Meanwhile, the proliferation of “patent trolling,” frivolous lawsuits brought against startups based on overreaching software patents, has been in the news lately. How can overzealous intellectual property prosecution coincide with a rise of the clones?
The reasons for both have to do with the country’s overloaded, backed-up patent system. A startup’s design and branding can be protected with a copyright or trademark, which takes six months to a year to process. A new technology or method, like Groupon’s “tipping point,” would need to be protected with a patent in order for Groupon to take its clones to court. But a patent application usually takes two or three or three years to be examined—an eternity for a web 2.0 startup—and it’s never certain whether it will be granted, said Elliot Furman, a patent lawyer who has a masters degree in engineering from Stanford and specializes in software and web start-ups. And even if a company owns a patent, legal action is difficult, time-consuming and expensive. Pursuing a case is often not worth it to a young startup, especially those in the earlier stage who are working with limited funds.
Groupon, for example, can’t sue for patent infringement: it doesn’t own any patents yet. The startup filed for a patent on its flash deal mechanism, “a system and methods to mutually satisfy a consumer with a discount and a vendor with a minimum number of sales by establishing a tipping point associated with an offer for a good or service,” in 2009. That and five other applications are still pending. The patents are very specific: rather than attempting to patent the idea of a tipping point-based discount, the application describes a series of 10 successive actions that describe Groupon’s particular implementation. But Groupon has raised more than a billion dollars and therefore has the resources to pursue other kinds of intellectual property lawsuits. The company sued at least one of its clones, the Australia-based Scoopon, for registering the trademark “Groupon” and squatting on groupon.com.au. The case settled out of court. Facebook game-maker Zynga, another billion-dollar company, is suing São Paulo-based Vostu for copyright infringement while simultaneously defending itself against a lawsuit from Los Angeles-based SocialApps, which is suing Zynga for copyright infringement, violations of the California Uniform Trade Secrets Act and other claims.
SocialApps claims that Zynga used its code to build Farmville without adequate compensation. But most derivative startups don’t steal code—they look at a site and reverse-engineer what they see. “Most of these companies are using more or less standardized protocols,” Mr. Furman said. “They may even be using off-the-shelf software.” The service built on top of the technology, he said, is in most cases what companies want to legally protect with patents for the way the service works, copyrights for the way it looks and trademarks for the name and branding.
Fast-follower startups are an international industry, much like the “fast fashion houses” such as H&M and Zara that spot a new design on the runway and place cheap knockoff in stores just months later. China has its own versions of most successful startups—which, conveniently enough, tend to be blocked by the government’s censors—including Twitter, Facebook, Google, Quora and a score of Tumblr clones such as Dian Dian, which differentiated itself in its first iteration with Chinese writing and a darker shade of blue. German entrepreneurs Oliver, Marc and Oliver Samwer are notorious for producing copycat start-ups. The brothers attempted to partner with eBay to launch the German version of the auction site; when eBay didn’t respond, they made their own–which they sold to eBay for $50 million four months after it went live, according to the New York Times. Oliver Samwer co-authored a book in 1998 called America’s Most Successful Startups: Lessons for Entrepreneurs. One of their incubated startups, Wimdu, is a mirror image of the short-term rentals site Airbnb which is valued at $1 billion dollars. Airbnb said of Wimdu: “These scam artists have a history of copying a website, aggressively poaching from their community, then attempting to sell the company back to the original.” Wimdu told us it’s building a business, not angling to be bought.