Sunday, April 12, 2015

Professor Robin Feldman and Reseach Fellow Evan Frondorf - Patent Demands and Initial Public Offerings - A Comment

In a study Patent Demands and Initial Public Offerings, forthcoming in the Stanford Technology Law Review, Professor Robin Feldman and Research Fellow Evan Frondorf of UC Hastings law school state a "significant majority of information technology companies received patent demands near their IPO and "almost all of that activity originated from patent NPEs." Sounds like a problem, right?

In this study the authors checked with lawyers at recently public companies about exposure to patent demands as their company developed. Mr. Frondorf explains "Patent trolls thrive on extracting settlements from startup companies that don't have the time or money to litigate, even if the claims are dubious. An IPO is new leverage that can be used against a company that wants to avoid the negative effects that pending litigation might have on its offering price or public reputation. The results are consistent with monetizers issuing demands based on the economics of patent litigation, rather than on the legitimacy of the claims. It's more evidence of the need for comprehensive patent reform."

I appreciate the research of Professor Feldman, but I am not seeing that a study revealing patent demands occur before IPOs is more evidence supporting the need for comprehensive patent reform being considered by Congress.

Patent demands made before IPOs is not a new tactic, but a long standing strategy of patent owners. As a patent lawyer at Wilson Sonsini Goodrich & Rosati from 1993 - 1998, I saw a number of tech companies get hit with patent demands and even patent lawsuits before going public. That does not prove, however, whether the patent claim is legitimate or not. Patents owners simply show up when they have the most leverage to get paid. Whether the patent owner practices the invention is not relevant to whether or not a patent is valid or infringed.

I also question the suggestion that companies near an IPO have no time or money to fight illegitimate patent claims. Many tech companies have pending patent litigation or threatened lawsuits but have the resources to handle that as well as go public. How many of them withdraw from going public because the patent lawsuit drained their resources? I would venture rarely if ever. A patent lawsuit may be resolved before the IPO, but it is not required. Instead, the risk of that patent lawsuit is disclosed in the prospectus. Whether or not it settles is up to the parties. One notable example is Yahoo's online advertising patent lawsuit before Google's IPO. Google disclosed the risk in the prospectus, and settled with Yahoo, then went public, and life went on. Sure Google had to pay a chunk of stock, but a number of observers believed Yahoo had a legitimate claim. Google had the legal talent, financial resources and considerable momentum in the search engine space that enabled it to settle that patent case on its own terms.

If a company is successful to the point of going public, it usually also has smart management, a viable business, legal talent, and the financial resources to settle or fight the patent demands before, during, and after the IPO. Further, the AIA trials give a relatively low cost way to deal with dubious patent demands today. Just before a company goes public is not when it's vulnerable to illegitimate patent demands. Higher vulnerability occurs at a much earlier stage, but as the study notes "almost no companies received demands near another important funding moment-- obtaining the first round of venture capital funding." Another vulnerable time for a startup to receive a patent demand is when seeking a first round of funding, since investors do not want to invest in that situation, but of course you have exceptions.

Copyright © 2015 Robert Moll. All rights reserved.