3. Perception of suits alone deters and kills startups.

This cost imposes significant burdens on small companies. Smaller firms avoid research and development in areas where a threat of a patent lawsuit from a larger firm exists.164 These circumstances can lead to reduced competition and consumer choice.165 Small firms suffer additional disadvantages in patent litigation when compared to larger, more established firms.166 Because such firms typically own few patents, early settlement of the allegations through a non- monetary cross-license is not an option in many cases.167 Additionally, small firms rarely have a large portfolio of patents to assert against others, reducing the possibility that such firms can be used to lay a foundation for settlement and cooperation.168 According to the Chien survey, the "significant operation impact" falls hardest on smaller entities--that is, "the smaller the company, the more likely it was to report a significant operational impact," and "small companies [are] targeted more as unique defendants, and paying more in time, money and operational impact, relative to their size, than large firms.169

This same study recognized startups cannot raise funds to fight a patent lawsuit, and that some small firms “can go out of business over these kinds of suits.”170 One interviewee noted that the company’s founder had “lost his house, car [and] all his assets.”171 Another observed that patentees have an incentive to assert patents against small entities, because such entities are more likely to settle for a higher royalty rate to avoid the high transaction costs of patent litigation, to “feed the war chest” for suits against larger players, and to establish a high royalty rate for the patent.172 One firm acknowledged that it no longer develops products for the U.S. market, due to the risk of patent litigation.173

Reports suggest that, even when small companies obtain successful results in court, the cost of such litigation can be lethal. For example, sources report that a small software company, Vlingo, invented successful technology, and was sued by a larger company, Nuance, with a broad patent that was alleged to be infringed by Vlingo’s core product.174 Vlingo incurred $3 million dollars in litigation expenses to win a judgment of non-infringement at trial.175 During the course of this experience, Vlingo “lost [its] partnerships with Apple and Google, and sold [the] company to Nuance in December 2008.”176 Another source describes microprocessor giant Intel’s patent lawsuits against start-up rival Cyrix.177 During the four years of litigation, Cyrix had trouble selling to computer makers because “most of them were also customers of Intel and they were reluctant to buy a product that might infringe.”178 Although Cyrix was ultimately successful in the lawsuit, it “lost the war, having lost much of its competitive advantage” and had “lost the window of opportunity to establish itself in the marketplace.”179