The Innovation Act HR 3309 Cure is Worse

The Innovation Act (HR 3309) Cure is Worse than the Disease House Staff Briefing Washington, DC 12/3/13 by Gary Lauder Managing Director of Lauder Partners 1

Intro • My name is Gary Lauder & I’m a venture capitalist (Lauder Partners LLC) – Have invested over $500 M in VC over past 28 yrs. • In > 80 companies and > 60 VC funds – Not a lawyer – Co-inventor on a dozen patents – Have no interest in any PAE nor entity behaving as such 2

My Expertise • How VC’s consider what to invest in – The role that patents play in that • How patents affect the success of small co’s. • Patents don’t matter much to SW & internet companies, but they do to most others • NVCA board has SW/internet types who don’t like patents, so NVCA has decided to be mild in its criticism of HR 3309

I’m no fan of PAE’s I’m Chairman of 2 companies W/in past 7 mo. , both have been challenged Now fighting in court Despite experience, HR 3309 more harmful than helpful. • Would make start-ups THAT NEED PATENTS harder to fund because harder to succeed • Much of PAE activity is just/fair… • •

Example of Just PAE • In 1994, invested in Hybrid Networks, inventor of asymmetrical cable modems • Cable industry created DOCSIS cable modem standard incorporating some of their tech. • Company moved to wireless modems, but company ultimately failed • Now all cable modems are asymmetrical • Assets of company went to debtors

Hybrid saga • • • Debtors sold IP to PAE who sued a large MSO offered $40 M to settle, but PAE declined Went to trial in East Texas and PAE lost Result: thieves won Note: I had no interest in the outcome Retrospective on this is illuminating

Analysis of Hybrid • I knew that this would be a huge market and there was risk of theft, but induced to invest based on faith in patents as backstop – So did Accel and Sequoia • Lenders lent company money based on them • For those patents to have had full value, needed to be salable to a 3 rd party (PAE). • If “practicing” was necessary, could have continued to make a few modems

Fairness • The cable industry’s cable modem cash flow is about $30 B/year • If the PAE had won, and if the entire industry paid $200 M, cable industry still would have still been big winner • Company was forced from practicing to non due to theft • I would not have made that investment if the patent regime had been AIA + HR 3309

Litigation is the wrong measure “Not everything that counts can be counted, and not everything that can be counted counts. ” —Albert Einstein • What’s most important about patent system is inducing the right behavior w/o litigation – Entrepreneurs and investors to take risk – Incumbents to buy innovator and not copy “When people are free to do as they please, they usually imitate each other. ” —Eric Hoffer

Conclusion/Epitaph • This bill will be yet another nail in the coffin of start-up ecosystem & VC in America – Capital inflows to VC are at pre-1998 levels • More than 10% of our GDP comes from VCbacked companies • If enacted, together w/the AIA, will take 20 years for effects to play out • By then you are likely to have been in the hospital room of a loved one wishing that someone had invented the cure s/he needs.

Recommendation • Don’t succumb to the “troll boogyman” urges towards knee-jerk legislation • Encourage your colleagues to seek out opposing perspectives from experts such as the ones shared in this briefing • Thank you for doing so yourselves

Thank you for your attention Gary Lauder Partners [email protected] Partners. com (650) 323 -5700 http: //www. lauderpartners. com/Patent. Reform/ 12

Jobs • Kauffman Foundation study found that all net new US jobs came from startups • Large companies are net jobs EXPORTERS • Jobs are always important, but more so now • Startups are harmed by this bill • Therefore it will have an adverse jobs impact

PAE recent suit growth due to AIA • Ironic and not understood • Elimination of joinder is one factor. • Also, the AIA forced patentees to sue < 3 months after patent issue. The new statute under the AIA at § 325(b) provides that if a patentee files suit for infringement within 3 months of the patent issuance, the court may not stay a motion for preliminary injunction on the basis that PGR (or TPCB) petition was filed or instituted to be immune from post-grant. This factor is glossed over by all who recognize that the AIA has a role in the uptick of litigation after the AIA.

Attempts to fix problems from AIA will make it worse “Most problems begin as solutions. ” —Eric Severide • If one can’t come up w/a perfectly just patent system, then to whom should injustice be allocated? • My answer is away from that precious thing we have in America: the start-up ecosystem • In other countries, private sectors don’t so government tries…with bad results.

Wrong way to make sausage • 1952 Patent Act: written by 2 experts over 4 yrs – Patent judge Giles Rich – Pasquale Federico, chief patent examiner of USPTO – No vested interests or conflicts – Passed both houses w/o debate – Simple and clear, let to huge success • 2011 America Invents Act written by lobbyists and staffers (non-experts) – Long, complicated & ambiguous – Excluded the interests of start-ups – Innovation Act (HR. 3309) is more of that