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"Patent Assertion and Startup Innovation" by Professor Colleen Chien: Some Sensible Ideas

This month, Colleen V. Chien, Associate Professor, Santa Clara University School of Law, published the above titled article that reported the results of a survey of a number of venture capitalists and start-ups.  The surveys were very instructive in a number of respects, and Professor Chien’s recommendations are thoughtful and constructive, and I support most of them wholeheartedly, including better funding for the USPTO, limiting the scope of patent cases so they do not automatically become wars of attrition, and requiring more specific infringement reads in demand letters.  I also think it would be interesting to know more about the “real party in interest” in NPE cases, in those relatively few circumstances it is truly hidden or obscured, but I’m not sure it really serves any purpose other than satisfying our curiosity.  I also agree with making start-ups less attractive as targets, but as I point out below, I think 99+% of all start-ups are already unattractive targets for the simple reason they almost never have money to pay damages.

While I like Professor Chien’s ideas as enumerated above, some of the statistical information in the article did not square with my personal experience representing start-ups over the last 30 plus years.  In particular, the article implies that there is a high likelihood that a start-up will face a patent law suit or patent demand crisis while still in the formative stages, and therefore be materially impeded from moving forward with their business.  For example, the article shows that 75-88% of VC’s have had an NPE make a patent demand on its portfolio, implying that 75-88% of all start-ups are going to face a serious patent issue.  To be fair, the article also notes that a much smaller 20% of start-ups responding to the survey reported getting a demand letter regarding a patent.

But these numbers, both for the VC’s and the start-ups, struck me as being much higher than my experience with what I believed was a “start-up.”  So, what accounts for the differences in my perception and the survey?  First, the definition of “start-up” used in Professor Chien’s article is pretty generous in terms of how long “start-up” mode lasts:  “Building upon the steps carried out by the Berkeley Patent Survey, we included in our sample companies less than 10 years old with at least one email address”, page 39.  Well, I have to admit there is no legal definition of how young a company has to be in order to be called a start-up, but I think calling a five year old business a start-up, much less a nine year old business, is a bit like calling a five to nine year old child an infant.  This is what Wikipedia says a start-up is:  “a business enterprise that has been launched recently.”  Generally speaking, I would say most people consider a start-up to be less than five years old, if not less than a few years old, if not less than two years old, but at the very least, not more than five years old.  Why is this important?  First, it helps account for why my experience has been so different than the typical experience of a VC funded start-up as represented in the article, in terms of patent threats.  If a VC funded start-up makes it past five years, it is likely one of the minority of start-ups that is making money, and is far from still operating in start-up mode.  Instead, it is at that point an emerging growth company, and indeed probably one in a very high technology industry that is thick with innovation and intellectual property.  In such circumstances, would it not be nearly expected for the company to be encountering some “friction” from companies it is competing with, or established holders of foundational IP?

Another interesting survey that was just released also flies in the face of the suggestion that the US patent system is weighing down start-ups, at least compared to other countries with patent systems less generous toward software patent protection.  This Business Week article: http://www.businessweek.com/articles/2013-08-27/why-the-u-dot-s-dot-should-get-more-credit-from-entrepreneurs, just released last month, cites to an Ernst & Young study published last month that concludes that the U.S. has the best environment for entrepreneurship among 20 of the world’s largest economies.  Why don’t any of these articles ever get any press in the anti-software patent lobby?

I am also amazed at how much time is spent focused on trashing software patents as though they were the “leading cause” of business failure, when in fact they are so far down the list of reasons businesses fail they barely register in surveys that aren’t on a witch hunt.  For example, in a statisticbrain.com survey (http://www.statisticbrain.com/startup-failure-by-industry/), patent suits or demands did not even make the list of top reasons for the failure of start-ups.  The top four reasons given were:  1) Incompetence; 2) Unbalanced Experience or Lack of Managerial Experience; 3) Lack of Experiences in line of goods or services; and 4) Neglect, fraud, disaster.  These four reasons alone account for 88% of failures, according to this survey.

Moreover, the odds of a start-up getting sued for patent infringement are negligible.  According to gust.com, a web site for start-up funding, there are several million “startups” formed each year, and of these, “in very general terms, roughly 1,500 start-ups get funded by venture capitalists in the US, and 50,000 by angel investors.” (http://gust.com/angel-investing/startup-blogs/2012/11/22/how-many-start-ups-in-the-us-get-seedvc-funding-per-year/) So then, what are the odds one of these three million or so start-ups is going to get sued?  Well, if you figure even 50% of the 5,000 or so patent suits are directed at start-ups, the odds of getting sued as a start-up are .083%, or about one in one thousand.  Hardly a crisis for start-ups in America, in my opinion.  Granted, if a “start-up” makes it to the point of profitability the odds go up, but even still, unless the start-up is infringing on a competitors patent, it runs little risk of being enjoined or put out of business, for while an NPE may be a parasite, its simply bad business for parasites to kill their hosts.

In summary, I like Professor Chien’s ideas for improving the patent system.  They are sensible and thoughtful.  As far as the survey data in the article goes, I think it greatly overestimates the problems poised by patents for the typical start-up.  In fact,  to the extent patents are a problem for a start-up, I think I can make a good argument that these problems are largely due to the success of other predecessor start-ups who toiled and pioneered technology years before and were granted valuable, broad, pioneering patent rights.

Finally, I always like to ask the question as to why, despite all the draconian predictions for years on end that patents are ruining innovation, start-ups continue to reliably deliver the bulk of true innovation and disruptive new technologies?  The answer is simple:  patents are the least of a start-ups problems.

 

 

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