Patents and Small Business

The Up and Running blog has an interesting post on patents and small business.  Although it is still somewhat expensive to go through the entire process, patents have become much easier and cheaper to file.  They are also increasingly viewed as extremely important assets by investors and potential acquirers, so most venture backed businesses file a large number of patent applications.

Patent lawsuits are extremely expensive.  I recently met with a small tech company that had spent roughly $5 million over the last two years on a single patent infringement suit.  Obviously most small businesses cannot afford to do this (it was also not clear to me this suit was a good use of funds by the company I met with). 

While I'm no expert on intellectual property law, I agree that patents generally provide limited protection from competitors copying ideas and/or inventions.  Work arounds that avoid infringement are often easy to do, and beyond the cost of IP suits proving infringement is very hard.

So why should a small business bother with patents??  I see three reasons:

• The MAD defense - The US and the Soviet Union used the fear of mutually assured destruction to help avoid nuclear conflict during the cold war.  Filed patents provides a similar defense.  It is so expensive to sue over IP, and so hard to prove infringement, that having patents gives a small business the ability to threaten counter suits and/or the ability to make a lawsuit so expensive that others will choose not to sue.  I've seen this defense effectively used on multiple occassions.  Of course the MAD defense also works against a small business if they want to sue a competitor with patents.
• Becoming an attractive partnering/acquisition candidate - Many big companies prefer to acquire small companies with strong IP positions.  If a small business plans include possibly being acquired, then having patents is a major plus.  They also like to do partnering deals with companies that have strong IP positions.
• Fundamental patents - a fundamental patent covers technology that is so fundamental to the business or technology involved that there are no work arounds and others have to either respect or license the patent.  These patents are rare, but very powerful.  For example, Qualcomm has built a huge and highly profitable business by owning fundamental patents on various aspects of cell phone network operations.  If a small business has fundamental technology, then filing can be a huge win.

Intellectual property (IP) is going to become even more important and valuable over the next decade.  Global patent filings are growing very rapidly (see this report by the World Intellectual Property Organization for more information) and will continue to do so.  Small businesses with the ability to file patents should stongly consider filing, even if the direct protection relative to the competition is somewhat limited. 

While I'm no expert on intellectual property law, it seems clear that IP is going to become even more important and valuable over the next decade. 

Comments

[Lawsuit Loans]

Patent lawsuits are extremely expensive. Yeah. This is true.

[Consuelo25Harding]

Specialists argue that mortgage loans help people to live their own way, because they can feel free to buy needed things. Moreover, a lot of banks give college loan for all people.

[Invertir Dinero]

Hello guys I'd like to know the main differences between Small Business and big business because I want to start it

[Steve King]

Chille:

Thanks for letting me know about the broken link, which is now fixed.

Steve

[Chille]

The link to Up and Running doesn't seem to work?

[Steve King]

Anita:

You are so right, the patent system is a mess. Making this worse, of course, is the patent trolls. There are even hedge funds that now invest in patent litigation.

A few hedge funds have teamed up with law firms to find/acquire patent holders and sue. The hedge fund gets a share of the revenue stream generated by the legal action.

Unfortunately there is no easy way to defend against the trolls. And of course the trolls also don't want to end up in court - it is too expensive. So the trolls tend to ask for relatively small royalties and, as you mentioned, the companies end up settling. And because of this, more frivolous patent suits are filed.

As you say - a nice racket.

Steve

[Anita Campbell]

Hi Steve,

Of course, the flip side of patents is that they have become far too easy to get by unscrupulous players who exploit the patent examiners' lack of understanding of technology, especially in the area of Internet-related technologies and business processes.

You have patents suddenly being issued, with far too-broad coverage, for obvious things that have been widely used for years. Then those unscrupulous players ("patent trolls") turn around and use the patents as weapons. Many of these patent trolls are not even operating companies -- their entire business model is to exploit the system, get patents and sue everyone in sight.

I know first hand of this happening in an industry I had been involved with in my past, where the company I worked for had a patent issued a dozen years ago (the patent preceded my time there, even). I was amazed to learn recently that some patent troll came along a decade later, managed to confuse a patent examiner and got a broadly-worded patent, and is now suing the first company that actually invented the product and had its own patent on it a decade before!!!

Most of the companies this troll has sued have caved and settled.

All I have to say is, "what a nice little racket."

There's something wrong with a system that allows this to happen.

Anita