3 Things Every Entrepreneur Should Know About Patent Risk
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You may think that only big, established companies need to worry about patent trolls but this couldn’t be further from the truth. Startups also run the risk of being a target of these trolls, or more politely known as non-practicing entities (NPEs).
For instance, if your company has a transactional website, conducts ecommerce, has a customer-facing smartphone app or provides in-store customers with Wi-Fi access you have patent risk and are a prime target, too.
Indeed, more than 11,000 companies -- ranging from Fortune 500 to venture-backed startups -- have been accused of patent infringement at least once by NPEs over the last decade, according to PatentFreedom. And today, about 60 percent of companies impacted by NPE litigation are businesses with annual revenue of less than $100 million, according to our own findings. These are the very enterprises generally least equipped to respond and manage patent risk.
If that sounds like your venture, here are three things to keep in mind about patent risk:
1. It’s much bigger and more expensive than you think. There are over 800 active NPEs. Their business model is remarkably simple: NPEs acquire patents directly from inventors, through patent brokers or from companies selling off assets. Then they identify companies that may be infringing those patents and bring legal action to generate a payment.
Companies of all sizes collectively spent nearly $13 billion last year dealing with NPE assertion and litigation. Just under half of that money went to legal expenses and the rest covered license or settlement payments.
2.This isn’t a legal dispute, it’s a business transaction. NPEs aren’t interested in proving you’ve done something wrong. They are interested in being paid. From the NPE perspective, patents are simply assets. They believe your company is using one of their assets and expect to be compensated for that use. Unfortunately, the legal system has become the default medium to make that exchange of value, and litigation is an extraordinarily inefficient way to conduct a financial transaction. Since more than 95 percent of NPE cases settle, it would seem to make sense for most companies to determine and pay the settlement amount early and avoid the legal costs altogether.
3. Any company using technology is at risk. The one constant among NPE defendants is the use of patented technology. The imprecisely defined ownership of those patents drives the NPE business model. Spurred by the explosion in new digital technologies in recent decades, the US Patent and Trademark Office has issued a steady stream of technology patents over the years -- more than 2.8 million since 2000 to be precise -- that are often not clearly distinct from previously issued patents. As a result, many tech-based products and services today arguably infringe dozens or even hundreds of patents.
In other words, your company doesn’t need to own patents to face patent risk. It only needs to use technology in its products or business processes to be accused of infringement.
So, what can you do about it? Be proactive.
Prepare by tracking NPE litigation activity in your technology sector. If hit with an assertion letter, learn everything you can about the NPE, including recent litigations, its willingness to settle and -- if possible -- past settlement amounts. You can also plan ahead by calling your technology providers to discuss their experience with NPE litigation. Ask if they are willing to indemnify your company against infringement assertions.
Look for ways to directly limit risk. Investigate options for NPE insurance. NPE assertions are far more common than liability suits against executives or for digital security breaches, yet companies that routinely carry directors and officers liability insurance or cyber-security policies, often forego NPE insurance. Monitor the open market for patents and consider preemptively acquiring or licensing relevant assets. Explore collaborative solutions to pool resources with other operating companies and share the cost of clearing risky patents.
Make patent risk mitigation a central element in your overall strategic planning. Emerging growth companies that are in the process of expanding or revamping their boards should take the opportunity to bring on directors with solid IP backgrounds who are experienced in assessing technology and/or transacting patent assets. These individuals can help guide management through an increasingly challenging patent landscape.
NPE risk has become a fact of life for thousands of technology-based companies. The scope and cost of that risk continues to grow and small- to medium-sized businesses are being swept up in the widening NPE net. Legislative and regulatory efforts have so far put only modest limits on NPE activity and legal solutions are unlikely to eliminate what is at heart a market problem.