IP Theft by an “Angel” Investor

An angry “angel” investor commits federal crimes by stealing IP.

How an investor stole intellectual property from a portfolio company.

This is a true story. Sadly, predatory actions by so-called “angel” investors are more common than it should be.

An angel investor has a portfolio of maybe a dozen startup companies. This investor takes a very active role in the companies. He had a very successful business prior to angel investing, so he looks for portfolio companies where his expertise can be useful.

This angel investor is sometimes the largest non-founder investor in the company. He does not take small positions, and he provides a lot of assistance to the companies. He has a team of people from his previous business with different skill sets that can be used by the portfolio companies.

The angel investor is very much a “hands on” investor. He gets deeply involved and spends a lot of time upstream in the research and development area, offering suggestions on how to improve the product. The investor’s expertise and experience is a huge asset.

All of this sounds idyllic: A generous, well funded investor with a stable of helpful experts to grow the company.

The death grip soon became federal crimes for stealing IP

Our “angel” investor was very hands-on, but was becoming increasingly frustrated with the portfolio company. They were not doing what he thought they should do, such as spending money on things that the “angel” did not like.

The “angel” investor took the step, as he had done before with other investments, of hiring his own patent attorney and filing a patent on the startup’s next product generation.

He signed his own name as a sole, first and true inventor of the “invention.” He did not include anyone from the startup company.

But it gets worse: the “angel” investor assigned the patent to his own holding company, not the startup.

This is a violation of federal law.

18 U.S. Code § 1832 – Theft of trade secrets

“Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly—(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information…shall be…be fined under this title or imprisoned not more than 10 years, or both.”

I was told that the “angel” investor did this as a punitive measure. In other words, the “angel” investor was angry at the startup founders and wanted to punish them. So, the “angel” investor created a patent that blocked the startup from developing or selling their future products.

For over a year, the startup asked the “angel” investor to assign the patent rights to the startup, but the “angel” investor steadfastly refused. Eventually, the “angel” investor was embarrassed into assigning the patent rights back to the company, but not after inflicting incredible damage to the startup.

The “angel” investor unmistakably violated federal law by converting the startup’s trade secrets into his own patent. On this action alone, the “angel” investor should spend a decade in federal prison.

The founders could have (and still have the opportunity to) call the Federal Bureau of Investigation to look into this case. The “angel” investor would not enjoy an FBI raid and special agents pouring through his “investments.”

The “angel” investor’s patent is likely invalid – or at least it has a terrible stench

The “angel” investor put his own name on the patent as the sole inventor. Even though many of the ideas came from the founders of the startup, the “angel” investor signed a declaration that he was the “first and true inventor.” This declaration was signed under penalty of two years in jail for false statements.

The USPTO allows for inventorship to be corrected, but any correction must be signed under a statement that the improper inventor was left off a patent “without deceptive intent.”

The fact patterns shows a very strong implication of deceptive intent.

First, the “angel” investor did not go to the startup’s patent attorney, he hired a separate, independent firm. He wrote the patent in secret, without telling the startup. Once the patent came to light, he refused to sign it over to the company.

Once the patent was examined, the startup’s patents were the primary reference used to reject the “angel” investor’s patent. This means that the examiner found that the invention came from the startup, not from the “angel” investor.

Even if the inventorship was corrected, everything points to deceptive intent on the part of the “angel” investor.

These circumstances means that the patent could be easily challenged and invalidated in court. This means the patent is worthless. It could never be enforced. The stench of the “angel” inventor has poisoned the IP.

Were the “angel” investor’s patent attorney criminally negligent?

The “angel” investor’s patent attorney also committed crimes, arguably. They aided an abetted a federal crime by writing and filing the patent. The patent attorneys had a duty to uncover the relationship of the “angel” investor with the startup company.

The patent attorneys knowingly assigned the patent to the “angel” investors holding company by filing an assignment. In fact, the attorneys filed a second, “corrective” assignment to fix a typo in the original one.

Of course, attorneys are getting paid to “look the other way” and “do as they are told.” But any attorney in the IP space would know that their “angel” investor client appears to be stealing IP from his investment company.

No attorney wants to turn away work, especially from a very wealthy “angel” investor with lots of investments. The attorney needs to put food on the table, and willful ignorance is their only defense.

It is unfortunate that the “angel” investor’s attorneys did not have the backbone to stop a federal crime that hurt the founders of a startup company. And it is reprehensible that they took the money to look the other direction.

How the “angel” investor’s theft damaged the startup

The “angel” investor’s patent blocked any future advancement by the company. The “angel” investor’s patent included all of the recent improvements to the product. The company could not go forward in any direction.

If the company were to engage a strategic investor, for example, the strategic investor would first negotiate with the startup, only to find out later that an investor had IP that blocked any further development. This meant that the “angel” investor would either get paid additional royalties, or more likely, any deal would be scuttled because the company did not own its IP.

First and foremost, the “angel” investor’s IP theft put a big damper on the company for an extended period of time. The founders knew there was a patent that blocked all of their research and development. They could not really move forward with R&D or with trying to sell the company or engage a strategic investor.

The effect of the blocking patent ground the company to a halt. The founders were in a hard place.

If the founders challenged their “angel” investor (or called the FBI to investigate the “angel” investor’s federal crime), the “angel” investor could pull all future funding.

The “line of credit” scheme described above meant that if the company could not raise more money, the “angel” investor could take all the IP and restart the company without the founders.

Obviously, the founders could not sue the “angel” investor for theft, because they had much more to lose than the “angel” investor. The “angel” investor had a few million dollars at stake, but that was a small portion of his enormous assets. The founders had invested everything they owned into the startup.

The asymmetry of power between the “angel” investor and the founders was staggering. The “angel” investor was, in my opinion, abusing this asymmetry in every way possible, including committing federal crimes.

What to learn from this unfortunate story

Every angel investor wants their portfolio companies to succeed, but they also do not like failure.

Our “angel” investor, in my opinion, was far too scared of losing that he spent more time planning for failure rather than planning for success. The “angel” investor took a very defensive position, making sure he got the IP if things went bad, rather than planning for success by making the company more attractive to other investors.

Angel investors need to let their horses run. They are betting on the founders being good businesspeople, having great ideas, and the angel investor’s job is to get out of the way.

Our “angel” investor did the opposite. From the beginning, the “angel” investor set up his investment defensively. In other words, if things went south, he wanted to grab the “good” assets for himself.

This structure made it impossible for other sophisticated investors to participate. Sophisticated angel investors or venture capital firms would never let another investor have senior rights to terminate the company and grab the intellectual property.

It turns out that the “angel” investor had stolen intellectual property from other of his portfolio companies in the past.

In my view, this is predatory behavior on the part of the “angel” investor. Not only does it harm the startups, but it eventually will catch up with him.

There is a line between supporting and helping a company grow, and smothering it. Maybe not intentionally from the start, but this “angel” investor created a situation where he grabbed too much power, then flexed his muscle far past the bounds of decency. In so doing, he committed multiple offenses of federal crimes that should have him locked up for decades.