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I'm planning a new software company that will license software to businesses. A lot of R&D will be needed to create the software and indeed, our codebase will be our biggest asset. Unfortunately our domain specialism is a minefield of thousands of existing patents - and there is a risk that, should we become successful, we will be attacked by patent trolls alleging unintentional infringement.

I want to create some sort of suicide pill that will protect my company against being sued for patent infringement. Let's say in three years time we have $50k in the bank, $1M annual revenue from loyal customers and $5M of intangible IP realised in our codebase. We're approached by a patent troll who sends us a list of patent numbers which have varying relevance to our work. Since he's asking huge amounts for licensing fees and damages, should he win a lawsuit, he'd win all our assets including our codebase. We need something to scare him off, and a suicide pill may be just the thing.

I'm trying to dream up legal constructs that give me such a suicide pill option. My best idea so far is that losing a patent suit would trigger the poison pill which would do two things:

  • My startup would no longer have rights to the codebase. So the troll can't get his hands on it.
  • The codebase would be automatically released to the public under an open source license. This means that the code lives on and gives the startup team the opportunity to build a new business upon it. Alternatively, the developers themselves, or another legal "phoenix" entity acquires rights to the source code so that the business can be reborn.

Is there a legal structure that could achieve something like this? One idea is that the developers themselves own the code copyright and license it to the company. The license would contain the poison pill. Or perhaps structure as two companies - a service company employing the developers that contracts to the customer-facing, branded main startup that builds source code into SDKs and is responsible for all patent licensing.

Sorry for such a rambling question - I hope I've made clear enough what I'm trying to achieve. All thoughts very welcome.

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Releasing someone else's patented technology through open source does nothing to protect you or anyone else who uses it. – JeffO May 15 '11 at 2:30
@Jeff, it is not someone else's technology - it is our own that a troll believes steps on a claim in one of several 1000 patent claims in the field. Open source is one mechanism that might just prevent us losing rights to our own code in the event of a devastating law suit. – paperjam May 15 '11 at 18:39
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Register a company far away from US and better in an offshore location. It's going to be unpenetrable. You can even hide the name of the owner of the company. – fobo Nov 23 '11 at 13:44

2 Answers

up vote 6 down vote accepted

Very interesting question. I'll break my answer down between patent trolls and competitors.

Patent Troll

My first thought is that such protections are not needed if your are sued by a patent troll (i.e., a company that has only patents and no products or services). A patent troll wants to get as much money from you as possible, but I don't think a patent troll would want your code. Even if a patent troll could somehow get your code, it would be a lot work to sell and of uncertain value. Patent trolls are in the business of suing people for patent infringement and not selling software.

Further, I don't think a patent troll could get your software even if it wanted it. If you lost in litigation, you would owe money, but a court could not order you to transfer your software.

If a patent troll takes all your money, then you might have to file for bankruptcy and as part of bankruptcy you might have to sell your assets (e.g., code) to the highest bidder. I don't know much about bankruptcy, but I imagine there would not be a huge demand for your code, and you could form a new entity to purchase it. If you do though, the patent troll could sue you again.

I don't know if your poison pill ideas would work as part of a bankruptcy proceeding. Doesn't pass the smell test for me, and I suspect it wouldn't be allowed.

A patent troll may not want to put you out of business, because it may be able to maximize its revenue if you stay in business and continue to sell the "infringing" products for another 10-15 years.

Competitor

The main difference with a competitor is that a competitor would like to put you out of business. It could seek to purchase your code in a bankruptcy proceeding to prevent you from starting another company with it. I doubt this would happen though. If you started another company, the competitor would just sue you again as you would again be infringing the patents.

In sum, this is an interesting and creative idea, but I wouldn't recommend it.

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great points. I would think it possible to redesign to avoid most types of patents in the "minefield" we're aware of so wilful infringement is much less of an issue. – paperjam May 14 '11 at 19:45
@paperjam, I didn't talk about willful infringement. Perhaps you mean repeated infringement wouldn't be an issue because you could avoid it a second time around? – user6603 May 14 '11 at 20:27
that's exactly what I meant. – paperjam May 15 '11 at 18:33
up vote 7 down vote

This is a bad idea and something that is symptomatic of the thinking in companies pre-destined to fail before they even get started.

Unless you are going to sell this suicide pill as a product to developers (i.e. the suicide pill is the actual product you are going to sell and you have experience developing suicide pills and other similar poisons), focus on your customers and developing a team that is better than anyone else at developing the next next next big thing, so that you are always two or three steps ahead leading the parade.

Throughout history, the most effective generals never worried about what the enemy is going to do to them, they worried about what they were going to do to the enemy. The generals that spent a lot of time worrying about the competition before the battle started never did well in battle -- they squandered resources, over-estimated the enemy's capabilities, became immobilized by fear and were always beat before they started. Attack opportunities first, engage in battle with your competitors -- seize new opportunities as the situation develops and use profits to defend against actual, real villains ...

Deal with reality as it really is, don't waste a lot of time trying to develop a suicide pill for your imaginary villain or shadows of your imaginary villain -- you have much bigger problems to work on first.

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This makes a lot of sense - the biggest identified risks in my business plan are failure to execute and patent torpedos. Since we're not incorporated yet, we're just musing whether an unconventional legal setup can give us an IP firewall. – paperjam May 14 '11 at 19:40
Well so far NZ is debating a no software patent clause in its new bill ... very controversial but at least one company has moved over here to have the freedom to operate in their development. Caution ... Bill not passed its final reading as of this day but there's some legal judo that might work (recent caselaw on split infringment in Akamai case, platform as service, outside data jurisdiction, etc) – drllau May 4 at 7:22

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