Troll Trouble

It has been an interesting week in the usually sleepy world of patents. Google’s $12.5B acquisition of Motorola Mobility and Apple/Microsoft’s $4.5B acquisition of 6000 Nortel patents highlight just how high the stakes have risen in the smartphone patent battle.

While all the media attention is focused on these sensational, multi-billion dollar patent battles between industry titans, little attention has been paid to how the dysfunctional US patent system is affecting early stage innovation and entrepreneurship. Eric Schonfeld’s recent TechCruch posting references a PWC study which describes how successful so called “non-practicing entities” have become in filing patent law suits. Ten years ago, the majority of patent settlements were paid to “practicing entities”, i.e. operating companies whose IP was judged to have been infringed by a competitor. In recent years, “non-practicing entities”, commonly referred to as trolls, have refined their strategies and identified friendly Texas jurisdictions which provide them with larger and larger payouts. This has encouraged yet more trolls to get into the game of acquiring patent portfolios and the whole situation risks spiraling out of control.

Within our portfolio of tech startups at Physic Ventures, this rise of the trolls is having two serious negative consequences:

Trolls are imposing an “Innovation Tax” on startups
Several of our portfolio companies have been hit by frivolous patent infringement accusations by trolls. Typically, the troll will write to a startup and accuse them of infringing an extremely broad patent related to widely used technology, such as Wi-Fi. The trolls have done their research and figured out the maximum that a startup could afford to pay for a license and they offer the startup the chance to take a license on those terms. The startup is faced with the unpleasant choice of succumbing to this shake down and paying the “license fee” or risking far higher expenses by defending themselves in a potential suit. These license fees consume extremely scarce cash resources, typically at a time when a startup is just launching its first product and needs to preserve every last dollar for product development, marketing and BD.

Business partners are practicing “Defensive Partnering”
Trolls get really excited by the opportunity to shake down a large corporation who can afford much higher license fees than a startup. As a result of increased Troll activity, we’ve observed several examples of potential partners that are reluctant to work with a startup unless that startup indemnifies the larger partner from any patent infringement costs associated with the startups product. Startups simply can’t afford to do this and so mutually valuable partnerships end up not getting signed because of a potential patent trolling.

It is important to point out that these unhealthy dynamics are almost exclusively related to the IT industry and software, in particular. Our investments in materials science and life science continue to focus on developing IP that will be valuable to potential partners and acquirers. While the glacial pace of the USPTO is a frustration to these companies, their business model still functions well.

Perhaps it is time to rethink how IP in software and tech is protected.  We should be able to continue supporting and rewarding tech innovation, without stifling it with frivolous and opportunistic exploitation of the current patent system.