It seems like everyday a new article comes out talking about patent trolls affecting our startup ecosystem. Most of these articles cite one or two famous patent trolls (Lodsys, etc). To begin to deal with these problems, just today over on Linkedin, a proposal calls for startup patent troll insurance, while Twitter is touting its Innovator’s Patent Agreement, Vermont is passing laws and suing patent trolls, while John Conryn introduced a new patent law reform bill. All of these may be fine solutions, but I would not be surprised if at this point the distraction of talking about patent trolls outweighed the distraction from actually dealing with patent trolls. While it is clear that some startups have been bothered by demand letters, at this point the hype seems to be outweighing the facts. I’d love to hear your thoughts.
Patent Trolls Eat Startups First. Here’s What You Can Do About It
Editor’s Note: This post first appeared on TechCrunch
Patent assertion entities (PAEs or trolls) regularly engage in the practice of sending patent demand letters to unsuspecting startups and small businesses in preparation for going after much larger entities. A patent demand letter is typically sent by a patent holder to a company it believes is infringing the patent, and in the letter, PAEs offer a license to the patent. Typically, such demand letters ask for an upfront payment for past damages and royalties on sales going forward. Small businesses receiving such demand letters often lack the overhead necessary to determine and execute an effective strategy with which to respond, which can have serious ramifications on the operations and viability of a small business.
In a recent study entitled Startups and Patent Trolls, Professor Colleen Chien of Santa Clara University School of Law finds that PAEs have a strong effect on small companies and startups. Specifically, Professor Chien focused her study on the effect that receiving patent demand letters sent by PAEs has on these companies.
The findings of the study are based primarily on responses to a non-random survey of small tech companies and startups, as well as interviews with some key stakeholders. Of the 223 survey respondents, almost one-third (79) indicated that they had received a patent demand letter. Of those 79 respondents that received patent demand letters, 13 had revenue of under $100,000 in IPCloans.com cash advance showing how indiscriminate PAEs can be in their patent assertion campaigns. The study, using a comprehensive database of patent litigations developed by defensive patent aggregator RPX Corp., also revealed that at least 55 percent of defendants in lawsuits initiated by PAEs make under $10 million a year in revenue. In contrast, practicing entities (non-PAEs) only initiated patent litigation about 16 percent of the time against defendants making under $10 million a year.
Considering the expense of patent litigation, targeting companies with such small revenues would not ordinarily appear to be a wise strategy. However, such litigations against smaller targets, with less money on the line, allow PAEs to establish favorable royalty rates and run up a count of parties that have licensed prior to going after larger entities that will provide a more significant return. In this way, small business may be considered the appetizer to the large company entrée.
TROUBLING EFFECTS
While patent litigation is expected to affect a business, the study’s finding that PAE’s use of demand letters against small companies can have a significant operational impact on those companies is troubling. Professor Chien defines significant operational impact resulting from a demand letter as being a business strategy pivot, product change, delay in hiring or meeting operational milestone, reduction in value of the company, and/or shutdown of the business.
Among the survey respondents, about half of companies making less than $100 million in revenue reported that receiving a patent demand letter had a significant operational impact, while none of the companies with revenues above $100 million reported any significant operational impact as a result of receiving a patent demand letter.
Based on responses to Professor Chien’s survey, several strategies appear to be prevalent in response to receiving a demand letter: 22 percent of companies “do nothing”; 18 percent of companies settle; and 35 percent of small companies or startups fight either in court or out of court. The average settlement cost is $340,000 among 12 respondents, the average in-court cost of fighting is $857,000 among seven respondents, and the average out-of-court cost of fighting is $168,000 among 18 respondents.
In some cases, creative settlement terms have included giving up equity in the company, as well as graduated licensing fees. Though the survey’s sample size is fairly small, the numbers for in-court costs of fighting are similar to the findings of the American Intellectual Property Law Association Report of the Economic Survey for 2011, which found that for litigations with less than $1 million in controversy, the average costs through the end of discovery are $490,000, and the average costs through trial are $916,000.
It should be no surprise that with such a potential impact on the business from receiving a patent demand letter, the common reaction for many business owners is to become concerned about the effect the patent demand may have on their business and their ability to get funding. Many small businesses simply lack the knowledge and information necessary to properly address the threat of a patent demand to their businesses.
(NON)RESPONSE RAMIFICATIONS
The result is that many companies still simply take a license in response to receiving the letter without fully understanding the ramifications of their actions, because it is often cheaper to take the offered license terms than it is to pay for legal analysis, negotiation and/or defense. Unfortunately, information about easy targets for patent assertion travels quickly among the PAE community in the absence of negotiated confidentiality agreements. Often, licensees of a PAE are even listed on thePAE’s website, giving the other PAEs a list of easy targets.
Those companies that respond without further research are putting themselves at a significant disadvantage. Patents, and especially the claims of a patent, that define the legal scope of the patent are notoriously difficult to understand. PAEs take full advantage by providing little or no information regarding how the patent may apply to the targeted business. Furthermore, while there are obligations for a patent holder to perform a good-faith investigation of infringement prior to commencing a lawsuit, no such standard exists to merely fire off a demand letter to a target company.
Unfortunately, there is usually little reliable information that is freely available as to what a patent actually covers to help the company understand its potential liability. Since patent claims are often difficult to understand, companies usually do not have information about available prior art that may help show that the patent is invalid in the first place. Further compounding this problem is the fact that small businesses are often prohibited from discussing their strategies in responding (or not responding) to such patent demand letters in public by the license terms offered by the PAE. Thus, each company is left to fend for itself without understanding which strategy works best against the particular PAE they are dealing with.
As pointed out by Professor Chien, many of the currently proposed legal reforms do not address these problems that are unique to small businesses with limited resources to hire legal representation, such as their lack of relevant information and cooperation. While the new post-grant review provisions in the America Invents Act may help prevent “bad” patents from being issued or being enforced, this process may cost upwards of $100,000 to $400,000. Similarly, the proposed SHIELD Act may force patent trolls to pay the defendant’s legal fees, but the defendant must still first spend time litigating to invalidate or prove non-infringement, and then seek successful collection from the PAE.
STRATEGIES FOR DEALING WITH TROLLS
To address this knowledge and information gap, Professor Chien proposes “collective, self-help-based solutions such as joint defense efforts and industry association groups.” As she further commented for this article, “the costs of assertion have been driven down by PAEs, the costs of defense could also be reduced if companies worked together to promote their common interests, for example in invalidating a patent with which they are threatened.”
This is an excellent suggestion that may help reduce the attractiveness of small business to PAEs, but it relies on small businesses overcoming their reluctance to sharing information about being the target of PAEs. In fact, such public information about patent assertions is becoming more common on the technology blogs, and efforts to organize it and share it should be encouraged.
It is a patent holder’s right to enforce their patents against infringers and to choose who they target. However, Professor Chien’s study confirms that in commencing attacks on companies, PAEs often choose to initially target companies that are not in a financial position to defend themselves. Returning to my appetizer/entrée analogy, since PAEs typically come after small businesses in preparation for litigation against larger entities, they are usually not looking for protracted battles with limited upside that may damage their chances against more lucrative targets.
For example, the threat of identifying strong prior art that is not yet of record in the patent (that may hurt the PAE’s chances against the more lucrative targets) may be an effective tool in responding to a PAE. Therefore, small businesses need to understand the options and strategies available to them. Even a few hours of legal advice from a patent professional that understands the unique challenges of small businesses can be invaluable in formulating a strategy for responding (or not responding) to a patent demand letter.
First-To-File Patent Law Is Imminent, But What Will It Mean?
Editor’s Note: This post first appeared on TechCrunch.
One of the main changes resulting from the passage of the America Invents Act (AIA) is the transition of U.S. patent law from a “first-to-invent” system to a “first-to-file” system on March 16. With the transition a mere four weeks away, it is important to understand what this change to the patent system means for inventors and companies.
EFF launches new 3D Printing Initiative
A post by Julie Samuels of the Electronic Frontier Foundation details the EFF’s new initiative to identify patent applications on 3D Printing technology and submit prior art applications using the new Third Party Submission provisions created under the America Invents Act. The idea behind the project is to crowd source prior art searching for the identified 3D printing patent applications. This is an interesting project being undertaken by the EFF. Similar projects, such as the USPTO NYU Law School Peer-to-patent program and then new Ask Patents program from Stack Exchange, have had some success. This appears to be the first highly focused program to identify prior art for a particular subset of patent applications, and could be a game changer for patent examination.
USPTO provisionally invalidates Apple’s bounceback patent
In the on going battle between Apple and Samsung, FOSS patents reports that the USPTO has issued a non-final office action in the reexamination of Apple’s bounce-back patent No. U.S. Patent No, 7,469,381. This patent was one of the patents Samsung was found to be infringing in Apple’s billion dollar verdict against Samsung. While this is clearly not good news for Apple, the fight is certainly not yet over, as Apple will have an opportunity to respond to the non-final Office Action before the USPTO issues a final decision.
In other Apple news, TechCrunch reports that a Dutch court has found that Samsung does not infringe Apple’s multitouch patent. According to TechCrunch, the judge noted that his ruling follows similar rulings in other European courts relating to Apple’s multitouch patents.
Google Wallet sued for Patent Infringement in Delaware
This afternoon, Google was sued over its Google Wallet smartphone application allegedly infringing U.S. Patent No. 7,298,271 (the ‘271 patent) in the Federal District Court of Delaware. According to Google, “Google Wallet is a virtual wallet that securely stores your credit and debit cards, offers, and rewards cards. You can tap your phone to pay in-store using Google Wallet anywhere contactless payments are accepted. You can pay online by signing into your Google Wallet account.” Of course, there is nothing new about payments using NFC technology, NFC has been popular in Japan for years. What’s interesting here is the actual patent being asserted against Google.
The ‘271 patent is entitled “Method and apparatus for providing awards using transponders.” The patent was filed Sept 19, 2005, and issued on November 20, 2007. The plaintiff in the lawsuit appears to be the inventor listed on the patent, Peter Sprogis. There is no assignment information recorded at the U.S. Patent and Trademark Office to determine if the patent may have been bought by another entity.
Figure 1 of the patent is reproduced below:
Here is what appears to be the broadest independent claim in the patent:
33. A system for encouraging customer patronage by providing awards to customers comprising:
- (a) one or more electronic data storage elements containing identifying information;
- (b) electronic data storage element readers capable of reading said identifying information from said electronic data storage elements;
- (c) an awards processing center that provides awards to one or more participant(s) in an awards program when said participant transmits the identifying information from said electronic data storage element to the awards processing center.
As in claim 33, each of the other independent claims of the patent appear to require providing participants with “electronic data storage elements” or readers, and each requires presenting “awards” to the participants. The specification describes an award as a “merchandise coupon or redeemable points.” Based on my initial review of the Google Wallet website, I did not find any awards being provided by the Google Wallet program. Google only states that “[y]ou may earn reward points for purchases through your card issuer’s credit or debit card rewards program (such as gas, grocery, and restaurants purchases, overall spending, and purchase protection or insurance), if applicable…. Your card issuer (not Google Wallet or The Bancorp Bank) determines and is responsible for whether rewards points or other benefits apply to these purchases.” Therefore, it will be interesting to see how the plaintiffs are interpreting the claims, in order to determine if this case has any legs.
Whether this case goes anywhere right now or not – and the timing appears to be odd, with the technology still struggling to take hold in the U.S., this appears to be a clear sign that patent litigation will expand into the mobile payments space as adoption of the mobile payment technology increases.
Software patents called out in New York Times
This weekend, the New York Times ran an article on patents in the new economy. There are some interesting bits in there, but it probably isn’t anything new to those already following the patent space. One quote in the article really got me thinking though:
In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.
Is this really so surprising? Aren’t Apple, Google, and the rest of the players bypassing some R&D costs when they purchase these huge patent portfolios? I would love someone ask in an interview with Mark Zuckerberg or Tim Cook whether the companies attempt to apply/implement any of the patented technologies protected by the patents they acquire. That is, do engineers at the acquiring companies consider the patented technologies that have been acquired when designing new products, or are the patents simply added to the war chest for use in licensing and litigation.
Also, the article fails to mention that because a patent has a 20 year life from its earliest filing date, the benefits of ownership of patent extend much further than the year in which the patent was acquired, thus it may not be fair to simply compare patent acquisition and litigation costs to R&D budgets. Further, the cost of patent acquisition and litigation should probably be set off from the benefits acquired, such as freedom to operate, damages and licensing fees.
Patent valuation an art or a science?
I wrote previously at TechCrunch about patent valuation and the prices paid for large patent purchases such as the Nortel and Kodak acquisitions. Today’s New York Times Deal Book article, With Smartphone Deals, Patents Become a New Asset Class, expands on this topic.
many factors… go into pricing patents. Timing, competitive forces, regulation and court rulings all have an effect…“ Patents are a volatile, spot market,” he said. “This is a market, but a market that is more like art than stocks or oil.”
The death of the “Non Practicing Entity”?
Editor’s Note: This post original appeared on TechCrunch.
While perusing the latest patent lawsuit filings on PriorSmart this week, I was drawn to a series of cases filed by a small company called PersonalWeb against RackSpace (possibly for hosting GitHub), Nexsan, Facebook, Apple, Yahoo, Microsoft, and IBM:
Is Crowd Sourced Prior Art the future of patent examination?
Some of the most important provisions of the America Invents Act came into effect this week. Among these provisions is the opportunity for third parties to anonymously submit prior art to the USPTO to be considered by a patent examiner prior to a notice of allowance being issued in a patent application. This allows third parties to identify prior art references to the USPTO that could affect the patentability of a patent application, thereby possibly preventing patents with unduly broad claims from being issued. Such submissions cost $180 dollars for up to ten references, and provide a great opportunity for the public to assist patent examiners through crowd sourcing.