“Patents are one of the most painful parts of running a startup.”
That was one of the responses Colleen Chien, an associate professor of Law at Santa Clare Law, got when she surveyed and interviewed some 300 venture capitalists and venture-backed startups in healthcare and tech to understand what patent issues were troubling them.
Momentum is building in patent reform as lawmakers consider changes to laws and procedures that would curb the growth of patent trolls many think are putting a damper on software and app innovation. Any kind of patent reform would have profound effects on startups. Especially in the medical device, pharma and biotech industries, new companies rely on the protection of their intellectual property to build a company’s value.
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In her report for the New America Foundation’s Open Technology Institute, Chien wrote that about 75 percent of VCs and 20 percent of venture-backed startups had been affected by patent trolls, or non-practicing entities (NPEs). NPE’s acquire patents and use them offensively, suing infringers for the sake of collecting licensing fees even though they do not make products based on the patents.
In the realm of healthcare, this problem is a little less pronounced. Only 13 percent of biotech/pharma/medical device VC respondents in Chien’s research said an NPE had made demands of its any of its portfolio companies. That’s consistent with reports in trade media about the rarity of patent troll lawsuits, although some lawyers suggest they may become more common in the medical device and biotech industries.
Where they could be troublesome is in the health IT sector. Many of the survey respondents identified low patent quality, specifically software and business methods patents, as problematic. One respondent noted that in the software world, many obvious things are patented, which “makes the whole system weaker.”
A few other interesting points from the report:
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- VCs and startups perceived that action by patent trolls was triggered both the vulnerability of startups and their perceived potential for success. One respondent suspected that publicity about his company’s fundraising activity let a patent troll know the company was vulnerable and would be likely try to settle and avoid costs of a lengthy patent battle. With new SEC guidelines that will allow startups to advertise their fundraising, I wonder if this could become more of a problem.
- Even though patent trolling is perceived as financially motivated, startups report negative operational consequences as well, such as delays in hiring, meeting milestones and exits. One VC interviewed for the report said a medical device company it invested in was sued by an NPE, and the result was that the company had to change its hiring and commercialization plans.
- Pharmaceutical and medical device VCs were more likely than others to believe that patents are important to innovation.
One of the unexpected findings was that some companies are actually benefiting from patent trolling. In Chien’s report, she puts forth that 5 percent of the startups involved had monetized their patents by selling them to NPEs.
Wired ran with that bit today in a story about Ditto, a startup that allows users to “try on” glasses virtually. When the company was sued for patent infringement by Wellpoint, which owns 1-800-Contacts, it hired one of the most notorious patent trolls, IP Navigation Group, to handle its case.
VCs in the survey who said one of their portfolio companies worked with NPEs said the money helped startups fund business pivots, hire new staff and meet milestones. But most VCs and startups reported moral opposition to such practices. Eighty-three percent said trolls were hurting innovation.
Beyond the trolling issues, startups and VCs expressed that large, high-revenue companies with extensive patent portfolios have the ability to bully smaller companies who don’t have the resources to fight patent infringement suits.
Chien summarizes:
Among answers to this survey there was a common theme: that small companies are disadvantaged by the costs and delays associated with the patent system because the patent “game” is one that is “too slow” and “too expensive to play for small companies.”
[Image credit: Flickr user rhastings]
