By Ron Conway and Julie Samuels
The debate over patent trolls rages on, getting some pretty high-profile (and hilarious) attention from John Oliver and action in the Senate, where the PATENT Act, the long-awaited companion bill to the House’s Innovation Act, was recently introduced. This legislation can’t move fast enough—and we are hopeful that the House Judiciary Committee will take the first step this week in passing meaningful reform. Every day without patent reform is another day of trolls targeting additional businesses and individuals. And unfortunately, those who suffer the most are the startups and small companies with whom we work. These are the companies that create jobs, build new technology, and have carried the laboring oar in helping our economy recover.
Which is why the investor community should wholeheartedly support these reform efforts. And most investors do. A survey of 200 VCs and their portfolio companies found “venture capitalists overwhelmingly believe that patent demands have a negative impact on the venture-backed community, with all or most of those assertions coming from” so-called patent trolls. And it’s beenestimated that were it not for troll threats, VC investment in startups would have been $8 billion higher over the last five years alone.
Even more, VCs nationwide, particularly those investing in high-tech companies, by and large support reforming the patent system. In fact, more than 140 of them signed a letter to Congress in support of the very type of reforms in the Patent Act and its companion in the House, the Innovation Act.
This makes all the more confounding a so-called “disagreement” in the venture community surrounding patent reform. Why would any VCs oppose reforms like those in the Patent Act or, the Innovation Act? Let’s look at some of the claims the National Venture Capitalists Association (“NVCA”) has made in testimony and in writing.
First, NVCA’s Scott Sandell expresses concern about the Innovation Act’s fee-shifting provision, claiming that it “effectively mandates the payment of legal expenses by the non-prevailing party in almost all cases.” Put mildly, that is a serious misreading of the current bill. In fact, members of Congress led by Rep. Hakeem Jeffries (D-N.Y.) reached a carefully negotiated compromise that would give courts discretion over when to award fees to a winning party—and said those fees should not be granted when a party’s “position and conduct … were reasonably justified in law and fact.” In English: bring a reasonable case and even if you lose, you won’t be stuck paying the winning party’s legal fees.
Sandell goes on to complain that fee-shifting “means that any entrepreneur who seeks to defend their patent will have to take into account the risk that losing in court could bankrupt their company.” Again, that is not the case. The only entrepreneurs who should in fact face such a risk are those who bring an unreasonable case—the exact type of litigation we are trying to discourage.
Perhaps even more troubling, Sandell claims that investors should not support this provision because it allows for investors to find themselves on the hook for a losing party’s fees. Again, not the case. Both bills carve out investors whose “sole financial interest” in the patent(s) is one who has an equity interest in the company. The Senate bill goes even farther, only applying in cases where the “primary business” party suing is “assertion and enforcement of patents,” e.g., is not making or selling anything based on the underlying technology. Even more, both bills allow for an investor to renounce his or her interest in a patent (and not the company that owns it).
Perhaps what’s most troubling, though, is NVCA’s blanket denunciation of these efforts and apparent unwillingness to come to the table to craft language that would accomplish the bills’ goals, which are not to target venture capitalists but to end the dangerous practice of trolls using shell companies to hide their identities and their assets.
Without fee-shifting, startups facing patent troll litigation have little incentive to put up a defense: even if they win the suit, they are stuck paying as much as millions of dollars in legal fees. The potential promise of seeing some of that money back helps align proper incentives—giving defendants a tool to fight back and encouraging plaintiffs to only bring reasonable cases.
Even more, Sandell claims that the fee shifting will cause more big companies to attack startups because they might recoup attorneys’ fees at the end of a suit. We reject this reading of the bill, but more importantly the data does not support this claim. Big companies are not, generally, suing startups over patents. We do not believe that adding even a million dollars in fees in a victory will change behavior. Will big companies decide that a small change in the balance sheet is worth the time of management to pursue? We think not.
Opponents of reform aren’t just making erroneous attacks on fee-shifting. Objections to other provisions of the Innovation Act and the PATENT Act similarly leave us scratching our heads.
Take heightened pleading. Reform opponents claim this creates too much work for patent owners, but what does it really require? Setting forth such basic information as who owns a patent, what product allegedly infringes the patent, and what parts of the patent are at issue. This is not rocket science —it’s the kind of basic information a party needs to decide whether to fight or settle. The same is true with discovery reform, which would streamline the process to get the most basic information about a case at the outset before costs balloon out of control, leaving startups and small companies with no choice but to feed the patent troll. The kind of goals we’re talking about—transparency and fairness—should apply to anyone bringing a lawsuit in federal court, small startup to Fortune 500 company.
So again we ask, why would anyone who supports entrepreneurship—especially those who invest in it—not support the level-headed, common-sense and carefully crafted reforms in the Innovation Act and the PATENT Act? Taken in conjunction with strong patent reexam provisions established under the America Invents Act, these bills represent an important package of incentives that would rebalance and restore faith in a broken system. They will level the playing field and give startups and those companies that investors like Mr. Sandell fund tools to fight back against patent trolls, while at the same time not burdening legitimate patent holders who want to defend their rights in court. Without them, patent trolls will continue to prey on the youngest and weakest companies. It’s well past time to put an end to this dangerous trend once and for all. We urge the members of the House Judiciary Committee who want to support the startup and venture capital community to vote in support of the Innovation and PATENT Acts.
Conway is an angel investor and philanthropist in San Francisco. Samuels is executive director of Engine, a non-profit organization that supports the growth of technology entrepreneurship.