Entrepreneurs 1 - Patent Trolls 0

Well it looks like we got a win yesterday when the Court of Appeals for the Federal Circuit ruled that software and business method patents must meet a two pronged test that should serve to render many of these patents useless. I am not a patent lawyer and there is a debate in the comments to this Techdirt post that suggest there’s still a lot of debate about how big of a deal this ruling really is. I’ve emailed my favorite patent lawyer to get his opinion.

We can use all the help we can get. Our portfolio companies have been spending hundreds of thousands of dollars per case in recent years fighting off patent trolls who acquire software and business method patents and then sue for infringement. It’s a huge tax on the startup/technology ecosystem and it’s hurting innovation. The whole thing has soured me completely on the patent system. I think there shouldn’t be any software and business method patents at all, but I think that’s not likely to happen anytime soon.

Hopefully the courts and the patent office are beginning to see the problem with software and busienss method patents and rulings like we got yesterday are a hopeful sign.

#VC & Technology

Comments (Archived):

  1. Julien

    I totally see the point here… but still, patents can also protect start-up sometimes, don’t you think? It’s probably one of the only things that a start-up can have to face the fierce competition from the big guys. What we need, rather, is probably shorter time to benefit from a patent. A start-up that can’t turn an invention into a successful product/service/business in less that 2/3 yrs shouldn’t be able a hold the patent any longer. Also, an invention should always come with “real” products and services; There is nothing worse than having a great idea, and seeing that someone had the same but locked it and didn’t do anything with it!

  2. andyswan

    I agree….it’s a matter of who actually USES the idea in a meaningful way. I think judges should absolutely be looking into the efforts of the patent holder to take the idea to market when making a decision. I’ve had enough of these “companies” that are nothing more than 4 lawyers filing patents for every good idea they see someone come up with and then suing the successful ones later.Of course, with a majority of our legislators as attorneys, it’s going to be tough to get meaningful change through.

    1. Steven Kane

      hi andy. i agree with you in concept but in practice, again, that would heavily tilt the system in favor of big companies and against scrappy entrepreneurs and small businesses. e.g. what litmus test could you use to determine whether a patent had been “taken to market”? a huge company could make (for them) nominal efforts routinely in order to always pass the test. a small entrepreneur may have many more great ides than resources and may take a long time to be able muster the stuff needed to make any meaningful stab at true market validation.this happenes every day — a brillint lonely inventor’s ideas get put down on paper then languish for many moons awaiting the external resources (funding, partnerships, inventors savings to grow, whatever) needed to go to a practical test. woe be us if we somehow further bias a system already wildly prejudiced against the small fry

      1. andyswan

        I agree….I think I either said, or meant, EFFORTS to take the product tomarket. If a big company can show that they started a real and sustainedprocess of taking an idea to market first…then maybe it was their idea.But as an entrepreneur, I can think of many ways that I could prove myefforts, despite the results. Hope that clarifies my posiiton….it’sdefinitely a tough issue and my main concern is not big vs small company butreal company vs sharks.

        1. Steven Kane

          AgreedBut I would still humbly submit that ³sharkness² is in the eye of thebeholder

          1. andyswan

            Ha! As a law-school dropout, I freely admit my bias!!!

      2. fredwilson

        I just don’t get why we are trying to protect someone who thought of something before anyone else. What matters is the people who act on the idea. Ideas are a dime a dozen. Entrepreneurs who can actually turn an idea into a business are not

        1. brlewis

          You are right to be puzzled about this. Theoretically, ideas are not inventions, and ideas are not patentable. Starting a decade ago, for all intents and purposes, ideas have been patentable. Hopefully this recent decision is the first of many steps back in the right direction.

        2. Steven Kane

          Hmmm. Well, that is certainly… radical. That calls into question the verycore value of intellectual property. Which you basically set at zero? Soartists can not claim ownership of a song or book or poem, just because theycreated it?And where will you draw the line? Why is one form of property proteced butothers not? As a legal/conceptual matter property is iether poperty or not.So, how about so-called real property rights? Why should someone be able toclaim ownership of a house, or building, or land? Just because they live init? Maybe an ³entrepreneur² developer could re-hab my house and make severalsmaller more affordable residences ­ which some people might argue is a muchbetter use of the property (not me!)And what about real property that is not lived in? Or not even utilized?Should Ted Turner’s zillion acres in Montana be open to development becauseTurner is obviously not being entrepreneurial? EtcMalcolm gladwell makes a good argument that neither ideas nor entrepreneursare actually all that critical or valuable — that its actually thecontinuous serendipitous confluence of property people events eras andtiming which ³create² innovationhttp://gladwell.com/2008/20…But none of that matters ‹ for one thing as someone who tries to traffic inideas I have to object that creative and productive and novel ideas are muchmore valuable and rare than you seem to believe. There are 100 millionguitarists but very few David Gilmours and Jimmy Pages. There are 1 trillionimages but very few Starry Nights. There are a zillion blogs but only oneAVC ‹ can I simply repurpose your blog without ttribution or compensationand plug my own advertising platform around it and pocket whatever isearned?Second, property rights are as core to liberal democracy and capitalism asany wrinkld old parchment statement of ideals. Before our very recent modernsystem of property rights, by definition literally anything and everythingthat could be considered ³property² was de facto controlled in perpetuity bya nobility or aristocracy ‹ that is, feudalism. Sk your friends in london ‹still to this day the royal family owns all of london — homeoners don’twon homes they have 99 year leases from the royal family! EtcThomas Edison invested the time and effort and thought and massive risk offailure to discover a filament that would work in a light bulb. Anyone elsecould have done the same; many tried. TE deserves a market reward for thesuccessful effort. As yet, the best mechanism anyone has come up with is apatent system — which btw the USA founders also thought a cornerstone of acapitalist/democratic system and spent much time thinking about same andcreating an IP system, in 1790, immediately after the american revolution…

          1. fredwilson

            What makes Thomas Edison¡¯s work transformative is not the idea, it was theexecutionI have huge issues with IP as we define it in this country. Of course Ithink you should be able to own real property but intellectual property isanother matterThe painting of starry night, the real thing, is pricelessBut the image of it is worth nothing. It¡¯s everywhereIdeas are everywhere, but the person who turns them into real property, abusiness with cash flows, is who deserves the pay day

          2. gregorylent

            how much should that business be protected?

  3. Steven Kane

    i agree business-process patents should be eliminated and I heartily agree our current USPTO system is broken but i do not share the usual disdain for “patent trolls”if we want to protect IP, we will need to be comfortable — nay, embrace — so-called “trolls”. it makes no difference who created a patent, only who owns it. imagine if you couldn’t transfer patents to a company acquiring another company just because the acquiring company didn’t originally author the patent! amongst other unfortunate consequences, in such a world, the value of sratups and VC investments would plummet.any case, our system is broken because big corporations are literally swamping the application queue, trying not so much to be inventive but rather to be defensive — by even being able to try patenting anything and everything under the sun, they essentially thwart true innovation, via a war of attrition — by making the patent application review and award process so slow and cumbersome and expensive that the little guys loseone big but easy and simple (but politically difficult for reasons stated above) step out of this mess would be to adopt the european system whereby patent applications are published immediately and may be challenged immediately (versus our system where many many months or years go by before applications become available for public review and scrutoiny and challenge).

  4. Bruce Warila

    “hurting innovation”..From where you sit, I can understand your perspective. However, from someone that has invested in filing lots of patents, one of our incentives to innovate was to obtain the patent. Reducing this incentive hurts innovation.Sure, someone can argue that man wants/needs to innovate and invent, and that is all the incentive you need. However, knowing that you 1) may be able to protect your invention, or 2) knowing that there is a market for it (patent troll, big company, small startup. etc.) sure helps to feed the desire to innovate.Perhaps the tax on the startup ecosystem is exactly what the lone inventor hopes for. Personally, I would like to see a system that does not have to involve so much legal arm wrestling. However, if I said to a startup – here’s my patent, please pay me a bit of money… What’s the first response? Go pound sand…Yes there are a lot of bogus patents. However, there are a lot of great inventions that should continue to be protected.

    1. gregorylent

      protection is based on fear and greed. best not to ennoble those traits so much that the frosting covers the reality. and you don’t have anyway of knowing how much innovation has been lost because of too narrow a focus on money.

    2. fredwilson

      What’s the point of inventing something if you just patent it and sit on it? It does nothing for society and then when someone else does invest the time and money to commercialize it, they get sued by someone who just happened to think of it first? I don’t like that system

  5. Pete

    I personally always felt that the issue with business process patents, wasn’t the patent itself, but the patent being awarded to ‘obvious’ business processes when patents are supposed to be limit to ‘non-obvious’ elements only. The most obvious being Amazon’s ‘one-click’ purchase process.

    1. fredwilson

      I agree. The whole makes me crazy

    2. jeremystein

      the problem is how you define ‘non-obvious’. right now the system defines it as prior art. you are supposed to discover and disclose prior art when you conduct a patent search. the real problem is that its to your advantage to do a very light search. what you dont know cant hurt you…

  6. Andy Freeman

    The decision was a bit broader than the above suggests. “Purported transformations or manipulations simply of public or private legal obligations or relationships, business risks, or other such abstractions cannot meet the test because they are not physical objects or substances.”Lots of inventions don’t manipulate or transform “physical objects or substances.”If I invent a better way to predict prices, would you rather that I patent it (which discloses it) or keep it as a trade secret?

  7. Michael Masnick

    Hi Fred: I have an updated post as well, based on my conversations with a bunch of patent lawyers. I’m worried that there’s something of a big loophole here, and the ruling isn’t as good as I initially assumed: http://www.techdirt.com/art… What seems certain is that the ruling isn’t as clear as it needs to be, so we’re going to see more lawsuits before this is settled. Oy.

    1. fredwilson

      That sucks

  8. Ted Murphy

    Its tough standing on the shoulders of giants when one of them can reach up and pop you into his mouth.

  9. gregorylent

    innovation is a natural human trait. patents protect the monetization of innovative ideas. something is lost when the innovation is motivated by money, instead of for the pure idea.we don’t have a metric for this loss, but our society suffers a consequential imbalance from limited motivations.long term, i am against copyright and patents, we have to think “we” instead of “me”, because it has greater strategic value. long term.

  10. gio

    Most software that is actually valuable implements its original concepts internally and is protected by trade secret. Thats’ why employees sign NDAs. Only ideas that will be externally visible, as 1-click buying, needed patent protection. If it can be hidden, patenting is foolish, since it makes the idea public, and available to others for implementation in internal code, which will be hard to discover by the patent holder.

  11. Charlie Crystle

    Fred, I have to disagree with you here to some extent. “I think there shouldn’t be any software and business method patents at all”I have a friend who built a software company around an invention–something we all use on a daily basis now. He was copied time after time, and now his invention is in every cell phone, iPod, tv set top, music website, etc, etc, etc.He shut his product company down after pushing that stone up the hill for seven or eight years (viable company, wasn’t a failure by any means). And now he’s seeking to enforce his patents, which he filed for before many of these companies even existed, and before the others were even in the game. And he’ll very likely win (plenty of investment and on-board lawyers to take it to court with a few choice offenders).And he should. Those were the rules. He played by the rules, and many, many companies ripped him off (some of which you might have invested in) who did not, in fact, play by the rules. The idea wasn’t theirs, they made money at a cost to him and his investors.It’s as though I come up with a product that’s black and sweet and fizzy and call it Coke. It’s as though I pen a song called Like a Rolling Stone that’s word for word, note for note the same as Dylan’s and call it mine. Not great for Dylan’s investment, or Columbia’s).I agree that the effect of ripping off patents can lead to positive consequences–you allow a free for all mix of ideas and talent and innovation without barriers, and some positive stuff will come out. But the expense of the original inventors. Yet patents don’t have to be obstacles to that. Hell, could we at least ask nicely when we’re about to rip off an entrepreneur? It’s very possible they’ll say yes. Or deal. Or say no. But it’s their right, not ours.

    1. fredwilson

      I feel badly for your friend but if he wasn’t successful commercializing hisideas and others were, I tend to think the people who were successful shouldnot have to face litigation from your friendI am in favor of darwinian capitalismI think it produces the best result for society

      1. Charlie Crystle

        He was successful until he got ripped off. He was ripped off by Apple, Microsoft, Aol, etc–you name it. Small companies get crushed by large, monolithic companies simply because of scale. That’s wrong, that’s not a level playing field, and, btw, that’s NOT the rules as any of us understand them. They’ve made hundreds of millions from his work.You’re basically saying that if you shoot someone successfully, he should have no legal recourse because, well, you shot him, first. You rob someone, the victim should have no legal recourse.Surprising line of thinking.

        1. fredwilson

          CharlieI don’t think patents can stop big companies from ripping off smallcompaniesAnd using the legal system as recourse seems like a huge cost to everyoneThe only thing that small companies can do is outcompete the big companiesWhich I think is getting easier every day

          1. Charlie Crystle

            Yes they can–that’s part of the the point of patents. We outcompete through innovation. we innovate, they copy, we’re screwed. they can outspend and outmarket us if they want to, no question. Yes, it gets easier. But the same tools are available to the big companies as the little ones. And time is still a factor. Build a new innovative part that increases efficiency in cars by 30%, someone reverse engineers it and has it in China at a fab plant in a few months, before the company has a chance to gain market share.I think we’re just going to completely disagree on this. (I don’t disagree about trolling; I think there’s some middle ground there.)

          2. fredwilson

            We can also agree to discuss it f2f next time we see each other and I betwe’ll find that common ground

          3. charlie crystle


  12. dave

    I am in the middle of a bs “business methods” patent infringement claim with one of my portfolio companies. The technology has been in use since the 1970’s. The “patent” was filed in 2001. Now the troll is going after all the “infringers”, including one of my companies who have their own more detailed patents from the 1990’s. Let’s hope the ruling stands up. It’s costing us hundreds of thousands in lawyers to defend.

    1. fredwilson

      YupHundreds of thousands of dollars that could otherwise be spent on newproducts, new customers, new employees, more sales people, etc, etcIt makes me sick to my stomach thinking about it

  13. William Reeve

    Nobody has mentioned that the issue is US-only. In Europe (and ROW so far as I know) ‘business method patents’ are unenforceable and software is practically impossible to patent. For very good reason, imho, for I fully agree with Fred’s comments above. But I just think it worth noting that the issue is a US-centric one and is one (of not many) ways in which Europe is more ‘pro-entrepreneur’ than the US.

    1. gregorylent

      the exaggeration of the concept of individuality in america is turning out to be costly to society

  14. Edward Daciuk

    Darn. I guess it doesn’t bode well for my business method patents:- Business process of selecting a good location for retail store- Method for using the color red to indicate a sale online- Method for the phrase “Thanks” in communications to customers following a saleGuess I’ll have to fall back on actually building a business.

  15. Mark McGuire

    I’d love to see the system modified for biz method patents to bring both the time for examination and the exclusionary period shortened to recognize the speed of innovation in today’s marketplace. Just as one example, our last start-up was purchased within 18 months of launch by Microsoft, but it will probably be another 2-3 years before our patent applications on the biz are even examined. The system should reward innovation at the early growth stage of a company and grant a reward that balances the fairness of rewarding a good idea with the way monopolies stiffle consumer choice. I’d love to see a system that examines every patent app within 6 months and provides a three year exclusionary period. Charge huge application fees if need be, but make the system work. You can see my full argument here if interested: http://flywheelblog.com/200

    1. fredwilson

      That’s an interesting suggestion

  16. Maryland Realtor

    The whole situation is disappointing, really. I’m an entrepreneur, former startup founder and dabble in application development (on the “idea” side) – not really a “high tech” insider, but the real story here is that the ideas are only useful in the hands of those who can actually EXECUTE. Some advice I got long ago from a business mentor – it’s better to have great execution of a mediocre plan/model than mediocre execution of a great plan/model (or idea, in this instance). In a struggling economy, why would we want to stifle ANY innovation? To keep attorneys knee-deep in work?