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

Comments (28)

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.

  • Jay Sandvos

    Yawn…. so you're moving to Brazil then?

    • Goose66

      We could only hope.

    • http://intensedebate.com/people/bfeld Brad Feld

      Nah, but it's kind of fun to ponder.

  • Paul Roales

    "patents have almost no impact on VC investment"

    Correction: "patents have almost no impact on {IT/WEB] VC investment"

    …you act like your sector of VC investment is the only sector that exists.

    • http://intensedebate.com/people/bfeld Brad Feld

      I try to always qualify this. Sawyer forgot in this case. Since his whole essay was themed around software he probably just assumed he could drop it in one case, or maybe he was being forgetful.

      I've often acknowledged that patents have plenty of impact outside software / Internet investments. My issue is with software patents.

  • http://intensedebate.com/profiles/in2liberty Morgan Warstler

    Of course corporate taxes are a far bigger jobs destroyer, but your point is well taken.

    If only you fully separated your effort on patents from the ridiculousness of Net Neutrality – it'd be easier to support you whole hog.

  • Adam Day

    Sawyer = Brad Feld
    This assumption of driving innovation abroad is flawed. If you want to invest in a political and economic venue where IP ownership is not recognized and it can be stolen by anyone especially the wealthiest and largest of players or that the local political environment is so corrupt that someone can be bribed to make a climate adversarial, you are welcome to invest. What you are complaining about is an economic and political environment that acknowledges and recognizes individual ownership of IP. A free, democratic and capitalistic environment that attempts to preserve every citizen’s right to achieve the American Dream.

    • http://intensedebate.com/people/bfeld Brad Feld

      Actually, Sawyer != Brad Feld. It's a completely separate person who is actually a patent lawyer!

    • Marduk

      you phail in your first line of code.

      the = operator will assign the following to the variable preceding the operator. in this case, that's impossible because you are implying that Sawyer is a reference to Brad, but your point is that Sawyer IS Brad. That's not technically possible if Sawyer is only a reference. You would have been correct if Sawyer had been previously defined as a reference object.

      Brad's retort was correct, he used a true equality operator.

      Since your reply bugged out in the first line, the logic in the rest of your code wasn't interpreted or compiled, and is probably as faulty.

      >:|

  • Goose66

    Why is there a problem with patents for software inventions. I don't understand why you would think other forms of innovation deserve the protection of the patent system, but software innovation is somehow second class, and not deservant of the same level of protection. IMO, the real problem is with how damages are awarded in infringement cases. If a plaintiff was not realizing revenue from their patented invention, then give them an injunction on further use/sales of the invention by the defendant, but they don't deserve damages.

  • http://intensedebate.com/people/bfeld Brad Feld

    I've written extensively on this blog about why I don't think software patents are valid constructs – just search for software patent and you find a bunch of stuff.

  • http://www.google.com/profiles/dvdotsenko Daniel

    One interesting angle would be to see if it's possible for states to become "free economic zones" by providing some state-level protections against "frivolous" patent infringement claims, for specific patent areas like method (software) patents.

    I can particularly see a lot of good from that for California. That thing alone can pull back the corps that already escaped "abroad" (to Nevada), as increased tax may be worth the trouble.

    The boost to corporate tax income would be substantial. The public would see a value in exchanging the "innovation tax" that the patent system is for "corporate tax."

    The threat to other states' corporate tax income may move the whole country in this direction state by state.

    Ugh… One hopes….

  • http://intensedebate.com/people/James_Mitchell James_Mitchell

    Sawyer's essay is a good one as long as you don't take it seriously. Yes, our government screws small business in many ways, with software patents near the top of the list. But anyone with a three digit IQ who is not smoking crack would probably agree that 99 percent of the time, if you are doing a software/Web startup, you should be in the United States. Some like Paul Graham even go further, saying not just the U.S. but particular areas such as Silicon Valley are vastly superior places to start a startup than even Boston, no. 2 on his list. See:
    http://www.paulgraham.com/startuphubs.html

    Yes, Brazil is an interesting country and no doubt the cost of living is much lower. But let's get real. How many A+ software developers are there in Brazil (we all know the top 1 percent of software developers out perform the other 99 percent)? How many VC firms in Brazil are in the league of Foundry Group? OK, forget that, how many are half as good as Foundry Group? Answer: zero. Do you really think Brad is going to invest in your Brazil startup? Yes, Brad will bitch about Bilski (as he should) but he ain't going to fund you if he has to dial 011 to call you. Is he going to fund a company where he has to take out his passport to go visit the company? How many co-founders can you find in Brazil, the kind of guys who have done it before, who are willing to work 100 hours a week for a 15 percent chance at getting rich? (The fact of the matter is almost everyone else in other countries is incredibly lazy compared to startup founders in the U.S.) How many law firms in Brazil understand tech startups? By the way, do you know how many months it takes just to start a company in Brazil, and how many government agencies you have to apply to for permits?

    No doubt you have great things to say about the legal system in Brazil, which is well known for fair, even handed justice by smart and fair judges. And if you believe that, I have a bridge to sell you, because most people acknowledge that half of the judges in Brazil take bribes. (Which happens so infrequently in the U.S. that when it is discovered, it makes front page news.) And no doubt many would argue that the top universities in Brazil are in the league of Stanford and MIT. Well, that's true if you are talking about Spanish literature, but if you are talking about computer science or math or engineering, the top universities in Brazil are slightly better than a mediocre junior college in Nebraska.

    Let's get real. Despite the idiotic laws we have in the U.S., and the incredibly stupid decisions of SCOTUS and and the Federal Circuit, 99 percent of the successful tech startups will take place in the U.S. The only issue for debate is how many will be in Silicon Valley vs. Boston/Cambridge vs. Boulder vs. Seattle vs. other U.S. cities.

    James Mitchell http://www.jmitchell.me

    • Marduk

      dude, can you discuss the difference between the forest and the trees in your next "high end" social group meet-up? lmao

      I think you missed the point entirely.

  • http://dedenm06.student.ipb.ac.id deden

    ok thanks for your information…

  • Len Williams

    Very good article.
    I think useful innovations with a positive impact on society should be promoted, but the problem is the patent system. We probably need a capital market for invention such as the venture capital market for start-ups. Now, some say that software patents make no sense as, like art, and other creative domains, software is mainly derivative work. Possibly almost any start-up software company could at some point be shaken down by the software patent holders. So, do patents have an impact on VC investment or not? And if they do, to what extent? Anyway, here's an article with some great news for tech entrepreneurs.

    Len.

  • Len Williams

    Very good article.
    I think useful innovations with a positive impact on society should be promoted, but the problem is the patent system. We probably need a capital market for invention such as the venture capital market for start-ups. Now, some say that software patents make no sense as, like art, and other creative domains, software is mainly derivative work. Possibly almost any start-up software company could at some point be shaken down by the software patent holders. So, do patents have an impact on VC investment or not? And if they do, to what extent? Anyway, here's an article with some great news for tech entrepreneurs.
    Len.

  • Damian

    @ James Mitchell:
    You make a good point about the state of software development in Brazil as you know it. Guess what? If people move, accepting all your points are worthwhile prices to be paid to have a company that won’t be litigated into the ground just by the threat of a baseless patent (and don’t tell me that hasn’t happened already, when you MUST pay to defend against even frivolous threats), then the expertise will come.

    Guess how the US got its start back when ‘all the expertise and the best way of doing things’ all belonged in Europe? Forgotten your history?

    Damian

    • James_Mitchell

      Damian, Paul Graham has several essays that deal with “What is the best environment for a tech startup?” Two of his essays are at:

      http://paulgraham.com/siliconvalley.html

      http://paulgraham.com/america.html

      He likes to imagine what it would take for a city to become the next Silicon Valley. Reading his essays critically, the answer is clear: At least for the next 20 or 30 years, it ain’t going to happen.

      First, you need a top university, a technical institute, such as MIT or Stanford. How many MITs are there in the world? How likely is another country likely to create a university half as good as MIT? Graham asked several computer science professors what the top engineering universities were outside the U.S. Everyone said Cambridge (England), and after that, there was a long silence. There really is no great technical university outside the U.S. other than Cambridge. Is Brazil realistically going to create one? Not in my lifetime.

      Looking at his essays, he lists the other ingredients necessary: lots of really smart nerds, angel investors (as important as VCs, maybe even more so for very early stage companies), VCs of course. And there are things he does not list, such as lawyers and accountants and executive search firms who understand startups. Probably the most important characteristic is a risk-taking mindset. In America, people are more willing to swing for the fences. And if they fail, which they do most of the time, the penalties are much less than in other countries. One reason smart nerds in American are more likely to take the risk of a startup is that we have so many role models. The media loves to write about Bill Gates and Steve Jobs and Mark Zuckenberg, and people say, “If they do it, maybe I can too.” Who are the role models in Brazil?

      We can, we should and we do bitch about all the dumb things the U.S. federal government and the states do to inhibit the formation of small businesses. We can fantasize about leaving the U.S. and starting a startup in Brazil. But it’s not realistic. Brazil does not have what the U.S. has and at least for the next 30 years (I don’t think beyond that), it’s not going to. Probably Israel is no. 2 among countries for startups, and after Israel, the list thins out pretty quickly.

      If you believe our government is making some serious policy mistakes, I agree, and we should try to remedy them. The U.S. Supreme Court has clearly indicated it will do nothing to sort out this mess. But it's not a constitutional issue and it can be remedied through legislation in Congress, assuming we can convince them that the current laws are doing more harm than good. But this “I am going to move to Brazil and start my startup there” talk is childish gibberish. It’s kind of like your kid saying, “I am going to hold my breath until I die.”

      One point I do not understand in most of the previous posts – You start your company in Brazil where supposedly you do not have to worry about software patents. Are you not going to sell your product or service in the U.S.? If you do, can’t the patent troll sue you in U.S. District Court?

      One question for Brad: How many startups has he funded that were based outside the U.S.?

      • Derek Scruggs

        First, you need a top university, a technical institute, such as MIT or Stanford.

        IIT in India. Vinod Khosla went there, along with countless other succesful engineers and entrepreneurs who now reside in the US. I can't speak to what the IP issues are in India, but if I had to bet on where the next Silicon Valley outside the US would be, I'd put my money on India.

        Dunno if Foundry is inveting outside the US, but one of Brad's partners from the Mobius day's likes China so much he moved there to start a fund.

        • Derek Scruggs

          Oh and BTW the largest tech company in the world by headcount is in China. Foxconn employs over 800,000 and among other things manufactures the iPhone, the iPad, Intel motherboards for Dell and HP, the Playstation, the WII etc. Interesting that tech companies which are supposedly so paranoid about patents, nevertheless allow their stuff to be built in China. You think maybe some American VCs back in 1975 would've liked to own a piece of that?

        • http://intensedebate.com/people/bfeld bfeld

          We aren't investing outside the US.

  • albert

    There's really no point in moving US operations abroad. Patents would prevent sale of patent violating software in the US, and any other country that recognizes US patents. No, the _innovation_ will move overseas to countries that don't recognize software patents. If they come up with new things, those things will be unpatentable (but usable) in the US, because they will be prior art. So any US company will benefit from overseas unpatentable software.

  • http://intensedebate.com/profiles/paramendra paramendra

    I watched a video a few weeks back that made a beautiful case. What would frivolous music patents have done to Mozart?

  • http://codegold.blogspot.com Andrew Haas

    Do you have any information on legal areas of patent / copyright / trademark law where they are purposefully not bothering to sue or prosecute patent infringement cases even though there are laws against infringement or infringement due to worries about prior cases and antitrust lawsuits?

    Just wondering about these 'gray areas' and how to not break the law in the cases where the law shouldn't be broken (infringement) but still have a company and where there is (almost) legislated allowment of infringement (so the economy still works without lawsuits every day?), what the rules are.

  • http://yohan06.student.ipb.ac.id yohan

    nice info, thank you :)

  • http://www.americanvanlines.com/ Charlotte Movers

    I think that IP cases should be held in a separate court ruled by people who actually have some sort of understanding on what they pass judgment on. But I'm just daydreaming, things are the way they are.

  • http://www.os-monitor.com/ Network monitoring software

    Good luck to Sawyer.

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