Is LOT Network’s New Fee Waiver for Startups a Good Deal?

The License on Transfer Network is making headlines again. This time TechCrunch reports that the LOT Network will waive membership fees for startups. The LOT Network, spearheaded by Google, aims to reduce litigation by “patent trolls” via an automatic cross-license to members upon transfer of a patent to a non-practicing entity.

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TC reports that “Between now and March 1, 2017, any new members that join LOT Network that have annual revenues below $5 million won’t have to pay the standard annual membership fees the group normally charges.” The offer states that membership dues are waived until the startup surpasses $5MM in annual revenue, but “the companies agree to be paying members of LOT Network for at least the same number of years for which they were granted a fee waiver.”

LOT recruiting startups is not new. In August 2015, Google made headlines by giving away patents to “startups” willing to join the LOT Network. In a piece I wrote for IPWatchdog, “Why Google Wins by Giving Away Patents to ‘Startups’ Willing to Join the LOT Network,” I detailed the goals of the LOT Network in limiting the amount of patents available for NPEs to assert by recruiting new blood (keep in mind that eligibility for Google’s Patent Starter Program was annual revenue between $500k and $20MM).

The potential benefits are good. Specifically, members win two ways: (1) the license triggered by a member’s sale of a patent to an NPE, and (2) if all members are deterred from selling to NPEs, they will only sell to other operating companies, and there will be less litigation.

However, let’s be clear here: joining the LOT Network does not get a startup licenses to use other members’ patents and it does not guarantee the startup will never be sued by an NPE.

The LOT’s goal is to starve the “patent trolls.” For instance, if another member sells their patent to a patent troll, then your startup gets a license and can’t be sued over that patent. LOT CEO Ken Seddon explained to TC that “There’s actually a distinct advantage that startups have that the big companies really don’t get as part of LOT” because “…when a startup company joins LOT, it immediately begins accruing all of these license rights.”

The benefit for a startup gaining licenses is readily apparent, but it is unclear if there are (or will be) any licenses triggered. There are 78 member companies in LOT with apparently “over 576,542 patent assets in the LOT Network,” but, again, a license to each current member only triggers upon a sale of the patent to an NPE. Perhaps someone could gather data to determine if any of the members often sell their patents, but common sense indicates that patents being sold by these operating companies are far and few between.

So the question is: how would a startup benefit if all of the other companies just collected patents in a trophy room? Typically they won’t. There are still plenty of outside-LOT patents for a troll to wield against startups. The word “protection” does not make sense here.

On the other hand, big companies have many benefits from persuading startups to join. For instance, a startup is more likely to need cash and, thus, more likely to sell a patent and trigger the licenses. Many of the patent suits initiated by NPEs focus on patents that were picked up from the ashes of failed startups. The LOT Network needs those destined-to-fail startups to join up or risk future troll litigation over their patents.

In the case of lean times (or bankruptcy), a startup needs to recognize that their patents will likely lose cash value because they essentially forfeit the right to sell the patent to a large section of a potential market: NPEs. Joining the LOT Network—even for free—may be costly, especially considering that the alleged “protection” may only rarely trigger. Lastly, the triggered licenses may not even be relevant to the startup’s technology (e.g., does Pandora care about Honda’s motor patent?) .

That said, with the LOT growing from 15 to 78 members since rule changes last November, there is clear value for many companies in becoming members. It is just important to evaluate each situation rather than assume that LOT is offering free “patent troll protection.”