Patent Risk Digest – November 2015

For Venture-backed Companies, Patent Troll Threat Looms Large

Most venture capitalists have portfolio companies that have received demands from patent trolls alleging infringement. For startups, a suit or even a threatening letter from a troll can have catastrophic effects, disrupting business plans, draining cash reserves for legal bills, and killing funding. Data shows how this cost can outsize—and quickly overwhelm—earlier-stage businesses.

VCs hold back billions in funding altogether each year because of patent troll threats and lawsuits—nearly $22 billion by one estimate in a 2014 study by MIT professor Catherine Tucker, “The Effect of Patent Litigation and Patent Assertion Entities on Entrepreneurial Activity.” Even with the most questionable infringement claims, smaller companies quickly find themselves outmatched on the legal stage, with the plaintiffs at a significant cost advantage.

A million-dollar proposition

For companies with under $25 million in revenue, the typical cost to resolve a single troll case is about $50,000—but cases commonly snowball to approximately $450,000, and up to $700,000+ for the most expensive cases. As companies grow into the $50 million revenue range, the typical cost to resolve a single troll case jumps to around $200,000, with the most expensive cases reaching into the millions.

Paving the road ahead

For most companies, with increased funding, visibility, and growth comes heightened exposure to patent troll attacks. In engaging early on with a trusted partner who understands their potential for large-scale risk, a venture-backed company can from its very early stages plan and budget for patent litigation, saving much needed funds, time, and distraction.

Troll Demand Letters: You Got One - What You Need to Know and Do

Every year, patent trolls send many thousands of demand letters to startups and small- to medium-sized businesses, threatening costly legal action for supposed patent infringement. When—or, better yet, before—your company gets hit by a patent assertion letter, here’s what you need to know about the threat and cost, and what you can do about it.

There’s a lot to know

Typically, patent assertion letters are vague, providing little information about the nature of the asserted patent or its owner, the technology at issue, or the alleged infringement. However, the letters often emphasize that others (often much bigger companies) have been accused of the same infringement and have settled—an effort to lend credence to the threat.

While patent holders are required to perform a good-faith investigation of infringement prior to commencing any lawsuit, no such standard exists for demand letters.

Your Cost: $30K-50K… And Into Six Figures

Based on a study of some 275 data points, the typical cost of researching and responding to a patent assertion letter is $30,000-50,000, with a possibility of becoming a six-figure expense on the high end. This holds true for companies addressing the matter by traditional legal means—hiring a law firm to perform the analysis, determine a strategy, and resolve the matter.

What you can do

Get informed—and don’t act alone.

With information on the background of the entity that sent the letter, extensive detail on the patents at issue, and an understanding of the history of any related litigation or settlements, companies that receive patent assertion letters can equip themselves to decide how to address them—often without intervention by outside legal counsel. The key is collaboration with a partner that has access to the broader market, and to the data, intelligence, and negotiating power required to defuse such threats rather than simply litigate them.

6 Months After Troll Sues, Promising $2M+ Company Shuts Down

In a typical patent troll lawsuit campaign, Iron Speed Inc.—a growing app-software developer with 8,000+ clients from solo consultants to McDonald’s—was sued along with 20+ other large and small companies over commonly used technology. Facing a multimillion-dollar fight, Iron Speed shut down at the end of August 2015, six months into litigation.

The campaign by troll Advanced Dynamic Interfaces LLC targeted Iron Speed along with a number of other small companies as well as several technology industry giants. The suit against Iron Speed was based on a 1999 patent covering technology related to the automatic generation of database applications. Such technology has been in use by major software providers since the early 1990s, and in products on the market since 2003—an example of the apparent randomness of many troll suits.

Crippling cost: $2-3 million

The tactic in this matter is a common one for troll campaigns: get the smaller, less-resourced companies to settle for terms that can be used to establish a “winning” track record for the troll—one that validates demands for even greater royalties and settlements from other defendants.

Unable to meet Advanced Dynamic’s demands, Iron Speed spent tens of thousands of dollars in just its first months of litigation, and faced spending up to an estimated $3 million to take it all the way through trial.

Your Patent Troll Litigation Risk

Patent trolls—also known as NPEs or non-practicing entities—have a simple business model. They acquire patents directly from inventors, through patent brokers, or from companies selling off assets, then target operating companies that may be infringing those patents and bring legal action to generate a payment.

The legal costs alone of a single infringement litigation can range from six figures to several million dollars. For large companies it is a frustrating problem that can reduce investment and profitability. For smaller companies, a patent troll attack can be fatal. Patent trolls have increasingly targeted companies—both suppliers and users of patented technologies—in a broadening range of business sectors. That means companies can be vulnerable just by running their websites, managing their E-commerce, providing WiFi access, using mobile devices, or deploying enterprise software solutions—all operations that utilize patented technologies.

RPX provides a suite of business solutions to reduce the expense and likelihood of such litigation. One is Patent Litigation Insurance, which combines a traditional claims-paying policy with select, proactive intervention in the patent market. RPX has a uniquely broad and deep store of litigation cost data, and with it has built a highly accurate actuarial model for patent troll risk and cost. Policies are customized to reflect a company’s size and risk profile.

Contact Us

For further information on news and data presented in the Patent Risk Digest, or to subscribe now, please contact patentriskdigest@rpxcorp.com.