The Innovation Act wins startups a battle but loses them the war

Over the last few months, there has been increasing media attention on the Innovation Act and patent reform. Numerous misleading statistics have been used to portray the patent troll issue as a crisis that is costing the economy billions and preventing startups from innovating. There are definitely bad actors in the patent space that are abusing the system, and there are provisions in the Innovation Act that will help deter them. However, the larger issue is how the Innovation Act as a whole will destroy the startup ecosystem by removing many of the protections startups and inventors have relied on for hundreds of years.

A recent VentureBeat op-ed from pro-patent reform coalition Engine claims that ‘waiting for patent reform is costing us billions’. You can view some of the specific data that Engine points to in their op-ed, and below is additional data that contradicts points Engine uses to support its position. I’m also using the term NPEs (Non-Practicing Entities) given there’s debate and increasing confusion as to what constitutes a ‘patent troll‘:

Misleading Data #1 – There has been an explosion in NPE lawsuits over the last few years

Statistics from USCourts.gov show an even sharper rise in the number of patent suits filed in 2012, to 5,189 cases. But analysts attribute most of this increase to the anti-joinder provisions of the Patent Act of 2011, which curtailed the practice of naming multiple defendants in a single infringement suit.

Misleading Data #2 – NPE’s make up a growing percentage of patent related litigation

The U.S. Government Accountability Office has released a report that was commissioned as part of a patent reform bill passed in 2011. The report is supposed to look at the impact of patent trolls, known technically as “non-practicing entities” or NPEs.

Yes, NPEs appear to be contributing to a rise in patent litigation. But overall, NPEs account for only 20% of patent litigation, according to the report. 

The point here is that there will always be data to support a bias or position, so it’s important to view all the data objectively for an informed opinion. What’s more troubling is how this misleading data is being presented to media and lawmakers by the pro-patent reform camp. It has led to some extreme measures that are being included in the Innovation Act that will further dilute the rights of patent holders — regardless of whether they are a startup, inventor, or other holder of a patent.

Another VentureBeat OpEd from Engine on April 6, entitled, “The Biggest Threat to Patent Reform: The Apple/IBM/Microsoft coalition”, reviewed specific provisions of the Innovation Act. This op-ed was more troubling in that while Engine’s stated goal is to help startups and shape public policy, its stance supports the destruction of a startups’ ability to protect their IP. While the Innovation Act does include some positive reforms for Demand Letters and Discovery that should help eliminate most of the bad actors in the patent assertion space, Engine’s stance on Fee Shifting and Loser Pays are confusing at best. The analogy that comes to mind is that Engine’s support of the Innovation Act (as written) is trying to win the battle to lose the war for startups. The battle is defending against patent trolls, while the war is protecting a startup’s ability to enforce its IP as it innovates or grows. Nowhere is this more evident than in its support of Fee Shifting and Loser Pays.

Fee Shifting

Engine – “It is nearly impossible for a startup to find the resources to fight a patent suit. The promise of seeing some of that money back at the end makes securing the resources easier.

Meaningful fee shifting will discourage the most egregious actors — those without meritorious cases — from suing in the first place; and joinder provisions are necessary to make sure that the real party in interest — the one that really owns the patent — can be held liable for the trolling activities of shell entities are also essential. In other words, no more hiding behind shell companies.”

Astonishingly, Engine doesn’t appear to see its support of Fee Shifting as having an adverse effect on startups as they mature and create IP.  If there is one area of the Innovation Act that will destroy startups, this is it. While Engine and other pro-patent reform coalitions cite that shifting fees to a ‘loser pays’ system will eliminate trolls, it will also eventually eliminate a startups ability to grow and define market share. How will any startup be able to protect its IP against a larger entity that’s infringing? Any larger entity will realize that it is a war of attrition, continue infringing and drown the startup in legal costs. Startups that try to enforce their IP already have an uphill battle to stop infringers, and having to potentially account for loser pays provisions will make this an insurmountable task.

Proponents of Fee Shifting will cite that loser pays only applies to cases without merit. But nothing in the Innovation Act currently defines what is a meritorious case and how much legal back and forth in an initial infringement case has to be spent to prove that. Do you really think that any accused infringer is going to agree that the case has merits? This also singles out patent holders as the only class in a legal system in the U.S. that will have to post a bond to protect its legal rights. IP Watchdog has a much more detailed opinion on this issue here and here.

The deck is already stacked against startups before you factor in pending changes to IP protection through the Innovation Act. This IP protection for startups is what has allowed startups to grow into larger entities and disrupt the legacy tech ecosystem and hierarchy. This continued disruption is what has been the main driver of innovation in the United States and throughout the world. But now these very IP protections are under attack from larger Silicon Valley entities that had previously used the patent system to their advantage. The Innovation Act, while masked as patent reform to eliminate trolls and help foster ‘innovation’, will only end up benefiting the Silicon Valley elite.

There’s no dispute that the patent system needs to be fixed and that there are bad actors abusing the system. But it’s a much more complex issue than it seems on the surface. Accelerating a bill through Congress only three years after the America Invents Act was signed seems rushed and manipulated by the very same companies that will benefit from ‘patent reform’. The battle cry of pro patent reform coalitions and Silicon Valley venture capitalists has continually been that “patents prevent innovation.” Patents do not prevent innovation, they prevent replication. How will startups continue to innovate if they do not even have basic protections from larger entities that can replicate their IP and innovations at will and without recourse? As currently written, the Innovation Act will create greater inequality between established tech players and the startups that have always grown to disrupt them.

Matt Szymczyk is CEO and founder of Zugara, a Los Angeles-based augmented reality software developer working to make online shopping more social and engaging.