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Alice Decision Saves Crowdfunding From Patent Troll

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Alice Decision Saves Crowdfunding From Patent Troll

David S. Rose is a serial entrepreneur turned angel investor. He’s the founder and CEO of Gust, a company that connects startups with investors around the world. David has been in crowdfunding circles for as long as crowdfunding has existed, so imagine his surprise when a company claiming to own patents on crowdfunding demanded payment from Gust in order to keep doing business.

“It was ridiculous,” David says. “They were trying to claim a patent on the concept of online equity funding.” AlphaCap Ventures’ suite of patents—Nos. 7,848,976, 7,908,208, and 8,433,630—cover routine ideas like a website having profile pages for each of its users, applied to the worlds of venture capital and crowdfunding. “They sued the ten leading players in the industry,” David says. “AngelList, Kickstarter, all of them.” AlphaCap sued in the notoriously patent-owner-friendly Eastern District of Texas, despite the fact that AlphaCap was based in California and Gust in New York. As is often the case with patent trolls, AlphaCap appeared most interested in getting defendants to settle as quickly as possible.

Indeed, most of the other defendants did just that, but David refused. He knew that if no one fought back, then AlphaCap would be able to demand money from every new player in the industry. “They would have been able to go after every platform. They would have been literally like the troll under the bridge.”

So David decided to sue AlphaCap, a decision that could have cost him a lot of money. “After filing the suit against us for damages, they called to discuss a settlement payment for “only” tens of thousands of dollars” David says. Giving in might have been cheaper but “we fought back on principle because someone had to stand up to them.”

Fortunately, the law was on his side thanks to the 2014 Supreme Court decision Alice v. CLS Bank. Under Alice, an abstract idea doesn’t become a patentable invention simply by being implemented on a computer. Or in this case, crowdfunding doesn’t become patentable simply because you’re doing it on a website. A district court in New York found the asserted patent claims invalid under Alice and forced AlphaCap to pay Gust’s legal fees. In fact, because the Alice ruling so clearly invalidated the patents, the court even held AlphaCap’s attorneys liable for Gust’s fees. That fee ruling is now on appeal before the Federal Circuit.

Would David have won without Alice? He believes so. “There was clear prior art,” he says, referring to the idea of proving a patent is invalid by finding previous, extant examples of the invention it describes. “Lots of people had been doing this previously.” But challenging the patents under Alice allowed him to put the brakes on a lawsuit that shouldn’t have happened in the first place. “It would have been a full-on fight. We still would have won the case without Alice, but it could have cost a million bucks or more.”

That’s the problem. Armed with overbroad patents that should never have been issued, patent trolls can become a nuisance to an entire industry. As patent lawsuits are often much more expensive for defendants than for plaintiffs, defendants have an incentive to settle, allowing the threat to remain next time around. Alice brings a modicum of fairness, where businesses can fight back against bad patents and eliminate the threat to their peers without going through a full patent infringement trial.

Thanks to David and Alice, the crowdfunding industry is safe for now. “Had Alice not been there, these guys would have been in charge. They would have effectively been able to go after all of the current and future crowdfunding firms and decide who could play. But when it became clear that we had a likelihood of winning based on the Alice decision, they backed down.”

Photo by David Knowles, CC BY-NC-ND 4.0. Adapted with permission.

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