Trolls seek to disrupt due diligence for startups seeking financing, suits have increased since 2016
Pre-IPO companies and startups in earlier financing cycles need their due diligence to go smoothly.
No surprise, then, that a recent study has found that while patent litigation initiated by operating companies has declined in recent years, suits initiated by non-practising entities – known as patent trolls – have increased consistently since 2016, holding steady in 2022 as compared to 2021.
The study by High-Tech Solutions, a consultancy, and commissioned by the LOT Network, a non-profit international organization committed to protecting members against patent troll litigation, analyses the behaviour of these companies that acquire patents to assert them against other companies and who do not produce goods or services or conduct research and development.
Indeed, trolls account for almost 60 percent of patent litigation worldwide, and some sources say that reaches 88 percent in the high-tech sector. In 2021 alone, patent trolls asserted 1,375 patents in almost 2,500 lawsuits.
And just as the 2008 recession resulted in many companies selling patents to trolls, causing patent litigation to more than double in the next three years, so is the current economic uncertainty poised to bring about a similar result. The growing availability of litigation financing only adds grist to the mill.
“Patent trolls wait on the sidelines until you’re in the process of raising money, which is when they show up,” says George Palikaras, CEO of Dartmouth, Nova Scotia-based Meta Materials Inc. This global deep-tech enterprise develops high-performance multi-functional materials whose exactingly-designed structures give them properties beyond those in nature.
According to the HTS study, at least a “mild correlation” exists between trolls’ targeting activity and IPOs. Among firms that conducted an IPO between 2012-2022 and were the targets of patent trolls between 2017-2021, approximately 30 percent involved lawsuits filed from two years before to two years after the IPO.
“There is indication that the occurrence of a significant funding round does put a privately held company at higher risk for becoming the target of a (troll) lawsuit," the authors conclude. "Better established private firms, where the most recent funding is a C-round (third-stage financing) or later, are at highest risk."
Attacks from patent trolls, which can result in lengthy and costly litigation, can deter investors and derail financing initiatives, including IPOs. The average suit costs over US$3 million to defend, with total expenses worldwide exceeding US$29 billion annually.
“Patent trolls count on the fact that fighting them can be so expensive that even defeating them can be a Pyrrhic victory,” said Sam Moorcroft, president and co-founder of ChristianCafe.com. This Ottawa-based dating site has been sued and threatened repeatedly by patent trolls.
Safety, it turns out, is in numbers, particularly the 2,900 companies in 56 countries that are members of the LOT network.
Members range from market leaders such as IBM, Toyota, Visa, Canon, Google, Red Hat, Tesla, Cisco, Amazon, Microsoft, Alibaba and Salesforce, and burgeoning companies across industries. Toronto-based Givex, a POS, gift card and loyalty solutions cloud provider, was the first Canadian retail company when it joined in 2020. Both Christian Cafe and Meta are members, with Meta joining just before its NASDAQ listing in June 2021.
LOT’s key feature is the agreement by all members that if any member’s patent assets fall to a troll, the company provides a license to all other network members, thereby immunizing them against litigation stemming from those assets. The provision does not prevent members from dealing with their patents in any other way.
There’s an irony here: over 80 percent of the patents that trolls use to sue companies originate with other operating companies.
“Membership in LOT can save millions for companies with valuable intellectual property,” Palikaras said.
But there are other advantages.
“LOT does a lot of studies that provide good information about how to protect IP from trolls, and it gives smaller companies like us access to the big names whose experience we can learn from,” Palikaras said.
In 2022, LOT launched a patent sale platform called LOT Patent Marketplace, an exclusive patent sale platform that bypasses traditional patent brokers. LOT hopes the platform will help younger companies in the market for quality patents defend their businesses until they can develop their own.
Making membership even more appealing is the fact that companies whose annual revenue is less than US$25 million pay no membership fees. Companies with higher revenues pay from $5,000 to $20,000.
As Palikaras sees it, joining LOT should be a no-brainer for startups.
“Most startups think just having a patent will protect you, but that’s not the case,” he said. “You need an overall patent strategy, of which LOT should be an integral part.”
