Patent Assertion and Startup Innovation

Abstract

Lawmakers are contemplating making changes to patent law and procedure to curb abusive litigation and demand practices. One of the most important constituents for them to keep in mind is small, innovative companies. The impact of the patent system on startups, and in particular high-tech startups, is crucial because they are a key source of new jobs and innovation. According to Engine and the Kau!man Foundation, “Though they start lean, new high-tech companies grow rapidly in the early years, adding thousands of jobs along the way.” Startups also have a unique perspective on patent assertion, with the potential to be helped as well as harmed by entities that assert patents as a business, referred to in this report interchangeably as patent assertion entities (PAEs) and non-practicing entities (NPEs). Companies with less than $10M in revenue comprise 55% of unique defendants to PAE suits. Startups, with their slim margins, focused operations, and high rates of innovation, can arguably least a!ord to engage in expensive litigation to defend against patent claims or stop incumbents from copying their innovations. But they can also gain from being able to monetize their patents through NPEs. The first part of this report describes the experiences of startups with patent assertion based on surveys of about 300 venture capitalists and venture-backed startups conducted in 2013. It also reports on companion surveys of patent litigators and large-company patent counsel in 2013, and a non-random, non-representative survey of startups conducted in 2012 for a total of over 1,100 respondents. Due to the diffculty of reaching a representative population, these results are not generalizable to all start-ups and startup investors, but instead serve as a window into their experiences and views. The second part of the report describes existing and potential legislative, judicial, and market-based responses and recommends how they may be tailored to better meet the needs of startups and resource-poor companies.

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