An IPO is a watershed moment for a growing and successful company, offering the promise of newly raised capital and extensive publicity — not to mention a big payoff to the stakeholders who have given years of time and effort to the company. But unwanted patent infringement litigation may spoil the celebration.
For years, the information technology community has been wary of assertion activity by monetizers, also known as patent trolls or non-practicing entities (NPEs), against companies preparing to go public, creating an unwelcome obstacle during one of the most visible and vulnerable times of a company’s development.
A new study by UC Hastings Professor Robin Feldman and Research Fellow Evan Frondorf shows that this fear is justified: companies frequently receive patent demands — in the form of lawsuits, threats, or similar requests — shortly before and after their IPO. These findings suggest that NPEs are tactically suing growing companies when they are at their most vulnerable, forcing settlements regardless of the merits of a claim.
The study is forthcoming in the peer-reviewed journal, the Stanford Technology Law Review, and is available here.
In “Patent Demands and Initial Public Offerings,” Feldman and Frondorf undertook the first empirical examination of this potentially strategic behavior used by NPEs. They surveyed lawyers at recently public companies about their exposure to patent demands surrounding major funding moments in a company’s development.
“A significant majority of information technology companies received patent demands near their IPO,” says Feldman. “And almost all of that activity originated from patent NPEs.”
Why do NPEs choose to target companies during the initial public offering period? One potential explanation focuses on the highly scrutinized public disclosures that companies must make before an IPO.
“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,” explains Frondorf. “An IPO is new leverage that can be used against a company trying to avoid the negative effects 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,” agrees Feldman. “It’s more evidence of the need for comprehensive patent reform.”
Through their survey of attorneys at newly public companies, Feldman and Frondorf found evidence of heightened demand activity launched against soon-to-be or recently public companies:
The effects were particularly pronounced for information technology companies: