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.
Yesterday I published one of Sawyer’s posts titled Why the Decks are Stacked Against Software Startups in Patent Litigation. In it, I realized that Sawyer hadn’t defined the different types of plaintiffs in a patent case. Below are good definitions (from Sawyer) of each type and clear explanations about what you are up against in each one.
If you’re sued in a software patent case, the first thing you should do is figure out what kind of plaintiff you’re up against, because that will have a major impact on your negotiation posture, and you will almost surely want to settle out sooner rather than later.
One important prefatory note has to do with contingent fee arrangements. Most software patent plaintiffs hire their lawyers on contingent fee. Depending on the state, the contingency can be anywhere from 30-40% of the final dollar amount exchanged between the parties, and it’s usually taken off the top. This arrangement gives the lawyers powerful incentives to (1) push the case toward its maximal outcome and (2) not do any work on the case if they don’t have to. So, if you think you have a contingent fee suit on your hands, know that you’re not just negotiating with the other side, but also with the lawyers who, both in front and behind the scenes, may be trying to undermine a resolution that they don’t feel is significant enough financially.
Now, here’s my non-exhaustive classification of types of software patent plaintiffs:
The active competitor: These are the IBMs and Apples of the world, the active, money-making companies that get patents and sue their competitors for market advantage. Competitor cases are usually not on contingent fee because the plaintiff doesn’t want money, it wants a more intangible advantage in the marketplace. Between big players, these cases are often settled in cross-license arrangements, but one can imagine cases like Apple v. HTC being taken straight to trial because the plaintiff wants nothing more than to wipe out or diminish the defendant.
The defunct competitor or pseudo-competitor: Many startups in the dot-com era filed for and got patents on things that we now would consider silly or obvious. As those companies went under, or go under now, the entity that ends up with the companies’ assets seeks to monetize whatever is left, which usually ends up being the patents. These companies morph from going concerns creating stuff to pure licensing entities that proceed to sue every player in a particular market sector. These case are often on contingency because the plaintiffs can’t pay hourly. Settlement strategies vary widely in these kinds of cases, but usually the plaintiff will be incentivized to push every suit to its rational limit unless someone comes along to vigorously defend against the patents. These, in my experience, are the cases startups get caught up in the most, because the plaintiff doesn’t want to sue big players who can defend themselves (the patents are usually pretty bad), and so decides to extract as much value out of small companies in a particular sector as it can.
The “small fry” troll: Here’s the strategy – I have a patent, and I want to collect money to fund some serious suits against big players. What I do is find dozens of small companies (and by small I mean even made up of two people) and I sue them all in one suit, or several suits. I have my lawyer play “nice guy” and offer to settle each plaintiff out for anywhere from $30k-100k, depending on company size. At the end of the day, I’ve collected several million dollars and I can roll that money into suits against the big companies. The reason the defendants settle is that they can’t afford to litigate the case out for a few months, let alone to trial, so they’re stuck and have to pay something. I won’t call it extortion, but I guess I just did. These cases are also sometimes on contingency, but the plaintiff usually hires very inexpensive counsel, with no intention of litigating the case, and those lawyers are fine with the relatively small payouts they get from small settlements.
The fund troll: Many patent suits these days are backed, if you can figure out who the backers are, by specialized funds. These are “venture funds” that collect money from LPs like traditional investment banks and use that money to identify and buy promising patents and set up/manage litigation against significant players to “make” the fund. These cases are sometimes on contingency, and usually on partial contingency with capped fees (half of fees paid, with a 15-17% contingency). The guys running these suits from the funds are usually very sophisticated, and have very specific ways of evaluating cases and deciding settlement amounts. They usually won’t sue anyone too small to defend themselves, because it doesn’t make financial sense. They also don’t let their lawyers influence settlement discussions. In my experience, they are the most reasonable people to deal with in settlement, but at the end of the day you’re still paying the toll.
The “big fish” troll: Sometimes there are software patents out there that have no good invalidity defenses, and where infringement by major players is very likely. These are the holy grail for plaintiffs: big, valuable, winnable cases. The number of firms who handle these types of cases is very small, and one in particular has been racking up huge wins down in Texas for a few years now, especially the past year or two. The plaintiff could be a specialized fund, or just an individual inventor; regardless, the plaintiff and the lawyers are perfectly aligned in wanting to litigate the case through trial. If you see one of these firms, it’s a signal that they did their homework and think they have a very good shot at winning several hundred million dollars against some major player in the case. The chances of settling these types of cases for anything less than eight figures is basically nil. If you’re ever on the other side of a case like this, be afraid.
There are other “types” of software patent plaintiffs, but I think they draw characteristics from the types above. The key takeaways, I think, are (1) that as a defendant, you’re negotiating both with the plaintiff and with the lawyers and (2) the suits aren’t usually filed by “real” businesses, so it’s generally hard to reach fair business-driven settlements. Favorable settlements tend to happen only when a defendant is prepared to litigate a case to the end, and in discovery produces some very solid prior art and information on good non-infringement defenses. This ends up being a function of the ability of the defendant to pay its own legal fees, so at the end of the day, settlements are based much more on the ability of the defendant to pay than the merits of the case.
The conventional wisdom has long been that software startups benefit from patents. I’ve been investing in software / Internet companies for over 16 years and I’ve never once had a patent influence my investment decision. More importantly, since it takes a number of years to get a patent, most startups haven’t even contemplated applying for a patent when they raise their first angel or venture round. Our friend Sawyer has seen this first hand and has some specific thoughts on what they decks are stacked against software startups in patent litigation.
Software startups are particularly vulnerable to patent suits, and often are in jeopardy of losing their businesses entirely after being sued. I think it’s important for everyone to understand the dynamics involved, because knowing why and how startups can be sued into oblivion will give you a new appreciation for the problems in the patent system.
A typical one patent case costs approximately $5 million to litigate through the end of trial, according to data that isn’t available online for some reason (the lack of pricing transparency in attorneys’ fees is a topic for another time). Costs vary wildly depending on where the case is, how complicated the technology is, who the firm involved is, etc, but $5 million is a decent estimate all-in-all.
I’m sure you can already see the problem. What software startup has $5 million to burn on defending a case with no value-add? Even $500k? I’d say it takes $1-2 million or thereabouts just to get through claim construction, which will give the parties a better sense of the overall merits of the case. One patent suit with a slightly determined plaintiff could very easily end a software startup just in legal fees, let alone the impact of the suit on gathering customers in the future.
So, software startups have to settle patent cases very early, and at high settlement amounts, because they have absolutely no leverage. Invalidity takes years to litigate, so you can’t threaten to invalidate the patent; same with inequitable conduct. Non-infringement arguments are great in theory, but the plaintiff won’t have a judgment day until the middle of the case at the earliest, after claim construction, when summary judgment motions are allowed (on most schedules), and that’s several years of litigation and several million dollars away. The defendant could file for a re-exam, but once it’s filed, the defendant has no control over it, and it takes a few years to get through the PTO.
Software startups sometimes have other leverage points, like the value of publicly shaming the plaintiffs, but when software patent NPEs are backed by investment funds through seven layers of corporate shell companies, or are dead companies with nothing to lose, who can you shame? And does anyone particularly care? The average person thinks patents are property (not entirely true) and a “great thing” for the economy; heck, our elected representatives say the same thing all the time.
The bottom line is that, in a world where a few million dollars and several months of work can build a promising software business, albeit one without serious cashflow, a patent suit can stop progress and kill those companies very quickly.
Luckily, perhaps, plaintiffs want money, and so in most cases it’s not worth it for them to sue a company with no revenue. But sometimes it happens, and it seems to be happening now with more frequency.
Startups can and do usually settle these cases, it’s just that the amounts paid aren’t particularly fair or a reflection of the value of the patents (generally nil); rather, it’s a reflection of a patent litigation system that only allows the huge players to defend themselves. Everyone else? Well, they’re kind of screwed.
Tonight, during Lost, I tried to decide just how “willful” Locke-the-smoke-monster was being. I didn’t reach a conclusion – and doubt I will until the end of the season. In the mean time, my anonymous lawyer friend known as Sawyer sent me a nice essay on the notion of “willful infringement in the context of patents.” He also sent me some interesting comments about how pissed off a bunch of biotech patent lawyers were today are at U.S. District Court Judge Robert W. Sweet for invalidating seven patents related to the genes BRCA1 and BRCA2, but that’s not what this essay is about. Remember, no matter how sensible Sawyer’s advice is, none of this is legal advice and, if you have a specific issue, make sure you spend lots of money on your lawyers since they also have to eat. Sawyer’s comments follow.
One of the issues that seems to most concern developers in software companies is whether they should ever look at a patent, and if they do, whether they are "tainted" by the exposure (a patent virus, perhaps?). The basic wisdom is that developers should avoid looking at or reading any patents, and I think that’s generally right, but the law isn’t as bad as it sounds.
There are two issues springing from exposure to a patent – the ticking off of the damages period for infringement of the patent, and willful infringement. The first issue is relatively easy: in order for a patentee to begin accruing damages, he must put a potential infringer on notice of his alleged infringement with some level of specificity. The requisite specificity is a thorny legal issue, but it’s not just enough to send someone a patent, a patentee must also make an allegation of infringement by something (so, the theory goes, the alleged infringer can stop infringing). Patentees can also sell products embodying the invention and mark them with the patent number, which counts as constructive notice, usually.
The second issue is the one I want to focus on. The definition of willful infringement and its legal requirements have changed a lot over time. It used to be something akin to "continuing to infringe when you knew someone was accusing you of infringement." Under the current legal regime, the alleged infringer must continue to infringe in a manner that is both objectively and subjectively reckless (the law is still muddy and some will quibble with my framing of the test, but this is roughly it). Objectivity in law means from the perspective of a hypothetical "reasonable man" (a legal fiction if there ever was one); subjectivity means from the perspective of the accused himself, i.e., that he believed or should have known that what he was doing was reckless and did it anyway. The idea is that if there are strong reasons for people to think that an accused infringer does really infringe, e.g., because there are weak litigation defenses, then his continued infringement is willful; but it isn’t enough to infringe just with mere knowledge of the patent, or even because of negligence in figuring out whether one infringes.
The upshot is that just being exposed to a patent, and then later accused of infringement, isn’t anywhere near enough to be "willful," and so developers shouldn’t be too worried if they run into something accidentally. That said, exposure to a patent is evidence that can come in at trial, and plaintiffs will use even tenuous exposure to paint a picture that could cause a jury to find willfulness even in the absence of solid, legally cognizable, evidence. So, people involved in a software business should probably still avoid patents (not the least of which because they’re often incomprehensible anyway), just to be safe.
Also, one more note: People think that a finding of willfulness means automatic treble damages, but the decision to enhance damages at all is discretionary with the trial judge, and he can choose to make no enhancement at all, or enhance to a level significantly less than treble. The real problem with willfulness is that it gets "black hat" stories about defendants in front of juries, which taint them against a defendant regardless of the merits – it’s easier to think that someone infringes if he’s just a bad guy anyway, especially if the technology is boring and the patent is hard to understand.
Today, Amazon’s 1-Click patent was confirmed following a four year re-examination. Amazon now has ownership of a highly controversial and very absurd patent which I hope will only be used defensively. This a classic example of a “business method patent” that should simply not exist. I continue to wait patiently to see what the Supreme Court says re: Bilski.
In other patent news, Google and Facebook were sued over a social network patent. This was a patent issued in October that apparently has something to do with how people join social networks on mobile phones. Egads.
In better news, it looks like I’ll soon be able to buy a jet pack for $86,000.
The Apple patent suit against HTC really riled up my friend Sawyer. I wasn’t planning on posting another missive from him until next week, but I thought this was particularly timely given the public statement from Apple, including a specific quote from Steve Jobs about its competitors stealing their patented inventions. Sawyer explains why this is simply inflammatory rhetoric and actually has no basis in fact or the way patent law works. He also makes the case – using this as an example – that patents stifle, rather than promote innovation. Enjoy. And, after you read this, if you want a little “doesn’t this sound familiar” action, take a look at the Wikipedia page on Apple Computer v. Microsoft Computer with regard to the GUI – with a little Xerox tossed in as a side dish. And now, my friend Sawyer.
The other day Apple announced that it is suing HTC for infringing several patents related to the iPhone, including patents on the UI, i.e., software patents. As part of the press release, Steve Jobs said the following (emphasis mine):
“We can sit by and watch competitors steal our patented inventions, or we can do something about it. We’ve decided to do something about it. We think competition is healthy, but competitors should create their own original technology, not steal ours.”
The rhetoric of "stealing" and "theft" surrounding accusations of patent infringement is bothersome, both because substantive patent law doesn’t embrace the concept of theft, and because most patent cases don’t involve credible allegations of actual theft or even copying.
Plaintiffs try to use "theft" to inject a moral element into patent suits, but there is no substantive moral element in patent law. The point of a patent is to grant a monopoly in exchange for public disclosure, and patentees want people to use the ideas (in exchange for license fees), otherwise the public disclosure aspect is pointless. The Constitution doesn’t authorize patent or copyright law for moral reasons either: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries…”
The only doctrine in patent law that shades into morality is willful infringement. The shifting law on willful infringement will be the subject of another post, but in any case, willfulness isn’t a morality doctrine; willful infringers aren’t bad people, they are just people who decided to continue possibly infringing because they didn’t think they infringed, thought the suit was frivolous, or thought they would lose more money by stopping, at least in the short term. The doctrine is set up to penalize people who recklessly infringe by potentially trebling damages, and so acts as an incentive to settle suits and pay licensing fees. This isn’t a moral calculus, it’s a utilitarian one.
Willfulness, however, acts as the main vehicle for plaintiffs to inject moral rhetoric and copying allegations into a patent suit. “Copying” in a patent law sense means that an infringer either literally read the patent and copied what the claims said wholesale, or saw a product embodying the patent and copied the patented aspect of it. Copying in patent law does not mean “theft.” Theft of secret ideas is actionable under trade secret law, and I know of very few cases pairing the two. Literal copying is often actionable under copyright law as well. Isn’t it the case though that patentees want people to copy? Doesn’t copying mean that their ideas are spreading and being used for follow-on innovation, which are good things? The issue if anything is proper compensation, not the act of copying itself.
Unsurprisingly, we don’t usually even get into copying as a consideration. A paper by Mark Lemley and a good blog post titled Patent defendants aren’t copycats shows that the vast majority of patent cases don’t involve an assertion of copying (and we’ll have to see if the Apple case does). Putting in place an independent invention defense to infringement, as suggested recently by Brad Burnham at Union Square Ventures, would potentially wipe out 90% of patent cases.
Setting all of that aside, in my experience, when plaintiffs do allege copying, particularly in software cases, the allegations are uniformly flimsy and bogus litigation tactics aimed at getting “black hat” stories about defendants told to juries. And it’s a great tactic because juries are people, and regardless of the merits, they like to stick it to the bad guys, especially so where the merits are boring patent law issues that no one understands anyway.
Now we have one of the biggest and most innovative companies out there, Apple, trying to sue one of its competitors out of the market with patents, and using the false rhetoric of theft to justify the suit. This underscores that the patent problem isn’t just "trolls" versus "big companies," it’s big companies using patents to sue others in the same market into oblivion, cutting off competition and destroying innovation. Imagine, if HTC weren’t making great Android phones to compete with the iPhone, would Apple be incentivized to significantly improve its products? Would we have no iPhone if patents didn’t exist? I think it’s fairly obvious that in the absence of patents, we would have more competition and more innovation here, not less.
In any case, the takeaway for reform advocates is that we need to shift the rhetorical frame in discussions around patents from the moralizing of "stealing" and "theft" to what the issue actually is, a dry utilitarian calculus about what outcomes are better for innovation and competition. When we think about the issues in that frame, it sort of takes the wind of out of Steve Jobs’ sails, doesn’t it?
I saw a tweet today that said “The doubly-linked list, a structure I studied thirty years ago, has recently been patented.” After giggling at the absurdity of the idea, I went and at a patent dated 4/11/06 that appears to be for the doubly-linked list. The prior art was extremely thin, only went back to 1995, and didn’t mention that entire computer languages have been created around the list as a core data structure. One of my first Pascal programming exercises in high school (in 1981 – on an Apple II using USDC Pascal) was to write a series of operations on lists, including both linked and doubly-linked lists (I always thought it was funny they were called “doubly-linked” instead of “double-linked” lists.) Anyone who ever graduated from MIT and took 6.001 learned to love all varieties of the linked list, including the doubly-linked one. That was 1984 for me by the way.
Ironically, Wikipedia had great entries – with source code no less – about both linked lists and doubly-linked lists. The linked list history goes back to 2001, well before the patent was filed. My understanding is that patent examiners aren’t allowed to use Wikipedia – I’m meeting with some PTO folks on Friday and I’m going to ask them if this is fact or fiction. Regardless, this patent is another example of how ridiculous the situation has become.
My friend Sawyer is back with another post in his series of talking about software patent issues. As I mentioned before, Sawyer is a real person named after our intrepid friend in LOST (I haven’t seen it this week – no spoilers please) who has agreed to help us navigate the parallel universe known as software patent land. I’m channeling Sawyer’s points of view as a public service announcement since he’s uncomfortable being named publicly – these are his words, not mine. Today’s post is on the famed “Eastern District of Texas” (EDTX), one of the most popular places in the United States for patent litigation.
In the past several years, the Eastern District of Texas (EDTX) has become one of the premier venues for patent litigation, along with NDCAL, CDCAL, DDEL, and WDWIS. Although the dockets are packed now, when the trend first started, plaintiffs could anticipate trials in short order, perhaps 12 to 18 months, and plaintiff-friendly juries. There is also a basic sense of unfairness that defendants, rightly, feel when they have nothing or almost nothing to do with the district and yet get hauled down to court there, but the ability of plaintiffs to do that is a more fundamental flaw in the Supreme Court’s personal jurisdiction jurisprudence that is best left for another discussion.
There are a lot of stories told about EDTX and how it became a big spot for patent litigation. I won’t name any names here because EDTX lawyers have a tendency to sue anyone who says anything that could be portrayed in a negative light (see, e.g., the Troll Tracker defamation suit.) The basic story I’ve heard though, is this: EDTX was well-known as district with plaintiff-friendly juries after a raft of tort litigation where juries handed down large judgments. The judges and practitioners in area, seeing the coming wave of patent litigation, got together and decided to retool the district for being “patent-friendly.” This mainly involved adopting rules to streamline patent cases, similar to NDCAL, so that plaintiffs would get to juries faster. It’s important to note that this isn’t per se a bad or unethical thing – lots of federal districts are known as “rocket dockets” for one kind of case or another because of concerted efforts to attract and streamline litigation of certain types of cases.
The adoption of those patent local rules, along with a general unwillingness of the courts to throw cases out before trial on what’s called “summary judgment,” lead us to where we are today. Another thing to note, which is changing due to recent appellate decisions, is that EDTX courts have been very unwilling to transfer cases out to other venues. The Fifth Circuit and Federal Circuit have issued an unusually high number of reversals of EDTX decisions not to transfer, and the message seems to be taking and moderating both the desire to keep cases and any “pro-plaintiff” bias one could see.
These days, EDTX actually isn’t so bad for defendants. They win a significant number of cases, primarily because defense counsel has figured out how to navigate the courts, how to wear the “white hat” with the judges, and how to appeal to the juries down there. Still, the data show that when plaintiffs win in EDTX, they tend to win bigger than in any other court; and, when certain defendants develop “bad” reputations with the court or with juries, they get hit with big judgments repeatedly.
It’s also appears that EDTX has made a concerted effort to be “patent friendly,” and that the concomitant economic impact on the area, particularly in Tyler and Marshall, Texas, has been significant. From observation, EDTX is also where most of the software NPE/troll cases are filed these days because it’s still the fastest and most friendly docket for those cases.
That said, blaming EDTX won’t solve the underlying problem of patents and the patent system, especially in software. If there was no EDTX, another district would crop up to attract the big-ticket software patent suits, especially the NPE/troll cases. As long as the expected value of an NPE suit is positive, plaintiffs will find friendly places to file, and districts will make themselves friendly to those suits to stay busy, attract the economic windfall, and generally stay relevant. Don’t get me wrong, venue is a significant issue and has a big impact on the outcome of cases, but focusing reform and publicity efforts on grumbling about the courts won’t get us anywhere. The real problems are more fundamental to how people get patents, what is patentable, what the patents themselves look like, and how the legal system allows them to be used; focusing on the mechanics of where suits are filed is a distraction from the real issues that are bleeding our most innovative technology sectors and slowing down technological progress.