If you were able to join us for VentureScape 2015 in May, you likely heard a lot of discussion about patent reform. The issue is receiving a tremendous amount of attention in Washington and has been identified as one of the few areas where President Obama and congressional Republicans can find common ground.
Because many of our members invest in patent-dependent startups, NVCA has been on the frontlines of the debate in Congress and actively engaging with lawmakers to strike the right balance of curbing abusive behavior by patent trolls and other bad actors while also protecting the rights of patent-reliant startups that depend on strong patent protections to ensure their survival.
At the time of this writing, the Senate Judiciary Committee has already passed out of committee S. 1137, the PATENT Act of 2015, and the House Judiciary Committee is on the cusp of reporting out of committee H.R. 9, the Innovation Act of 2015. While well-intended, we have serious concerns with several provisions in the bills and believe the unintended consequences resulting from these bills would cause a tremendous amount of collateral damage to the entrepreneurial ecosystem.
Any congressional effort to address abusive patent litigation practices that has the effect of making patent enforcement more risky, difficult and expensive will have a dramatic impact on small businesses and startups. Universities, medical device manufacturers, technology companies, and businesses of all shapes and sizes, from startups to Fortune 500 companies, are critically dependent on patents to protect investments of time, money and other resources from both competition and imitation here and abroad. Especially for the thousands of venture-backed startup companies across a broad spectrum of industries, preservation of their ability to obtain and enforce patents is fundamental to survival.
To be clear, NVCA is not opposed to patent litigation reform outright and agree that the abusive behavior of patent trolls needs to be addressed. It’s just that we don’t believe H.R. 9 or S. 1137 are the best approaches to bring about these much-needed reforms. Specifically, we have three broad concerns with the legislative proposals receiving all the attention in Congress.
Fee Shifting. Both bills will increase the risk of patent litigation for startups by creating an overly broad fee shifting standard that gives a significant advantage to large incumbent companies and even large patent trolls that have the financial resources to engage in litigation in ways startups simply can’t match.
Joinder. Setting a disturbing precedent, H.R. 9 provides not only that startups would be on the hook for legal fees if they lose in patent litigation, but so too would their venture capital investors if the portfolio company goes bankrupt.
Discovery and Pleadings. Further stacking the deck against small startups, both bills will increase the cost of patent litigation by creating unnecessary requirements in pleadings and opportunities for expensive delays during the discovery process.
The bottom line is that many of the provisions in H.R. 9 and S. 1137 make litigation more expensive by extending and increasing the costs and risks of the litigation process. To add insult to injury, it’s not even clear if either bill will really address the essence of the patent troll issue. In fact, in the case of H.R. 9, the only provision the bill which directly addresses abusive demand letters is a toothless “Sense of Congress” resolution that is nothing more than a stated opinion.
Simply raising the cost and risk of litigation for all parties, which appears to be the most likely consequence of H.R. 9 and S. 1137, may deter some bad apples and benefit others, particularly when their targets are small startups. As currently drafted, H.R. 9 and S. 1137 will negatively impact the rights of patent owners and, as a result, wreak havoc on the innovation economy by discouraging entrepreneurs from pursuing their visions.
As the voice of venture capital and by extension the portfolio companies our members invest in everyday, we will continue to sound the alarms with lawmakers on Capitol Hill about the unintended consequences that would result if either of these bills make it into law as currently written. However, we can’t do it alone. If you agree with our concerns, I urge you to get active in the debate by reaching out to your senators and representatives to let them know how these bills will negatively impact the entrepreneurial ecosystem if left unchanged.