Entrepreneurship and patent lawsuits
My original plan was to write a series about starting my eccomerce business; going through the process of finding a market, a product and funding. I still plan to do this, but I would like to talk about something that is far more pressing to me: IP litigation.
Background
I graduated from college in 2011 with a degree in stupid studies. At the beginning of my last year of college, I was set on working in finance. This changed as I realized I would be far better suited to start a business. Working for someone is easy. It requires no curiosity and a set of credentials that are known to the prospective employee years in advance. The process for starting a business is much harder and filled with more pitfalls. Consumer sentiment can turn on a dime. Making decisions about the human capital you employ is difficult. There are a menagerie of services and capital equipment that you can use to produce what ever good and service you want to provide. I chose the entrepreneurship path because of this reason and also because I had ran businesses in college that gave me the seed capital and enough money to fall back-on if (as expected) my business failed.
I would like to go into further detail about the businesses that I started while in college. I don't think enough kids take advantage of all the eccomerce tools available to them. It has never been easier to start a business. From the comfort of my dorm room, I started an Ebay business that had sales of $ 10000 a month. I would go on Alibaba.com to buy generic MP3 players, headphones, bluetooth headsets and sell them on Ebay. This is a great way to gain experience running a business. My second business was providing email marketing services to penny stock trading companies. This involved relatively little skill and was fairly lucrative.
First IP suit
My company is in the 3d printing market. As of now, I have 7 employees working for me. I will go into greater detail in my next post about finding an idea and market. The first suit against me was filled in the summer of 2011. I was scared shitless. Seriously, the nice paper, fancy letterhead and incomprehensible legal speak created an aura of unparalleled fuckery. After doing some research I was befuddled. The company that was suing me DIDN'T MAKE ANYTHING. As far as I could tell, they were a law firm based in a UPS store in Houston Texas. There main business was buying troves of patents from individuals and failed businesses and using them as a basis to shake down start-ups. There letter of terror was followed up with a letter that explained that for 6000 dollars, I could make the entire thing go away. After doing research, I found that this was BY FAR the cheapest option. Hiring an attorney and going to court would have cost at least 50k. IP litigation is at the federal level and is particularly onerous: lawyers spend hundreds of hours researching the patent in question and researching other patents. After doing the mental calculus, I cut the patent trolls a check.
Understanding IP
Intellectual Property is the idea behind the patent/copyright system. Speaking succinctly, its proponents believe property rights should be extended to ideas. This is obviously not true; ideas are not property. First and foremost, property is discrete and is irreparably harmed when trespassed against. For example, if I take your laptop without your permission, you are deprived of a laptop and thus don't have it anymore. If I were to copy some technology, the original creator still has the knowledge behind the technology and is unharmed. Property is scarce and require resources to reproduce while ideas require nothing to reproduce. In reality, IP involves the government granting one party the ability to use the court system to prevent others from using their own property in certain ways. In Stephan Kinsella's “The Case Against IP: A Concise Guide” he explains, “In both cases, the state is assigning to A a right to control B's property — A can tell B not to do certain things with B's property. Since ownership is the right to control, IP grants to A co-ownership of B's property. This clearly cannot be justified under libertarian principles. B already owns his property. With respect to him, A is a latecomer. B is the one who appropriated the property, not A. It is too late for A to homestead B's property — B already did that. The resource is no longer unowned. Granting A ownership rights in B's property is quite obviously incompatible with basic libertarian principles. It is nothing more than redistribution of wealth. ”
Stephan Kinsella, Jeffrey Tucker and Stephan Molyneux are far more eloquent when talking about this than I, and they should be consulted when talking about matters of IP.
More than theory
There are serious moral qualms that are established with IP. The most obvious is the state taking money from the citizen to prevent that same exact citizen from using his or her own money to engage in a voluntary interaction with another person. This has deleterious effect on prices and makes things much more expensive than they would otherwise be. Anyone with a basic understanding of supply and demand will tell you reducing competition makes a good or service more scarce and drives up its price. The evidence of this can be seen most readily in pharmaceuticals. Drugs, that if paid for out of pocket at Walgreens/CVS, that cost hundreds of dollars per prescription can be had for pennies on the dollar in foreign countries that don't respect American patent. It also stifles innovation and R&D by allowing the IP holder to sit on their laurels. Pfizer would be producing far more drugs if they had more competition and weren't given a 20 year monopoly to produce their wares.
The other is enabling trolling. The firm that I was getting sued by was law firm that's only business was suing startup companies. They produced nothing but reams of paperwork and consternation. My first payout of $6000 could have been used for marketing, buying new computers, office equipment, hiring freelance designers or programmers, etc. It would have actually created wealth; instead it went to some law firm empowered by America's stupid IP laws.
I am pretty sure many of the brainwashed readers will be saying, “Without a government granted monopoly, why would anyone invest in R&D?” This is pretty stupid argument and shows the mindset who will not make it far in any type of creative endeavor. There have been great natural experiments showing that not having IP doesn't stifle innovation. The algorithms which run software programs weren't patentable till the mid 90s. During this time of no IP protection, software firms boomed and the nexus of innovation called Silicon Valley was formed. Microsoft, Oracle, Apple, etc. still invested 10s of millions of dollars into each of their software products even though they weren't patentable. As we speak, there are no software patents in the European Union but European software companies still invest in R&D! Companies put money into R&D because they perceive there to be a market for their product. The first mover advantage that a company gets when they innovate is the impetus for R&D. For example, there are many alternatives for smart-phones which all essentially do the same thing yet Apple still has 40% market share(USA) mainly due to the fact they had an 18 month lead on their competitors in the smart-phone market. Also, the logic, “if there are no patents, there will be no innovation” doesn't factor in the hundreds of ways that innovation is financed. There are charitable trusts, crowd sourcing platforms, open source projects, and almost unlimited way for financing innovation that don't involve patent protection at all.
Again, outside resources should be consulted. Two St. Louis Fed economists wrote an excellent and fairly easy to read paper called the case against patents....
http://research.stlouisfed.org/wp/2012/2012-035.pdf
IP in my life now
I managed to go through 2012 without getting sued. I grew my company from 3 to 7 people. We aren't a producer but use some nifty software to help possible producers prototype. We were profitable from the start and have grew to revenues of about 100 thousand a month. I thought my company would grow even faster and was planning an expansion into retail for 2013. My plans have been stymied by multiple patent lawsuits this year. 2 are from patent trolling law firms and the third is from a competitor that alleges that our BUSINESS PROCESS of accepting CAD files and sending them to our customers infringes on their patent. Just let that stew. They are suing us because we offer larger customers the ability to pay a flat fee to have unlimited prototypes developed. Instead of expanding my business I have to worry about these infantile claims. A plan to hire a two web developers and to buy some better 3d printers has been replaced by a plan to hire IP lawyers. The employees who I was set on hiring would have allowed me to grow my business and make the economy more productive. The lawyers who I instead have to hire add nothing.
The lawsuit from my competitor is designed to put us out of business. In this case, patents are being used as weapons by lazy companies that don't want to compete the honest way. They maybe successful in this effort because of the cost of litigation. Regardless if we win or lose, we will be in the hole for $250000.
As of late, I have been in talks to sell my business to a manufacturer of 3d printers that likes our business model. I am open to any questions about starting my business or handling patent lawsuits.
It's a shame about the patent trolls - I think we should at least pass laws that prohibit those kind of businesses, even if we don't make the patent law changes you're talking about.
Can you give us some rough data to give a better idea of the realities of ups and downs of entrepreneurship? For example:
Year 0 - 1.5 (college sophomore/junior): Business: Buy mp3s from Alibaba, sell on Ebay Starting capital: $0 Hours worked: about 30 hours/week throughout Income: nothing for the first 3 months, rising to about about $500/month over the next 6 months, then rising to about $10,000/month over the next 9 months Exit: 1.5 years later, about $50,000 payout (or business dissolved, no payout)
Year 1.5 - XXX Business: Email marketing services Starting capital: $20,000 etc.
Thanks for the post.
That doesn't sound right. How can you start out with no capital if you needed to buy inventories from Alibaba? The math nor logic adds up.
Another excellent example of how technology is moving ten times faster than the government can and a thousand times faster than the government will.
Being in a creative business, I know how ridiculous it is. Copyrights are essentially worthless today, and in my case I just monetize the plagiarism. Sorry you've had a baptism by fire into the realm of bullshit lawsuits. In my experience, it never gets any better. All you can do is press on or get liquid and make it someone else's problem, which it sounds like you're doing.
Great work growing the company, by the way. +1
i'm in a mixed view about IP, if your example were say, a new cancer drug, then i think your example will fall down pretty badly. the IP trolls are a loathsome bunch, but I'm not convinced that some areas of R&D dont need protecting with IP.
R&D doesn't mostly need or deserve protection, but companies apply, and the USPTO is swamped and though they're pretty sharp young lawyers there they just don't have the time to really examine what's a 1-side application submitted by some big company using technical jargon that's hard to argue with - and there's no "other side." So alot of these software and R&D tech companies will apply anyway and often get a Patent granted, then use it to make a small busniess's life hell. Best to work out a royalty or settlement with them, b/c challenging the patent will be very expensive, though cheaper than a lawsuit, so best advice is to hire a patent lawyer who's an expert in challenging patents for business processes and winning. That's a claim to the USPTO not a whole court fight, so for $10 or $15 grand you can fight on an equal footing with a big corporation and have a good shot at the Patent being voided. Good luck.
A claim for cancellation of a patent is not $10K or $15K. It's not a trial, but it is similar (there's discovery and what not). It's not quite as expensive as a proper trial, but should be about $100K. You also run the risk of not getting the patent voided and THEN having to go to trial should the company decide to sue.
Keep in mind the patent trolls do not want to pay legal fees either. There are intermediate solutions that do not cost you $250K and do not involve a trial. You can just hire attorneys to cite case history and send them a "fuck you" letter back to those threatening to sue you. That usually is the end of it. No one's going to spend $250K to go to trial to win a settlement that will net them maybe $50K a year (and that's IF they win).
I half agree and half disagree with your general thoughts on IP laws. The IP laws are a mess but we do need something because certain products do require patent protection because the first mover advantage is pretty worthless and the product's manufacturing cost is tiny compared to the R&D cost (pharma is the prime example).
I'm a fellow entrepreneur (Jet Cigs, www.jetcigs.com) and IP has been an issue for us too. There's a patent troll out there in our space, too. Also, we recently got some high-profile attorneys (Troutman Sanders is our law firm) to send one of those carefully worded replies to a Big Tobacco firm that sent us some not-so-nice legal correspondence. Their aim is mostly to have us spend money on legal because they know we're small and they're very threatened by our business model (sell essentially the same product but at a significantly lower price point). But, they really have no legal leg to stand on either (our goal is to have it so even if they sue us the case gets thrown out as frivolous). If your competitor does not have case history on their side, you can probably get the case thrown out in summary judgment (or earlier). That should not cost you anywhere near $250K in legal fees. You could also offer a settlement if their case holds some water so that you don't have a big up-front payment and instead pay some sort of royalty. The best course of action depends in large part on the particulars which no one on this board will know. Your lawyers should be offering you more solutions than just "ok well we'll go to trial, our fees will be in the neighborhood of $250K".
By the way, do you need full-time web developers or are you looking to create an informational/store-front site that would require minimal maintenance? If it's the latter I can put you in touch with the people that did our site; would definitely be cheaper than hiring a full-time developer.
I do agree that the IP system needs to be revamped in ways but honestly a system of IP protection is essential to a modern economy, especially since the U.S. is moving away from base manufacturing towards an economy focused on ideas. There are a host of companies who business model is the design and research new technologies (think wireless) that allow for greater data transference, greater signal range, etc that produce no actual products. They simply bring that technology to the market place with the idea that manufacturers (often in other countries) will adopt those technologies in exchange for royalties. There is nothing per se nefarious about a company that invests in R&D and whose main output is patents.
The issue (and this really has nothing to do with making or not making a product, plenty of large manufactures screw over start ups with frivolous lawsuits too) is that some firms use b.s. patents that don't cover anything useful, and probably wouldn't stand up to reexamination, to bully smaller corporations into settling lawsuits for quick cash. One way to help stop this kind of behavior is new legislation that would employ a "loser pays" model where the loser of the lawsuit paid not only damages (if applicable) but also both sides attorney's fees. If your a smaller company who feels a patent is b.s. then you can argue it essentially on borrowed money from the prosecution. The wrinkle here is of course that if a patent is legitimate and you lose, then your screwed (but in a way you would be guilty of actual patent infringement and are arguably suppose to be liable)
The one thing I cannot rap my head around is, when it comes to a legitimate patent that covers a legitimate technology, who honestly cares who asserts it? Conceptually a company does research and receives a patent as research output. Somehow society is relatively fine with the company asserting this patent against infringers, especially if they make a product. However, if that same company sells their patent to a third party, whose sole occupation is to monetize the IP through lawsuits, the transaction price for the technology with reflect the market value of the patent, (in a sense the NPV of all the expected cash flows from licensing, plus any increase in profits due to having a monopoly on the technology if your are a product maker). The third party then asserts the patent, which is the identical action that the researcher would need to take anyways to monetize the patent. Its completely semantics. A legitimate patent should be enforced at the will of the patent holder (less any consideration for public interest) - it honestly doesn't and shouldn't matter what the holder does in terms of production. That being said, stupid, illegitimate patents are a waste of time and money for everyone and should be eliminated - more funding for the USPTO for this purpose I think would be very helpful.
Also I have to disagree about ideas not being harmed when others are privy to them. Obviously a manufacturer loses when competition arises because their patented ideas are shared. Also, with respect to pharma, literally no one would invest billions of dollars in research if the U.S. market didn't prevent competition from bringing down the price of pills to pennies. Case and point almost immediately after a monopoly on a major drug expires, competitors come in and acquire significant market share, because at the end of the day people just want effective pills at the cheapest price.
The best way to stop this type of behavior is to end the IP regime all together. I don't know how you could possibly think that congress could pass legislation to reduce their power. Its like asking Congress to pass legislation to end the income tax. You do understand that the parties involved give tons of money to Congress. Saying you can pass legislation to solve your problems is pretty damn stupid in my opinion.
How is a patent legitimate or illegitimate? The people who judge these matters are the average Americans, who reads on an 8th grade level and has no knowledge of science/ engineering, technology, etc. How could they be trusted to determine if any advanced technology is infringing on another patents. As we speak, there are 250000 patents that pertain to cell phone technology. There are 2.1 million patents in force. How is it possible to determine if any claim about infringement is true or not; especially when the arbiters are the mental equivalents of 13 year olds?
An absolute utter lie. If this were true, why did people invest in tech companies before the algorithms that drove their software was patentable? Seriously, answer my question. By your failed logic there would have been NO commercial software prior to 1996. Except this obviously not true.
It doesn't cost billions to produce a pharmaceutical drug. The "billions" figure comes a juvenile study conducted in 2003 by the "Tufts Center for the Study of Drug Development". This study just takes R&D and divides it by the number of drugs that made it to market,without factoring the 10s of thousands of drugs that a pharmaceutical company works on at any given time.
The median cost to develop a drug is $43 million. The study in question can be found by googling the names of the researchers. http://www.slate.com/articles/business/the_customer/2011/03/the_makebel…
Back your claim with evidence. There are great natural experiments in regards to patents and in every case the the non IP world wins every time. Microsoft spent $100 million dollars developing Halo 4 full well knowing that the game would be pirated and released on the internet free prior to the official release. This is a sum that nearly twice as great as what pharmaceutical companies spend. By your logic Microsoft would have never pursued the project because they were dealing with competition that gave the SAME exact product for FREE!!!
So you support patent trolling? The idea behind IP is incentivize production yet you support IP being used as a way to make money for people who aren't involved in production at all. Again, you show a lack of pragmatic knowledge of what IP lawsuits actually are. The vast majority of them are settled for a price that is below what it costs to get an attorney. If they go to trial, the judgments are based on the capriciousness of the judge. The judges aren't godlike calculators that calculate the "NPV of all the expected cash flows from licensing, plus any increase in profits due to having a monopoly on the technology if your are a product maker". YOU KNOW NOTHING OF IP IN ACTION. Patents have NOTHING to do with innovation. There are hundreds of patents for items that don't even exist. For example, I know people who have filed patents and received patents for different aspects of quantum computing while NEVER creating a quantum computer or doing any research into quantum computers. Why should those people be able to sue firms actually interested in innovating and providing goods and services to consumers?
Back your claims with evidence.
From all that you've mentioned, I've drawn the following conclusions:
1) You've opted to settle in the face of frivolous lawsuits ($6,000 to a law firm in Houston, TX) 2) You don't have a lawyer on retainer. 3) You are scared shitless of IP trolls.
My recommendations are as follows:
1) Hire a lawyer on retainer. If they are worth their salt, they will enter a counter-wso/">suit with their fees to be paid by the plaintiff if you are able to prove you did not violate the patent. Most "settlement trolls" will back off at this point.
2) You must realize as an entrepreneur, YOU WILL CONTINUE TO BE SUED. This does not mean that every case is without merit, but be aware, it's best to be prepared in any event that you get that lovely blue packet delivered to you.
3) Take the time to legitimately review their filed patents. Figure out exactly WHY they are suing you. Not simply because some asshole paralegal took the time to write it in legalese. Request the proofs from the U.S. Patent Office.
4) If are violating patents, take the corrective actions to resolve the complaint and continue ops.
very interesting.
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