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Defending Against Non-Practicing Entities in Patent Litigation (Part 3)

As one commentator noted, “Patent Trolls Eat Startups First.”  The author points to a recent study of small businesses and start-ups by Professor Colleen Chien of Santa Clara.  The study found that almost one-third of the 223 survey respondents had received a patent demand letter.  Some of these start-ups and small businesses had revenues of under $100,000.  Considering the expense of patent litigation, non-practicing entities (or patent trolls) are often able put great pressure on small businesses.  The study appears to confirm the problem that patent infringement lawsuits by non-practicing entities are increasing, with more non-practicing entities targeting smaller companies.

While the sample size is small, Professor Chien’s study shows that a single demand letter may cause troubling effects to small businesses.  Of the respondents, 22% did nothing, 18% settled, 35% fought back in some way, 9% changed the conduct of their business, and the rest were unresolved.  The study further noted that a majority of the businesses said that responding to the demand required significant time (73%), distracted from the core businesses (89%), and had a financial impact on the businesses. (63%).  Companies had to delay hiring, change business strategies or products, and suffer delays in meeting deadlines and milestones.

As a result, non-practicing entities often can greatly harm and impact the survival and operation of a small company, and even represent a “death knell” to prefunded companies.  In fact, prefunded companies may be extremely out of luck, as they will have great difficulty in raising financing to defend the case, and no one wants to fund an untested company with potential lawsuits.  This is a big problem, as simple demand letters from non-practicing entities may force small businesses out before they even start.  It’s not just non-practicing entities though, competitors, knowing the damages that demand letters cause, may similar harass with demand letters to try and destroy the business.

To combat this, creative settlement terms have been used, such as giving up equity in the company or more graduated licensing fees following funding.  The study further recommended speaking to counsel to address the issues, or even working together with other defendants who may have been sued.  After all, non-practicing entities sometimes sue tens and hundreds of defendants.  Finally, patent infringement insurance may be available.  While big patent lawsuits seem to get more of the press, smaller companies should take note that non-practicing entities now have their eyes on what they consider to be more vulnerable targets.

This article is the third part of a continuing series.  The previous part can be found here.

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