June 12, 2005
MYTH: "Patents Protect Small Companies"
REALITY: “Only DEEP DEEP Pockets = Patent Protection”
Patents are just negotiating chits in a Big Company Chess Game. You not only need the patents but you need lots and lots of money to play against the “Big Boys.”.
If you don’t have the financial resources to support years and years of patent litigation, then your patents have no teeth and therefore your negotiating chit has no credibility in the eyes of your potential licensees (potential licensee = future violators) of your patents.
Deep pocketed companies with significant patent portfolios negotiate with other deep pocketed companies with significant patent portfolios as part of an overall strategy to align companies more competitively within existing markets and to extend themselves into new markets. This is a big company game. Small companies have a role to play but small companies can never afford to “over-play their hand” because they will lose. The courts are only an ally of the small company in theory — never in practice.
A small company with a significant patent in an area deemed of strategic importance to the deep pocketed companies is always of interest but as the CEO of the “little guy” you can’t over-play the hand — unless you have deep pocketed backers — meaning industry players — NOT investors —
RULE: VCs don’t find litigation a particularly good use of their capital
When a big company comes knocking, that is your opportunity — but also a warning sign of which you’ll only get one — if you rebuff them, you are headed for trouble. Large companies have no problem violating you patents. They know that without lots and lots of money, you won’t be able to match the years of litigation they can tie you up in. They also know that your investors have little interest in matching dollar for dollar their litigation wherewith-all
Litigation is just a business tool to test your meddle. If you bluff too hard, they will call you hand because what’s their risk?
Here is their decision tree:
1) NEGOTIATE: Cut a reasonable deal with you now (Win: Win)
2) LITIGATE: If you aren’t reasonable, then tie you up in court for years and use the patent anyway. These are how the litigation scenarios would break-out —
#1 — You Go Out of Business (Win:Lose)
Very likely scenario since they can out spend you and just wait until you run out of cash — they know investors have no interest in coming to you aid — no investor wants to flush their money down a bottomless legal pit.
#2 — You Finally Cut a Deal to Survive and Avoid More litigation (Win: Lose)
Okay, so they have to pay for something but the deal they cut under your duress is not going to be as attractive as the original one they proposed before you got so greedy — they win again with a better deal struck
#3 — You Sell Your Company to One of Their Competitors to Survive (Draw)
the only risk would be if you allied with one of their competitors — ie, you sell out under the financial stress — this would be a draw since the patent would be returned to a big company who at least know the rules of the game … much easier to negotiate with. However, it is more likely that #2 would occur than #3.
#4 — Court Rules Against You (Win:Lose)
Remember: Patent Examiners are just worker-bees – Not rocket scientists. Just because they let you get away with your patent filings does NOT mean it will hold up in court. Do you think these guys have really read every patent that came before you? What’s there motivation? Now once a patent is in court, now lawyers are motivated to really look at the prior art — good luck on that one! Gee, who do you think is going to do a more thorough job: a salaried government worker or a $600 per hour attorney? This is a “full-employment” situation for patent attorneys — and they know which side pays the best — and its not your side.
#5 — Court Rules For You (Draw)
“Hey, shit happens!” … the court might actually side with your little company … But it doesn’t mean the court is going to be “punitive” against the big guy … The court is likely to enforce something that looks a lot like the original deal you rejected – plus interest and court expense, of course. But the court is never really going to hurt the offending company — during the last 10 years they used your patent to compound their growth in current markets and new markets — unlikely they will lose their improved or now dominant market position because of a patent penalty. Really more of a “Win: Win”
Big Companies don’t have much of a disincentive NOT to violate your patents. Notice that in NONE of the scenarios do they ever actually “LOSE”.
So when “Big Companies” come knocking, their choice is always the same —
1) NEGOTIATE or 2) LITIGATE
They always prefer #1 over #2 — but will never ever expect them to pay too much of a premium over what they would get in the litigation scenario anyway.
So when that “Big Company” comes knocking on your “Little Company” door —
- Count your blessings
- Do a “thorough” cost:benefit analysis “from their point of view”
- Never ever over play your hand
If you over-play your hand, you won’t get a second chance — the system still favours them and they know it.
6/30/05 Update: Jeff Bussgang, a former entrepreneur turned VC, has an excellent site called Seeing Both Sides which contains lots of must read posts for entrepreneurs and VCs alike. Of particular relevance to the value of patents in the minds of VCs is Seeing Both Sides: Patents Don't Matter
… patents are so tertiary to the VC decision process, that it's really a bit silly to spend more than a nanosecond on them when pitching VCs.
First of all, having a patent pending is like kissing your cousin - it simply doesn't count. Anyone can file. Getting a patent issued is what really matters. But even when you have an issued patent, 95% of the time it is too narrow to be relevant as a blocker, and so typically a competitor can find a way to design around you or have other patents in the same field that will cause a standstill to occur. That other 5% of the time, a start-up will simply not have the legal resources to properly prosecute a patent strategy that could yield the investors any return.
Posted by cmayaud at 11:39 AM | Permalink| Comments (1)
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A comment on this post from a reader who wishes to remain anonymous:
Just came across you blog and the “Patent protects small companies”. Great advice, and I particularly like the straight-to-the-point tone.
One qualifier to the main thrust – Patent Trolls. These are generally small companies, but with no other business than threatening other companies with their patents, and because they have no other business, they’ve got nothing to lose by this approach. Some will quickly go out of business when challenged (through lack of $), but others will have some financial success with the threats, then the money that this generates will help fund further threats and litigation, and this can spiral quite nicely to the point where it is worth it to go after big players even given the comments you make. NTP vs RIM is the classic current example, although I think ContentGuard makes the most interesting case – given they got the targets to invest in them!
Still, I agree this is all pretty academic from a VC point of view, as few VCs would want to *start* with a company with nothing but patents (you could end up there once the company fails at IT execution, but that’s different). It’s more a play for high net worth individual who understand an area well enough to make their own judgement of (a) patent quality, and (b) chances of succeeding with threats given the marketspace.
Posted by: Christian Mayaud at June 28, 2005 08:08 AM
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