Patent Assertion and Startup Innovation

This report, supported by funding from the New America Foundation, details the experiences of startups with patent assertion based on surveys of about 300 venture capitalists and venture-backed startups conducted in 2013. According to survey responses, patents for novel inventions play a generally positive and at times crucial role for startups. They help to transfer technology, enable investment, and improve exits, particularly in bio/pharma industries. But patent assertions by NPEs, which at times hit startups when they are least able to fight them — on the eve of a funding or acquisition event, or, 40% of the time, in the context of the startups’ customers — can have significant and at times devastating impacts on companies. Though partnering with NPEs to monetize patents can be beneficial to companies as well, the benefits do not appear to offset the harms, according to survey responses and VC interviewees whose companies had been sold to and been sued by NPEs. Furthermore, many survey respondents do not find these to be socially productive assertions — but rather on the basis of patents that, though they may be valid, are viewed as frivolous or overbroad.Though the risks associated with patent assertions were described as feeling “unbounded,” startups are routinely expected to absorb these risks in their dealings with acquirers, investors, and customers. Overall, these assertions have added friction to technology transactions, reduced the value of pursued startups, and triggered large indemnities, according to study subjects. Specifically, the report finds: Finding 1: Based on survey responses, 75% of surveyed venture capitalists (VCs) and 20% of venture-backed startups with patent experience have been impacted by an NPE demand; nearly 90% of all tech VCs have been impacted. The demand was based on the startup’s adoption of another’s technology 40% of the time. Low quality and sofware patents were identified as problematic. Finding 2: Although NPE assertions are perceived as motivated primarily by money, respondents reported routinely experiencing non-financial consequences including delays in hiring, meeting milestones, and business line pivots and exits. Finding 3: Most VC respondents believe patents are important for innovation. An estimated 5% of startups have sold their patents to NPEs, experiencing positive benefits from doing so. However, 84% surveyed VCs, many whose companies had sold to NPEs, still believed that NPEs were harmful for innovation. Finding 4: Startup concerns with patent enforcement go beyond NPEs and extend to the disadvantages startups suffer relative to larger incumbents as a result of poor patent quality, high costs, and delays associated with the patent system, survey respondents told us. The inability of startups to defend their own patents and suits brought by “patent predators,” larger companies that sue with anti-competitive motives, also presented specific concerns.To ameliorate the harms of patent assertion on small companies, the report recommends several interventions, keeping in mind the special needs of startups, who, with their fewer resources, less time, and greater focus on building the business, are at a relative disadvantage when patent processes are expensive, slow, or require deep patent expertise (or “patent game”-playing skills). These include: Recommendation 1: Fully fund the PTO and its quality initiatives including tightening functional claiming and expand low-cost access to the PTO’s transitional program and other forms of post-grant review by reducing fees for small and micro entities and supporting and prioritizing collaborative challenges to patents asserted against large numbers of defendants, particularly by downstream users and small entities. Recommendation 2: Make patent cases about the merits, not about who can outlast or outspend the other side, by permitting more discretion in awarding fees and costs for non-core discovery and promoting uniformity and early dispositive rulings, for example by requiring the Patent Pilot Program to implement and measure the impact of best practices. Recommendation 3: Make patent risks more manageable for startups by requiring demand letters and complaints to disclose the real-party in interest, claim charts, related litigations and reviews, and licenses that could cover the target. Recommendation 4: Make startups less attractive targets by limiting the liability of downstream users and the precedential value of the settlements signed by small companies.