* Late-stage companies are targets
* More startups receiving patent notifications
* Venture capitalists divided on patent relevance, reform
By Sarah McBride
SAN FRANCISCO, Sept 16 The patent wars that have
embroiled many of the world's technology giants in recent years
are spreading to a new set of combatants: start-up companies and
their venture-capital backers.
A group familiar to many larger technology companies is
instigating the battles: non-performing entities, or NPEs, who
acquire patents or serve as agents for inventors. Paradoxically,
they often represent start-up friendly institutions such as
They are disparagingly referred to as "patent trolls" in
Silicon Valley, and are increasingly going after entrepreneurs
and their investors, claiming patent infringement.
The unflattering nickname arose due to their habit of
suddenly demanding licensing fees from unsuspecting businesses,
much like mythical trolls that lie in wait under bridges to
extract tolls from travelers.
Long focused on large corporations because of their deep
pockets, the NPEs now seem to have an eye on start-ups that are
not as established but who have raised large amounts of money
and often have substantial revenue.
But some start-ups and their investors are putting up a
fight, rather than quickly paying up.
"I would say it came up in zero out of ten companies a year
ago," said Brian O'Malley of Battery Ventures, talking about
patent strategies. "Now it comes up in three out of ten
Venture capitalists such as George Zachary of Charles River
Ventures and David Cowan of Bessemer Venture Partners say that
all of their larger, more successful companies have been hit
with one or more legal notices over alleged patent infringement.
The mounting legal risk for start-up companies is fanning an
already heated debate about whether the patent system has
evolved in a way that threatens rather than supports innovation.
Some VCs argue that software products in particular should not
be afforded patent protection at all.
But there is little prospect of an overhaul of the patent
system anytime soon, and thus start-ups are now faced with
patent-related decisions that could make or break their
Take cloud-storage startup Box, which is dealing with a
March lawsuit from Titanide Ventures, a Texas company that
accuses Box of violating three of its cloud patents. Or e-tailer
Gilt Groupe, which last month got hit with a lawsuit from TQP, a
Texas company that believes Gilt is violating an encryption
patent. Box has raised $287 million; Gilt, $240 million.
Travel site Hipmunk received an infringement claim from i2z
Technology LLC in June, just after it announced $15 million in
new funding. Rather than negotiate or wait for a lawsuit, it
brought a case against i2z in July.
"It was very clear to us that this was a totally bogus
claim," says Adam Goldstein, chief executive of Hipmunk.
The patent at issue was created by Brigham Young University
professors and is now owned by i2z. In his June letter to
Hipmunk, i2z President Rakesh Ramde noted that several large
companies, including Microsoft, had already licensed
the patent. Ramde did not respond to a request for comment.
While patent holders sometimes seek millions in compensation
for a patent on a particularly valuable technology, intellectual
property lawyers say a typical licensing fee might run $100,000
to $750,000. At those prices, many companies that have faced
patent infringement charges traditionally were quick to pay.
But some entrepreneurs, especially idealistic founders who
might be leading their first start-up, say they hate the idea of
helping legitimize a patent they do not agree with, stoking
their fire to take on the patent holder.
"There probably is a growing tendency of young companies to
defend these cases," says Robert Taylor, a lawyer at Arnold &
Porter, who says he feels misgivings over the trend. "For a
small company, particularly one needing infusions of capital in
order to grow, I'm not sure I would agree it's a sound strategy
to fight every patent case that comes down the pike."
Taking a patent case all the way through trial could cost $2
million or more and take two to three years, Taylor says --
money and time the start-up is arguably better off spending on
its product and growth.
But giving in too easily could help spur future claims, both
against the start-up, and other related businesses,
entrepreneurs say. The arguments on how to react, and how best
to fix the patent system, can grow heated.
"Patents are like this radioactive word in Silicon Valley,"
says Zachary of Charles River Ventures. "It's a complicated
topic. It brings on this level of fervor."
CONTRIBUTION TO THE WORLD
For inventors, many of who cannot afford to turn their ideas
into products, the situation seems more straightforward.
"All my clients view their inventions as a contribution to
the world," said Chris Banys, a lawyer for Titanide, a Longview,
Texas-based company that specializes in cloud-computing patents
and has sued defendants ranging from Google to IBM
. Companies active in asserting patents also include
Intellectual Ventures and Acacia.
Many venture capitalists complain about patents. But at the
same time, they encourage their companies to amass them, in part
to return fire if they find themselves on the receiving end of a
patent-infringement notice. That works best if the notice comes
from another technology company rather than an NPE because NPEs
do not make products and thus cannot violate others' patents.
Venture capitalists often advise their companies to just sit
tight when they first receive a patent infringement claim. It's
inexpensive to send an initial infringement notice, and
sometimes the patent owners may just be seeing if they can get
some easy cash.
"They're kind of like the Nigerian guy who wants to borrow
money," says O'Malley, referring to a common category of spam
email. "They're just hoping someone bites."
Fighting a patent claim can carry big risks. In the
worst-case scenario, a company can be slapped with an injunction
barring the sale of its products, as what happened to Samsung
in its multi-front patent war with Apple.
"It's the nuclear option of a patent," said Randy Komisar, a
partner at Kleiner Perkins Caufield & Byers.
In one famous case, BlackBerry smartphone maker Research in
Motion was forced to settle with patent holding company NTP for
$612.5 million, far more than it would likely have cost RIM to
license NTP's wireless-email technology. NTP had won an
injunction that would have shut down the BlackBerry system; it
was stayed pending appeal, but the mortal danger to RIM was
Komisar is an investor in a company called RPX,
which seeks to protect companies against patent demands by
buying or licensing large numbers of patents and giving its 120
member companies the right to use them. RPX is controversial in
part because non-member companies are still vulnerable to
litigation on those patents by third parties.
Bessemer's Cowan used to evaluate each patent claim and
decide whether to fight or pay up. But a year ago, he decided to
fight in every case that escalated beyond initial notices. That
is in part so his companies will not get reputations as easy
As is typical in patent fights, he also simultaneously seeks
to invalidate the holder's patent as an additional deterrent.
"If they lose, they're going to lose not just me, they're
going to lose their whole patent," he said. Since making his
decision, he has launched four fights; all are in various
stages, with none resolved.
Some venture capitalists fear that the verdict in the Apple
case, which validated patents for seemingly basic ideas such as
a phone's flat black surface, might inspire NPEs to file more
infringement notices. But they say the cases might not play out
the way the NPEs hope.
"I don't think they should confuse this verdict for an
endorsement of their business model," says David Hornik of
August Capital. "I think that Apple won in large part because a
jury related to the company as inventors and innovators. The
same will not hold true of an NPE."