Insuring Failure: How Crowd-sourcing Sites May Be Forced Into the Role of Patent Insurance

• Publication year: 2016

Insuring Failure: How Crowd-Sourcing Sites May be Forced Into the Role of Patent Insurance

Spencer S. Haley

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INSURING FAILURE: HOW CROWD-SOURCING SITES MAY BE FORCED INTO THE ROLE OF PATENT INSURANCE

Spencer S. Haley^*

Table of Contents

I. Introduction..........................................................................................180

II. 3D Systems versus Formlabs and Kickstarter..........................183

III. Global Tech.............................................................................................186

IV. How Crowd-Sourcing Companies May Be Forced Into the Role of Patent Insurance........................................................189

V. Conclusion...............................................................................................190

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I. Introduction

Crowd-sourcing is a form of investment model in which a creator or startup company makes a promise to investors in return for the funds that are used to complete a project.¹ Crowd-sourcing is typically facilitated by a website based service, such as Kickstarter, that charges an amount based on the total amount of funds raised by the creator or start-up.²

Startups that rely on crowd-sourcing are producing solutions to novel challenges.³ Even public entities, such as the U.S. government, are using crowd-sourcing to solve economic and scientific problems.⁴

Crowd-sourcing may be one manifestation of a brave new world of high technology innovation in which markets are no longer defined by economies of scale and developed distribution networks.⁵ Unfortunately, crowd-sourcing and similar innovations have come into being at a time when the proliferation of high technology patents has made it difficult in some industries to acquire all the legal rights necessary to bring new products to the market.⁶

In practice, many technology developers ranging from tech giants to public researchers deliberately ignore potential infringement issues often fail to run patent checks and take no action when confronted with a cease and desist letter.⁷ This pattern may hold for tech startups, which are heavily incentivized to ignore potential patent infringement issues.⁸

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While many companies and researchers continue to produce new products despite the threat of litigation,⁹ crowd-sourcing sites that partner with tech startups may be particularly susceptible to litigation threats because crowd-sourcing sites may rely on a business model that produces a small profit (five percent in Kickstarter's case)¹⁰ from an individual instance of hosting a tech startup. Under this model a very successful technology project may yield around $50,000 in profit for Kickstarter,¹¹ but litigation costs to defend against a patent lawsuit in lower stakes cases (under $1 million) average over $600,000.¹² Despite the advantages that crowd-sourcing offers to innovators, patent litigation may soon threaten the relationship between crowd-sourcing companies and tech startups, specifically through litigation brought under § 271(b) of the Patent Act.¹³

The Supreme Court's decision in Global—Lech Appliances, Inc. v. SEB S.A. may cause crowd-sourcing sites to rethink their relationships with tech startups due to the implications of the Court's holding that willful blindness may equate to a showing of induced infringement.¹⁴

If a tech startup is found to have committed direct infringement under § 271(a), then it may be possible for legitimate companies and paper-holding trolls¹⁵ alike to sue the startup's project sponsors (including crowd-sourcing sites) through strategic use of notice under a theory of knowledge or willful blindness.¹⁶

By notifying a crowd-sourcing company of a client startup's infringement (both real and imagined), the company will be placed in the unenviable position of deciding between two equally unsatisfactory legal postures.¹⁷ The crowd-sourcing site can ignore the notice and demonstrate willful blindness to possible

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infringement, or it can investigate the claim.¹⁸ Investigating the claim will only provide a defense in subsequent litigation if the defendant's belief that the plaintiff's patent has not been infringed is deemed reasonable,¹⁹ and the company may still be required to defend or settle the lawsuit.²⁰ This posture pushes the hypothetical crowd-sourcing site away from its original function as an enabler of innovation and into the historically problematic role of patent insurance²¹ by forcing a crowd-sourcing platform to evaluate potential startups on the basis of litigation risk. This possibility is problematic because patent insurance may be fundamentally unfeasible due to the costs involved and the difficulty of ascertaining patent rights.²² Neither of these outcomes is desirable in a society where technological innovation and judicial efficiency have been enthroned as paramount values.²³

Part II of this Note will set up the discussion regarding crowd-sourcing sites and induced infringement by examining the legal dispute between the company 3D Systems and the startup Formlabs. This dispute provides relevant context because Formlabs began its life as a crowd-sourcing project on Kickstarter, and Kickstarter was briefly a co-defendant under a theory of induced infringement.²⁴ Part II will also explain the reasons that this suit, which concluded with Kickstarter dodging all liability for induced infringement, may not be representative of the pattern that future litigation will take. Part II will also examine the unique legal position of the plaintiff 3D Systems, and the variety of possible plaintiffs that might want to sue a crowd-sourcing company for induced infringement.

In Part III, this Note will analyze the Supreme Court's decision in Global-Tech and how the Supreme Court's clarification of the mens rea requirement of § 271(b) of the Patent Act places crowd-sourcing companies in a precarious legal position. This Part will analyze how the actual knowledge requirement will be an easy bar for plaintiffs to meet through the strategic use of notice and the broad utilization of circumstantial evidence in patent litigation. Part III will also

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analyze crowd-sourcing companies' potential liability under the willful blindness standard the Court outlined. This Part will include a brief overview of some of the problems inherent in importing the willful blindness standard to patent law.

In Part IV, this Note will suggest that the problems arising from the litigation of induced infringement claims may force crowd-sourcing sites to adopt a model of behavior that is analogous to patent insurance. Part IV will examine the reasons patent insurance has traditionally failed and will link these failures to the high level of uncertainty that is generated by the patent system itself.

In Part V, this Note will summarize the issues facing crowd-sourcing sites. Part V will conclude that the Global-Tech standard may create an undesirable result in the context of crowd-sourcing.

II. 3D Systems versus Formlabs and Kickstarter

In 2012, established 3D printing company 3D Systems submitted a claim for patent infringement in South Carolina state court against tech startup Formlabs and crowd-sourcing site Kickstarter.²⁵ Soon thereafter, 3D Systems voluntarily dismissed the suit against both companies only to refile exclusively against Formlabs in the Southern District of New York.²⁶ While the initial South Carolina state action was still active, 3D Systems and Formlabs attempted to settle the dispute.²⁷ Although 3D Systems and Formlabs were unable to resolve their differences during the initial talks, the New York federal action ultimately settled, and Formlabs consented to a licensing agreement.²⁸

The result of this litigation appears to demonstrate the legal system working at its best: Formlabs was able to bring an innovative and cost-effective new product to the market, and 3D Systems' property rights were validated.²⁹ 3D Systems even acknowledged that the dispute changed its entire view of IP litigation, and Kickstarter dodged all the potential negative legal consequences.³⁰

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3D Systems, Inc. v. Formlabs, Inc. concluded on a seemingly positive note, but future cases may come out quite differently. Potential plaintiffs considering patent litigation must consider their own strategic objectives within a complex set of situational variables that depend on the context surrounding the legal proceedings.³¹ 3D Systems, the plaintiff in this case, may have found itself in a position that does not necessarily characterize all potential litigants. Given the small overall profit that crowd-sourcing sites may derive from a single project,³² it may be that litigation threats from both legitimate companies and patent trolls will force crowd-sourcing sites to screen and evaluate projects more thoroughly.

Two primary forms of litigation threats may impact a crowd-sourcing company's relationship with startups. First, a legitimate company may determine that its interests would be best served by seeking damages rather than a license.³³ Companies may perceive the negative aspects of licensing as limiting the expected rents the company can collect from other companies in similar licensing arrangements, a reduction in possible damages in future actions, and the promotion of future litigation.³⁴

A legitimate company might even attempt to use its patents as offensive tools to prevent the emergence of competitors that rely on crowd-sourcing for capital.³⁵ Such a company may have good reason to sue the crowd-sourcing site in conjunction with its startup client. By suing the crowd-sourcing platform, a litigating company may attempt to discipline crowd-sourcing providers and make clear that aiding the development of competitors will be met with legal consequences.³⁶

Secondly, crowd-sourcing sites may face legal threats from patent trolls, companies that hold patents for the purpose of making money through litigation threats rather...