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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.

Bummed Out About Bilski

Comments (20)

I’ve been quiet on my reaction to Bilski because I’ve got an OpEd floating around that might get published in the next few days.  It’s been rejected by one major publisher because according to the senior editor  “it didn’t fit their opinion on the case” and another major publisher because “no one really cares that much about patents.”  Ok – whatever.  Fortunately, I have a blog, but I’ll wait a few more days and see if I can get someone in the traditional media to care.

In the mean time, my partner Jason has written a post titled Bilski Redux and Why You Shouldn’t Believe Everything You Read and Fred Wilson has also weighed in that it’s time for Congress to buck up and take some action in his post Bilski and Patent Reform.

For a great summary of the case, take a look at the Groklaw article titled Here’s Bilski: It’s Affirmed, But . . .No Decision on Software Patentability.

I expressed my opinion briefly in a ReadWriteWeb article titled Supreme Court: Software is Patentable… Sometimes where I said that I was profoundly disappointed with the outcome.

“They had a chance to address a serious and deep issue surrounding innovation in the software industry. Instead of taking a clear and forward looking position, they effectively punted on the hard stuff, surrounded it with ambiguity, and increased the mess we find ourselves in surrounding software and business method patents.”

I’ve got a lot more to say but let’s see if the OpEd shows up somewhere else first.  If not, I expect Independence Day will liberate me.

Mailing Out Patent Absurdity

Comments (245)

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.

Dear XX

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.

(http://www.wsgr.com/PDFSearch/09202004_patentpirates.pdf)

* Economic research demonstrates that software patents are acting as a drag on the US economy.

(http://en.swpat.org/wiki/Studies_on_economics_and_innovation)

* 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.

(http://ec.europa.eu/internal_market/indprop/comp/analyses_en.htm)

* Venture capitalist like me, who work with new innovative start-ups can testify that software patents have a chilling effect on the market.

(http://en.swpat.org/wiki/Statements_from_venture_capitalists)

* 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.

(http://www.techdirt.com/articles/20100217/1853298215.shtml)

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.

Yours sincerely,

Brad Feld

Sawyer Opines on the Eastern District of Texas

Comments (27)

My friend Sawyer is back with another post in his series of talking about software patent issues.  As I mentioned before, Sawyer is a real person named after our intrepid friend in LOST (I haven’t seen it this week – no spoilers please) who has agreed to help us navigate the parallel universe known as software patent land.  I’m channeling Sawyer’s points of view as a public service announcement since he’s uncomfortable being named publicly – these are his words, not mine.  Today’s post is on the famed “Eastern District of Texas” (EDTX), one of the most popular places in the United States for patent litigation.

In the past several years, the Eastern District of Texas (EDTX) has become one of the premier venues for patent litigation, along with NDCAL, CDCAL, DDEL, and WDWIS. Although the dockets are packed now, when the trend first started, plaintiffs could anticipate trials in short order, perhaps 12 to 18 months, and plaintiff-friendly juries.  There is also a basic sense of unfairness that defendants, rightly, feel when they have nothing or almost nothing to do with the district and yet get hauled down to court there, but the ability of plaintiffs to do that is a more fundamental flaw in the Supreme Court’s personal jurisdiction jurisprudence that is best left for another discussion.

There are a lot of stories told about EDTX and how it became a big spot for patent litigation. I won’t name any names here because EDTX lawyers have a tendency to sue anyone who says anything that could be portrayed in a negative light (see, e.g., the Troll Tracker defamation suit.) The basic story I’ve heard though, is this: EDTX was well-known as district with plaintiff-friendly juries after a raft of tort litigation where juries handed down large judgments. The judges and practitioners in area, seeing the coming wave of patent litigation, got together and decided to retool the district for being “patent-friendly.” This mainly involved adopting rules to streamline patent cases, similar to NDCAL, so that plaintiffs would get to juries faster. It’s important to note that this isn’t per se a bad or unethical thing – lots of federal districts are known as “rocket dockets” for one kind of case or another because of concerted efforts to attract and streamline litigation of certain types of cases.

The adoption of those patent local rules, along with a general unwillingness of the courts to throw cases out before trial on what’s called “summary judgment,” lead us to where we are today. Another thing to note, which is changing due to recent appellate decisions, is that EDTX courts have been very unwilling to transfer cases out to other venues. The Fifth Circuit and Federal Circuit have issued an unusually high number of reversals of EDTX decisions not to transfer, and the message seems to be taking and moderating both the desire to keep cases and any “pro-plaintiff” bias one could see.

These days, EDTX actually isn’t so bad for defendants. They win a significant number of cases, primarily because defense counsel has figured out how to navigate the courts, how to wear the “white hat” with the judges, and how to appeal to the juries down there. Still, the data show that when plaintiffs win in EDTX, they tend to win bigger than in any other court; and, when certain defendants develop “bad” reputations with the court or with juries, they get hit with big judgments repeatedly.

It’s also appears that EDTX has made a concerted effort to be “patent friendly,” and that the concomitant economic impact on the area, particularly in Tyler and Marshall, Texas, has been significant. From observation, EDTX is also where most of the software NPE/troll cases are filed these days because it’s still the fastest and most friendly docket for those cases.

That said, blaming EDTX won’t solve the underlying problem of patents and the patent system, especially in software. If there was no EDTX, another district would crop up to attract the big-ticket software patent suits, especially the NPE/troll cases. As long as the expected value of an NPE suit is positive, plaintiffs will find friendly places to file, and districts will make themselves friendly to those suits to stay busy, attract the economic windfall, and generally stay relevant. Don’t get me wrong, venue is a significant issue and has a big impact on the outcome of cases, but focusing reform and publicity efforts on grumbling about the courts won’t get us anywhere. The real problems are more fundamental to how people get patents, what is patentable, what the patents themselves look like, and how the legal system allows them to be used; focusing on the mechanics of where suits are filed is a distraction from the real issues that are bleeding our most innovative technology sectors and slowing down technological progress.

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