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New Report Shows Chilling Effect Patent Trolls Have On Startups, VCs

Startups and their venture capital investors are caught in the crosshairs of patent trolls, but the damage these unscrupulous litigants are inflicting isn’t just legal or financial – it’s hampering business and stifling innovation, according to a new report that reaffirms the urgent need for aggressive legislative action by the U.S. Congress.

The report, “Patent Assertion and Startup Innovation” by Colleen Chien, Associate Professor at Santa Clara University School of Law, shines a light on the experiences of startup entrepreneurs and venture capital investors when dealing with patent trolls. The report is a “view from the trenches” with startling testimonials from victims of patent troll demands.

As lawmakers contemplate patent law reform and work to curb abusive patent litigation, Chien writes that “[o]ne of the most important constituents for them to keep in mind is small, innovative companies. The impact of the patent system of startups, and in particular high-tech startups, is crucial because they are a key source of new jobs and innovation.”

Based on Chien’s research, companies with less than $10 million in revenue comprise 55 percent of unique defendants to suits by patent trolls. The companies least able to afford the enormous cost of defending patent suits are getting hit the hardest. It is well documented that defending a patent suit through trial can cost upwards of $5 million. It is a financial impossibility for a $10 million revenue company to handle that kind of financial burden. The result in virtually every case is an expensive settlement for less than expected defense costs. This is an access to justice issue if there ever was one.

Based on Chien’s survey, 75 percent of venture capitalists and 20 percent of venture-backed startups have been impacted by a patent troll demand, while nearly 90 percent of all tech VCs have been impacted. Among the most interesting findings is that startups not only feel the financial crunch but also experience non-financial consequences such as delays in hiring and meeting milestones, business line pivots, product changes and other operational impacts. In some cases, these startups close up shop and exit the business altogether as a direct result of a patent suit.

Chien recommends several solutions that recognize the special needs of startups that often have fewer resources, less time and a need for greater focus on building their businesses. Those recommendations include making patent cases about the merits, not about who can outlast or out spend the other side, by permitting courts more discretion in the awarding of costs and fees; making patent risks more manageable for startups by requiring demand letters and complaints to disclose the real party in interest, claim charts, related litigation, reviews and more; and making startups less attractive targets by limiting the liability of downstream users.

At Rackspace, we’re pushing hard for patent reform to put an end to these spurious patent lawsuits that are plaguing the industry. Chien’s report is yet another unsettling reminder that patent trolls can stifle innovation and bring small businesses, along with entrepreneurs and developers, to their knees.

About the Author

This is a post written and contributed by Alan Schoenbaum.

Alan Schoenbaum is Special Counsel for Rackspace.

Prior to joining Rackspace in 2005, he was a partner at Akin Gump Strauss Hauer & Feld LLP in San Antonio, Texas. Alan has more than 25 years of experience in corporate and securities law and mergers and acquisitions. Throughout his legal career he has represented public and private growth companies, venture capital funds and their portfolio companies. Alan received his B.A. in English and his law degree from the University of Texas at Austin.


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