Many of you are privy to the problem of excessive patents. You have all seen the articles about yet another cellphone company infringing on yet another patent, but what you’re left with are questions of what all this activity means and how to use that information to act in your best interest– whether you are the CEO of a company or the general counsel for one. At the 2013 ABA Annual Meeting held in San Francisco, legal experts tackled this problem, discussing the trends in patent litigation and some potential strategies for companies preparing to introduce products into heavily-patented market segments.
Generally speaking the use of patents can vary with some people using them for insurance and others using them strategically. From a business standpoint how a company uses a patent depends on the industry that company is in. For example, in the medical technologies space, all the companies will have patents on their core technologies and be highly cognizant of the patents they have to deal with. With the record number of high patent filings, the continued state of high damages, and the fact that even smaller companies are beginning to see patent infringement lawsuits, it’s clear that patent strategy is a complex matter– further complicated by the presence of patent thickets.
A patent thicket is a bunch of overlapping patent rights you have to have in order to safely launch new technology. (Many of us are privy to this problem in the smartphone space. Basically, in order to invent and patent anything you have to go get licenses from several different sources before making it any sort of commercial success.)
Non-practicing entities that manage to acquire one of the patents in a patent thicket can pose a problem for companies looking to innovate. One of the most notable trends in patent litigation is that NPE suits doubled from 2011 to 2012, says Michele Moreland, director of acquisitions at RPX Corporation. While part of that is due to AIA provision that NPEs now have to file single suit against single entity instead of engaging in multi-defendant suit, there is still an uptrend.
Senior Counsel at Google, Amar Mehta, speaks specifically to increase of suits in the software arena. There, just the sheer number of patents is driving suits in software e-commerce space. Another factor that drives these suits is that software patents are vague very difficult to figure out the scope of a patent, even once issued. “Trying to answer the question of how do we construe this [patent] or how broad is it is one where unfortunately you have to wait until the judge tells you much later in time,” says Mehta.
On the other hand, medical companies are currently seeing fewer NPE suits. “Part of it is the converse of [software]; in pharmaceutical companies they have a single patent that covers formulation that they’re marketing so less opportunity for NPE in that area,” says Greg Garfield, general counsel at Auxogyn. Though Moreland predicts that as technology becomes more relevant to medicine, there will be a lot more suing on the NPE side of medical devices going forward.
And small companies aren’t immune to the problem either. Sixty-three percent of small companies are hit by NPE litigations, says Moreland. That being said, bigger companies tend to be the ones who get repeat defendant status in NPE litigation, and they often have to pay higher damages. As you might guess, there’s not a clear threshold for when a company gets big enough to get more suits and higher damages.
Median damages awards have actually dropped some from the 2001to 2006 timeframe where they had really spiked, according to the PwC 2013 Patent Litigation Study. Even with that, it’s still easy to justify from business standpoint why to file suits. “There’s just money to be made there,” Moreland says. NPEs seem to have more success than practicing entities when it comes to the amount of damages they receive.
It seems clear that whether you’re in the medical space, in the software space, big, or small, you need to be aware of what risks your technology might pose for you down the road. Some clues as to when litigation is likely to arise are if there is revenue from a patent, if you’re working with an active technology, if you have well-known competitors in the space, or if you’re nearing an initial public offering (IPO).
That time is one when a company is particularly vulnerable. On the one hand capital in the public market will allow you to expand significantly, but the threat of patent litigation can make accessing the public market much more difficult.
The best advice for avoiding patent lawsuits is to start the process much earlier than an IPO. Garfield suggests starting to develop an intellectual property strategy at least 12 to 18 months before IPO, that way all the negotiating pressure isn’t on you. “Getting the right people with the right IP strategy early on is what will help you can mitigate the threat,” he says. Preemptively trying to acquire or license technology may help you avoid this kind of litigation. Additionally, being able to go to an investor and be able to confidently tell them that you have freedom to operate, a reasonable prospect of patenting the core idea, and that there’s not going to be an NPE –or a practicing entity for that matter– that is going to throw you into litigation is just good business strategy.
With NPEs getting more aggressive now and going after users instead of the source of technological innovation, start-ups need to prepare early on. “If you’re gonna be a start-up in an area like software where there’s huge thickets, I’d say you should raise a little extra cash, have a little slush fund, and know you’re going to spend that if you’re successful,” says Mehta.
Another way to prepare is to take a look at lay of land see where the NPEs are buying patents to get a sense of what your overall risk is. If there traditionally hasn’t been much activity in your sector that tells you something. If there has been a lot of activity in your sector, a lot of action in open market in terms of operating companies selling patents to NPE, or a giant company starting to launch new litigation campaigns in your ecosystem, that tells you there’s an increased risk that will help you forecast as far as potential litigation goes.
Aside from the drain on time and money, the distraction of being sued has a huge psychological impact particularly with a start-up. Frequently it’s the senior management that is suffering the most significant drain at a point in time where they really need to be focused on developing and commercializing their technology.
“This company is their baby. Trying to give them the litigation support that will allow them to stay focused on the business and make objective decisions about how to manage patent litigation is just our job,” says Garfield.