What To Do If You Get A Patent Troll Demand

Editor’s note: Colleen V. Chien is an associate professor of law at Santa Clara University School of Law who researches and writes and has testified before Congress on patent and patent-reform issues, including how they impact startups. Follow her on Twitter.

You have an idea for a product that is going to change the world. For years you work day and night, and over time, that hard work turns into a company. You have users, revenue and, finally, the business of your dreams. But as you get traction, you also have a patent troll letter. The timing couldn’t be worse. As you find yourself spending more and more time with lawyers and learning patent law, you understand why, “[p]atents are one of the most painful parts of running a startup, and that’s saying something.”

This story, adapted from a radio ad campaign profiled by NPR, is the one that you usually hear about patent trolls. But there’s another side to the story that sounds like this: Your company is doing okay. Well, maybe not so okay. And it has some patents that you think might be worth something. You poke around and find out that they are actually really valuable. So you put the patents on the market and end up selling them to an infamous patent troll who is actually great to work with. You earn seven figures from the sale — no dilution — and get back on your feet. And now you are able to say about the money: The “company would have died without it — instead we grew.”

The quotes are directly from a survey of 300+ startups and VCs that I just published with the good people at the New America Foundation’s Open Technology Institute, which builds on an earlier survey. While the study looks at a number of things, the question that looms largest is whether, net-net, trolls help or hurt startups.

President Obama and Congress are poised to tackle litigation abuses (through at least six pending bills) to deal with the growth of patent trolls who brought an estimated 60 percent of all patent suits last year. But the sentiment often expressed in reaction to those who oppose trolls, or patent assertion entities (PAEs), is that they’re not all bad, and, in fact, “make it easier for a failed startup to monetize its patents, providing some insurance for venture capitalists.”

Do they, though? I found some evidence that trolls did help: An estimated 5 percent of portfolio companies of responding VCs had monetized their patents (vs. 20 percent of startups, based on VC and startup responses, who had been hit with the demand — see Figure 1).

Often the money was helpful, funding a pivot or paying for new hires (N=30). But the folks who took the survey and talked to me about the overall impact on companies and on innovation were negative about it (see Figure 2).

One investor, California-based Don Ellson (details changed) talks in the report about how his companies had both “trolled” and been trolled. And actually, the patents from one of his portfolio companies ended up being used to sue another, which also happened to Fred Wilson. According to testimony Ellson gave for my report, for the company that sold to trolls and was trolled, the “benefit of selling patents — their own use of the system — didn’t offset the pain of the lawsuits, particularly when they came… I’d rather there be no patents than the current system.”

When I asked 42 VCs what they thought about the positive impact of NPEs on innovation, they were similarly skeptical (see Figure 3): 78 percent strongly disagreed that “the ability of my companies to enforce or monetize their patent through NPEs/trolls helps innovation” and 67 percent strongly agreed that NPEs/’trolls’ are harming innovation in my industry.” These were not folks that were anti-patent. In fact, they generally liked them (Figure 4).

I hope lawmakers will consider these complexities and, more importantly, the stories that are included in the report in order to understand what it is like to be a startup facing a patent demand — though it’s not always easy reading.

In addition to discussing some of the more popular proposals out there, e.g. abolish software patents (see Figure 4), I also propose my own recommendations:

1) Fund the PTO so that only truly novel inventions get patents and make low-cost and collaborative access to post-grant review available.

2) Make patent cases about the merits, not who can outlast or outspend the other side.

3) Make patent risks more manageable for startups.

4) Make startups less-attractive targets.

Help or Hurt, Help Yourself

But in the meantime, if you get a demand, you need a solution right now. You often hear different tactics like “slaughter ‘em,” lay low” and call your representatives in Congress, and your lawyer will have no shortage of suggestions. There are also new defense solution ideas and providers popping up every day, such as EFF’s Trolling Effects, which allows you to share and get information on demand letters, not to mention Google’s patent pledges and Twitter’s patent hack.

To really get a feel for what options are out there, and what does and doesn’t work, I asked startups, lawyers, VCs and service providers for advice and information. The report includes a list of 17 defense service/solutions providers and how to engage them, as well as a list of 21 different tactics and what experienced counsel inside companies and law firms, as well as public-interest attorneys, think about them.

It also contains five stories from those who know what it’s like to face patent suits – including from two investors and two startups. For example, Laura Smith (not her real name), discusses how not to pick litigation counsel and what it’s like to win against a patent troll. And Kate Endress, founder and CEO of Ditto.com, discusses the unconventional strategy that ultimately worked for her: Work with famous contingent counsel for a piece of her company.

Knowledge is power, and my hope with this report is to share with you the wisdom of those who’ve gained it the hard way.