The conventional wisdom has long been that software startups benefit from patents.  I’ve been investing in software / Internet companies for over 16 years and I’ve never once had a patent influence my investment decision.  More importantly, since it takes a number of years to get a patent, most startups haven’t even contemplated applying for a patent when they raise their first angel or venture round.  Our friend Sawyer has seen this first hand and has some specific thoughts on what they decks are stacked against software startups in patent litigation.

Software startups are particularly vulnerable to patent suits, and often are in jeopardy of losing their businesses entirely after being sued.  I think it’s important for everyone to understand the dynamics involved, because knowing why and how startups can be sued into oblivion will give you a new appreciation for the problems in the patent system.

A typical one patent case costs approximately $5 million to litigate through the end of trial, according to data that isn’t available online for some reason (the lack of pricing transparency in attorneys’ fees is a topic for another time).  Costs vary wildly depending on where the case is, how complicated the technology is, who the firm involved is, etc, but $5 million is a decent estimate all-in-all.

I’m sure you can already see the problem.  What software startup has $5 million to burn on defending a case with no value-add?  Even $500k?  I’d say it takes $1-2 million or thereabouts just to get through claim construction, which will give the parties a better sense of the overall merits of the case.  One patent suit with a slightly determined plaintiff could very easily end a software startup just in legal fees, let alone the impact of the suit on gathering customers in the future.

So, software startups have to settle patent cases very early, and at high settlement amounts, because they have absolutely no leverage.  Invalidity takes years to litigate, so you can’t threaten to invalidate the patent; same with inequitable conduct.  Non-infringement arguments are great in theory, but the plaintiff won’t have a judgment day until the middle of the case at the earliest, after claim construction, when summary judgment motions are allowed (on most schedules), and that’s several years of litigation and several million dollars away.  The defendant could file for a re-exam, but once it’s filed, the defendant has no control over it, and it takes a few years to get through the PTO.

Software startups sometimes have other leverage points, like the value of publicly shaming the plaintiffs, but when software patent NPEs are backed by investment funds through seven layers of corporate shell companies, or are dead companies with nothing to lose, who can you shame?  And does anyone particularly care?  The average person thinks patents are property (not entirely true) and a “great thing” for the economy; heck, our elected representatives say the same thing all the time.

The bottom line is that, in a world where a few million dollars and several months of work can build a promising software business, albeit one without serious cashflow, a patent suit can stop progress and kill those companies very quickly.

Luckily, perhaps, plaintiffs want money, and so in most cases it’s not worth it for them to sue a company with no revenue.  But sometimes it happens, and it seems to be happening now with more frequency.

Startups can and do usually settle these cases, it’s just that the amounts paid aren’t particularly fair or a reflection of the value of the patents (generally nil); rather, it’s a reflection of a patent litigation system that only allows the huge players to defend themselves.  Everyone else?  Well, they’re kind of screwed.

Tonight, during Lost, I tried to decide just how “willful” Locke-the-smoke-monster was being.  I didn’t reach a conclusion – and doubt I will until the end of the season.  In the mean time, my anonymous lawyer friend known as Sawyer sent me a nice essay on the notion of “willful infringement in the context of patents.”  He also sent me some interesting comments about how pissed off a bunch of biotech patent lawyers were today are at U.S. District Court Judge Robert W. Sweet for invalidating seven patents related to the genes BRCA1 and BRCA2, but that’s not what this essay is about.  Remember, no matter how sensible Sawyer’s advice is, none of this is legal advice and, if you have a specific issue, make sure you spend lots of money on your lawyers since they also have to eat.  Sawyer’s comments follow.

One of the issues that seems to most concern developers in software companies is whether they should ever look at a patent, and if they do, whether they are "tainted" by the exposure (a patent virus, perhaps?).  The basic wisdom is that developers should avoid looking at or reading any patents, and I think that’s generally right, but the law isn’t as bad as it sounds.

There are two issues springing from exposure to a patent – the ticking off of the damages period for infringement of the patent, and willful infringement.  The first issue is relatively easy:  in order for a patentee to begin accruing damages, he must put a potential infringer on notice of his alleged infringement with some level of specificity.  The requisite specificity is a thorny legal issue, but it’s not just enough to send someone a patent, a patentee must also make an allegation of infringement by something (so, the theory goes, the alleged infringer can stop infringing).  Patentees can also sell products embodying the invention and mark them with the patent number, which counts as constructive notice, usually.

The second issue is the one I want to focus on.  The definition of willful infringement and its legal requirements have changed a lot over time.  It used to be something akin to "continuing to infringe when you knew someone was accusing you of infringement."  Under the current legal regime, the alleged infringer must continue to infringe in a manner that is both objectively and subjectively reckless (the law is still muddy and some will quibble with my framing of the test, but this is roughly it).  Objectivity in law means from the perspective of a hypothetical "reasonable man" (a legal fiction if there ever was one); subjectivity means from the perspective of the accused himself, i.e., that he believed or should have known that what he was doing was reckless and did it anyway.  The idea is that if there are strong reasons for people to think that an accused infringer does really infringe, e.g., because there are weak litigation defenses, then his continued infringement is willful; but it isn’t enough to infringe just with mere knowledge of the patent, or even because of negligence in figuring out whether one infringes.

The upshot is that just being exposed to a patent, and then later accused of infringement, isn’t anywhere near enough to be "willful," and so developers shouldn’t be too worried if they run into something accidentally.  That said, exposure to a patent is evidence that can come in at trial, and plaintiffs will use even tenuous exposure to paint a picture that could cause a jury to find willfulness even in the absence of solid, legally cognizable, evidence.  So, people involved in a software business should probably still avoid patents (not the least of which because they’re often incomprehensible anyway), just to be safe.

Also, one more note:  People think that a finding of willfulness means automatic treble damages, but the decision to enhance damages at all is discretionary with the trial judge, and he can choose to make no enhancement at all, or enhance to a level significantly less than treble.  The real problem with willfulness is that it gets "black hat" stories about defendants in front of juries, which taint them against a defendant regardless of the merits – it’s easier to think that someone infringes if he’s just a bad guy anyway, especially if the technology is boring and the patent is hard to understand.

Today, Amazon’s 1-Click patent was confirmed following a four year re-examination.  Amazon now has ownership of a highly controversial and very absurd patent which I hope will only be used defensively.  This a classic example of a “business method patent” that should simply not exist.  I continue to wait patiently to see what the Supreme Court says re: Bilski.

In other patent news, Google and Facebook were sued over a social network patent.  This was a patent issued in October that apparently has something to do with how people join social networks on mobile phones.  Egads.

In better news, it looks like I’ll soon be able to buy a jet pack for $86,000.

The Apple patent suit against HTC really riled up my friend Sawyer.  I wasn’t planning on posting another missive from him until next week, but I thought this was particularly timely given the public statement from Apple, including a specific quote from Steve Jobs about its competitors stealing their patented inventions.  Sawyer explains why this is simply inflammatory rhetoric and actually has no basis in fact or the way patent law works.  He also makes the case – using this as an example – that patents stifle, rather than promote innovation.  Enjoy.  And, after you read this, if you want a little “doesn’t this sound familiar” action, take a look at the Wikipedia page on Apple Computer v. Microsoft Computer with regard to the GUI – with a little Xerox tossed in as a side dish.  And now, my friend Sawyer.

The other day Apple announced that it is suing HTC for infringing several patents related to the iPhone, including patents on the UI, i.e., software patents.  As part of the press release, Steve Jobs said the following (emphasis mine):

“We can sit by and watch competitors steal our patented inventions, or we can do something about it. We’ve decided to do something about it. We think competition is healthy, but competitors should create their own original technology, not steal ours.”

The rhetoric of "stealing" and "theft" surrounding accusations of patent infringement is bothersome, both because substantive patent law doesn’t embrace the concept of theft, and because most patent cases don’t involve credible allegations of actual theft or even copying. 

Plaintiffs try to use "theft" to inject a moral element into patent suits, but there is no substantive moral element in patent law.  The point of a patent is to grant a monopoly in exchange for public disclosure, and patentees want people to use the ideas (in exchange for license fees), otherwise the public disclosure aspect is pointless.  The Constitution doesn’t authorize patent or copyright law for moral reasons either:  “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries…” 

The only doctrine in patent law that shades into morality is willful infringement.  The shifting law on willful infringement will be the subject of another post, but in any case, willfulness isn’t a morality doctrine; willful infringers aren’t bad people, they are just people who decided to continue possibly infringing because they didn’t think they infringed, thought the suit was frivolous, or thought they would lose more money by stopping, at least in the short term.  The doctrine is set up to penalize people who recklessly infringe by potentially trebling damages, and so acts as an incentive to settle suits and pay licensing fees.  This isn’t a moral calculus, it’s a utilitarian one.

Willfulness, however, acts as the main vehicle for plaintiffs to inject moral rhetoric and copying allegations into a patent suit.  “Copying” in a patent law sense means that an infringer either literally read the patent and copied what the claims said wholesale, or saw a product embodying the patent and copied the patented aspect of it.  Copying in patent law does not mean “theft.”  Theft of secret ideas is actionable under trade secret law, and I know of very few cases pairing the two.  Literal copying is often actionable under copyright law as well.  Isn’t it the case though that patentees want people to copy?  Doesn’t copying mean that their ideas are spreading and being used for follow-on innovation, which are good things?  The issue if anything is proper compensation, not the act of copying itself.

Unsurprisingly, we don’t usually even get into copying as a consideration.  A paper by Mark Lemley and a good blog post titled Patent defendants aren’t copycats shows that the vast majority of patent cases don’t involve an assertion of copying (and we’ll have to see if the Apple case does).  Putting in place an independent invention defense to infringement, as suggested recently by Brad Burnham at Union Square Ventures, would potentially wipe out 90% of patent cases. 

Setting all of that aside, in my experience, when plaintiffs do allege copying, particularly in software cases, the allegations are uniformly flimsy and bogus litigation tactics aimed at getting “black hat” stories about defendants told to juries.  And it’s a great tactic because juries are people, and regardless of the merits, they like to stick it to the bad guys, especially so where the merits are boring patent law issues that no one understands anyway.

Now we have one of the biggest and most innovative companies out there, Apple, trying to sue one of its competitors out of the market with patents, and using the false rhetoric of theft to justify the suit.  This underscores that the patent problem isn’t just "trolls" versus "big companies," it’s big companies using patents to sue others in the same market into oblivion, cutting off competition and destroying innovation.  Imagine, if HTC weren’t making great Android phones to compete with the iPhone, would Apple be incentivized to significantly improve its products?  Would we have no iPhone if patents didn’t exist?  I think it’s fairly obvious that in the absence of patents, we would have more competition and more innovation here, not less.

In any case, the takeaway for reform advocates is that we need to shift the rhetorical frame in discussions around patents from the moralizing of "stealing" and "theft" to what the issue actually is, a dry utilitarian calculus about what outcomes are better for innovation and competition.  When we think about the issues in that frame, it sort of takes the wind of out of Steve Jobs’ sails, doesn’t it?

I saw a tweet today that said “The doubly-linked list, a structure I studied thirty years ago, has recently been patented.”  After giggling at the absurdity of the idea, I went and at a patent dated 4/11/06 that appears to be for the doubly-linked list.  The prior art was extremely thin, only went back to 1995, and didn’t mention that entire computer languages have been created around the list as a core data structure.  One of my first Pascal programming exercises in high school (in 1981 – on an Apple II using USDC Pascal) was to write a series of operations on lists, including both linked and doubly-linked lists (I always thought it was funny they were called “doubly-linked” instead of “double-linked” lists.)  Anyone who ever graduated from MIT and took 6.001 learned to love all varieties of the linked list, including the doubly-linked one.  That was 1984 for me by the way.

Ironically, Wikipedia had great entries – with source code no less – about both linked lists and doubly-linked lists.  The linked list history goes back to 2001, well before the patent was filed.  My understanding is that patent examiners aren’t allowed to use Wikipedia – I’m meeting with some PTO folks on Friday and I’m going to ask them if this is fact or fiction.  Regardless, this patent is another example of how ridiculous the situation has become.