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U.S. Venture Capital Market Harmed by Growing Number of Patent Assertions

November 07, 2013

Growth in the number of patent assertions facing startup companies is hampering U.S. venture capital, according to a new survey of venture capitalists (VC) and venture-backed companies from the National Venture Capital Association (NVCA) and Robin Feldman, director of the Institute for Innovation Law at University of California Hastings. Eighty percent of VC respondents note that the number of patent assertions filed against portfolio companies have increased over the past five years, with half indicating these assertions were a major deterrent to investment. Seventy percent believe the growth in claims is a negative influence on U.S. entrepreneurship.

Feldman and NVCA surveyed 200 venture capitalists and their portfolio companies about the recent increase in patent demands filed by parties asserting a claim to the intellectual property behind other companies' products or services. In recent years, these sort of claims have made national headlines, including two episodes of This American Life (When Patents Attack! and When Patents Attack!... Part Two), as the number of claimants who do not produce their own products and services have increased. Feldman notes that a sophisticated trade in patents and assertions has sprung up, enabling firms to acquire, license and litigate patents without producing new discoveries or making products. In 2012, about 60 percent of all patent lawsuits were filed by patent holders whose core business involves litigating patents rather than business or consumer services.

These patent holders often argue that their trade supports inventors and U.S. innovation as a whole by providing an incentive for researchers to generate new intellectual property whether or not they intend to bring it to market themselves. The most obvious option for these inventors is to license their technologies to others, but those licenses have little meaning if the patent holder is unwilling or unable to assert their claim in cases of possible infringement. Under this framework, this new class of patent litigation firm fills a vital role by buying the rights to a patent from the original inventor, compensating them and providing an incentive to do further research, and generating their own revenue by defending the patent.

The survey, however, indicates that two important constituencies of the U.S. innovation community are troubled by the rise in patent assertions. Almost three-quarters of VCs and 58 percent of startup companies reported that patent demands had a significant impact on their company, with the cost of preparing for and defending against demands often exceeding $100,000. Feldman and NVCA also cite a pending study that estimates only 20 percent of patent assertion revenue flows back to inventors or internal research.

The researchers conclude that the rising number of assertions are serving as a major deterrent to investors and interfering with the growth of U.S. high-tech startups, particularly in the information technology sector.

Read the report at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2346338.

venture capital, intellectual property