Startups with Patents are the Ultimate Anti-Monopoly

“Big tech multinationals know that if they steal an invention, they can easily invalidate the patent [and that], even if they fail to invalidate it and they lose an infringement case, the worst that will happen is they will be awarded a compulsory license with damages calculated by a liberal arts major in a robe.” are often referred to as monopolies. But that is a fundamental misunderstanding of how patents work to enhance competition. The truth is that a patent is a natural anti-monopoly.

In a functioning patent system, inventions become investible assets when they are patented, and the value of the invention increases as market demand increases. Because of the direct relationship between market demand and patent value, a patented invention can attract enough investment to compete with entrenched incumbents in the market for the invention.

This effect introduces new competitors into the market who are protected against incumbents for a long enough period that they can survive after the patent expires. Thus, patents act to increase competition by introducing new competitors into the market and thereby create competitive markets. But perhaps even more important, some inventions deliver a strong dose of creative destruction to monopolistic incumbents who did not innovate fast enough, causing those companies to fail and clearing the market of dead weight, thus opening the market to innovative new companies.

Patents are the ultimate anti-monopoly in a free market. But for this to work, the market must function undisturbed by crony laws and regulations. A patent must be a presumed valid “exclusive Right.”

The Exclusive Right Creates Market Scarcity

Like any free market, the value of an invention is determined by variations in supply and demand. Demand for an invention cannot be increased or decreased for an invention except by market effects outside of the invention. But supply is different.

If supply for an invention is unlimited, the value of the invention is zero no matter how high demand goes. Therefore, an invention with unlimited supply has no value and can never attract investment. The problem of unlimited supply was corrected by the Founders, who wisely constructed a patent as an “exclusive Right” in the U.S. Constitution. (The word Right is used only once in the Constitution and capitalized in the original.)

The exclusive Right creates scarcity in the market for the invention—it prevents anyone other than the inventor from commercializing an invention protected by a patent. This limits supply so that demand can act to increase the patent’s value. Thus, the exclusive Right creates an investible asset that can be collateralized to attract enough investment to commercialize an invention and supply it at a level that meets demand.

The exclusive Right also keeps entrenched competition on the sidelines, allowing the startup to build the substantial resources necessary to compete against entrenched competition when the patent expires.

The exclusive Right encourages everyday people to invent and patent their inventions because a patent generates a value in relation to demand of the invention. They can license it, sell it, or commercialize it, but whichever path they choose, they get the investment of their hard work and money returned.

Without the exclusive Right, huge incumbents take marketable inventions and massively commercialize them by leveraging their established markets and deep pockets, thereby excluding from the market all others who cannot match their resources. The big win and the little lose. The inventor who risked so much to get their piece of the American Dream is left with a booklet of paper, a line on their resume, and tens or hundreds of thousands of dollars in debt, while the huge multinational thief gets even bigger. Without patents, monopolies are perpetuated.

Patents Are Most Valuable at the Earliest Stages of a Startup

In a perfect system, when an inventor invents something and files for patent protection, the startup has no customers, no product, no employees, and no sales, marketing, production or distribution capabilities. In most cases, there are no assets that can be collateralized to attract investment other than a patent.

At this early stage, demand for an invention is not known and will not be known until the product is created and put on the market. This is the point of highest risk for the inventor and investors. They bet it all on the patent’s exclusive Right that will create economic scarcity, thus limiting supply, and their own calculations of future demand.

Nobody can accurately project demand for an invention until it is tested with a viable product on the market. So, the first investment a startup attracts (often called angel or seed investment) is often just enough to prove demand. As the startup tests demand, it creates a product, attracts a core team and builds other investible assets.

If demand is proven and assets are built, the startup may attract venture capitalists (VC) who invest bigger money. Each subsequent round of VC funding builds more investible assets, so the patent becomes less and less valuable in relation to the other assets in investment decisions.

It is important to note that the first investment is primarily based on the patent and its presumed valid exclusive Right. This first investment is the most important investment because without it there can be no further investment. Without the first investment, the startup does not start.

Patents are Anti-Monopolies Only When Law Supports Free Markets

Patent’s anti-monopoly power is only effective if a patent is truly an exclusive Right that is presumed valid because there is a legitimate belief that the courts will uphold it.

The U.S. government has abandoned protecting patents for startups on multiple levels. Injunctive relief is highly restricted due to eBay v MercExchange; the Patent Trial and Appeal Board (PTAB) remains a killing field, wiping out over 80% of challenged patents; Section 101 exceptions have destroyed business method and software patents; patent suits must be filed at the headquarters of the infringer, creating venue chaos and radically increasing risks and costs; damages models have been obliterated, crashing damages awards as a result; the rational tests for obviousness are gone, replaced with hindsight bias; and much more. There is no longer any presumption of validity and no longer an exclusive Right.

Virtually every decision coming from any branch of the U.S. government related to patent protection in the last 15 years has gone against startups, independent inventors and other small entities. These decisions have tilted the field so far in favor of big tech that there are no longer contingent fee attorneys and no investors. The small cannot even get their day in court.

Today, big tech cannot be challenged with better technology because the only effective tool enabling competition has been destroyed. Judicially-created Section 101 exceptions specifically target business methods and software inventions—the very type of inventions that make up the core business models of the big tech giants. Business methods that are today unpatentable subject matter include page ranking algorithms (Google), “like” or “friend” buttons (Facebook), shopping carts (Amazon), online auctions (eBay), and many more. But big tech defends 101 exceptions because they have already monopolized these technologies and patents are the sole threat to their monopolies.

The sad result is that big tech multinationals know that if they steal an invention, they can easily invalidate the patent. They also know that, even if they fail to invalidate it and they lose an infringement case, the worst that will happen is they will be awarded a compulsory license with damages calculated by a liberal arts major in a robe who has never started up a company or marketed a product, and cannot possibly know what the market value of an invention is. If they steal it, they keep it and the cost is lower than licensing it in the free market.

Big tech multinationals simply watch and wait as new startups are built on new business methods and software. If the startup earns significant market adoption, big tech swoops in and copies the business method into their own platform. Then, leveraging their monopolistic user bases, search algorithms, data mining, endlessly deep pockets, app stores, and oligopoly relationships, they drive market saturation to their own platforms, thus running the startup out of business and burning all that was invested into it. The inventor and their investors are powerless to stop it.

Their business models are safe from creative destruction served up by a startup with better technology, and they have monopolized as a result. So now politicians consider enforcing antitrust laws against big tech to end the abuse of their monopolistic positions. It is beyond unfortunate that it is now necessary to use antitrust laws to restore free markets by breaking up big tech’s operating control of these markets.

If the U.S. government had not destroyed the patent system, startups with better technologies could disrupt big tech and more competition would be inserted into the market. Big tech companies that are not innovating faster than startups would be cleansed from the market and replaced by more innovative companies. Free and competitive markets would return without government intervention because patents are a natural anti-monopoly.

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Join the Discussion

22 comments so far.

  • [Avatar for Night Writer]
    Night Writer
    April 12, 2019 09:14 am

    Everyone forgets, but the Office of Budget and Management back in the early 2000’s said that there was no troll problem. This was before the massive internet dollars went into burning down the patent system.

    The fact is that last objective look at the patent system by the federal agency that is known for being the most objective non-political agency out of the entire federal government said there was no troll problem.

  • [Avatar for Night Writer]
    Night Writer
    April 11, 2019 10:50 am

    @19 EG

    Spot on is right. I think you need to add the academics too. Basically those internet dollars have bought everyone.

  • [Avatar for Anon]
    April 11, 2019 07:56 am

    Benny @ 7:

    Anon, I re-read my previous comment and could find no reference to the “efficient infringement” you so often mention. Do you really find it necessary to insert the term in every comment you post, regardless of context or lack of thereof?

    Re-read my comment please. I do not say anything about your instant comment to contain an explicit Efficient Infringer viewpoint.

    Rather, I state that your long-standing positions have created for you that “Efficient Infringer mouthpiece” effect.

    Your “whine” of context is misplaced.

    The context is that even here your view is colored by the bias that you have made to be part and parcel of your positions towards patents. Yes, my pointing this out IS on point precisely because how you feel overall impacts the specific things you state here.

    Paul M, let me correct you (slightly). You ask for some examples, and that is the wrong thing to ask for. Whether or not some examples exist today does not change the larger issue of overall trends as to the larger and larger tendency to disregard the legitimate IP protections of start-ups given the Efficient Infringer Mantra and denigration of strong patent rights.

    Even IF Benny supplies you with “some” examples, those “some” examples do NOT show that respect for IP is preventing the stomping on the start-ups that is the focal point of your writing.

    Mere “examples” do NOT prove Benny’s point.

  • [Avatar for EG]
    April 10, 2019 04:02 pm

    To all:

    I again emphasize that what Paul says in this article is spot on. The Goliath multi-national techs, a number of IP academics (if you can call them that as many of them have no technical or science background), and the popular media (including the notorious EFF) have gotten Congress with the AIA (Abominable Inane Act), as well as the courts (SCOTUS being the notorious example in “rewriting” Section 101 on patent-eligibility amongst other judicial overreach) to buy into the “patents are bad” narrative, as well of the fable of the “patent troll” having no support in fact. In short, those undermining the U.S. patent system as it was say 15 or even 10 years are employing gamesmanship, propaganda, politics and media hype with the U.S.’ innovation future. As all of this innovation continues to flee abroad or is not be developed at all, you can thank (or blame) these IP pirates who view “efficient infringement” (i.e., theft) of other people’s property as an appropriate way to do business. Indeed, I find it truly ironic that the U.S. government is so concerned with IP theft by China (and it is a serious problem), yet has no concern about similar “IP theft” by the Goliath muti-national techs that reside, for example, in the Silicon Valley.

  • [Avatar for Night Writer]
    Night Writer
    April 10, 2019 01:25 pm

    @1 Benny

    You always have this anti-patent narrative where you ignore reality. I worked in at a big corporation. If you didn’t have IP protection, then what we did is figure out how much it would cost to build what you were doing and decide whether to buy you, have you build it, or build it ourselves. The price was always much lower if you didn’t have IP protection.

    Additionally, I have first hand experience with start-ups where big corporations have just copied what they did and rolled over them.

    Please try to stick to the real world. What you said does happen, but it is not the whole story.

  • [Avatar for Glen Wade Duff]
    Glen Wade Duff
    April 10, 2019 01:08 pm

    Paul, thank you. We have a unique oddity, a full contingency patent protection firm that has worked with us for years to protect our innovation from those who want to steal innovation and not pay for the right. Contact me for Matt’s info, so others can enjoy some support to protect their hard earned efforts.
    I especially liked your comment:
    “They can license it, sell it, or commercialize it, but whichever path they choose, they get the investment of their hard work and money returned.“
    We have been uniquely fortunate to license our multiple patents and get our innovations commercialized, while we return our upfront investment by selling into the market and growing. We have engaged in multiple licensing discussions and continue to try to make our innovations available to the largest group of riders in the world.
    I know we were also fortunate to appeal to the Supreme Court with supportive Amicus Briefs showing how the small guys can bond together for strength!
    Another unique opportunity: Shark Tank exposure has helped our small startup expand our marketing and branding considerably. But not everyone can get that same advantage. In our unique case the infringers of our system of riding ZUP watersports boards made our “Shark Tank episode more exciting for TV!” So maybe a “win-lose-Win” ultimately.
    We join you in your efforts to help the Hungry Innovators continue to grow the eco-system so our children and grandchildren can see that it is worth it to pursue their future dreams!

  • [Avatar for Matt]
    April 10, 2019 10:31 am

    I have some experience with individuals pursuing a start up and many of them simply don’t see the value in hiring a patent attorney due to how expensive they can be. This leads to very poorly drafted patent applications by pro se applicants that do not understand the case law. I worked with a friend of mine who was pursuing a startup to draft his flagship patent and he understood the value of having a professional draft the application, but the inventors were extremely resistant to the idea. I think this plays into big companies challenging patents rather than acquiring or licensing the patents from startup companies.

  • [Avatar for EG]
    April 10, 2019 10:24 am

    Hey Paul,

    A well-written article and sad story of how the U.S. patent system has fallen prey to the Goliath multi-national techs who want no competition from the Davids of Innovation. As a patent attorney of almost 42 years (and second generation one at that) who will soon hang up his IP law spikes, I truly wish the situation was different.

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 10:21 am

    Benny, Waze sold exclusively through the Google app store, which is a market fully controlled by Google. Look for me next article.

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 10:18 am

    Benny, Chronatis was 2002. but dont worry. I’m going through the rest of them.

  • [Avatar for Benny]
    April 10, 2019 10:06 am

    Paul –
    Mobileye. Chromatis. Waze. Argus. XtremeIO. Imperva. Playtika. Mazor…There’s plenty more where that came from, but I won’t bore you. Did you say “there are none?”

  • [Avatar for xtian]
    April 10, 2019 09:51 am

    From the biotech side, I agree with Benny. Big Pharma looks to start-ups and universities to license or acquire the research. Having IP covering the research where such IP has a substantial patent term remaining is critical to these deals. Without IP, no Big Pharma business development executive would would look twice at the research.

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 09:49 am

    CP. Your list is virtually all pharma. Thank you but pharma is very different than tech. May I remind you that tech has monopolized. Please give me a list of tech post AIA.

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 09:48 am

    CP. Your list is virtually all pharma. Thank you but pharma is very different than tech. May I remind you that tech has monopolized. Please give me a list of tech post AIA.

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 09:45 am

    Benny/CP, you wave you hands and say there are acquisitions. Give me a specific example. One that had the potential to disrupt. One with patented inventions. One not selling through app stores. One not infected by big tech. One on the outside trying to make a difference. There are none. You know it. So you won’t be specific. If you find one, please let me know.

  • [Avatar for Benny]
    April 10, 2019 09:02 am

    I wasn’t expecting a homework assignment. If you want a list of startups acquired by large corporations in the 50M$-14B$ range, use the internet (it is still free). In my comment I only referred to those in my home country, I would assume that is typical of the global picture.
    Anon, I re-read my previous comment and could find no reference to the “efficient infringement” you so often mention. Do you really find it necessary to insert the term in every comment you post, regardless of context or lack of thereof?

  • [Avatar for CP in DC]
    CP in DC
    April 10, 2019 08:54 am

    Once again I agree with Benny because the facts support the conclusion. Here is a long list of mergers post 2013 in the pharma industry, where the value of the merger was 10 billion or more. The small ones get bought out at a rapid rate as well, I’m just not willing to do more research for the author.

    The big boys buy out the competition and the IP, especially were capital counts. There are those who do not wish this was true, but that doesn’t change the facts. Did you notice Allergan was bought out? Remember them?

  • [Avatar for Paul Morinville]
    Paul Morinville
    April 10, 2019 07:24 am

    Benny,, Who are the innovative companies that have been acquired since 2013?

  • [Avatar for Anon]
    April 10, 2019 07:19 am

    Sorry Benny, but you just do not have credibility to have your statements have any force.

    While it is certainly true that Big Tech does buy out innovators “lock, stock and IP barrel,” it does NOT follow that such activity outweighs outright IP theft.

    You have provided nothing but your feelings as to this factual comparison, and the heavy alignment of your feelings with the positions of Efficient Infringers diminishes your statements here.

    For your feelings to have an impact, you will need to present at least some independent corroborating evidence in addition to the fact that outright purchase does also exist in order to place the relative weight of those two very different activities.

  • [Avatar for John Daniels]
    John Daniels
    April 10, 2019 07:01 am

    Paul, you have hit the nail on the head. I have been a US patent attorney and independent inventor since 1990. The first invention I sold in the early 90s was sought out by the company that bought it, they knew that they needed to have my invention to protect their investment in a new product. The presumption of validity and enforceability gave me enough advantage to make a good deal. In 2001, I was fortunate enough to sell a suite of patents to the world’s largest software company, they have since made hundreds of millions of dollars from my inventions, but they first paid for my patents to step into my shoes. Independent inventing is highly speculative and should be encouraged by our patent laws and our tax code (maybe the germ of another article). Today, I am in Berlin, Germany collaborating with one of the world’s largest healthcare companies on products that will change the future of healthcare for the better. I could not have gotten here without a robust patent portfolio. But when an invention is germinating, you often cannot know what is the rough and what is the diamond, so you have to speculate (the 99% persperation). I can only do this speculation because I don’t have the expense of paying an attorney to prepare and prosecute patent applications. What our law makers do not seem to realize is that many truly worthwhile inventions do not happen all at once, it takes time for an invention to ripen and to evolve – time is money, the window of opportunity is something that all startups/independent inventors are short on. So when they took away the one-year grace period (as one example) it was a blow to the independent inventor and gave more advantage to the entrenched encumbant. A start-up or independent inventor cannot work on commercializing a good idea in a vacuum, like a big corporation can, and keep inventing in secret. To be cynical, the lobbyists did realize this when they wrote the AIA act for the law makers so that their clients are better off with provisions that did further damage to the patent monopoly incentive for the independent inventor and startup.

  • [Avatar for Annie]
    April 10, 2019 05:30 am

    Such a good article, thank you. As a start-up person new to patents this situation is absolutely astounding and I am really, really surprised at America. I do not understand why this has been allowed to happen. Are there any counter-arguments that anyone could make as to why this isn’t a huge fall from grace?

  • [Avatar for Benny]
    April 10, 2019 05:24 am

    In the real world, big tech buys out the start-ups, lock, stock, and IP barrel. McDonalds buy-out of AI startup Dynamic Yields is just the latest in a large index of start-up acquisitions. Even Google’s most profitable tech come from bought-in startups, rather than outright theft of IP. Where I live, startup managers that sold out to big tech years ago (and there are many examples) are still partying.