Strengthening the U.S. Innovation Economy by Ending Abusive Patent Litigation


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Strengthening the U.S. Innovation Economy by Ending Abusive Patent Litigation

  1. 1. In late 2013, the U.S. House of Representatives passed the Innovation Act (H.R. 3309), legislation that would reform the U.S. patent litigation system.1 The Senate is now poised to act. The patent reform debate centers on what is best for the future of the U.S. innovation economy. Everybody claims they want to promote innovation. But by and large, those at the front end of innovation — the entrepreneurs and executives leading America’s young, fast-growing companies — have had only a limited voice in this debate. In Silicon Valley Bank’s Innovation Economy Outlook 2014 survey, we asked leaders at these high-growth U.S. companies what they think. Here, we’ve summarized what we heard from more than 1,000 executives across the United States. We also offer our views, as bankers who work closely with many of these companies, on the principles that should guide Congress as it moves forward. Strengthening the U.S. Innovation Economy By Ending Abusive Patent Litigation The problem Increasingly, small startups, growing tech companies and even many nontechnical companies that use technology tools face patent lawsuits in which the cost of defending the suit — rather than the strength of the plaintiff’s claim — drives the outcome. In a 2013 study by the National Venture Capital Association (NVCA), 80 percent of the venture capitalists and executives surveyed said the number of patent demands they face has grown over the past five years. Litigation is an expensive distraction for any company, large or small. But for startups, it can be the difference between success and failure. Patent infringement suits drain much-needed time and money from young companies. These lawsuits can also interfere with future fundings and acquisitions. In fact, half of the venture capitalists in the NVCA study said an existing patent demand would be a major deterrent to investing in a prospective portfolio company, while every investor said it could factor into their investment decision. Collateral damage caused by litigation may be the price we have to pay to protect legitimate patents from infringement. But when litigation outcomes are driven by tactics rather than valid intellectual property (IP) rights, the U.S. innovation economy suffers. What innovation economy executives say In Silicon Valley Bank’s Innovation Economy Outlook 2014 survey, we asked executives what they see in today’s patent system and what they think of different reforms Congress is considering. We heard from 1,004 U.S. executives leading companies in 36 states and the District of Columbia. More than half of the respondents are CEOs, and 84 percent are C-level executives. These executives work for companies from a variety of sectors that include software (55 percent of respondents), healthcare (25 percent), hardware (10 percent) and cleantech (5 percent). Most of the companies represented in the survey are young startups. Thirty-one percent of the respondents work for a company that did not earn revenues in 2013. Of those whose companies earned revenues, nearly half had 2013 revenues below $5 million and a majority had 2013 revenues under $25 million. Fifty-seven percent of the executives’ companies were not yet profitable in 2014. 5%10%55% 25% Respondents by sector ◻ Software ◻ Healthcare ◻ Hardware ◻ Cleantech
  2. 2. Here’s what we heard 55%of the survey’s respondents say their company filed a U.S. patent in 2013. Patent filings and litigation risk by sector 100% 80% 20% 40% 60% 0% Healthcare 9% 73% Hardware 10% 80% Software 12% 45% Cleantech 7% 79% Patent filings Litigation risk 1. Companies across the U.S. innovation economy use patents. Fifty-five percent of the survey’s respondents say their company filed a U.S. patent in 2013. The focus on patents begins at a very early stage: 57 percent of executives with companies not yet earning revenues say they filed a U.S. patent in 2013. The number dips a bit among companies just starting to earn revenues (to 44 percent among companies earning less than $5 million), then picks up again as companies gain scale. Among executives at companies earning $50 million or more in revenues, 70 percent say they filed a U.S. patent in 2013. 2. Software companies are less likely to rely on the patent system. Only 45 percent of executives at software companies say their company filed a U.S. patent in 2013. That’s much lower than in healthcare (73 percent), cleantech (79 percent) and hardware (80 percent). This echoes the skepticism we heard from software executives in last year’s survey about patents overall. In Silicon Valley Bank’s 2013 Startup Outlook report, 36 percent of executives with enterprise software companies said the cost of IP protection diverts resources from more productive uses, and 59 percent said they focus on nonlegal means (rather than patents) to create their competitive advantage. For consumer Internet companies, the numbers were 26 percent and 59 percent, respectively. 3. Software startups are more likely to get sued. Although software companies are less likely to rely on patents, they’re more likely to get sued. Twelve percent of software executives say their company has received a demand letter or been the target of an infringement suit, compared with 7 percent of cleantech executives, 9 percent of healthcare executives and 10 percent of hardware executives. 4. Patent litigation is pervasive among somewhat larger companies and also hits small startups. Nearly half (48 percent) of all executives with companies that earned $50 million or more in 2013 revenues say their company has been the target of a patent infringement suit or demand letter. One in four executives in these larger companies also says their company isn’t yet profitable. Therefore, patent litigation takes scarce capital away from other uses — like hiring new employees and growing the business. And although litigation against smaller companies is less pervasive than against larger companies, 4 percent of executives with companies that earned less than $5 million in 2013 say they have been a target of a demand letter or infringement suit. The problem doesn’t end with a single lawsuit. Among those who have been sued, 62 percent say they are concerned that they or their customers will be sued again. 5. Most of the suits are coming from non-practicing entities. The core issue in the patent reform debate is abusive litigation tactics. However, the one-sided nature of litigation by non-practicing entities and patent assertion entities — often referred to as patent trolls — raises unique challenges that affect how well the litigation system works. As a result, we wanted to understand to what extent these suits are driving the litigation facing young companies. The answer? A lot. Among executives whose companies have received a demand letter or infringement suit, 65 percent say it came from a patent assertion entity or non- practicing entity. 55% 48% STRENGTHENING THE U.S. INNOVATION ECONOMY BY ENDING ABUSIVE PATENT LITIGATION 2
  3. 3. Demand came from patent assertion entity Views on patent reform HealthcareHardwareSoftware 65% Among executives whose companies have received a demand letter or infringement suit, 65 percent say it came from a patent assertion entity or non-practicing entity. If somebody files a meritless lawsuit, they should have to pay the other side’s legal bills. The numbers are even more striking for software and hardware companies. Eighty percent of software executives and 78 percent of hardware executives say the demands they face have come from non-practicing entities or patent assertion entities. Among healthcare executives, in contrast, the number is 20 percent. 6. People settle. Today’s litigation system creates a strong incentive for companies to settle patent infringement suits, regardless of the merits of the cases. The median cost of litigating a moderately sized patent suit is $2.6 million (up 70 percent since 2001), while the cost of defending even a low- stakes patent suit will generally exceed $600,000, according to a letter written in November 2013 by intellectual property law professors supporting patent reform. Not surprisingly, 86 percent of the executives in this year’s survey who received a patent infringement suit or demand letter say they chose to settle rather than go to trial. 7. Innovation economy executives overwhelmingly support the reforms Congress is considering. Ninety-five percent of executives in the survey have views about how the patent system should be reformed, and virtually every executive in the survey supports at least one of the proposals on the table. Three in four support fee shifting, and three in five support greater transparency in demand letters and a more streamlined discovery process. If somebody claims I’m violating their patent, they should have to make clear up front who really owns the patent and how they think I’m infringing. The discovery process should be streamlined so it costs less to decide whether or not the case has enough merit to go forward. Startups need to be protected. Congress should create some kind of “safe harbor” to make them less attractive to patent assertion entities. The litigation process should be streamlined so the court focuses first on the most important issues in the case. Other The patent system needs to be reformed, but I don’t know how. 5% 14% 42% 47% 59% 63% 77% 55% 48% 80% 20%78% STRENGTHENING THE U.S. INNOVATION ECONOMY BY ENDING ABUSIVE PATENT LITIGATION 3
  4. 4. ©2014 SVB Financial Group. All rights reserved. Member Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group and Silicon Valley Bank are registered trademarks. FG-0314-0032. Rev 03-21-14. CORPORATE HEADQUARTERS 3003 Tasman Drive, Santa Clara, CA 95054 U.S.A., Phone 408.654.7400 Changes we support By working in concert with the innovation community, Congress can structure legislation that protects the legitimate rights of innovators and fosters the creativity behind the world’s most successful companies. In light of what we’ve heard from startups and growing companies across the country, we believe Congress should do the following: ▶▶ Help align litigation incentives by having courts require the losing party to pay the fees and costs of the prevailing party, unless the court concludes that the losing party’s position was reasonably justified or it would be unjust for the court to shift fees (such as when it would cause financial hardship to entrepreneurs and innovators). ▶▶ Increase transparency by having plaintiffs be clear in complaints and demand letters about the nature of their claim (what patent and/ or what claims are being infringed, by what products and services and in what manner); who the real party of interest is; and what other similar litigation is pending. ▶▶ Protect end users from abusive threats and litigation by staying duplicate cases against them. ▶▶ Make litigation work more efficiently and effectively by limiting the scope of expensive discovery and phasing the discovery process, while leaving trial judges with appropriate discretion to deal with case-specific issues. ▶▶ Keep the system balanced. Make sure legislative changes preserve a startup’s ability to use the courts to protect its intellectual property and provide appropriate protection to equity investors. ▶▶ Promote the long-term value of intellectual property by focusing on measures that eliminate abusive behaviors, rather than developing rules that depend on a plaintiff’s specific business model. 1 H.R. 3309—Innovation Act, 113th Congress (2013–2014),