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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: http://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.
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.