1. In late 2013, the U.S. House of
Representatives passed the Innovation
Act (H.R. 3309), legislation that would
reform the U.S. patent litigation
system.1
The Senate is now poised
to act.
The patent reform debate centers on
what is best for the future of the U.S.
innovation economy. Everybody claims
they want to promote innovation. But
by and large, those at the front end of
innovation — the entrepreneurs and
executives leading America’s young,
fast-growing companies — have had
only a limited voice in this debate.
In Silicon Valley Bank’s Innovation
Economy Outlook 2014 survey, we
asked leaders at these high-growth
U.S. companies what they think. Here,
we’ve summarized what we heard
from more than 1,000 executives
across the United States. We also
offer our views, as bankers who work
closely with many of these companies,
on the principles that should guide
Congress as it moves forward.
Strengthening the U.S. Innovation Economy
By Ending Abusive Patent Litigation
The problem
Increasingly, small startups, growing tech companies and even many nontechnical
companies that use technology tools face patent lawsuits in which the cost of
defending the suit — rather than the strength of the plaintiff’s claim — drives the
outcome. In a 2013 study by the National Venture Capital Association (NVCA),
80 percent of the venture capitalists and executives surveyed said the number of
patent demands they face has grown over the past five years.
Litigation is an expensive distraction for any company, large or small. But for
startups, it can be the difference between success and failure. Patent infringement
suits drain much-needed time and money from young companies. These lawsuits
can also interfere with future fundings and acquisitions. In fact, half of the venture
capitalists in the NVCA study said an existing patent demand would be a major
deterrent to investing in a prospective portfolio company, while every investor
said it could factor into their investment decision.
Collateral damage caused by litigation may be the price we have to pay to protect
legitimate patents from infringement. But when litigation outcomes are driven
by tactics rather than valid intellectual property (IP) rights, the U.S. innovation
economy suffers.
What innovation economy executives say
In Silicon Valley Bank’s Innovation Economy Outlook 2014 survey, we asked
executives what they see in today’s patent system and what they think of different
reforms Congress is considering.
We heard from 1,004 U.S. executives leading companies in 36 states and the
District of Columbia. More than half of the respondents are CEOs, and 84 percent
are C-level executives.
These executives work for companies from a variety of sectors that include software
(55 percent of respondents), healthcare (25 percent), hardware (10 percent) and
cleantech (5 percent).
Most of the companies represented in the survey are young startups. Thirty-one
percent of the respondents work for a company that did not earn revenues in
2013. Of those whose companies earned revenues, nearly half had 2013 revenues
below $5 million and a majority had 2013 revenues under $25 million. Fifty-seven
percent of the executives’ companies were not yet profitable in 2014.
5%10%55% 25%
Respondents by sector
◻ Software ◻ Healthcare ◻ Hardware ◻ Cleantech

2. Here’s what we heard
55%of the survey’s
respondents
say their
company filed
a U.S. patent
in 2013.
Patent filings and litigation risk by sector
100%
80%
20%
40%
60%
0%
Healthcare
9%
73%
Hardware
10%
80%
Software
12%
45%
Cleantech
7%
79%
Patent filings
Litigation risk
1. Companies across the U.S. innovation
economy use patents. Fifty-five percent
of the survey’s respondents say their
company filed a U.S. patent in 2013. The
focus on patents begins at a very early
stage: 57 percent of executives with
companies not yet earning revenues
say they filed a U.S. patent in 2013. The
number dips a bit among companies
just starting to earn revenues (to 44
percent among companies earning less
than $5 million), then picks up again as
companies gain scale. Among executives
at companies earning $50 million or
more in revenues, 70 percent say they
filed a U.S. patent in 2013.
2. Software companies are less likely
to rely on the patent system. Only
45 percent of executives at software
companies say their company filed
a U.S. patent in 2013. That’s much
lower than in healthcare (73 percent),
cleantech (79 percent) and hardware
(80 percent).
This echoes the skepticism we heard
from software executives in last year’s
survey about patents overall. In Silicon
Valley Bank’s 2013 Startup Outlook
report, 36 percent of executives
with enterprise software companies
said the cost of IP protection diverts
resources from more productive uses,
and 59 percent said they focus on
nonlegal means (rather than patents)
to create their competitive advantage.
For consumer Internet companies,
the numbers were 26 percent and 59
percent, respectively.
3. Software startups are more likely to
get sued. Although software companies
are less likely to rely on patents,
they’re more likely to get sued. Twelve
percent of software executives say their
company has received a demand letter
or been the target of an infringement
suit, compared with 7 percent of
cleantech executives, 9 percent of
healthcare executives and 10 percent
of hardware executives.
4. Patent litigation is pervasive among
somewhat larger companies and
also hits small startups. Nearly half
(48 percent) of all executives with
companies that earned $50 million
or more in 2013 revenues say their
company has been the target of a
patent infringement suit or demand
letter. One in four executives in
these larger companies also says
their company isn’t yet profitable.
Therefore, patent litigation takes
scarce capital away from other uses —
like hiring new employees and
growing the business. And although
litigation against smaller companies
is less pervasive than against larger
companies, 4 percent of executives
with companies that earned less than
$5 million in 2013 say they have
been a target of a demand letter or
infringement suit.
The problem doesn’t end with a single
lawsuit. Among those who have
been sued, 62 percent say they are
concerned that they or their customers
will be sued again.
5. Most of the suits are coming from
non-practicing entities. The core
issue in the patent reform debate is
abusive litigation tactics. However,
the one-sided nature of litigation by
non-practicing entities and patent
assertion entities — often referred
to as patent trolls — raises unique
challenges that affect how well the
litigation system works. As a result,
we wanted to understand to what
extent these suits are driving the
litigation facing young companies.
The answer? A lot. Among executives
whose companies have received
a demand letter or infringement
suit, 65 percent say it came from
a patent assertion entity or non-
practicing entity.
55%
48%
STRENGTHENING THE U.S. INNOVATION ECONOMY BY ENDING ABUSIVE PATENT LITIGATION
2

3. Demand came from patent assertion entity
Views on patent reform
HealthcareHardwareSoftware
65%
Among executives whose companies
have received a demand letter or
infringement suit, 65 percent say it
came from a patent assertion entity or
non-practicing entity.
If somebody files a meritless lawsuit, they
should have to pay the other side’s legal bills.
The numbers are even more
striking for software and hardware
companies. Eighty percent of
software executives and 78 percent
of hardware executives say the
demands they face have come
from non-practicing entities or
patent assertion entities. Among
healthcare executives, in contrast,
the number is 20 percent.
6. People settle. Today’s litigation
system creates a strong incentive
for companies to settle patent
infringement suits, regardless of
the merits of the cases. The median
cost of litigating a moderately
sized patent suit is $2.6 million
(up 70 percent since 2001), while
the cost of defending even a low-
stakes patent suit will generally
exceed $600,000, according to a
letter written in November 2013 by
intellectual property law professors
supporting patent reform. Not
surprisingly, 86 percent of the
executives in this year’s survey who
received a patent infringement suit
or demand letter say they chose to
settle rather than go to trial.
7. Innovation economy executives
overwhelmingly support the reforms
Congress is considering. Ninety-five
percent of executives in the survey
have views about how the patent
system should be reformed, and
virtually every executive in the
survey supports at least one of the
proposals on the table. Three in four
support fee shifting, and three in
five support greater transparency
in demand letters and a more
streamlined discovery process.
If somebody claims I’m violating their patent, they
should have to make clear up front who really owns
the patent and how they think I’m infringing.
The discovery process should be streamlined so
it costs less to decide whether or not the case has
enough merit to go forward.
Startups need to be protected. Congress should
create some kind of “safe harbor” to make them
less attractive to patent assertion entities.
The litigation process should be
streamlined so the court focuses first on the most
important issues in the case.
Other
The patent system needs to be reformed,
but I don’t know how. 5%
14%
42%
47%
59%
63%
77%
55%
48%
80% 20%78%
STRENGTHENING THE U.S. INNOVATION ECONOMY BY ENDING ABUSIVE PATENT LITIGATION
3

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Changes we support
By working in concert with the innovation
community, Congress can structure legislation
that protects the legitimate rights of innovators
and fosters the creativity behind the world’s
most successful companies. In light of what
we’ve heard from startups and growing
companies across the country, we believe
Congress should do the following:
▶▶ Help align litigation incentives by having
courts require the losing party to pay the
fees and costs of the prevailing party, unless
the court concludes that the losing party’s
position was reasonably justified or it would
be unjust for the court to shift fees (such as
when it would cause financial hardship to
entrepreneurs and innovators).
▶▶ Increase transparency by having plaintiffs be
clear in complaints and demand letters about
the nature of their claim (what patent and/
or what claims are being infringed, by what
products and services and in what manner);
who the real party of interest is; and what
other similar litigation is pending.
▶▶ Protect end users from abusive threats
and litigation by staying duplicate cases
against them.
▶▶ Make litigation work more efficiently and
effectively by limiting the scope of expensive
discovery and phasing the discovery process,
while leaving trial judges with appropriate
discretion to deal with case-specific issues.
▶▶ Keep the system balanced. Make sure
legislative changes preserve a startup’s
ability to use the courts to protect
its intellectual property and provide
appropriate protection to equity investors.
▶▶ Promote the long-term value of intellectual
property by focusing on measures that
eliminate abusive behaviors, rather than
developing rules that depend on a plaintiff’s
specific business model.
1 H.R. 3309—Innovation Act, 113th Congress (2013–2014), http://beta.congress.gov/bill/113th-congress/house-bill/3309