. CLS Bank International and other related decisions from lower courts, which made it much harder to patent algorithms, AI, medical diagnostics, electric car chargers, and even garage door openers.
Matich goes on to write about the lobbying (by Big Tech) and eventual passage of the America Invents Act in 2010. He explains that the stated purpose of the act was to “set up an administrative body that could review the validity of already-issued patents, to confirm whether they were genuinely novel, useful, and nonobvious.
He continues “Unfortunately, Big Tech almost immediately abused the law, by infringing on smaller rivals' patents and then repeatedly filing challenges against those patents. In fact, there are now companies whose entire business is challenging patents on behalf of Big Tech [linked added by author]. These professional patent challengers keep their clients anonymous, enabling them to mount repeated attacks on their rivals' patents.”
The current state of the patent system does nothing to discourage Big Tech from infringing others’ rights. The amount of time it takes for patent infringement law suits to work their way through the courts is significant. Getting to trial can take a few years. With inter-partes reviews, appeals to the U.S. Court of Appeals for the Federal Circuit, and the potential for the Supreme Court to hear the case, a patent litigation can last as long as 10 years or more.
Beyond the years of litigation, plaintiffs must consider the difficulty in getting a court approved injunction, the relatively small damage awards that are doled out, and the expense involved with hiring litigation counsel that are now billing hourly rates upwards of $1500 per hour.
Then, compare the impact of a patent litigation on a smaller tech company that sues a large tech conglomerate. The smaller company must endure the 6-10 years that the litigation lasts during which it is spending resources (time and money) and distracted from building sales, marketing, and operations. This ultimately may (often does) lead to the death of the company. Conversely, the large, deep pocketed conglomerate can continue to grow its market share, often using the plaintiff’s technology unlawfully, with little negative impact to its operations.
Even though patent litigation finance options are available to smaller tech companies, the odds of winning in court and receiving any significant remuneration are slim. Meanwhile, the impact to a large multinational with a massive balance sheet, i.e. $100b in cash while generating $330 million per week in net revenue is negligible.
Matich concludes the article, this way:
“The result of all of these changes to our patent system is that it is almost impossible for startups to use patents to challenge the Big Tech incumbents as they might have in the past. With their other market advantages, Big Tech companies can crush new competition -- and make our economy less dynamic in the long run.”
My colleague, Bowman Heiden and I recently wrote a paper about patent holdout, the ability of large companies to simply stall and not pay for others’ technology they are using. We uncovered many of the tactics deployed by large infringers with deep-pockets to avoid (or prolong) paying smaller technology firms for the technology. Ultimately, we concluded that the system is stacked against smaller technology firms and the U.S. patent system fails to properly incentivize all parties.
Patent litigation is becoming less common relative to the number of patents filed
One common trope of the mainstream media is how damaging patent litigation is to all tech companies. The narrative frequently pushed by the mainstream media is that evil patent trolls are lurking everywhere and are out to exploit tech companies. Add to this, common advice from risk-averse lawyers (and reinforced by most VCs) suggesting that startups must have a patent in order to establish a moat in the market and have a chance against potential infringers. There are additional, confusing messages emanating from law firms that discourage startups (and large companies) from searching for patents. The logic is that if you search for patents you may be on the hook for willful infringement in the future which often results in trebled (triple) damages. We looked at this closely several years ago and found that the frequency of willful infringement and triple damages is close to zero.
This article written by Bruce Berman, a long time IP consultant from Brody Berman, reinforces the reality that patent litigation in general is extremely rare. On his IP Closeup blog post “Patent disputes are rarer than perceived; Trials are 6/1000th of active patents”, he writes about how infrequently patent litigation occurs in the United States.
His research revealed that although the number of active patent grants are up over the past 5 years, “Despite what the headlines might imply, patent suits are an increasingly smaller fraction of active patents”
The article states, “On average, 3,800 patent suits are filed each year. The number tried is only about 200, or about 5% of the litigation brought. As many as 97% of patent suits settle. Unfortunately, I am told, a potential licensor today must sue first to show it is serious. If that were not the case, there would likely be even fewer suits.” The necessity of licensors having to sue to show they are serious stems in part from the Medimmune v. Genentech Supreme Court decision discussed above.
The full column written Bruce Berman was featured in an IP Watchdog column earlier this month. Berman digs into details and reinforces many of the points discussed in Nick Matich’s article.
To summarize, both articles point out the realities of the current patent system for startups and smaller technology firms. Big Tech and their allies have weakened patent protections, making it difficult for startups to challenge incumbents and ultimately leading to a less dynamic economy. Meanwhile, despite an increase in active patent grants, patent litigation is becoming increasingly rare, with only a small fraction of active patents resulting in trials.
The combination of these articles highlights how the patent system is failing to properly incentivize all parties (especially startups and smaller companies). There is clearly a need for reform to level the playing field and promote innovation for all participants.
Part of my role at Future Frontier Capital is to support startups in establishing foundational intellectual property (control) positions. Ideally, these control positions are aligned with the startup’s technology and business strategy. We strive to write checks to support founders with great, novel ideas. I am seeing first hand how patents alone are not enough. Startups must establish other forms of control through technology, market, or other means in order to establish strong positions which inhibit others from simply copying their ideas.
In spite of this, please don’t forget to Ignore the Confusion!
Thanks to Rohit Gupta for inspiration and editing.