Historically, startups have had little occasion to pay attention to the proceedings of our nation’s highest court. While arcane questions of constitutional law have an enormous impact on broader society, the Supreme Court’s activities are often too far removed from the challenges entrepreneurs must handle every day to simply keep their businesses afloat. But, an upcoming case on the Supreme Court’s docket may warrant a shift from this traditional mindset, as the outcome of the dispute could have a resounding impact on startups and small businesses in all industries.
During its next term, the Supreme Court will review an important intellectual property case that pits two of the world’s biggest technology companies against one another: Apple and Samsung. In a 2015 ruling, the U.S. Federal Circuit Court of Appeals ordered Samsung to pay Apple the "total profits" attributable to several Galaxy smartphone devices after Apple alleged that Samsung infringed on certain patented design features used in its iPhone device. As often happens with cases of this magnitude, the decision was quickly appealed to the Supreme Court.
Total profits awards for highly complex multicomponent devices as envisioned under the Court of Appeal’s decision are uncommon, not to mention incredibly problematic, and the Supreme Court seems to agree.
Under traditional patent law, holders of so-called "utility patents" — patents that relate to an item’s functioning, like the GPS system within a smartphone — can recover from an infringer the profits lost due to the infringing activity or the amount the infringer would have paid had it licensed the technology. But, under the Court of Appeal’s decision, holders of "design patents" — patents that relate to the external appearance of an item or in this case, specific design features — can recover all the profits the infringer made by virtue of having improperly used the patented design.
Total profits awards for highly complex multicomponent devices as envisioned under the Court of Appeal’s decision are uncommon, not to mention incredibly problematic, and the Supreme Court seems to agree. Typically, total profit damages — a legal concept that dates back to the nineteenth century — were awarded for much simpler items for which a design patent would cover an entire product. In comparison, some estimates show that there are as many as 250,000 patents related to a typical smartphone. Total profits awards for complex modern technologies will foster an environment prioritizing litigation over competition. It will make innovators especially vulnerable to crippling lawsuits arising from design patent infringement claims.
A 2014 study revealed that venture capital investment would have been $21.772 billion greater had it not been for "litigation brought by frequent litigators."
While competing tech companies occasionally clash in court, this particular case has roused fear and panic within the tech community. A host of industry leaders, including Dell, eBay, Facebook Google, HP, Newegg and Vizio, filed a brief with the Court of Appeals supporting Samsung’s position, and warning of the dangerous precedent total profits would engender for innovators.
For smaller companies that may not have the legal resources to weigh in with the court, the impact of a total profits regime will be particularly devastating. Utility patent trolling is already a huge problem for startups, and giving trolls an even more lucrative and powerful tool to target small businesses will spur a cavalcade of specious lawsuits and extortive threats. The mere threat of having to forfeit the total profits associated with an item simply because of an infringement claim for a single design patent is enough to scare off any sensible investor, and the cost of mounting a legal defense to even an implausible claim of infringement can easily bankrupt a typical startup.
If startups and small businesses must compete in a world where a patent troll can seek "total profit" damages for infringements associated with a single spurious design patent, there may be "no profit" remaining.
Patent trolls have already caused investors in startup ventures to leave billions of dollars on the table. It’s not hard to imagine the landscape for small business financing will soon be plagued by similar fears. A 2014 study from Catherine Tucker of MIT’s Sloan School of Business revealed that venture capital investment would have been $21.772 billion greater had it not been for "litigation brought by frequent litigators."
One can’t blame these investors for harboring such anxiety about the potentially ruinous liability their investments could face as a result of patent trolls. This anxiety will only be compounded by the rise — or more likely explosion — of design patent infringement claims if the Court of Appeals’ ruling stands.
If startups and small businesses must compete in a world where a patent troll can seek "total profit" damages for infringements associated with a single spurious design patent, there may be "no profit" remaining. That means no innovation, no economic growth and no job creation, which can disproportionately harm historically underserved communities. Often, these communities heavily rely on small businesses for jobs, because many of us don’t live in a city with a booming tech sector. This point was articulated by some of these groups in a brief that was filed with the Supreme Court.
Today’s startups and small businesses won’t have the chance to even get out of the gate, let alone succeed, and a more precarious and inhospitable business environment will drive innovation and investment overseas. Entrepreneurialism has always been a bedrock quality of the American ethos. We only hamper that spirit by allowing the intellectual property system meant to inspire innovation to stifle it. As the voice of startups in government, Engine will continue advocating on this issue and invite all those who have a stake in the outcome of this monumental case to join us.
Evan Engstrom is the executive director of Engine, a nonprofit that supports the growth of technology entrepreneurship through economic research, policy analysis and advocacy on local and national issues. Reach him @evanmengstrom.
This article originally appeared on Recode.net.