“An early stage investor takes more risk per dollar than any other person in the entire innovation ecosystem. They take a longshot bet at the highest point of risk that the startup will ever have…. With no patent protection, the risk is too high to invest.”
Joe Mullin, a policy analyst at the the Electronic Frontier Foundation (EFF), recently penned a misleading article about the Inventor Rights Act (H.R. 5478). He says it will promote and protect patent trolls. To unravel what he really means, it is first necessary to understand early stage investment, and from there, to define what a “patent troll” truly is.
Through organizations like EFF and their companion organization, Engine, Big Tech often writes scary stories about how patent trolls hide under bridges for no other reason than to utterly destroy innovation.
Very scary stuff.
Scary because this fantasy has misled the courts, Congress, and multiple administrations, convincing them to change the law in ways that destroyed America’s startup engine. Scary because early stage investment is fleeing to China at the expense of American startups. Scary because it has created perpetual Big Tech monopolies with no allegiance to the United States that are immune to American competition and taxes. These forces now control what we read and say, how we vote, and even what we believe to be true.
Even today, trusted political staff, craving a Big Tech big money lobbying job, whisper patent troll fairy tales into the ears of their lawmakers. Lawmakers, most equipped with neither tech nor startup experience, hear the lies over and over as they echo through the halls of Congress, fueled by Big Tech big bucks. The lies are now the reality that lawmakers believe. Lawmakers today refuse to fix what they broke, leaving startups, innovation, economic growth, and even our national security in clear and present danger.
Now is the time to leave fantasyland and rejoin reality.
A Tale of Pillage and Plunder
Little guys are easy to knock off when they first start commercializing a big idea. Big Tech multinationals prowl for new technologies that create a competitive edge, open a new market, or protect their market share. Since little guys historically invent the most important new technologies, they are the hunted. These monopolies have huge markets, deep pockets, engineering, manufacturing, distribution, and many other resources, including political and industry connections, none of which the little guys have. These resources are brought to bear on the little guy to steal their inventions. These monopolies are modern day marauding hordes of medieval horsemen plundering small villages.
A little guy must build a wall to protect the invention from raids by powerful corporations. Not so long ago, patents provided that barrier. They forced the powerful to deal with little guys. If they wanted to loot the village, they had to remain outside of the gates and ask for permission. This drove acquisitions, mergers, licensing and much more. But since 2006, the patent system has been gutted for little guys. Today, it is arguably a CEO’s fiduciary duty to their shareholders to plunder startups and litigate them into oblivion.
No one is an expert in all things, and little guys don’t normally have any resources, so they need investors to buy the resources they lack, like prototyping, market research, engineering services, and connections to make deals for market access and distribution. They need early stage investment to start up the startup.
No one invests in a great idea that can be easily stolen. This is like hanging a satchel of silver coins on a pole outside your hut. Someone will come along and take it. Likewise, if you don’t protect your big idea and it has market value, it will be plundered. Investors know the hypercompetitive nature of free market competition means that investing in unprotected technology risks losing all that is invested.
What Patents Were, Once Upon a Time
Patenting inventions once provided this protection and encouraged early stage investment. A patent once was a legally enforceable exclusive right that allowed you to halt the raid. It was also a private property right that could be collateralized for investment. These things encouraged early stage investment because they lowered the risk of huge multinationals plundering the tech. It also created a way for investors to recoup investment because if they raided the startup and burned it to the ground, the investor could take control of the patent. Then they could sue the thieves and collect damages, or sell the patent to someone else better armed and equipped to sue the thieves.
Early stage investment has now gone to other countries like China and Germany because we no longer protect inventions here and they do there. An early stage investor takes more risk per dollar than any other person in the entire innovation ecosystem. They take a longshot bet at the highest point of risk that the startup will ever have. The technology is not proven, potential competition is powerful and entrenched, the market is unknown, and the management team in many cases does not exist and will have to be built, and there are often no assets to collateralize other than a patent. With no patent protection, the risk is too high to invest.
The EFF recognizes this in a different article saying patent trolls “are firms that failed years ago, and now exist as shell companies that hold and assert patents. Or companies that never got a product off the ground, and now focus instead on litigating patents in court. And some patent owners never tried at all—they are simply individuals who acquire patents from the U.S. Patent Office for the purpose of making infringement accusations against others.” They don’t explain these infringers are being sued because they are believed to be actually infringing valid patents. If the patent holder sues under false infringement contentions, they will pay the other side’s costs. That fact alone is strong evidence that the invention is useful, novel, sufficiently disclosed, and infringed and therefore cannot be a “bad patent”, the new trendy fairy tale also invented by Big Tech.
An early stage investor is the most important person in the entire innovation ecosystem. Without early stage investment, the startup doesn’t start up. But according to Mullin, an early stage investor is really an evil patent troll who must be destroyed.
The Ending EFF Wants
The best way to discover the true intent of the EFF is to replace the phrases “patent troll” and “patent owner” with “early stage investor.” You will see that what they really want is to wipe out any startups that pose a threat to Big Tech monopolies. Here are a few examples:
“Certain [early stage investors] just can’t get enough of the monopoly power patents bestow.” Without an “exclusive Right”, infringers never settle. It is smarter to drive litigation costs into the stratosphere so early stage investors cannot stay in the game. In most cases since eBay v. MercExchange ended injunctive relief, litigation costs exceed the value of infringement. Investors simply cut their losses and the thieves are never held to account.
“H.R. 5478, hijacks the positive associations many of us have with “inventors” to radically tilt the patent system in favor of [early stage investors].” It is impossible to disentangle inventors from early stage investors, or even from those better positioned to fight infringers who buy their patents. The dynamics of startup funding and a failed patent system aligns their fate. By attacking one party as an evil cartoon, Mullin’s rhetoric is an attempt to bifurcate that relationship and then destroy it in the public eye.
“[early stage investors] make money by threatening people over everyday activities, not by inventing, building, or selling anything of value.” (Engine’s language is virtually identical) This is a display of naivety – or malice – I don’t know which. The early stage investor’s funds bought the startup’s needed resources and without those resources, nothing would have been built or sold. If the EFF instead means to disparage the investors who purchased patent rights from an early stage investor, it is also a display of naivety – or malice – for the same reasons. But the consequences are worse because the patent sale enabled the early stage investor to recoup losses sooner and that returned capital can then be reinvested in another startup sooner.
“H.R. 5478 will give enormous new litigation powers to a select group of patent owners, which will include many [early stage investors].” Mullin may believe these powers are new, but they were defined in over 200 years of legislation, case law, and Constitutional law. Only in the last 14 years has the Supreme Court become entranced by fairy tales and joined the effort to kill startups by twisting the plain meaning of the words of law. This judicial misdirection of public policy has resulted in entire swaths of technology moving to China.
Getting Back to Reality
Now you know what these very scary fairy tales mean in the real world. The EFF and their coconspirator, Engine, clearly intend to destroy the startup ecosystem by crashing early stage investment in startups. The effects are intended to perpetuate Big Tech monopolies—the same Big Tech monopolies that fund EFF and Engine.
If you don’t yet believe me, take a closer look at Big Tech business models. Big Tech monopolies control markets larger than most countries and control access to those markets by taking power reserved for sovereign nations. They have their own proprietary patent systems. Big Tech rightly views the U.S. patent system and its protection of startups as a threat to their monopolies, and wrongly desires to kill both.
They have already succeeded. We need to reject the EFF, Engine and Big Tech fairy tales and take a close look at the real world, or we need to accept the consequences that early stage investment in new technologies will continue to move to China, Germany, and other countries where patents still matter.
H.R. 5478 is only a first small step in restoring the foundation of our innovation ecosystem—our startups. H.R. 5478 encourages early stage investment by providing minimal patent protection for startups. The result will be to increase American innovation by driving the demand for huge multinationals to acquire startups, license technology and create other mutually beneficial relationships. Early stage investors will see a path to get investment returned and will start investing in American startups again.
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