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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Have We Reached The Software Patent Tipping Point?

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We’ve shifted into a new zone in the world of software patent stupidity.  A few weeks ago, Oracle sued Google over a series of Java-related patents they got when they acquired Sun.  Last week, Paul Allen sued 11 major software companies, including Google, over four patents that were granted to his now defunct Interval Research think tank.

Much of the early commentary has already been said.  And, from what I’ve read, it’s not very generous to either Oracle or Paul Allen.  One of the best lines is from James Gosling, the authors of RE38.104 (Method and apparatus for resolving data references in generated code) in his post The shit finally hits the fan.  There has been plenty of speculation about the motivation of the Oracle patents and the speculation as to Paul Allen’s motivation is just beginning.  Regardless, there are lots of lawyers in the mix advising their clients and devising strategies around these patents.

My own opinion will be no surprise to regular readers of this blog.  I think this behavior is an absurd abuse of the patent system.  I think it’s a massive tax on innovation.  I think it’s an insult to anyone who is a real innovator.

As I was reading through some of the Paul Allen commentary this morning, it occurred to me that this might finally be a tipping point.  Last week, Microsoft asked the supreme court to hear their appeal of the I4i patent suit.  I hope Google steps up and really takes a stand here given that they are on the receiving end of both the Oracle and Allen suits.

Maybe we’ve reached a tipping point.  If you want a little more perspective, go read the book review of Lewis Hyde’s Common as Air.  Or better yet, read Common as Air.

Excellent Summary of Berkeley Patent Survey Results

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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.

The Internet Makes DC Closer To Homer

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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.

Sawyer on Why Bilski Really Means That Software Companies Should Leave the US

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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.

Bummed Out About Bilski

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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.

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