Startups Need Patent Reform Now | Commentary
There’s quite a distance between having a great idea and developing it into an actual business. As the CEO and founder of two startups, I know firsthand the amount of work it takes to bridge the gap. I’ve been fortunate to work with very talented people to create new and innovative products. I’ve had my share of challenges from raising money, hiring employees, generating revenue and navigating the dynamic markets. But a problem I never anticipated were patent trolls.
My first startup business was Rush Tracking Systems, now named TotalTrax. It helps businesses integrate and make the most of tracking technologies. We had raised two rounds of funding and successfully exited to a Private Equity. The management team and I stayed on board to continue growing the company. Not long after the sale, I received a letter from a company claiming we were infringing its patent. The company demanded to be compensated. If we didn’t comply, it threatened to sue.
At first I thought it was a hoax; but my lawyers informed me otherwise. Although it was likely we weren’t infringing, it would cost us nearly $1 million, stretching over several years to mount a full fledge legal defense to prove us innocent. Or, we could simply pay a much smaller amount to make it go away quickly. Just asking my lawyers to evaluate the letter and advise me on it cost me thousands. My company was about to acquire two other companies. We couldn’t afford this distraction or cash drain. We decided to go the less expensive route.
The entity behind the threatening letter is an example of a patent troll. These entities create and produce nothing. They exist to secure broad patents — not to protect their inventions, but to extort settlements and licensing fees from businesses. The majority of defendants battling trolls are small to mid-sized businesses, like mine, with annual revenues of $20 million or less.
A startup, even with a full-time attorney, which most don’t have, cannot be expected to make sense of the tangled and overlapping patent landscape. And, taking early licenses and settlements, like we did, only feeds the troll, continuing a dangerous cycle.
I am now in my second startup, EyeVerify. We are working to bring to market a biometric security idea allowing consumers to use their smartphone cameras to turn a picture of the eye into a key that protects their digital life. The core asset of the company is our intellectual property. While we’ve been successful with our initial fundraising, I am fearful I will receive another demand letter from yet another troll.
Using patents as weapons drains resources from innovation, and amounts to an “innovation tax” on a growing company. One estimate found trolls have cost the U.S. economy half a trillion dollars in the last 20 years.
Last year, the House of Representatives made patent reform a priority when both parties joined to vote in favor of entrepreneurs like myself, not patent trolls. Unfortunately, the Senate continues to cave to pressure from special interests despite the real damage being done to our economy right now. In light of these challenges, it is still possible to reform our system so that trolls can no longer abuse small companies with vague demand letters which raise more questions than answers. Senators from both sides of the aisle have expressed their support, but it’s time to make those efforts a reality.
I am not a legislator. I don’t claim to know what the right solution is. But I am directly impacted by the current system, which is inefficient and broken. Immediate action is needed now. Otherwise, the constant threat of patent shakedowns, and the stress and uncertainty it brings, will burden our technology ecosystem driving some players completely out of business.
Toby Rush is an entrepreneur and angel investor.