Big tech companies maintain patent peace through something that looks a lot like Mutually Assured Destruction. They’ve got massive portfolios that make litigation suicidal for both parties. Small companies? You’re excluded from this equilibrium. You don’t have portfolios substantial enough to counter-negotiate cross-licensing agreements.
Here’s a sobering statistic: 55% of patent troll targets are companies under $25M revenue. Why? Because you lack portfolio leverage. You can’t fight back the way the big players do.
Traditional patent advice fails for SMBs because it assumes resources and leverage you don’t have. This guide is part of our comprehensive exploration of game theory for technical leadership, where we examine how strategic dynamics shape technology decisions. In this article we’re going to examine asymmetric strategies that actually work – cost-benefit analysis frameworks, defensive tactics that don’t require massive portfolios, alternative protection methods, and practical responses to patent threats. You’ll be able to make informed decisions about patent investments without burning capital on unwinnable patent wars.
Let’s start by looking at how patent portfolios work for large companies, and why that model doesn’t translate to smaller businesses.
How do patent portfolios create mutually assured destruction dynamics between large tech companies?
Large tech companies accumulate thousands of patents covering overlapping technologies in each other’s product areas. When Company A threatens litigation, Company B can counter with infringement claims from its own portfolio.
This creates a standoff. Both parties face litigation costs of $3-5 million per patent case and potential injunctions against their products. The result? Cross-licensing agreements where companies trade access to portfolios, often with zero royalty payments.
Google and Samsung created a cross-licensing agreement in 2014 covering patents filed over the next 10 years. Apple and Microsoft created a historic cross-licensing agreement in the late 1990s that ended litigation and allowed both companies to focus on innovation.
The equilibrium works only between companies with comparable arsenal size. Small companies lack the portfolio ammunition to participate.
Want to see what happens when MAD breaks down even between large companies? Oracle sued Google in August 2010 over Java APIs in Android. The case consumed over a decade before ending in 2021 – a classic example of the war of attrition dynamics that emerge when neither party can establish overwhelming advantage.
Why can’t small companies participate in patent cross-licensing agreements?
Cross-licensing requires each party to bring substantial patents the other party wants. Small companies typically hold 0-10 patents. Large companies hold thousands.
Large companies have no incentive to cross-license when they can simply out-spend small companies in litigation. And building meaningful portfolios is expensive for SMBs – patent prosecution costs $15,000-$25,000 per patent.
Even when you do get a seat at the table, you’re still paying. When one company’s patent portfolio is much smaller than a potential partner’s, the smaller company typically pays balancing fees. If Company A has 1,000 patents and Company B has 200, Company B pays licensing fees to make up the difference.
There’s another problem. Broad cross-licensing between incumbents makes market entry difficult as new companies cannot access the cross-licensed technology pool. This asymmetry means SMBs need defensive strategies rather than offensive patent accumulation.
This exclusion from cross-licensing creates a particular vulnerability – you become an attractive target for patent trolls.
What are patent trolls and why do they target small companies?
Patent trolls (Non-Practicing Entities) purchase patents primarily to sue businesses for infringement rather than to develop or commercialise technology. They operate outside MAD doctrine because they have no products to counter-sue against.
The numbers are stark. 55% of patent troll targets are small businesses. 55% of PAE lawsuit defendants make under $10 million annually. Some trolls have even targeted companies with under $100,000 in revenue.
Why target small companies? You lack portfolio leverage to counter-negotiate and you cannot afford defence costs. Defence costs average $857,000 in court, or $168,000 out of court. Settlement costs average $340,000 – that’s multiple years of revenue for early-stage startups.
Trolls exploit this asymmetry by demanding settlements below defence costs – typically $50K-$200K. The most cost-effective response is often to settle, even with strong invalidity defences.
Cross-licensing is ineffective against patent trolls because they don’t make products. Patent trolls often target dozens of companies simultaneously with the same patent, using an “appetiser strategy” – gathering quick settlements from multiple small targets to fund larger campaigns.
So if you can’t build a portfolio and you can’t rely on cross-licensing, what protection options do you have?
When should small companies choose patents versus trade secrets for protecting innovation?
Trade secrets protect through secrecy. You avoid prosecution costs and public disclosure. Patents provide 20-year monopoly but require full public disclosure of invention details.
Patents are most useful for preventing competitors from offering valuable features that provide a competitive edge. Trade secret protection is less valuable for innovations that can be easily reverse engineered.
Software companies often favour trade secrets for core algorithms. Google’s search algorithm is a famous example (though this strategy works across industries – Coca-Cola’s formula uses the same principle). Patents make sense when your invention is reverse-engineerable, competitors will independently develop it, or VC funding requires IP signals.
Front-end features visible in products or user interfaces are generally better suited for patent protection because infringement is easier to detect and prove.
There’s a time element to consider too. Trade secrets have indefinite duration as long as secrecy is maintained unlike patents’ 20-year term. But patents provide exclusive rights even against independent inventors, while trade secrets offer no protection against independent discovery.
You can use a hybrid approach. Patent visible innovations while keeping underlying optimisation algorithms as trade secrets. Patent investor-visible features, keep core algorithms as trade secrets, and use defensive publication for peripheral innovations.
What is defensive publication and when should small companies use it?
Defensive publication publicly discloses invention details to establish prior art, preventing others from patenting it.
The cost difference is significant. Defensive publication has no filing fees, no maintenance fees, no attorney costs for prosecution. Compare that to patents which cost $15,000-$30,000 in the U.S. for attorney fees and filing, plus maintenance fees at 3.5, 7.5, and 11.5 years, plus another $4,000-$12,000 on prosecution costs. Publication can be done in days rather than years.
Defensive publication prevents competitors from patenting the same invention and establishes prior art quickly. This ensures you and competitors can use the method without patent restrictions.
When does this make sense? Use defensive publication when high patent costs make ROI unjustifiable. It works well in fast-moving technology industries where innovations become obsolete quickly. In competitive landscapes where blocking competitors is more valuable than exclusivity, publication makes sense.
You can publish through academic papers, technical journals, IP.com, Research Disclosure, or dedicated prior art databases.
But understand the trade-off – publication is irreversible. Defensive publication allows anyone to use the disclosed invention, which means you forfeit potential licensing revenue and bar future patent protection. You get no enforcement rights.
It works best when combined with trade secrets (publish peripheral features, keep core improvements secret) or provisional patents (file provisional to preserve patent option while evaluating publication). It’s also an effective counter to patent trolls by eliminating patents they could acquire and assert.
So defensive publication helps you prevent threats. But what do you do when you’ve already received one?
How can small companies respond to patent infringement demands without portfolio leverage?
Small companies cannot counter-assert patents like large companies. Here’s your first step: request detailed claim charts showing exactly how product allegedly infringes each patent claim. Many troll claims fall apart under technical scrutiny.
Next, conduct prior art searches to identify existing publications that invalidate patent claims. Prior art is powerful and can eliminate threat entirely.
There’s a cheaper alternative to district court litigation. Inter partes review (IPR) challenges patent validity and is often more cost-effective than district court litigation. PTAB invalidity challenge costs $150,000-$300,000 but can be split among multiple parties vs $500,000-$3,000,000+ for full litigation defence.
Join defensive organisations like LOT Network for shared intelligence on troll entities and their patents, potential joint defence arrangements, and reduced individual costs through collective action.
When evaluating settlement, be strategic. Compare settlement cost vs defence cost vs design-around cost. Most demand letters are negotiable.
Your design-around option is to modify your product to avoid patent claims. This is often cheaper than litigation. And document all prior art and design decisions to strengthen invalidity defences.
There’s strength in numbers. Identify other companies who received similar demand letters, share costs of prior art searches and legal defence. If 50 companies each contribute $10,000 to prior art search and PTAB challenge, individual cost is $10,000 vs $100,000+ alone.
All of these responses require understanding the actual costs involved.
What is the cost-benefit analysis framework for patent decisions at small companies?
Let’s talk real numbers. Patent prosecution costs realistically $15,000 to $30,000 from filing through grant for a utility patent. Maintenance fees add $5,384 over the patent’s life.
Want to go international? International expansion via PCT costs $50,000-$100,000 total, multiplying costs. Most applications face multiple Office Actions, adding $4,000-$12,000.
Expected revenue protection must justify costs. A typical threshold is 20-year revenue of $500K+ to justify $15K investment.
But there’s more than direct ROI to consider. Investor signalling value matters. Startups with registered IP have more than twice the likelihood to obtain seed-stage funding and up to 6.1 times higher chances to obtain early-stage funding. Odds of successful exit are doubled by IP registration.
There’s a cheaper entry point. Provisional patent costs $130 for small enterprises as a filing fee, though you’ll typically spend $2,000-$5,000 with attorney fees. This gives you a 12-month window to decide on full patent.
Compare to alternatives: trade secrets (ongoing security costs), defensive publication ($0-$2K), defensive network membership ($1K-$5K annual). Strategic value beyond direct ROI includes blocking competitor patents, enabling partnerships, and supporting acquisition negotiations.
One of those defensive network memberships deserves a closer look.
How do defensive patent networks help small companies without large portfolios?
LOT Network was founded in 2014 by Canon, Google, and Red Hat as a nonprofit organisation to combat patent trolls. Members agree to non-aggression pact – patents owned by members cannot be used by patent trolls to sue other members.
Here’s how it works. When a patent is transferred to a PAE or when a member becomes/is acquired by a PAE, that patent automatically becomes cross-licensed to all LOT members.
The pricing makes sense. Membership costs: Small companies/startups $1,500 per year, mid-size companies $5,000-$10,000 per year, large enterprises up to $20,000 per year. When you consider that average PAE lawsuit costs over $3 million to defend, even one avoided lawsuit provides substantial return.
The network has grown significantly. As of August 2024: Over 4,300 members, 4.5 million patent assets under protection, 56 countries represented. Notable members include Google, Microsoft, Uber, Ford, Netflix, and Tesla.
The network provides portfolio-like protection without needing to build individual patent arsenals. It automatically covers patents acquired by members after joining. And it protects against patent troll assertions when patents are sold to NPEs.
What it doesn’t do: It does not prevent litigation from non-members, but it reduces your threat surface significantly. And LOT Network membership doesn’t restrict normal patent activities – members can still sell patents, license patents for revenue, and assert patents against non-members.
This is the most cost-effective protection mechanism for small companies facing asymmetric patent threats.
FAQ Section
Should my startup file patents before raising venture capital funding?
The data is compelling – patents increase VC approval likelihood by 59% and funding amounts by 51.7%. But you need to balance this against capital constraints.
File provisional patents ($2K-$5K) to establish priority and signal IP awareness, then decide on full filing after you’ve secured funding.
Timing matters here. Public disclosure starts a one-year clock for patent filing, so file provisional before any public demos, pitch competitions, or publication.
What should I do if I receive a patent infringement demand letter?
Do not ignore it – but also do not immediately settle. Request detailed claim charts, conduct prior art search, and evaluate patent validity.
Compare settlement cost to defence cost to design-around cost. Consider inter partes review ($15K-$50K) if patent appears invalid.
Most trolls target companies precisely because litigation is unaffordable – settlement below defence cost is often rational.
Are software patents worth it for small companies?
Software patents face unique challenges, with many algorithmic patents being invalidated. Trade secrets often provide better protection for software innovations, avoiding disclosure and prosecution costs.
Patent software when: invention is reverse-engineerable from product, competitors will independently develop it, or VC funding requires demonstrable IP. Keep core algorithms as trade secrets, use defensive publication for standardisable interfaces.
How does the Patent Cooperation Treaty (PCT) help small companies?
PCT allows single international application covering 150+ countries, deferring country-specific costs for 30 months.
Costs $50K-$100K total vs $15K-$25K per individual country filing. It’s strategic for companies with international markets, but evaluate market size vs costs. Many small companies file US-only initially, add PCT if international traction validates expense.
What is the difference between provisional and non-provisional patents?
Provisional patents cost $2K-$5K, establish priority date, and give 12 months to file full non-provisional application ($15K-$25K). Provisional requires less formal specification but must describe invention completely.
Strategy: file provisional to secure priority before fundraising/public disclosure, evaluate full filing decision during 12-month window. Cannot extend beyond 12 months.
How can small companies defend against patent trolls without spending millions on litigation?
Join defensive networks (LOT Network $1K-$5K annual), use prior art searches to challenge validity ($5K-$15K), file inter partes review at USPTO ($15K-$50K), or settle strategically when settlement costs less than defence.
Design around patent claims when feasible. Document all prior art and design decisions from the start. Most importantly, factor troll risk into product design and patent filing decisions before threats arrive. For a complete overview of strategic decision frameworks in technical leadership, see our game theory for technical leadership guide.
When is it worth investing in patents for a small company?
Use an ROI threshold: 20-year expected revenue protection should exceed $500K to justify $15K patent investment. Factor in investor signalling value (51.7% funding increase), acquisition considerations, and competitor blocking.
Patents make sense when: preparing for VC fundraising, invention is reverse-engineerable, building standards-essential technology, or creating acquisition targets. Skip patents when: bootstrapping without investor pressure, innovation stays hidden, or competitive advantage comes from execution speed.
What are the real costs of patent prosecution for startups?
Here’s the breakdown: U.S. patent prosecution: $15K-$25K (attorney fees, filing fees, prosecution). PCT international: additional $50K-$100K. Maintenance fees: $4K-$7K over 20 years.
Hidden costs: inventor time for specifications (40-80 hours), prior art disclosure risks, prosecution delays (2-4 years). Provisional patents cost $2K-$5K, providing 12-month evaluation window. Budget realistic costs before committing – many startups underestimate expenses and abandon patents mid-prosecution.
Can small companies use cross-licensing like large tech companies?
Cross-licensing between small and large companies works differently than between large companies. Small companies typically hold 0-10 patents. Large companies hold thousands.
When there’s such an imbalance, the smaller company pays balancing fees to participate. You’re still paying money rather than getting the free cross-licensing arrangement that large companies enjoy. And large companies often have no incentive to negotiate when they can simply out-spend you.
This asymmetry means small companies need defensive strategies (networks, publications, trade secrets) as their primary approach.
How do I know if my invention should be a patent, trade secret, or defensive publication?
Here’s your decision tree:
(1) Is invention reverse-engineerable from product? If yes, consider patent or defensive publication. If no, trade secret is viable.
(2) Can you afford $15K+ prosecution? If no, use defensive publication or trade secret.
(3) Do you need 20-year monopoly or just freedom to operate? Monopoly needs patent, freedom is served by defensive publication.
(4) Is VC funding required? If yes, patents signal IP awareness.
Hybrid approach: patent visible features, trade secret core algorithms, defensively publish peripheral innovations.
What happens to my patent rights if I don’t file within one year of public disclosure?
The U.S. provides a one-year grace period after public disclosure to file a patent application. After one year, public disclosure becomes prior art against your own application, destroying patentability.
Most countries have no grace period – public disclosure immediately destroys foreign patent rights.
Strategy: file provisional patent ($2K-$5K) before any public disclosure (demos, papers, pitch competitions) to preserve all rights, then decide on full filing during the 12-month window.
Should small companies file patents defensively to prevent troll assertions?
Common misconception – filing your own patents does not prevent troll assertions unless your patents read on the troll’s products (unlikely for NPEs). Defensive filing costs $15K+ per patent with minimal protection benefit.
Better defensive strategies: join LOT Network ($1K-$5K annual) for collective protection, use defensive publication ($0-$2K) to block competitor patents, maintain prior art documentation, keep a legal defence fund. File patents for ROI or investor signalling, not troll defence.
