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I woke up this morning to a great article by Nick Grossman at Union Square Ventures on The Patent Quality Improvement Act. Nick does a great job of describing the software patent problem, suggesting several solutions, and explaining how the Patent Quality Improvement Act helps the increasingly dismal situation around software patents.
Nick has a great paragraph from Mark Lemley of Stanford Law School that describes a powerful solution to part of the problem – that of eliminating “functional claiming.” Regarding functional claiming, Mark says:
“This is a problem that is unique to software. We wouldn’t permit in any other area of technology the sorts of claims that appear in thousands of different software patents. Pharmaceutical inventors don’t claim “an arrangement of atoms that cures cancer,” asserting their patent against any chemical, whatever its form, that achieves that purpose. Indeed, the whole idea seems ludicrous. Pharmaceutical patent owners invent a drug, and it is the drug that they are entitled to patent. But in software, as we will see, claims of just that form are everywhere.”
Mark has written a strong paper on this called Software Patents and the Return of Functional Claiming that describes the problem – and the solution – in detail.
Fred Wilson, Brad Burnham, Jason Mendelson, and I have been talking about the problem of software patents for a long time and Fred brought it up again today on his blog in a post titled Piecemeal Patent Reform. It’s nice to see Senator Chuck Schumer proposing a simple yet powerful solution to part of the software patent problem.
While we continue to struggle with patent trolls in the US – which used to be called “non-practicing entities” (NPEs) but now apparently prefer to be called “patent assertion entities” (PAE) – the New Zealand government has announced that software will no longer be patented. Maybe someday we will be so bold.
I regularly get emails and have discussions with entrepreneurs who are on the receiving end of a software patent lawsuit. Many of these are young companies, often with little or no revenue. It’s total, completely madness. If you don’t believe me, read the latest rant from a young entrepreneur on the receiving end of a software patent lawsuit from a troll.
My startup, all five employees and $0 revenue, is being sued by a patent troll. It is madness.
Software patents are weapons of mass extortion. The trolls know that the cost of patent litigation is huge- millions of dollars for a thorough defense. The vast majority of companies do a simple cost benefit analysis and settle. It costs a pittance to file a lawsuit, a fortune to fight. A troll can sue many companies and live off the settlements. Trolling is a lucrative, legally sanctioned business model with virtually no risk. The longer this continues the worse it will get.
And getting a patent is not that hard. For less than the cost of a small friends and family round you make a series of claims that describe your “invention”. Sort of a technical concept document written by a lawyer. There is no code required, no detailed product spec. You don’t have to build anything. We are being sued for having a UI connected to a server connected to a mobile device. And get this- data goes back and forth between the UI and the mobile device. Break through, right? Yes, according to the Patent Office.
And just like with illegal extortion, patent extortion causes real personal and economic pain:
- I wake up in the middle of the night with my hands clenched like lobster claws. I’ve actually cried from the injustice and worry;
- Every three hours of legal advice costs the same as an on-shore customer service representative with benefits for a week.
- A full legal defense could be my entire future Series A. And who is going to invest in that round when use of funds says “litigation”?
It is romantic to fight but the trolls know that a startup’s number one job is to stay alive. Screw romance. Screw justice. One lawyer I consulted told me not to read the patents- they were irrelevant. And the troll agrees. He said he didn’t really understand my business and didn’t care. We just looked like other companies he has sued. If your startup hasn’t been sued yet, don’t worry. You will.
What we need is leadership. But where are our leaders? In court. It’s disgusting. The millions spent haggling over the curvature of an icon could fund a massive lobbying and social action effort. Is it possible we can send a million tweets about happy cats but not stop patent extortion? We’re a community that believes in big dreams and blowing up obstacles. We can do this. We just have to try.
By now the blogosphere, twitterverse, and even mainstream media is abuzz with the absurd decision that Yahoo has made to sue Facebook over ten software patents with the assertion that Facebook’s entire business is based on Yahoo’s patented inventions. My partner Jason Mendelson called this on 2/28 when he wrote his post Goodbye Yahoo! It was nice knowing you and Fred Wilson weighed in this morning with his post Yahoo! Crosses The Line.
My personal view is well known – I don’t think any of these patents are actually valid. Take a look at the analysis on PaidContent of The 10 Patents Yahoo Is Using To Sue Facebook, read the plain English descriptions, and then look at the filing dates. Now, try to make the argument that these are novel, useful, and non-obvious inventions of the part of Yahoo. For a less nuanced view, now read TechDirt’s post Delusions Of Grandeur: Yahoo Officially Sues Facebook, Laughably Argues That Facebook’s Entire Model Is Based On Yahoo.
I’m hopeful this is the beginning of the endgame of massive patent reform around software. It’s time for the entire industry to recognize that we are quickly shifting from a cold war (patents are deterrents) to a nuclear war that – like the one in War Games - the only winning move is not to play.
I’ve decided to let a week pass while I think about what the right response to this is. Software patents have the same polarizing dynamic that SOPA/PIPA had . Our government is, through laws and regulations – many of which make no sense, has created a construct with the legal industry that is untenable. Once again, we see an incumbent (Yahoo – and yes, I recognize the irony of calling Yahoo an incumbent) attacking an innovator (Facebook) with irrational weapons that have huge collateral damage, all in the name of “enhancing shareholder value.”
This is not a winnable game for Yahoo, the Internet, innovation, or society. Like nuclear war, the only winning move is not to play. However, Yahoo has now played. The next few moves are critically important.
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.