James Bessen, Jennifer Ford, and Michael Meurer of BU School of Law have written a phenomenal paper titled The Private and Social Costs of Patent Trolls. Rather than be politically correct and refer to NPE’s simply as “non-practicing entities”, they cut through all the noise, define what a patent troll is, and go through a detailed and rigorous analysis of the private and social costs of patent trolls. Some highlights from the paper follow:
- From 1990 – 2010 NPE lawsuits are associated with $500 billion dollars of lost wealth to defendants.
- In the past four years, NPE lawsuits are associated with an average of $80 billion per year of lost wealth to defendants.
- Very little of this loss wealth represents a transfer to inventors.
The litigation has distinctive characteristics:
- It is focused on software and related technologies.
- It targets firms that have already developed technology.
- Most of these lawsuits involve multiple large companies as defendants.
The authors suggest that these lawsuits exploit weaknesses in the patent system. They conclude that the loss of billions of dollars of wealth associated with these lawsuits harm society and state “while the lawsuits increase incentives to acquire vague, over-reaching patents, they decrease incentives for real innovation overall.”
While I’ve just summarized the executive summary, the paper is extremely well written, the topic rigorously researched, and the conclusions follow from the actual data. The footnotes are a joy to read as they tackle a few previous papers that use completely contorted logic to make their points. My favorite is footnote 6:
“In effect, Shrestha is arguing: A) Valuable patents receive higher citations, and, B) NPE litigated patents receive higher citations, therefore, C) NPE litigated patents are valuable patents. This is a classic logical fallacy.”
It’s a special bonus that the header on each page says “page # – Troll – 9/11”.
My partner Jason and I were talking about exactly the problem the other day as we wondered why so many people have trouble with logic and deductive reasoning. Our world of software patents is rife with this category of problem. It’s awesome that serious academics like Bessen and his colleagues are going deep into this issue.
These days I’m regularly exposed to patent trolls. Sometimes I read about them, sometimes friends email me about them, and sometimes companies I’m an investor in gets sued by them. Whenever I read the claims in the lawsuits, I often think that the claim in question is “obvious.” For those of you out there who know how patents are supposed to work, for something to be patentable it needs to be “non-obvious” as well as “unique.” While the specific claims may not be obvious to the patent troll, especially those who are lawyers who own patents they’ve picked up from other people (bankrupt companies, individuals who applied for and got a patent, patent factories), they are often extremely obvious to any software developer.
For a while I was frustrated by software patents. I tried to educate some of my friends in government about this. I was hopeful when the Supreme Court heard Bilski that they would take a stand on it. And I hoped that the people I talked to in the Obama administration, who acknowledged that they understood the issue, would try to do something about it. I hoped that the Patent Reform Act would actually have some teeth in it that would help address the completely messed up dynamics around software patents and my strong belief that this is a huge tax on the innovation process.
I had zero impact. Zero. As I sit here at the end of 2011, the software patent situation has spun completely out of control. In addition to endless patent trolls, who are multiplying like tribbles, large companies are now fighting massive legal battles with each other using patents. Some of the inventors (including a number of amazing software engineers) listed on the patents are finally speaking up against the patents, but since they’ve assigned them to companies they are no longer at, or the company that owns the patent acquired the company the original patent creator was at, their only recourse (and impact) is to get tangled up in a lawsuit as a witness.
In his 2003 letter to shareholders, Warren Buffet famously called derivatives, “”financial weapons of mass destruction” that could harm not only their buyers and sellers, but the whole economic system. “ You may recall that AIG, thanks to its non-transparent and heavy investments in derivatives, was almost bankrupt once the mortgage-backed securities it was insuring began to drop in value. The $85 billion bailout of AIG was the beginning of the government’s response to the financial crisis and we are still feeling the after-effects of that calamity.
Today, we are experiencing a similar threat to innovation with patents playing the role of “weapons of mass destruction.” Sadly, the America Invents Act, which seeks to provide the Patent Office with tools to operate better and passed recently, does precious little to address the patent litigation mess.
Like derivatives, there are thousands of software patents that are not transparent and remain available to do damage in the hands of patent trolls – and even respectable companies – who use them in lawsuits that bear little relationship to protecting inventions or spurring innovation. As others have detailed, there are increasingly destructive dynamics at play here and the easiest solution is to abolish patents in areas – most notably, software and business methods – where they are doing more harm than good.
Unlike the financial system, which derivatives helped bring to its knees, it is not clear how our innovation system will get to a breaking point that will require attention from policymakers. The Supreme Court could address the problem, but it missed a golden opportunity in the Bilski case, where it declined to end (by a 5-4 vote) the patenting of business methods. Perhaps the Supreme Court will realize that the situation requires fixing, looking for other ways to limit the damage.
The are simple options, such as disclosure where patent applicants should be required to disclose the source code behind their inventions, thereby ensuring that the invention is real and not merely a basis for a future lawsuit, which is what many software patents have become. Indeed, this requirement of the Patent Act (Section 112) is applied with some rigor in the biotech context, but has yet to be happen with regard to software. Such a change cannot come soon enough.
At some point the software industry is going to have to do something about this. We seem to not be able to rely on the government to take action that will affect change. I can only hope there are other leaders in the software industry, especially the amazing developers creating the innovations in the first place, who will take some collective action before it’s too late.
In 2008 I was invited by Pamela Samuelson, who I met through several Silicon Flatiron events, to be on an advisory board at the Berkeley Center for Law & Technology. I attended the one meeting that we had and a subsequent symposium and wrote about it in the post Entrepreneurial Companies and the Patent System. As with most things like this, I found it fascinating, stimulating, and frustrating all at the same time and hoped that I’d contributed something useful to the discussion.
I read the paper titled High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey when it came out at the end of June 2010. I thought it was a solid paper although there were some things that I struggled with which is typical for me in any academic paper, especially when I get bogged down in arguing with myself while trying to parse the footnotes. But I was optimistic that as the authors started talking about the article, some thoughtful and constructive discourse would result.
I was appalled when I started seeing soundbites emerge from at least one of the authors of the paper from weak conclusions buried in the midst of the data. My partner Jason took one of them on when he wrote his post 76% of Venture Capitalists Believe that Software Patents are Important (NOT!) In this post I think Jason does an excellent job of dissecting the data and explaining why this is not only an incorrect conclusion from the data, but a terribly misleading soundbite.
Fortunately, Pam Samuelson (one of the other co-authors) has set the record straight with her excellent summary of the Berkeley Patent Survey on her post on O’Reilly Radar titled Why software startups decide to patent … or not. Her essay is very digestible and focuses specifically on the issue of software patents and what she believes they reported in the paper. She reached the following conclusions which she states in her intro:
- Two-thirds of the approximately 700 software entrepreneurs who participated in the 2008 Berkeley Patent Survey report that they neither have nor are seeking patents for innovations embodied in their products and services.
- These entrepreneurs rate patents as the least important mechanism among seven options for attaining competitive advantage in the marketplace.
- Even software startups that hold patents regard them as providing only a slight incentive to invest in innovation.
Pam is balanced in her intro as she concludes by saying “While the three findings highlighted above might seem to support a software patent abolitionist position, it is significant that a third of the software entrepreneurs reported having or seeking patents, and that they perceive patents to be important to persons or firms from whom they hope to obtain financing.”
The juiciest conclusion is about halfway through the essay and is “One of the most striking findings of our study is that software firms ranked patents dead last among seven strategies for attaining competitive advantage identified by the survey.” Another one was “We were surprised to discover that the software respondents reported that patents provide only weak incentives for engaging in core activities, such as invention of new products (.96) and commercialization (.93).”
I’m glad Pam took this on and put this out there. I look forward to more studies she does from this research set.
I’m far away from Washington DC today. Actually, I’m a lot closer to Russia than I am to DC and that makes me an expert on Russia. Wait, someone else said that (although the people next to me and Amy at dinner last night were speaking Russian.)
But my friend the Internets (actually, the Web) brought DC closer to me today. While I’m only involved in a handful of things related to politics and DC, several of them popped up somewhere in my world in the last two days. So, I thought I’d share them with you.
Let’s start with software patents. I’m still seriously bummed about Bilski – not the specific ruling, but the fact that in my opinion the Supreme Court wimped out on something that is very important. Several friends have told me that the Supreme Court did exactly what they were supposed to – they ruled on a vary narrow and specific issue that was put before them. A few other friends of mine, including several lawyers that know a lot about the Supreme Court, said it looked like the Supreme Court came close to making a significant and profound ruling – with plenty of hints buried in the stuff Justice Stevens wrote. I can’t interpret any of the Supreme Court inside baseball, but I do know how I feel about software patents and expressed my frustration in an article that I co-authored with Paul Kedrosky titled Software Patents Need to Be Abolished that showed up in the Huffington Post yesterday. In case you need more evidence around the stupidity of the whole situation, take a look at the crap van Rijn is going through. Or maybe this patent from Microsoft on “how to turn a page in an electronic book.”
DC Topic #2 is the Startup Visa. Inc. Magazine has a great article about the issue and the Startup Visa titled The Immigrant Advantage. My friends Kevin Mann (British) and Thanavath Jaroenvanit (French) – both of TechStars Boulder 2008 – co-founders of Graphic.ly – and one of my inspirations for the Startup Visa movement) are prominently featured. And the Kauffman Foundation just came out with a study that concludes that Job Growth is Entirely Driven by Startups. I’ve had a few encouraging conversations about the Startup Visa movement recently, including hearing about a new co-sponsor of the Senate Bill (“The Startup Visa Act of 2010”) as well as talking to a handful of prominent organizations that are close to signing up to get behind it.
Finally, LeBron James has apparently signed with the Miami Heat. I have no idea what that has to do with DC, other than I’m sure the Wizards were trying to get him also.
My friend Sawyer was as disappointed in the outcome of Bilski as he was in the ending to LOST. In fact, he asked if I’d change his pseudonym to Joseph Adama of Caprica but I vetoed this over extreme nerdiness. Nonetheless Sawyer let loose on Bilski and helps clarify both his perspective on why the Supreme Court took such a milquetoast approach as well as what one of the unintended consequences of their action – or lack thereof – will be. And for those of you who have forgotten Sawyer’s background, he’s a patent attorney that is channeling his opinion through me. And we’ve been discussing setting up a very large data center on an island somewhere in the middle of the Pacific Ocean.
Seeing the reaction to Bilski, what has struck me is how surprised and disappointed some people are with the weak will of the Supreme Court to act to limit the damage that software patents are causing, and will keep causing, to innovation in the U.S.
As I’ve written before, software patents amount to an innovation tax, transferring wealth from people who build things and make stuff to investment bankers, hedge funders, and, most of all, patent prosecutors and litigators. If you think that bankers and lawyers drive innovation, this is a “good thing”; otherwise, this is an utterly disastrous government-sanctioned redistribution of wealth that discourages software innovation. Software innovation continues, by the way, in spite of the patent system, not because of it.
Courts may or may not understand the negatives of the patent system, but they’re the last place we should look for positive change. As others have written about, the Supreme Court has become a rubber stamp on public opinion and on Congress. On the issue of IP, Congress is in the pocket of media companies, biotech companies, large software companies, and lawyers (all of whom can afford to litigate IP suits), and popular opinion skews in the “pro-patent” direction because awareness and interest are low when thousands upon thousands of people remain unemployed for the longest periods of time in decades.
Given a fearful, conservative Court unable to affect meaningful change in most areas until the whole country is behind it, the expectation that the Supreme Court would strike software patents down was folly. Judges don’t know enough, and don’t care enough, to stick their necks out against the monied special interests that control the levers of power. The current system, constructed in part by the pro-patent judges at the Federal Circuit, who have appointed themselves as the ultimate shepherds of this country’s pro-patent mentality, will continue to rule the roost. And the PTO, headed now by the pro-patent former head of IP at IBM, David Kappos, will continue to treat patentees like “customers” and pump economy-destroying patents out as it if were the Fed printing money.
So, yeah, we’re a little screwed. The Federal Courts have bought into the patent system; the PTO grants patents like there is no tomorrow; and Congress is poised to pass a completely eviscerated “patent reform” bill that will make patents harder to render unenforceable, among other things. The outlook is bleak. So what’s the answer, as more and more software patents are issued, and more and more startups and small businesses are sued into nothingness?
Move VC and seed investment in software abroad. This, I think, will be the unintended consequence of Bilski and the alignment of the government against innovation in software. When patents are the rule, and only big companies can play the patent game, small companies, the ones that are driving lots of employment and lots of innovation, will move to places that are both cheaper to live, and less risky legally.
As a counterpoint, a law professor claims that “startup executives reported that nearly 70% of venture capital firms and 50% of angel investors said that patents were important to their investment decisions.” This study was, of course, repudiated by the most credible person on it, Professor Pamela Samuelson. As Brad Feld and Jason Mendelson have said repeatedly, patents have almost no impact on VC investment because, among other things, it takes 4-5 years to get them, and in the current software startup climate, your business will prove itself in 1-3 years one way or another. The fiction that strong patent rights lead to more domestic VC investment is highly damaging and utterly false in software, an industry where low capital intensity and low barriers to entry make product and user acquisition, not “IP,” king.
What Bilski means for software is that the advantages of starting software businesses abroad have become even more clear. The tax situation and cost of living in, say, South America, is much better than in the U.S. currently. Now that startups have to live in fear of the uncertainty of the U.S. patent system, when they could be wiped off the face of the Earth by legal fees and customer loss in the span of a few months by the mere filing of a patent suit, and with an entire government that seems to have no sympathy toward their small businesses, why start a software company in the United States? A determined group of developers could start the same company in, say, Brazil, make their venture money last much longer, and with a higher quality of life at a lower cost of living. Seed and VC investment beginning to move to more hospitable legal climates is inevitable, and Bilski will be the straw that begins the flood of such investments overseas. The only barrier is moving the developers abroad, but communities already growing in foreign countries could begin an exodus that our government seems to want to encourage.
At minimum, U.S. startups will begin locate some portion of their operations abroad. Although the law is unsettled, and highly dependent on the patents at issue, the AT&T v. Microsoft and NTP v. RIM cases indicate that moving operations abroad, like the creation of golden masters and the location of web servers, could insulate some portion of a company’s operations from U.S. patent damages, which cannot be extraterritorial. For sure, locating everything in the U.S. is an invitation for patent plaintiffs to claim worldwide damages on software patent system claims involving a server.
Surely the Supreme Court didn’t intend to drive our most innovative companies abroad, but it may be time for innovators in the U.S. to fight the system the only way that they can when the whole government is out to get them – get out of dodge.
I’ve been quiet on my reaction to Bilski because I’ve got an OpEd floating around that might get published in the next few days. It’s been rejected by one major publisher because according to the senior editor “it didn’t fit their opinion on the case” and another major publisher because “no one really cares that much about patents.” Ok – whatever. Fortunately, I have a blog, but I’ll wait a few more days and see if I can get someone in the traditional media to care.
In the mean time, my partner Jason has written a post titled Bilski Redux and Why You Shouldn’t Believe Everything You Read and Fred Wilson has also weighed in that it’s time for Congress to buck up and take some action in his post Bilski and Patent Reform.
For a great summary of the case, take a look at the Groklaw article titled Here’s Bilski: It’s Affirmed, But . . .No Decision on Software Patentability.
I expressed my opinion briefly in a ReadWriteWeb article titled Supreme Court: Software is Patentable… Sometimes where I said that I was profoundly disappointed with the outcome.
“They had a chance to address a serious and deep issue surrounding innovation in the software industry. Instead of taking a clear and forward looking position, they effectively punted on the hard stuff, surrounded it with ambiguity, and increased the mess we find ourselves in surrounding software and business method patents.”
I’ve got a lot more to say but let’s see if the OpEd shows up somewhere else first. If not, I expect Independence Day will liberate me.
On the eve of re: Bilski, the anxiously awaited Supreme Court decision on business method patents (with potential implications for software patents), I decided to collaborate with the End Software Patents coalition and send out 200 copies of the short movie they recently produced called Patent Absurdity about why software should not be able to be patented to a focused list of key people. The letter follows.
My name is Brad Feld and I’m a venture capitalist who has a popular web blog about innovation and investing in tech start-ups at www.feld.com.
I’m writing to you about a new documentary film "Patent Absurdity: how software patents broke the system", and including a DVD of that film with this letter. I hope you will spare 30 minutes to watch.
I selected you as one of two hundred influential people to receive this DVD because I wanted to make sure that the film is reaching the right people–people who can help inform the debate over the patenting of software. Specifically, I’m hoping the film will bring you to an understanding of why patents on software are a massive tax on and retardant of innovation in the US.
I’m including with this letter a full list of the 200 people who are receiving a copy of this film as well as publishing those names on-line at: https://en.swpat.org/wiki/Who_should_see_Patent_Absurdity.
Any day now the US Supreme Court will issue a ruling in a landmark case known popularly as "Bilski". This ruling is likely to have significant impact on the US economy and the prospects for the new innovative companies that I partner with and who create great new products and services.
Patents, as you are probably aware, are government granted monopolies that last 20 years. They allow the patent holder to restrict others from entering the market. Historically, patents have covered novel machines, processes for industrial manufacture, and pharmaceuticals. In more recent years, patents on software have been granted–hundreds of thousands of patents. These patents cover essential techniques in computer programming, and their existence is having a chilling effect on the startup companies that I work with. These start-ups are finding it increasingly difficult to make headway through this software patent thicket.
Here are some specific points I would like to bring to your attention about software patents:
* The financial cost of defending yourself against a software patent claim are impossible to overcome. Just to analyze whether the claims being made against you are justified will incur legal fees in excess of $50,000.00, and more than $1 million in legal fees before trial. Yet it costs the price of a postage stamp for a software patent holder to make a legal claim against you.
* Economic research demonstrates that software patents are acting as a drag on the US economy.
* Programmers – those skilled in the art of writing software, would be expected to benefit from, and support the patenting of software. They do not. They uniformly despise them as a limitation on their art.
* Venture capitalist like me, who work with new innovative start-ups can testify that software patents have a chilling effect on the market.
* With well over 200,000 software patents having been issued, non practicing entities and hedge funds are buying up tens of thousands of these trash patents and using them to extract hundreds of millions of dollars from US companies. This activity takes the form of a protection racket.
I would be happy to offer my time to answer any questions you might have about this film and what we can do to help end this software patent absurdity.
Last week, Microsoft sued Salesforce.com claiming infringement of 9 software patents. This comes shortly after Nokia sued Apple who sued Nokia over software patents, and after Apple sued HTC who sued Apple over software patents.
As an example of the ridiculous nature of software patents, Microsoft’s claims cover user interface features, including a "system and method for providing and displaying a Web page having an embedded menu" and a "method and system for stacking toolbars in a computer display."
This explosion of litigation based on the patenting of software cannot be brushed-off as large corporations doing what they do, as almost every start-up software company is at some point being shaken down by software patent holders. It’s a massive tax on and retardant of innovation.
I’m promoting the film Patent Absurdity because I know it’s helping people understand the situation. It’s gratifying to hear that more than100,000 people have now viewed the film since it was released a month ago. But are the right people seeing it?
I don’t know, so I’ve decided to send a DVD of the movie in the postal mail to 200 people who you think would most benefit our cause by seeing the movie and hearing the views of a few venture capitalists. My friends at the End Software Patents campaign have started the list and are asking for your help to identify those people that need to be made aware of how the patent system is failing us.
Watch the film, share it with friends, and take a look over the list of people who should watch this film.
As long time readers of this blog know, I’m strongly against software patents. Succinctly, I think they are (a) invalid constructs, (b) totally unnecessary, and (c) a massive tax on and retardant of innovation.
More and more of my VC brethren are beginning to come out publicly against them as are many extremely well respected long time software innovators. So I was amazed to start hearing a statistic being thrown around that 76% of Venture Capitalist Believe that Patents are Important. My partner Jason Mendelson dug in, figured out what was going on, and wrote a very important post titled 76% of Venture Capitalists Believe that Patents are Important (NOT!) explaining that it’s a totally invalid conclusion from a recent study.
In additional “c’mon guys, software patents are invalid” news, there’s a great short movie that was supported by the Free Software Foundation called Patent Absurdity. It explores the case of software patents and the history of judicial activism that led to their rise, and the harm being done to software developers and the wider economy.
The film is based on a series of interviews conducted during the Supreme Court’s review of in re Bilski (which I attended in person) — a case that could have profound implications for the patenting of software. It’s really good and worth 29 minutes of your life.
When I saw this a few minutes ago as I trolled through my daily folder, I thought of an email I got yesterday titled “turtles all the way down” that referred to an article yesterday on TechDirt titled What If The Very Theory That Underlies Why We Need Patents Is Wrong? The article discusses a new paper out by my MIT advisor Eric von Hippel and his Harvard Business School colleague Carliss Y. Baldwin titled Modeling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation.
I expect this to be a key paper cited in the ongoing debate about software patents (and patents in general). Anyone in the software industry will quickly understand this paper and the massive shift we’ve seen from a “producer innovation model” to a “open single user and open collaborative initiative model” of innovation.
In the mean time, here are the butterflies.
What do you think this is? I’ll give you a hint – the little white line in the left corner is a scale that represents 5,000 km.