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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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How Patent Trolls Really Work

Comments (11)

I’ve been asserting for at least six years that patent system is completely broken for the software industry. I’ve given numerous examples, dealt with the issue first hand as patent trolls have tried to extort many of the companies I’m an investor in, and I’ve had many public discussions about the topic.

On my run on Sunday, I listed to This American Life - When Patents Attack… Part Two! It is easily the best and most detailed expose I’ve ever heard on this issue. If you care to really understand how patent trolls work, spend an hour of your life and listen to it.

 

The issue has finally gone mainstream. Here’s a great quote on patent trolls from an article in Time Magazine (how much more mainstream can you get than that.)

“In 2011, Apple and Google spent more money on patent litigation and defensive patent acquisitions than on research and development. That’s not a good sign for the U.S. economy; in fact, it’s a stark indication that our intellectual-property system is broken. Rampant patent litigation is impeding innovation and ultimately increasing the costs of gadgets for consumers, according to legal experts and industry observers. Now President Obama says he wants to reform the system.”

There was an outcry of support last week when President Obama issued a set of executive orders and suggested legislative actions to fix the broken patent system. While the press release from the White House had a bland title, the substance was solid and the articles about it got to the point.

As expected, plenty of people suggest all of this is misguided or overblown. I read John Sununu’s (former New Hampshire Senator) Boston Globe OpEd Who is a patent troll? Obama calls nation’s techies to arms, but enemy is difficult to define and grimaced as he mostly missed the point, while at the same time blaming it on the government and lawyers.

All of this is shining a bright light on a deeply rooted problem that has spiraled completely out of control and has become an enormous tax on innovation in the United States. While I don’t believe Obama’s executive orders go nearly far enough, they are a start in something that has been ignored by the White House and our government for far too long.

  • http://jeffjudge.com Jeff Judge

    I’m very excited to see the president take action on this issue, even if it’s a small start. Without any real change here, startups will always be penalized once they hit some form of scale. Startups who think they won’t eventually run into issues here are operating on wishful thinking.

  • MHS

    Brad – I’d like to throw my 2 cents into this as we’ve been dealing with both sides of this issue. We were granted a pretty significant patent last year. Over the last few years, we have seen larger tech companies replicate our patented technology and methods. Some of these companies even visited us under the guise of BD to request technical or other product roadmap type information. Now as a small startup we are faced with a host of issues:

    - The patent system is and will always be rigged for larger corporations. As a smaller, operating entity, if we go after one of the Fortune 500 tech companies for infringement, they will A. File a Declaratory Judgment to put us on the defensive. B. Bury us in legal costs. C. Countersue us and likely also include A and B.

    - Our other option is to try and license our patent to these entities. For the most part, they blow it off if there’s no ‘bark behind the bite’; they feel that they’ll risk a lawsuit down the line which will be a fraction of the market share they generated from infringing. See Apple/Samsung for a perfect example of this though on a macro level.

    - This leaves us with one less than desirable option. We can sell our patent to a patent aggregator or troll, to get direct and/or future compensation off our patent. Or we can become a NPE and try to enforce our patent rights using similar ‘troll’ tactics. Right now, the NPE route unfortunately seems to be the only way we can enforce our rights against larger entities. This would then brand us as a ‘troll’ simply because we have no other options to enforce our rights.

    I am not defending trolls at all. I think what most of them do with ridiculous patents is a horrible strain on the startup ecosystem and innovation in general. However, I think the larger Fortune 500 companies are directing this conversation about patent troll abuse while they are in effect gaming the system:

    - Microsoft, Google and others are investors in Intellectual Ventures. The same patent troll outlined in the NPR article.

    - Allied Security Trust is another patent aggregator with members such as IBM, Microsoft, and others.

    My point on all of this is that the same companies that are crying that patent trolls are an issue are the same entities themselves that act as trolls or worse yet, invest in the same problem they’re crying about. This conversation needs to focus on protection around smaller entities and startups and not the larger entities that are taking advantage of the broken system from both ends.

    Matt

    P.S. One final note as there seems to be a sense in the startup world that patents are bad. Patents prevent replication – not innovation.

    • http://www.feld.com bfeld

      MHS – it’s hard to respond with specifics since I don’t know any information about your company or your patent. I understand the argument of how you protect yourself against the big companies ripping you off. However, in my experience investing in software startups over the past 20 years, I’ve found this particular argument to be a very hollow one that is typically used by entrepreneurs who have gotten a patent on something that is not novel or non-obvious, and as a result shouldn’t really be patented. The patent is then waived around as the innovation while the business goes no where. But the patent was problematic in the first place.

      Your comment about the large companies is correct. There is a wide variety of complex behavior here. None of it is pure and most of it is a function of a completely broken system and the compounding impact of decisions made to try to address specific things, that conflict with other decisions, approaches, and in some case logic.

      Your statement that patents prevent replication – while noble – misses the point of disclosure. If you disclosed source code with you patent, then we can have a rational discussion about replication. But that’s what copyright is for. And as far as I have seen, no one discloses their source code with their patents. As a result, there is no actual disclosure of the software – just a bunch of legal language describing an idea. It’s well understood that you can’t patent an idea – this cuts to the core of the problem.

      Unfortunately, there is no magic solution anymore.

      • PatentGeek

        Legally you can’t patent an idea, or “abstract thought.” But if you have an idea, and then take 10,000 words to say “and we’ll do it using computers,” then the USPTO will issue you a patent for your idea. *That’s* the root problem.

  • http://www.justanentrepreneur.com Philip Sugar

    I don’t want to over complicate things but the issue I have is how much did you spend on the technology behind the patent, not the patent, but actually on technology.

    The ones that really burn me are where somebody patented something obvious, was already out there, or the only work they did was to file the patent.

    I understand you spent millions of dollars coming up with and testing some novel idea and you don’t want somebody just ripping it off. Fine, get ten times or fifty times your money.

  • PatentGeek

    I don’t see what’s so bad about Sununu’s article, Brad. “The deeper problem begins with bad patents” he says. “When the US Patent and
    Trademark Office issues a patent that is overly vague, broad, or trivial, it invites uncertainty and litigation.” That is, indeed, the problem.

    At the end of the day, whether a startup gets sued by a troll or an operating entity such as Nuance (see, for instance, http://onforb.es/13yx6XK), the end result is the same. In fact in many cases the operating entity is worse, because their intention is to kill or take over the company. Trolls don’t want to destroy companies, because then they don’t get paid.

    The ultimate problem is bad patents; trolls are merely a symptom created by these bad patents. Stop the bad patents, and the trolls go away.

    There’s another reason that the focus on trolls is problematic; it’s an argument that you simply can’t win in a capitalist America. What, you don’t believe in property rights? What are you, some kind of commie?! The trolls and supporters will compare patent property with land property (I’ve seen it done in court!), and in fact they do have a good argument; if non-practicing entities don’t have the right to own patents, does that mean you don’t have the right to own a piece of land if you don’t live on it? (There are many people who in fact would say Yes to that question, but it’s not an argument that will fly in the US of A.) Sununu’s statement that “Arguing that some patent holders have full rights to sue while others do not flouts the principle of equality under the law” is hard to argue against in a society that protects property rights.

    Then there’s Sununu’s question, “Who qualifies as a patent troll?” I know of two recent cases in which the “trolls” were people who *used to* operate … people who had companies, developed technology, patented it, never sold the patents, and years later, after their companies were no longer operating, attacked others. Are these trolls? Certainly they are *now* non-operating entities, but they don’t match the normal profile of companies such as Acacia.

    The problem is that these companies should never have been issued the patents in the first place. The form of ownership of the patent is merely a red herring distracting us from the real problem.

    And, by the way, the argument that non-practicing entities have an advantage because the companies they sue can’t sue for patent infringement in return is also a bit of a red herring. How many of the companies you have been involved with that have been sued had patents that they could use to sue in return? Probably none, right?

    The real problem is that the USPTO is issuing patents that they have no right to issue. They’ve been doing this for a long, long time. I love this quote from the Supreme Court, which describes exactly what is going on today:

    The design of the patent laws is to reward those who make some
    substantial discovery or invention, which adds to our knowledge
    and makes a step in advance in the useful arts. Such inventors are
    worthy of all favor. It was never the object of those laws to grant a
    monopoly for every trifling device, every shadow of a shade of an
    idea, which would naturally and spontaneously occur to any skilled
    mechanic or operator in the ordinary progress of manufactures.
    Such an indiscriminate creation of exclusive privileges tends rather
    to obstruct than to stimulate invention. It creates a class of speculative
    schemers who make it their business to watch the advancing
    wave of improvement, and gather its foam in the form of patented
    monopolies, which enable them to lay a heavy tax upon the industry
    of the country, without contributing anything to the real advancement
    of the art. It embarrasses the honest pursuit of business
    with fears and apprehensions of concealed liens and unknown liabilities
    to lawsuits and vexatious accountings for profits made in
    good faith.

    When did they write this? 1883.

  • http://www.pointsandfigures.com pointsnfigures

    Richard Epstein posted on this:http://www.hoover.org/publications/defining-ideas/article/149096 He doesn’t agree with the administrations efforts on this-but I don’t think he would twiddle his thumbs and do nothing either.

    • PatentGeek

      Interesting article. Again, he explains why you won’t win the argument against non-practicing entities (trolls); that there are good reasons for “specialization,” as he puts it.

      In fact focusing on the trolls is a huge distraction. People seeking to fix the system will end up spending a lot of time arguing about a peripheral issue, an argument that they almost certainly can’t win, while the root cause — bad (unconstitutional even) patents — gets less than the full attention it deserves.

      And that’s just what’s happening. Epstein’s article focuses purely on the troll issue, with no discussion at all of the fact that the USPTO is poisoning the well by issuing garbage patents. The Presidential report on patents does that, too. Well, it does discuss the problem of bad patents, posing the issue of one as basically the USPTO issuing patents on concepts that are obvious. But that’s only one part of the problem with these garbage patents, and in any case the report spends only a page and a half, out of 17 pages, discussing this. Virtually all the rest focuses on the way these patents are used by trolls, rather than the fact that they shouldn’t be issued. A classic case of putting the cart before the horse.

  • PatentGeek

    Here’s an interesting concept; Vermont has passed a law against “patent owners who – acting in bad faith — threaten to sue, or
    who actually sue, a Vermont company.” We could do with something like that in Colorado! One of the ways to fend off trolls is to make it difficult, risky, or expensive for them to pursue a case. Laws like this will encourage trolls to, in some cases at least, avoid certain companies and look elsewhere. Not a final answer to the problem, of course, but something that can help in certain situations. See http://www.ims-expertservices.com/blog/2013/vermont-takes-aim-at-trolls/

    The law actually turns the Attorney General into an ally in the fight against trolls. The very day the bill was signed into law, the Attorney General’s office filed its first lawsuit against a troll. Kudos to Vermont for doing something to protect its tech companies!

    • http://www.feld.com bfeld

      Interesting – I’ll look into that. I missed that for some reason.

      • PatentGeek

        It’s something that I’ve been thinking about recently. CO has a lot of vulnerable startups, and of course more mature tech companies that are also at risk. The patent wars are sucking money out of Colorado’s tech sector, and out of the CO economy totally in many cases, something that that State should be concerned about. There are things that the State can do to help in this area.

        Another thing might be to cultivate friendly judges — to educate judges about the problem — so local companies can file for a Declaratory Judgement against patent holders who they believe may at some point file suit… that would force the patent holder to defend its patent in Colorado rather than a location of its choice, increasing costs and potentially thwarting the attack.

        Until the patent problems are fixed directly, everything that makes it difficult or expensive to use a patent against a CO company can help…

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