How Patent Trolls Are A Tax On Innovation

I've written on the subjects of patents before on this blog and on the Union Square Ventures weblog. There have been good discussions around this issue, both in this post and in the sessions event that the USV weblog posts talks about. At this point, after 22 years in the venture capital business and countless hours discussing this issue, I come out on the side of less patent protection in information technology, no patent protection for software and business methods, and first and foremost the elimination of patent trolls.

This post is about patent trolls. On friday I wrote this twitter post.

Just in case you didn't know how I feel: patent trolls are a tax on innovation and are evil of the highest order

I received at least 50 replies, with almost everyone agreeing with me. But as anyone who knows him would suspect, Steve Kane did not completely agree with me. He wrote:

Swap the word "trolls" out and instead use "owners." Still evil?

and

how can IP protection be bad for innovation? One mans troll is another mans wronged IP owner

Steve makes the important and valid point that the small inventor who comes up with some novel idea and patents it is then entitled to enforce the patent and get economic value from it. If the inventor chooses to extract that value by selling it to a patent troll, well then that's his/her choice, isn't it?

Irwin Gross, a former IP lawyer and now a partner at the top VC firm Sequoia Capital, made this argument at our Union Square Sessions event on public policy issues facing the venture industry. Irwin said:

the notion that because patents are complex, we should abolish the
property right, which is sort of the argument against patents, has
always seemed to me to be both rational and wrong. Really the answer in
a very substantial way is to come up with and innovate, as the Creative
Commons folks have, come up with ways to lower the information costs.
Come up with valuation models that make sense. They need to be based on
first principle. Byron Scholls once told me that the Black Scholls
Model isn't widely used because it's right. It's right because it's
widely used.

This is the the "market is always right" argument. One that has been challenged in the past year for sure in the area of mortgage backed and deriviative securities and a lot more.

I'm a fan of allowing market forces to work in most cases, but not in the area of patents. And here's why. It's a huge tax on innovation.

At this very moment, I know of three lawsuits against our portfolio companies being brought by patent trolls. And one other portfolio company of ours spent $500,000 last year (10% of the venture round they raised) defending themselves from a totally baseless claim by another patent troll. That claim was thrown out and our company is now suing the patent troll to reclaim legal fees.

I am all for trying to protect the small inventor, but solo inventor who does not commercialize his/her technology does not bring nearly as much economic value (and jobs) to our society as the entrepreneur who actually takes the risk, starts the company, hires people, commercializes the technology, raises the necessary capital, and builds lasting sustainable value.

When that entrepreneur and the company he/she creates is hit with a baseless claim from a patent troll represented by lawyers working completely on contingency, it's a very big problem. As you can see, it can take a lot of time and money to fight and win.

The other option, and I see our companies do this all the time, is to pay a fraction of that $500k or more to settle the case and make the patent troll go away. That can be $25k to $100k in my experience. But that payment just funds the patent troll to go do it again and again. It's the expedient and rational thing to do for many entrepreneurs, but it's the wrong answer for the venture ecosystem and our society as a whole.

What we need to do is come together as a community of information technology companies, entrepreneurs, and investors to gang up on these trolls. I'm not going to suggest all the things we need to do in this regard. My partner Brad is doing a lot of work behind the scenes to figure out what we can do as an industry to fight the trolls and at the right time I'll write more about what needs to be done.

But there are two ideas I'd like to put forward as legislative reform that I think would be very helpful. The first is to force the plaintiff to pay the defendant's legal fees if a patent infringement case is lost. That would force the trolls to actually do some work and make sure they have a really strong case before bringing it. That is clearly not being done now because the trolls can sue anyone they want with relative impunity and no liability. Of course the defendant, like our company that spent $500k last year, can sue to reclaim legal fees, but that case is hard to win and costs more money that's not going to hiring people, building technology, and delivering new products and services. If the losing plaintiff has to pick up the defendant's legal fees, I think we'll get closer to Irwin's market forces. There will still be money to back a strong case, but there won't be any money to back a weak one.

The second idea, which is more controversial, was suggested by Nathan (who designed this blog for me) on twitter on friday:

Patents and copyright should have a "use it or lose it" clause like trademarks.

I like this idea as well. The small inventor who we are trying to protect can still get economic value from his/her patent, but it must be sold to an operating company that will use the patent to defend an operating business, not a financial investor who is just going to run around suing companies with impunity.

I have no idea whether the political environment is ready for this kind of reform. I would hope with a new adminstration that is tech friendly and desperately trying to find new sources of economic energy for this country, we'd have a more welcome ear in washington for this kind of thinking. Because we can't keep spending 10 cents of every dollar we raise in venture funding fighting patent trolls. That's just too expensive, for our companies and our society.

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