How to kill the next generation of startups

It’s one of the slickest bait-and-switch maneuvers in recent congressional history. A bill advertised as a targeted approach to reining in patent trolls who extort small businesses has now been twisted into a measure to immunize big tech companies against the patent rights of startups and small businesses who create nearly all breakthrough innovation and job growth in the U.S.

The last time a legislative miscarriage of this scale occurred, it was the passage of the Sarbanes-Oxley Act of 2002, which was supposed to prevent financial misconduct by big businesses like Enron. Instead, the law burdened small public companies with multi-million-dollar accounting costs and killed the IPO market for nearly a decade, while still allowing the biggest banks in the world — all of them Sarbanes-Oxley compliant — to plunge the nation into the economy-shattering financial meltdown of 2008.

Is America about to shoot itself in the foot again — only this time with patent rather than accounting reform bullets?

{mosads}The provisions of H.R. 9, the so-called “Innovation Act” sponsored by House Judiciary Chair Bob Goodlatte (R-Va.), suggest that the answer is yes. Backers of this bill promise it will reduce abusive patent troll litigation by heightening pleading standards, staying lawsuits against the innocent customers of infringing products sold by manufacturers, and making patent trolls liable for the legal costs of defendants proved innocent of infringement.

It sounds reasonable at first — assuming that the bill truly targets only the patent trolls who extort settlements from non-infringing victims unable to pay the huge costs of standing up to them in court. But that’s not what it will do. Instead, the bill will undermine the intellectual property rights that small companies desperately need to protect their hard-won achievements in R&D and compete fairly against their larger and wealthier incumbent competitors.

For example, under H.R. 9’s “customer-stay” provision, the $60 billion tech giant Hewlett-Packard could be considered a “covered customer” of Intel, whose chipsets it uses in its laptops. That means it would be immune from a patent suit filed by a startup whose inventions HP had infringed. Not exactly a Mom and Pop coffee shop owner we’re protecting here, is it?

Then there are the fee-shifting provisions of the bill, which presumptively require all plaintiffs to pay the legal costs of defendants that prevail at trial unless additional rulings determine that the lawsuit was “reasonably justified.” Again, this is supposed to penalize patent trolls who file meritless patent suits.

But what about meritorious suits? Since even justified suits are likely to win at trial only about 50 percent of the time, this could turn a legitimate patent suit filed by a startup against an industry kingpin into a bet-the-company affair if the defendant’s vastly-superior resources carry the day in court and the startup has to pay the defendant’s multi-million-dollar legal costs.

And it’s not just the startup that would be subject to an extinction-level fee-shifting event. Under the joinder rules in H.R. 9’s fee-shifting provision, the angel investors and venture capitalists who invested in the startup would also be on the hook, as would the universities whose patented research the startup is bringing to market.

According to the 2008 Berkeley Patent Survey, 67 percent of entrepreneurs say patents  are vital to obtaining venture funding for their startups. But just try to get funding for your startup with that sort of Damoclean sword hanging over both you and a venture backer.

As for America’s other great midwife of new products, services, and medical treatments — the universities whose patented research has spawned more than 10,000 new startup  companies and an array of wonders from GPS and the Internet to hundreds of life-saving medicines and vaccines — this fee-shifting rule could dry up university technology licensing completely. That would leave thousands of future startups and innovations stillborn.

No wonder the “Innovation Act” is strongly opposed by both the National Venture Capital Association and 144 major universities across this nation.

So whose side should Congress be on: that of the rich and powerful industry giants lobbying for H.R. 9, or that of the startups responsible for nearly all breakthrough innovation and job growth in the U.S.?

In considering this question, Congress should remember that the biggest job-creating industries of the last 60 years  — semiconductors (consumer electronics), personal computers, software, biotech, and Internet e-commerce — were all launched by venture capital-funded startups that commercialized university research.

At the very least, Congress should ask the tech giants like Google and Amazon lobbying for this bill to explain their recent (and very convenient) change of heart regarding patents.

Has Google forgotten that when it was a startup, it deemed its original PageRank patent No. 6,285,999 so vital it filed for it before the firm even had a business plan, venture funding, or a domain name — and then paid Stanford University $336 million in shares for an exclusive license to it? Google’s current claim that patents (especially software patents) “hinder innovation” thus seems rather disingenuous, especially for a firm accused of anti-competitive behavior by governments on three continents. It’s also supremely ironic, given that Google was the first company in the world whose initial success was built on a software patent.

And what about Amazon’s famous one-click software patent, granted in 1999? Only 23 days after it obtained that patent, Amazon filed a patent suit against its then-larger competitor Barnes and Noble. Today, however, Amazon is the defendant in two patent suits filed by startups in the cloud computing business, the source of more than a third of Amazon’s total profits.

The point being that as a startup, Amazon certainly wasn’t shy about using its patents to keep competitors from stealing its technology — a practice that Amazon would now seek to deny or make prohibitively-costly for today’s startups.

The hypocrisy here is breathtaking. Does the last generation of startups really intend to yank up the patent ladder behind it just to prevent the next generation of startups from challenging their supremacy — no matter the cost to the American people and economy?

If this is not their intent, then all they have to do to demonstrate that fact is support an amendment to H.R. 9 giving safe harbor from the bill’s provisions to universities and startup companies as defined under Title 1 of the Jumpstart Our Business Startups (JOBS) Act of 2012.

This is the same JOBS Act, incidentally, that was passed 10 years after Sarbanes-Oxley to remove the unintended onerous burdens it placed upon startup companies. Hopefully we won’t need to wait a decade to correct similar flaws in the so-called “Innovation Act.”

Pridham is the chairman and chief executive officer of the patent advisory and venture firm Dominion Harbor Group.