Patent trolls have another trick up their sleeves that could hurt small startups and entrepreneurs, and it involves crowdfunding.

For those of you who aren’t sure what this means, the names Kickstarter and Indiegogo may ring a bell. Basically, crowdfunding is a feel-good way to raise capital for a new venture. Fans or supporters can donate money to an initiative, usually via the internet, and once a monetary goal is reached the project can start development.

Crowdfunding can be quite powerful. According to the New York Times, “Nearly three million people have helped a total of 30,000 projects meet their fund-raising goals on Kickstarter… to the tune of $300 million in pledges.” Often, crowdfunding raises money for tangible products, such as ElevationDock charging station for the iPhone, the first Kickstarter campaign to surpass the million dollar mark. Crowdfunding has also found its way to Hollywood. Popular TV show Veronica Mars raised funds to make a full length movie and was the “fastest campaign to reach its goal ($2 million in under 12 hours), and it had the greatest number of supporters in Kickstarter history (91,585 people donated $5,702,153).”

So why is crowdfunding the next target for patent trolls? In order to gain support and funding, entrepreneurs that use crowdfunding often have to reveal a good amount of information about their products, including technical details and timing for fundraising and product launch. This kind of insight gives patent trolls the opportunity to assess whether their IP is being infringed and file a lawsuit at the most painful moment. If trolls are already going after established businesses, imagine the damage they could do to small startups that haven’t even landed on their feet yet.

Yancey Strickler, one of the founders of Kickstarter, pinpointed a huge challenge for crowdfunding: “As a product reaches a certain scale, a person is expected to be a corporation.” (NYT). Most crowdfunding entrepreneurs are just the average Joe with a good idea and have no experience with product development, manufacturing, or legal processes that come with running a business, nor do they have the extra capital to defend themselves. In 2011, the median award in a patent case was $8.8 million. A startup cannot handle these kinds of fees no matter how much their fans love them.

There are a few provisions in place that can protect an inventor from patent trolls. Back in March we wrote about a “loser pays” update to the Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (SHIELD). If the court determines there has been no patent infringement, the defendant has the opportunity to recover all legal costs by showing that the plaintiff does not meet certain conditions. The chances of this happening are slim, especially without the necessary battalion of lawyers needed to fight the war.

So before starting a crowdfunding project, Scott Popma, Seth Ogden, and Andrew Holtman of Finnegan Henderson suggest that those considering this route take a close look at the freedom-to-operate (FTO) in their sector.

An FTO is essentially a risk-management audit and should be performed often as patents are constantly being filed or expiring. Popma, Ogden, and Holtman have divided the analysis into three steps:

1. Break the product down into the smallest possible components and then focus on the parts that are the most innovative/not obvious
2. Execute an exhaustive search for each of these components
3. Compare prior art to determine the likelihood of infringement

Here are some options if  infringement is likely:

• Move forward with the project and wait to see if someone sues you
• Abandon the project
• Approach a company and propose a merger
• Re-design the product so that it doesn’t infringe on any third-party patents
• Pay the holder a patent licensing fee
• Arrange a reciprocal patent licensing agreement
• Attempt to invalidate the third-party patent

With crowdfunding predicted to be on the rise after the Jumpstart Our Business Startups Act is implemented, it will be interesting to see how crowdfunders and their supporters will react to the increase of litigation. Could the rise of public interest in America’s patent issues spur change?

More on patent trolls.

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