The Chokehold of Software Patents: How They Stifle Startup Innovation

One of the biggest arguments offered in support of software patents is that it will help startups compete against larger companies. Sounds like a wonderful David and Goliath story, doesn’t it? Poor little David is attacked by big bully Goliath but tiny David uses the magic powers of his software patents to slay Goliath. Funnily enough, this argument is trotted out not by startups, but by MNCs, their lawyers and their lobby groups. The theory sounds wonderful until you start digging deeper into the real world practice. 



In the real world, if an elephant steps on an ant, the ant will die but if an ant steps on the elephant, nothing much happens to the elephant. Similarly, if a startup is faced with patent litigation from a large company, their cost of defending themselves can rise up to Rs 3 crores. This is enough to bankrupt seed stage startups that typically raise Rs 1 crore to Rs 3 crores at this stage. Software patents confer the exclusive right to prevent others from making, using, selling, or distributing the patented software without the patent holder's permission. This means that the patent holder has the legal authority to control how the patented software is utilized by others for a certain period of time, typically 20 years from the date of filing the patent application. In this article, we look at the real world impact of software patents on startups.

An Expensive Affair

A little appreciated fact is that acquiring and enforcing software patents is a task that requires a lot of business sophistication. This favors larger companies and goes against startups. The process of obtaining and defending a software patent is an expensive and time consuming process for startups. A few early stage startups that we spoke to said that they chose to allocate their limited resources to immediate priorities like product development and marketing, instead of acquiring software patents. At this stage startups often struggle with issues of finding product-market fit, navigating the regulatory landscape, and scaling up. Every penny counts, and acquiring software patents is very low on the priority list. 

In contrast, mature organizations have the time, money and expertise needed to acquire and enforce patents. A product manager at an MNC reported to us how lawyers from his company asked him to describe his work. A few months later, the lawyers had converted his descriptions into nine patent filings. These filings were wrapped up in such complicated legal language that he was not able to recognize his own work! 

Even if a startup acquires a patent portfolio and sues a larger company for patent violation, the time and money involved in prosecuting a case make life tough for startups. Given the achingly slow pace at which Indian courts work, the startup might have ceased to exist by the time the case is decided. Financially, if the startup is up against a much larger firm, the legal fees can be daunting. Larger companies can afford top notch lawyers who charge as much as Rs 25 lakhs for each appearance and have the staying power to see through court cases that take years, if not decades. The other alternative for the startup would be to settle out of court on terms that could be unfavorable. Clearly, the dice is loaded against startups in the case of software patents. 

Chilling effect on innovation

Startups and VCs hesitate to enter areas that have high patenting intensity. As James Bessen and Michael Meurer point out in their book, Patent Failure, the abstract nature of software patents makes it the most litigated category of patents. They argue that if it is difficult to draw boundaries around something, it does not work well as property. Additionally, low-quality patents with vague claims and overbroad scope create a risky playing field for startups. This patent on online voting is a prime example of a low quality patent that can cause serious problems for others who wish to use similar methods. 

The concentration of patents in the hands of large companies can lead to patent thickets that create significant barriers to entry in a particular market. For example, the smartphone sector is reported to have 125,000 patents. When Google acquired the Android operating system, they had a very small smartphone patent portfolio as compared to Apple. To mitigate the threat of being sued, Google acquired Motorola for $12.5 billion, mainly for access to Motorola’s patent portfolio.

Multiple companies in the same industry could also get into an arms race to acquire patents in order to get a competitive edge. In such cases, the dominant patent owners usually cross license their patents to each other, leaving other players by the wayside. 

Another threat emerges from the rise of patent trolls or Non Practicing Entities (NPEs). These are organizations that do not build anything but acquire a portfolio of patents with the aim of using them for litigation and royalty collection. Startups, lacking the resources to navigate the complex patent landscape or engage in costly legal battles, may find themselves marginalized or even driven out of the market altogether.

Deterrent to Investment

The existence of software patents can act as a deterrent to potential investors. Imagine that an early stage startup that has raised Rs 2 crores as seed capital is hit by patent litigation from a large patent owning company. At a time when the startup is struggling to find product-market fit and scale up, management resources and limited capital get diverted to combating this existential threat. Investors that the startup has been in touch with for the next round of funding back off until the legal uncertainty is resolved. Given the slow pace of Indian courts, the mere threat of software litigation, and the uncertainty cause can be lethal. By the time courts proclaim a verdict, the Rs 2 crore seed money that the startup has raised, might be exhausted. Alternatively, the startup might have to settle out of court on unfavorable terms. 

Conclusion

India has been relatively free of software patent litigation. However, the pace of granting software patents has been increasing in recent years as per a Software Freedom Law Center study that was supported by FOSS United. Entrepreneurs are often tempted to consider software patenting to protect their business ideas. However, they must realize that this is a double-edged sword that favors larger enterprises who have more manpower and legal firepower in this fight.