In recent months, several early stage startup founders have asked me if I can file patents that will prevent “patent trolls” from knocking on their doors.
Patent trolls are sometimes, more euphemistically, referred to as “non-practicing entities” or “NPEs.” These companies often acquire patents with zero interest in making or manufacturing the items that they hold patents to. Instead, they hope to make money by licensing their patents to unsuspecting startups (and sometimes larger companies).
Trolls are almost universally disliked because they assert patents that tend to be very broad and unenforceable. But no one challenges these patents because the settlement value is almost always less than the cost of challenging the patents in court. One of my clients called them modern day “stick-up artists.” My clients are not alone. Several studies, including this recent study, by professors at Harvard Business School and University of Texas at Dallas, confirms that patent litigation initiated by NPEs damage the target companies’ abilities to innovate in the future. For startups looking to raise money, the problem is more than doubly magnified because investors will rarely invest in a company that is defending a patent suit. Unless you are a Facebook, investors will walk away from any and all investment opportunities until the litigation is resolved.
Because patent trolls don’t make or sell anything, it is categorically impossible to deter them by filing your own patents. But this question always causes me to scratch my head. How can smart founders—who are generally fairly well educated on patent issues—get this issue so wrong?
Maybe I shouldn’t be surprised by this type of thing anymore, but I was shocked to learn that this myth may have been perpetuated by patent attorneys themselves. Some patent attorneys boast that their startup clients have never been sued by patent trolls. Some claim that their patent portfolios are so great that patent trolls begin quaking in their boots at the prospect of suing their clients.
If a patent attorney ever tells you that he or she can prevent patent trolls from suing you, run—as fast as you can—in the other direction.
It is absolutely impossible to deter patent trolls through your own patent filings. Trolls, by definition, cannot be sued on your startup’s patents—no matter how good your patents are.
Let’s jump into a little bit of a history before going into a more detailed explanation.
Patents don’t prevent others from suing you (but they can be used to sue others)
In the United States, a patent confers “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”
The operative term here is “exclude.” A patent gives you the right to exclude someone from infringing on your invention. It does not give you the unfettered right to practice your own invention if it infringes on someone else’s invention. In other words, if you make, use, offer for sale, sell, or import someone else’s patented invention, then you may be sued for patent infringement, regardless of whether you have a patent on your own invention.
This seemingly confusing law plays out as follows. Let’s say your startups creates a robot that delivers wirelessly printed documents from the printer to the user who initiated the print job. You may be able to secure a patent on your document delivery robot. But you may also infringe someone else’s patent on a protocol for sending data wirelessly to a printer.
Patents as deterrents
Large corporations in America and elsewhere soon realized that, even though patents can’t be used to prevent lawsuits, they (the patents) may be used to deter potential asserters. This counter-assertion-deterrence model took hold as the cost of patent litigations began to climb. (The median cost of patent litigation in the United States in about $.3.5 million now). Large corporations began to use their patent portfolios in the same way as U.S. and Russia used their nuclear arsenals in the cold war—to ensure mutually assured destruction, which in this case simply meant very expensive and distracting patent litigation that could result in very large jury awards.
As an aside, the counter-assertion-deterrence model led to a patent arms race among companies that had the most exposure to patent lawsuits. Large tech companies began to file and acquire patents that had nothing to do with their business. These companies happily acquired patents as long as those patents may be potentially infringed by one of their competitors. If you wanted to blame anyone or anything for the proliferation of bad patents in the United States, you could pin at least some of the blame on the counter-assertion-deterrence model.
Trolls turn the deterrence model on its head
The counter-assertion-deterrence model works well in theory only if your opponent potentially infringes your patent. But what if your opponent does not? Enter patent trolls, stage left.
Patent trolls were specifically designed to be immune to the counter-assertion-deterrence model. These companies were purpose built as patent holding companies; they did not practice invention that their patents claimed, did not make or manufacture anything, and did not sell anything (other than a license to a patent). You can’t sue to them on any patents because, remember from above, a patent can only be used to exclude someone from making, using, selling, or importing a patented invention. Well, patent trolls don’t do any of these activities. You can’t exclude someone from doing something that they are not already doing.
As a second aside, patent trolls proliferated when, during the tech downturn, large corporations sought to monetize their very large and very expensive patent portfolios. Tech companies either sold their portfolios or spun off holding companies specifically for the purpose of monetizing their patents. Large companies couldn’t monetize their patent portfolios themselves because of the counter-assertion-deterrence model—they were afraid of getting countersued on patents held by their opponents.
Trolls—by definition—are entirely immune to the threat posed by your startup’s patents
I hope it is abundantly clear by now that patents are not adequate deterrents to trolls. I become immediately very concerned if a startup tells me it is counting on its patent portfolio to deter troll suits. A strong patent portfolio has many uses, and may be incredibly valuable to a high growth tech startup, but it is not a very good tool for deterring patent trolls. (A 2012 study by Prof. Collen Chien (who was my patent law professor at Santa Clara Law School) releveled that 16% of startups who had received a demand letters from a patent troll had revenue under $100,000).
In fact, startups with less than $10 million in revenue may be especially susceptible to patent trolls because, as Prof. Chien’s study noted, they experience significant operational impact from patent lawsuits. Thus, smaller startups are more likely to settle. On the flip side, trolls love smaller startups precisely because they are more likely to settle. Moreover, these smaller settlements allow the patent holder 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.
Bonus: How can startups deter patent trolls?
Some of you may be wondering, then, how can a startup deter patent trolls? Unfortunately, there is not much that you can do to prevent trolls from filing lawsuits against you. If you are making any reasonable amount of money (even as little as $100,000 according to the study mentioned above), and if you are using any technology whatsoever, you may be on the receiving end of a demand letter by a patent troll.
It may not be possible to stop individual lawsuits against your startup, but you can join the movement to reform our patent system. EFF runs wonderful campaigns to push patent reforms through Congress. You may donate to them, or urge your local congressional representative to push for reform. Many insurance companies are also starting to offer patent litigation policies that cover lawsuits from non-practicing entities. Please contact us if you want us to put you in touch with a handful of such insurers.
Some in the IP industry imply that a strong patent portfolio will protect startups against lawsuits from patent trolls. But nothing can be further from the truth. Patent trolls are entirely immune from the threats posed by any outstanding patents. If anyone tells you that they can deter troll litigation—run the other way.