Patent News

Jun. 22, 2015

Forbes: How Small Companies Get Crushed In Patent Disputes, by Todd Hixon

This post originally appeared in Forbes on June 22, 2015.

A wise old VC once told me, “The true sport of kings is patent litigation, not horse racing. It takes 5 years and $5 million to litigate a patent, and the only safe bet to win is on the lawyers.” Entrepreneurs and venture capital investors are raising strong concerns about patent legislation now pending before Congress. Described as a measure to curb patent trolls, the bill (“HR 9″*) dramatically increases the cost and risk of challenging a patent infringer. This will inhibit trolls to some extent. But, the bigger impact will be on small companies. They will have little chance of defending their IP rights against infringement by a larger, better-financed competitor.

Scott Sandell of New Enterprise Associates lays out HR 9’s effect on the balance of power in patent litigation in a recent article. Under the proposed law, the legal steps required to prosecute a patent infringement suit become much more complex, which will increase cost and time required significantly, and the circumstances in which the challenger can be ordered to pay all legal costs will be greatly expanded. Big companies with large cash reserves and long time horizons will have a huge advantage. Small companies with small cash reserves and (for start-ups struggling to get profitable) short time horizons will often be well-advised to let the big companies have their way.

Here is how this works in practice, based on a real story. A very bright engineer developed a technology, was granted a U.S. patent on the technology, and founded a company (“Phoenix”) to commercialize it. He built a product (“Alpha”) based on the technology and brought that product to market, achieving modest sales. Phoenix later developed a better opportunity with another product built on similar technology and continues to operate its business.

Phoenix noted that a big company (“Juggernaut”) had copied Alpha and made it part of a product line that yields revenues in the $100s of millions. Phoenix was not able to commercialize Alpha on its own, and Juggernaut did not invent the technology or own the patent, so a license made sense. Phoenix approached Juggernaut offering a license in exchange for royalty payments, and Juggernaut refused to pay. Phoenix decided to take Juggernaut to court.