The patent wars are not exactly new. They have been taking place for years. On one
side of the battle stand disgruntled inventors, claiming their patents have
been infringed and demanding royalty fees.
On the other side of the battlefield are product manufacturers and
distributors, accused of unlawfully incorporated patented inventions into their
products. Each side is represented by
lawyers. The battle isn’t exactly
even. The inventors resemble a
disorganized, ramshackle bunch of renegades with home-made weapons. The product manufacturers on the other side
have war chests of funds, the latest military equipment and armies of well-organized lawyers.
The disputes usually follow this pattern: Joe (inventor) comes up with new idea, files
for a patent. After several years, the
patent is granted by the patent office. Joe
lacks the resources necessary to break into the marketplace and sell his own
product. Joe runs out of cash and begins
to starve. Corporation takes Joe’s idea
and builds it in to Corporation's products.
Joe asks Corporation to pay a royalty fee. Corporation ignores Joe’s request. Joe manages to persuade lawyers to represent
him. Joe sues Corporation for patent infringement
There is a modern twist to this pattern. Instead of the lawyers representing Joe and
sharing the proceeds of the litigation with him, the lawyers buy the patent
from Joe, add it to a bunch of similar patents and then the lawyers sue
Corporation. Instead of suing with one patent, the lawyers sue Corporation with
a whole portfolio of patents. It could be argued that this grouping of cases is
more efficient, as it reduces the number of cases coming before the courts, but it’s not very popular
with Corporation, which would rather just ignore the infringement and carry on
with the business of selling products.
The lawyers representing small inventors like Joe see
themselves as “white knights”, prepared to rescue the under-trodden and fight
with the mightiest organizations on earth. Their opponents have a different view,
and see the lawyers as “patent trolls”.
You’ll see that I’m characterizing the dispute as one of
large versus small. This is based on
fundamental economics. There are legal
costs and risks associated with bringing lawsuits, and lawyers cannot afford to
sue small businesses—they would if they could justify it, but the lawyers need
to see a large potential payout if they’re going to invest several years into a
case. It doesn’t make sense for a lawyer
to sue a defendant that lacks the funds to pay a substantial judgment. Lawyers go for the defendants with deep
pockets. Defendants with deep pockets hire the best lawyers in the business,
and the battle is engaged.
We need some more characters for our plot. In August 2012, US Congressmen Peter DeFazio
and Jason Chaffetz introduced a bill to Congress named: Saving High-tech
Innovators from Egregious Legal Disputes (“SHIELD Act”). The SHIELD Act was purported
to “protect American tech companies from frivolous patent lawsuits that cost
jobs and resources”. The SHIELD Act places the financial burden on so-called
“patent trolls” that buy patents solely to sue the American tech startups that
created the products.
Clearly, a bill to protect large corporations from starving inventors is not going to get much support, so the Washington spin doctors came up with the cunning plan to position the bill as protecting small, defenseless startups. The spin doctors then brought in the idea of protecting jobs and led with the following headlines:
“DeFazio Introduces SHIELD Act to protect American Innovation, Jobs
SHIELD Act would protect American tech start-ups from predatory lawsuits”
SHIELD Act would protect American tech start-ups from predatory lawsuits”
This sounds wonderful doesn't it? Who could argue with creating jobs, protecting startups and innovation? If they’d only added in widows, orphans and puppies, the act would have clearly won unanimous support. The problem with this positioning, however, is that it doesn’t make any sense to sue a startup—they don’t exactly have deep
pockets. In fact, startups are usually
running on fumes, with insufficient cash to operate their businesses or pay salaries.
I guess DeFazio and Chaffetz are somewhat loose with the term “tech startup”, as the companies being sued for infringement include Samsung, Apple, Microsoft, Google, Intel, a who’s who of the largest companies in the world. They certainly have deep pockets, but you wouldn’t really consider these corporations to be “startups”.
I guess DeFazio and Chaffetz are somewhat loose with the term “tech startup”, as the companies being sued for infringement include Samsung, Apple, Microsoft, Google, Intel, a who’s who of the largest companies in the world. They certainly have deep pockets, but you wouldn’t really consider these corporations to be “startups”.
The problem was that the whole concept of defending tiny
startups from lawsuits didn’t make any sense, so research had to be commissioned and smokescreens created to hide the real story. Enter Colleen
Chien, professor at Santa Clara University Law School, and avid opponent of
patent “trolls”. Chien undertook a study
and used the findings to support the notion that startups are being attacked by
patent trolls.
Chien’s study[1]
is partly based on asking folks in Silicon Valley if they are afraid of patent
trolls, and asking them to complete a survey. Chien’s survey of 223 tech
company startups, resulted in finding 79 of which had received a demand letter
from a lawyer. Companies like Twitter
were classed as startups and included in the group. The dispute has gotten personal. Chien was
accused of being a “paid puppet for large invention thieves” when she posted an
article on the TechCrunch website[2]
discussing her study findings.
There are certainly some lawyers that have sent out mass mailings accusing thousands of companies of patent infringement. Some of these demand letters are to be taken seriously, others are not. Chien’s study fails to distinguish hopeful letters from serious lawsuits.
In September 2013 Chien published a study for Open Technology Institute, Santa Clara Law School, and New America Foundation called "Patent Assertion and Startup Innovation". The study involved asking venture capital investors if their startups had received demands from NPE's for patent licenses and produced headline news that "75% of the VC's reported that an NPE had made a demand on their portfolio, and for tech-focused VCs, that number reached 90 percent". The news stories failed to consider that VC investors routinely syndicate their investments. So one demand for a patent license on one venture-backed startup could result in 10 VC's reporting they had startups that had been attacked by patent trolls if the investments in that startup had been syndicated to 10 VC's. Indeed, the 90% figure reported by Chien could represent only a handful of startups. If 90% of tech VC's have some shareholding in Twitter, then all 90% could all report a positive result for Chien--as Twitter has certainly received requests for license royalties from patent holders. The 90% figure might distort the true picture, but it appears to be another master-stroke from Washington spin-doctors. Perhaps it's not surprising that Chien has now left Silicon Valley and works in the Office of Science and Technology Policy at The White House.
There are certainly some lawyers that have sent out mass mailings accusing thousands of companies of patent infringement. Some of these demand letters are to be taken seriously, others are not. Chien’s study fails to distinguish hopeful letters from serious lawsuits.
In September 2013 Chien published a study for Open Technology Institute, Santa Clara Law School, and New America Foundation called "Patent Assertion and Startup Innovation". The study involved asking venture capital investors if their startups had received demands from NPE's for patent licenses and produced headline news that "75% of the VC's reported that an NPE had made a demand on their portfolio, and for tech-focused VCs, that number reached 90 percent". The news stories failed to consider that VC investors routinely syndicate their investments. So one demand for a patent license on one venture-backed startup could result in 10 VC's reporting they had startups that had been attacked by patent trolls if the investments in that startup had been syndicated to 10 VC's. Indeed, the 90% figure reported by Chien could represent only a handful of startups. If 90% of tech VC's have some shareholding in Twitter, then all 90% could all report a positive result for Chien--as Twitter has certainly received requests for license royalties from patent holders. The 90% figure might distort the true picture, but it appears to be another master-stroke from Washington spin-doctors. Perhaps it's not surprising that Chien has now left Silicon Valley and works in the Office of Science and Technology Policy at The White House.
The issue is certainly one of power. Small independent inventors are at a huge
disadvantage when taking on large corporations. The imbalance of power often
results in startups failing to break into the market, and being out-muscled by
the incumbent market leaders. I’m all
for innovation, jobs and for supporting startups. My issue with the SHIELD Act is the deceptive
nature of its positioning. The SHIELD Act is hiding its key beneficiaries—large
corporations. DeFazio, Chaffetz and Chien fail to recognize that the vast
majority of lawsuits are brought by small patent holders against huge,
multinational corporations.
The SHIELD Act proposes that patent holders are forced to
pay the legal fees of the accused infringer in the event that the plaintiff loses the case—the
patent is found invalid, or the defendant is found not to infringe. This will certainly deter patent holders from
bringing suits, especially when the accused infringer is a huge
corporation. Large companies have correspondingly
large legal budgets, and sometimes spend as much as $15m in legal fees to
defend an accusation of infringement. The
costs could be apportioned to the inventor if the SHIELD Act is passed. A large corporate war-chest of funds for legal
fees, and a preparedness to fight any accusation will act as a deterrent to
inventors, especially the inventors and lawyers unable to match with similar
levels of spending. Large deep-pocketed corporations will likely respond to requests for patent royalties with threats along the lines of: “sure, sue us, but we’re going to spend big bucks defending
our case, and you’re going to have to pay our fees if you lose”. This is not a gamble many lawyers are likely
to take.
For those of us unaccustomed to the spin, lobbying and
political maneuvers surrounding new legislation, the deceptive nature of the
SHIELD Act is somewhat disturbing. If
the SHIELD Act is sold to the American public on the basis that it’s intended
to protect startups, then I say restrict the scope of the bill to startups. Focus
the bill on situations where the defendant is a real startup. Leave the largest,
wealthiest corporations in the world to pay their own legal fees, as well are
their Washington lobbying fees.
Author David Smith is President of Silicon Valley Business School, where he is teaching a class on Entrepreneurship & Startup Management.
David Smith also Brokers Technology Transfers and Patent Sale Transactions with Tynax, the Global Patent Exchange.
[1] Chien,
Colleen V., Startups and Patent Trolls (September 28, 2012). Stanford
Technology Law Review, Forthcoming; Santa Clara Univ. Legal Studies Research
Paper No. 09-12. Available at SSRN: http://ssrn.com/abstract=2146251 or
http://dx.doi.org/10.2139/ssrn.2146251
