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The Innovation Act (HR 3309) Cure is Worse than the Disease House Staff Briefing 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 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 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. 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 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 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 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 • 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 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 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 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 Gary@Lauder. Partners. com (650) 323 -5700 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 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 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 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 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