Out on the West Coast—and especially here in Northern California—there is no shortage of technology start-ups and other venture-backed companies. At RPX, we spend a fair amount of time talking to executives and board members at these companies, and I’ve noticed two things: 1) It is rare to find an early-stage growth company with a full-time general counsel or an in-house intellectual property attorney, and 2) even the most seasoned entrepreneurs often have a limited view of how patents and patent risk fit into their operating strategy.
The two phenomena may very well be related. Many of these small companies are led by technologists that are told by their investors that they need to file for patents, but are given very little guidance as to why. As a result, they often see patents primarily as an outgrowth of internal product development, something that prevents others from using their technology. In reality, of course, patents are rarely used in this way, and as in-house counsel well understand, it is external patents and the non-practicing entities (NPE asserting them that deserve the most attention from the C-suite. Large, established companies have learned the hard lesson that patents can be a source of significant costs (in the form of both legal fees and settlements). Leaders of emerging growth companies are just beginning to learn this.
That's because the NPE problem is steadily spreading to impact smaller companies. Over the last decade or so, more than 11,000 companies have been targeted at least once by an NPE, and today about 60 percent of the defendants in NPE litigations have annual revenue lower than $100 million. It's not just a big company problem anymore and the financial stakes are much higher for start-ups and other emerging growth companies, where even six-figure settlements (and the associated legal fees) can do significant damage to the balance sheet. Litigation can also eat up precious venture dollars that otherwise would go toward hiring one or two additional key engineers.
These small companies don't have the seasoned in-house IP teams or deep pockets that would let them efficiently deal with NPE assertions. So what can they do to avoid potentially devastating infringement battles?
First of all, venture-backed technology companies should be aware that they—especially as they begin to gain traction and notoriety—are targets and should be ready to respond appropriately to an assertion letter. Paying attention to NPE activity in this industry can provide early warning of a coming threat, and arming oneself with data and information is key to successfully navigating the NPE threat highway. And there are available repositories of information that offer intelligence on different NPEs, their recent litigation activity and—in some cases—their settlement history. Smaller companies should also discuss infringement indemnity with the suppliers of their core technologies.
Many start-ups also have board members from venture firms and/or larger strategic investors who have had hands-on experience dealing with NPE litigation. Such directors can be invaluable sources of guidance if and when an assertion occurs, especially for companies that do not have in-house legal counsel. Given the trend toward NPEs targeting smaller companies, growth companies would be well advised to seek out this kind of expertise as they expand or restructure their boards.
In addition to bolstering their ability to deal with NPE risk, growth companies should also proactively look for external resources to help minimize the potential cost of an assertion. Collaborative patent buying and licensing efforts are becoming more common. And there are NPE-specific insurance products that can efficiently mitigate the risk and expense of infringement lawsuits that could cause serious financial damage to a smaller company.
Legislation, judicial precedent, and regulatory changes alone are not going to eliminate that risk for companies large or small. The sooner emerging growth companies join the effort to take proactive steps to reduce the threat of NPE patent assertion and litigation, the better their chances will be to survive and thrive in the long term.