Posts from policy

The PATENT Act

Regular readers know of my longstanding concerns and frequent posts on the topic of patent trolls. They are a scourge on the startup sector, where patent trolls wreak havoc, and the innovation sector more broadly. The Senate has been working to address these issues via a non-partisan bill called the PATENT Act and a companion House bill called The Innovation Act. These are both good bills and everyone in the startup sector should support them enthusiastically. Julie Samuels of Engine wrote an excellent post about the PATENT bill in the Senate and I’m going to cut and paste it below instead of trying to do better (because I can’t).

————————–

Today, Sens. Grassley, Leahy, Cornyn, Schumer, Lee, Hatch and Klobuchar introduced the PATENT Act, an important piece of legislation targeting a serious patent troll problem. Engine is proud to support that bill.

The PATENT Act, and the Innovation Act, its House counterpart, are effective because they are comprehensive in scope. Each contains a package of incentives that, taken together, insert balance back into patent litigation, giving troll targets the tools to fight back and ensuring that patent holders act responsibly. Importantly, they are carefully crafted to ensure that a patent holder with a high-quality patent and a legitimate claim of infringement will face no barriers to making that claim.

To understand the way these bills work, you have to understand a bit about the patent troll problem. Patent trolls are primarily armed with two weapons: low-quality, impossible-to-understand patents and the outrageous costs of patent litigation, which can easily cost a defendant well into the millions of dollars. So imagine you are a small startup, cash-strapped and hungry, and you get a patent demand from a company you’ve never heard of, claiming it owns some seemingly basic technology. (This really happens. Often. See here, here, here, and here, for example.) Your choices are: hire a lawyer and spend valuable time dealing with the problem or pay the troll to go away, usually for a sum far smaller than what it would cost to hire that lawyer or go to court.

The good news is that the Supreme Court has been busy trying to fix the problem of low-quality patents. The bad news is that we still have a long way to go. Patent litigation remains outrageously expensive and one-sided, giving a patent owner who is willing to take advantage of loopholes in the system the ability to run roughshod over defendants.

This is where Congress, and specifically today’s introduction of the PATENT Act, comes in. Its provisions help right the imbalance in patent litigation through a series of reforms:

  • Transparency and Heightened Pleading: Currently, someone can file a patent suit without providing almost any basic details about his or her case, information like how a patent is infringed, what products allegedly infringe it, and even who owns that patent. This information is easily known to any patent holder at the outset of a case, especially those who engage in a responsible amount of due diligence prior to filing a case. However, getting this information can cost a party being sued tens or even hundreds of thousands of dollars. The PATENT Act would fix that, requiring patent holders to provide this basic information at the outset of litigation and also require patent holders to tell the Patent Office when they transfer a patent. Only with this basic information can parties make informed decisions about how they should proceed. If a party legitimately cannot find some of this information after making a “reasonable inquiry”, it may still file a suit, an important caveat protecting the responsible patent holder.
  • Fee-shifting: Currently, little incentive exists for a party to defend itself in court. After years and millions of dollars spent litigating, a successful party will often be sent on its way with nothing more than a Pyrrhic victory. The PATENT Act remedies this by awarding fees to a winning party when a court determines that a losing party’s position was not “objectively reasonable”. This provision carefully strikes a balance between deterring those who bring crappy, unsubstantiated lawsuits and those who bring reasonable, good-faith cases. It also includes important provisions that would effectively end the practice of using shell companies with little or no assets to avoid responsibility. Specifically, a party who doesn’t make or sell anything with its patents will have to show that it can pay for fees if they are awarded. Only with this incentive can many startups afford to take on a troll threat, discouraging those trolls from bringing frivolous cases.
  • Demand Letter Reform: Currently, trolls send vague demand letters full of legalese, targeting small businesses and even individuals. Because this takes place before a lawsuit is even filed, there is no public record of how often it happens. We know it is common practice, so we also know that we can’t even properly understand the scope of the entire patent troll problem. The PATENT Act will help fix this by requiring that such letters include certain basic information about the infringement claim and that they do not make false claims about the patent holder’s rights with regard to the patent. Only with these requirements will startups be able to make informed decisions about whether they should respond to or ignore a demand letter and whether they should hire a lawyer.
  • Discovery Reform: Currently, discovery is by far the most expensive part of litigation for any party facing suit. For a patent troll who doesn’t make or sell anything, the cost of discovery is next to nothing. However, it can use abusive discovery practices to drive the costs of litigation even higher than they already are. The PATENT Act would curb some of the worst of these practices by staying discovery until a party has had a chance to try to have a case dismissed. It also makes further recommendations to shift some of the discovery burden from the party producing information to the party requesting it. Only with these reforms can small companies and startups afford to litigate.
  • Customer Stay: Currently, trolls love to target a company’s customers, claiming that by using off-the-shelf technology those customers are liable for infringement. This can put enormous pressure on companies that provide products and services (e.g., every company). The PATENT Act provides tools to both the customers and the companies in this dangerous situation, allowing the company to fight the litigation on behalf of its customers. Only with this provision will startups be able to protect their customers.

To be certain, the PATENT Act is not perfect. There are a number of areas where the bill could be made stronger. For instance, we wish the discovery reforms went farther, clearly providing in-statute limits on discovery to those documents directly related to the litigation and requiring a party seeking documents to cover the costs of getting those documents. We’d also like to see the bill more directly address venue and make it easier for parties to move a case out of the Eastern District of Texas, where so many cases are brought and where judges are notoriously plaintiff-friendly. Likewise, we remain concerned that the current customer stay provision only kicks in when the manufacturer is already involved in litigation. We think improvements could be made to make it any easier for that manufacturer to actively step in on behalf of its customers. Finally, we think the bill could also make it easier and cheaper for parties to challenge low-quality patents at the Patent Office through a process called inter partes review (IPR). For many parties, seeing a case all the way through to a final decision is not an economic reality, even with the above-discussed reforms. IPR provides a valuable means for a startup or party with limited financial resources to invalidate or narrow the scope of an otherwise overly broad patent.

All that said, we remain proud to support this bill. The heart of it—the litigation reform provisions—represent a hard-fought compromise, spearheaded by Sens. Schumer and Cornyn, who tirelessly worked to get this done. We will continue to work to improve the PATENT Act where we think it needs improvement, and fight off any efforts to water down its provisions. We look forward to seeing this become law.

Why be civically engaged if you’re in tech?

Tomorrow, Ron Conway and I are going to kick off Disrupt NY 2015, with a fireside chat with Kim-Mai Cutler. We plan to discuss philanthropy and civic involvement. I’m looking forward to this talk. I think folks in the tech sector need to embrace philanthropy and civic involvement and I look forward to making the case for that.

I’ve been working in the VC business since the mid 80s. And for most of that time, I’ve felt that the tech sector was surprisingly uninterested and uninvolved in things outside of the tech sector. That’s a great strength of the tech sector, it’s is focused on innovation, making things, and building companies. And it does not get distracted by things outside of that realm.

But we know that the things we make and the companies we build have great impact on those outside of the tech sector. It can be for the good, like building cars that don’t use carbon fuels and showing the auto industry that it can be a good business to do that. It can be for the bad, like automating away jobs that once paid the way for a middle class lifestyle.

It feels to me that our economy and our society is now deeply entwined with technology and being significantly impacted by it. If that is true, I believe it is shortsighted to avoid getting engaged in the discussions and debates about what kind of world we need to work toward. I think one way or another the tech sector is going to get pulled into these debates. It will be one thing if that happens thoughtfully and positively and another if the tech sector is pulled into them kicking and screaming.

Regular readers of this blog know that my partners and I have been involved in these discussions since we started USV over a decade ago. We spend our time, energy, and capital in areas like policy debates, philanthropy, and civic engagement. There are others in the tech sector who do the same. Ron Conway comes to mind as someone who has spent a similar amount of time, energy, and capital on this stuff. And I am thrilled to share the stage with him tomorrow as we discuss these issues.

We go on stage at 9:05am eastern tomorrow. I’m hoping the talk will be livestreamed and you can watch it live. If it is, it will be somewhere like here.

The Lesson Of Title II and Time Warner Cable: Markets Have Two Sides

On thursday of this past week, I attended a small gathering of academics and policy makers who follow the technology sector. During that gathering, the news came out that the Comcast acquisition of Time Warner Cable was falling apart due to regulatory opposition. The conversation turned to the reasons why this happened.

I surmised that the reason for both the failure of Comcast/Time Warner Cable and the success of the Title II debate several months ago is that regulators and policy makers now understand that markets have two sides and you can’t just look at the consumer facing side of a market.

Comcast was correct in its assertion that they have very little customer overlap with Time Warner Cable and therefore consumers were not being harmed by the consolidation of the two networks. But if you look on the other side of their networks, to the suppliers of applications (Amazon, Google, Facebook, etc) and content (Time Warner, News Corp, Netflix) you see that the consolidation was going to be very harmful. Netflix was going to have one company standing between it and possibly half of its customers in the US. Same with Facebook. And there is no way that was going to be good for them. They may not have come out publicly in opposition to the merger, but you can bet that they came out in opposition privately.

The same is true of Title II regulation of the last mile Internet access. This was not a consumer story either. Very few advocates of “net neutrality rules” believe that this is a consumer issue. Very few have advocated that Internet access prices should be regulated. The debate has always been about the supply side of the market. The side where applications and content live. And the decision to apply Title II regulation to last mile Internet access was essentially a recognition that both sides of a network matter and that it is bad for the economy, society, and innovation to have a network attain enough market power to control what happens on the supply side of a market.

I don’t know enough about communications policy and antitrust policy history to know whether the two sided market construct has played an important role in the past. I think it may well have been an important factor in breakup of AT&T’s monopoly on wired telephony. And I expect there have been other examples as well.

But the one two punch of Title II and Comcast/TWC is a reminder that both sides of a market matter and competition (or the lack thereof) will have an important impact on how these markets function. I am a fan of both decisions and believe that our regulators and policy makers are thinking about this stuff correctly.

Video Of The Week: Albert’s TEDx Talk

My partner Albert gave this TEDx talk earlier this year. Somehow I missed it until this morning when I was looking around YouTube for something to post. I’ve heard Albert articulate all of these ideas for years. He’s influenced my thinking on them greatly and I’ve gone from dismissive, to skeptical, to supportive of experimenting with them. I suspect you will move in that direction too after watching this short (17mins) talk:

Comments On The Proposed Bitlicense Regulations

Over the past year, the New York State Department of Financial Services (DFS), led by Superintendent Benjamin Lawsky, has been attempting to create a set of regulations for virtual currency services. They called this set of regulations the “Bitlicense.”

I have been following this issue closely and participated in public testimony before the DFS back in January 2014 that was a precursor to creating these new regulations.

While these regulations will only apply to businesses operating in New York State, they will naturally be a precedent for many other states who seek to regulate virtual currency services and as such, we should consider them a potential framework for all state regulation of virtual currency.

The initial proposed Bitlicense regulations were published last year and were subject to a comment period which produced more than 3,700 total comments. The DFS did an excellent job of working through those comments and came back with a revised Bitlicense draft early this year. The comment period for the revised Bitlicense started in late February and will end this friday, March 27th.

This blog post is being submitted as a public comment on the revised Bitlicense regulations and should be read as such.

While the DFS has taken great care to simplify the Bitlicense regulations and reduce the scope of them, there remain two fundamental and important problems with them, both relating to duplication of existing regulatory requirements.

Before I get into the specific issues around unnecessary duplication in the proposed Bitlicense regulations, I would like to speak about the issue of regulation and startups and high growth companies in general.

I believe startups and high growth companies are important to the US economy and US citizens for many reasons, but primarily because they bring important new technologies into our lives and improve them, and because they are engines of economic growth and jobs.

Startups and high growth companies should be required to comply with all existing laws and regulations. They should not be excluded from the laws that apply to all other businesses. However the arrival of new technologies should always be seen as an opportunity to review and update our laws and regulations in accordance with the benefits and challenges brought by these new technologies.

It is also true that startups and high growth businesses often start with a very small base of employees and capital and they cannot afford the compliance and regulatory affairs teams of much larger companies. Because of this, startups and high growth companies are more heavily “taxed” in their efforts to comply with regulations and we should be mindful of this “tax on innovation” that regulations place on the startup sector and high growth companies in general.

Duplicative regulatory requirements are a particularly harmful form of this regulatory burden. If one regulatory body is responsible for making sure that businesses comply with the rules, we should not force companies to comply with a redundant and duplicative set of rules and compliance requirements. This is particularly true of state regulations as duplicative compliance requirements could, at the extreme, require companies to do the same thing 50 times (once for every state). And small high growth companies are the ones who will feel the pain of this duplicative and redundant regulatory burden the most.

So, it is with that backdrop that I wish to highlight two such duplicative and redundant regulatory requirements in the Bitlicense. The first are the anti money laundering (AML) requirements in the Bitlicense regulations. Virtual currency exchangers and administrators  are already required to comply with federal AML regulations.  In many ways this is a good thing. FinCEN (the federal money laundering regulator) set a clear federal standard for all bitcoin companies in March 2013. New York State and all other states should require these virtual currency businesses  operating in their jurisdiction to comply with the federal AML regulations but they should not require duplicative and redundant AML compliance on a state by state basis.

The second duplicative and redundant provision in the Bitlicense is related to state money transmission regulations, which are already in place and are applicable to all virtual currency businesses. The Bitlicense requires similar provisions to what is already in place for money transmitters under state regulations, thus creating duplicative and redundant compliance obligations, which, again, could end up being replicated in all fifty states around the country. A better construct would be to exempt licensed money transmitters authorized by the DFS to engage in virtual currency business activity, just as the BitLicense has done for entities chartered under NY Banking Law.

The New York State Department of Financial Services has made a commendable effort to understand the risks posed by virtual currency and to construct regulations to protect society from them. There has been a lot of great work done in this effort. And it is particularly helpful to the startups and high growth companies operating in the virtual currency sector to know what is expected of them to operate legally and safely. I believe if the DFS addresses these two duplicative and redundant provisions, we will have a much better and more efficient regulatory structure for virtual currency providers and that will be a very good thing for all involved.

The Clinton Email Affair

The fascinating thing about the Clinton Email Affair is that it illustrates a central truth of our time; someone is storing and reading your emails. That someone could be your employer, your government, your email provider, or all of the above. A very small percentage of email users choose to run their own email servers and avoid this fate. It turns out that the woman who wants to be our next President is one of those very few.

What does this choice say about her and how she would approach digital privacy? If Edward Snowden is the person who told us what we always suspected but were in denial about, then Hillary Clinton is the person who opted out of the system and lived to tell us how she did it.

The media wants her to tell us why she did it. As if there is any question about that. She did not want the witch hunters in Washington to have access to her emails. That’s it. She has been there and has the scars to show for it and did what any intelligent person with balls would do. She opted out. And she got away with it for four years.

Of course, this affair could get in the way of her desire to get back to the White House. We will see about that. In which case she will have not gotten away with it.

But even so, I would hope that this affair, along with the Snowden revelations, clarifies things for people. Your emails are not private messages. They aren’t much different than posting on Twitter and Facebook. If you do anything that a lot of people care about, your emails will be read and shared. Unless you run your own email server and encrypt your messages.

Sadly this email affair is playing out like all other Washington scandals when it could be anchoring a much larger national discussion about the privacy of personal communications and what are our rights are in that regard. Maybe if this email affair blows over and Hillary ends up in the White House, she can lead that discussion. She will be well suited to do so.

Video Of The Week: Kara Swisher Interviews Hillary Clinton

I posted an interview that Kara Swisher did with President Obama a few weeks ago. Shortly after that interview, Kara interviewed Hillary Clinton. Kara is on a roll. I hope she interviews Jeb Bush next.

In any case, it is great to see a tech journalist interviewing the major national political figures. There are a host of important national tech issues and it is great to be able to hear these politicians address them.

Sadly the email scandal broke about a week after this interview so Kara was not able to ask about that. But otherwise, this is a great discussion and, as I said, I hope she does more of this.

Open Internet Rules

The FCC is expected to approve its Open Internet Rules today. This is a big deal and something we have been fighting for since former FCC Chair Michael Powell unfortunately and incorrectly ruled that Internet Access was an “information service.” We believe that last mile Internet Access is a natural monopoly/duopoly in most geographies and needs to be regulated as such.

My colleague Nick Grossman has a good quick read on usv.com about these rules, why we are strongly in support of them, and what this means.

As Nick says in his post,

We believe in markets. We believe that by recognizing that access to the Internet is an essential service, the FCC has moved to protect the free and open markets that depend on that access. Contrary to much FUD, this is NOT regulating the internet, it’s ensuring open access TO the Internet.

Utility vs Information Service

I saw this headline on the New York Times today:

F.C.C. Is Expected to Propose Regulating Internet Service as a Utility

Now you can argue whether regulating the last mile Internet is a good idea and we have done that ad naseum here at AVC over the years.

But if you accept that some regulations are necessary, you are then faced with the question of whether you should classify last mile Internet as a “utility” or an “information service” as is currently the case.

The decision by then FCC Commissioner Michael Powell to classify internet access (the last mile) as an information service a decade ago is really what’s at stake in this net neutrality debate.

An “information service” is something like AOL or maybe even Wikipedia. It is a service that provides information to a user. The wire (or fiber) that Comcast, Verizon, or some other telco runs from their network to your home or office is most definitely not an information service and should not be regulated as such.

To me it looks like a utility. Just like my electricity service, my water service, and my gas service. The honest to god truth of this matter is that last mile internet service is a utility and has been since broadband arrived a decade or more ago.

Again, we can argue about whether it should be regulated (as electricity, water, and gas are), but we really cannot argue with a straight face that broadband internet access is an information service. It never was and it never will be.