Why Patent Trolls Are A Tax On Innovation (continued)

Matt Blumberg, CEO of our portfolio company Return Path, has a post on his blog today about the patent troll issue. His company, Return Path, is the company that spent $500,000 last year defending itself against a baseless patent infringement claim.

Matt says:

I should know. 
We are the company that he refers to who spent about half a million
dollars successfully defending ourselves (for now – who knows what appeals
might bring) against a baseless suit by a patent troll.  For the record, we did try to settle and were
presented with a multi-million dollar option only.  I have been advised by our lawyer not to
write about this case because there are elements of it that are still pending,
but I don't care.  I'm irritated enough
about it that I want to get this out there while it's still fresh in my mind.  And I'm not going to use names here or say
anything I wouldn't say publicly in any other forum.

Matt goes on to make one additional recommendation in the ongoing debate about patent reform. If this is an area you are interested in, click thru and read the whole post.

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Comments (Archived):

  1. Adam

    It’s obvious that legislators need to define some criteria where plaintiffs would pay defendants’ legal feels for “patent troll” case.Also, I’d like to see more stringent approval process for awarding patents.

  2. Michael F. Martin

    Valuing patents at the cost of litigation is an abuse of the system. But if tuned up properly, a patent system can actually promote innovation by keeping independent inventors in the game with established incumbents. Maybe they’re unnecessary in the consumer Internet industry because capital expenditures are so low now on an absolute scale. That doesn’t make them unnecessary in other industries, and new medical treatments, in particular, will be much harder to finance without patent protection for new entrants.You may enjoy Michael A. Gollin’s book on Driving Innovation, which he guest blogged about at Broken Symmetry:http://brokensymmetry.typep

    1. fredwilson

      Thanks for the link. I’ll check it outAnd I agree with you about the more capital intensive industriesBut its not only consumer internet where the capital efficiencies make patent protection less necessary. The whole software industry is an area where patent protection is less necessary

      1. Michael F. Martin

        Sounds like we agree. Software isn’t so capital intensive either. Besides that any industry for which trade secrets are a viable alternative to patent protection is going to find patents a burden.It’s worth pointing out for non-specialists, however, that the Courts severely restricted the scope of software patenting last year in Bilski. As that decision works its way through the system and begins to show up in district court decisions, at least some of the patent troll problem for software and consumer Internet companies is going to go away. I would guess that the lawyers for nearly all of your portfolio companies defending suits brought by patent trolls are looking into Bilski defenses right now.

        1. fredwilson

          Yes, we are hearing a lot about bilskiI hope it lives up to its billing!

  3. Michael Rattner

    The patent system screws up small entrepreneurs even before the trolls have their way. One of the first thing our biomed startup did was to file patents, capital that we would have much rather spent on development. But not having the patents is a terrifying prospect.

  4. JLM

    I know next to nothing about patents but I do know something about the crushing cost of litigation — stupid, useless, lawyer driven mean spirited extortionist litigation — and the impact it has on business development and most importantly on job creation, one’s energy and profits.Before you start planning a benefit or referring me to psychiatric assistance, most of this is self inflicted as I have bought businesses which were in trouble with the idea of fixing them up and I have done very well, so I am not complaining as much as observing. My business philosophy is very simple: “When order is made from chaos, value appears.” So I am always looking for chaos with the sense that chaos is always discounted far more than any other type of trouble. And, I am a problem solver who believes that chaos theory is really quite orderly and not random. The two big discounts in the marketplace are always fear and chaos. Kinda like today, eh?But I have litigated or settled almost every kind of chicken excrement legal claim one could imagine.I am now beyond the ability to be surprised or to even develop a sense of wonder. It is only to be endured and luckily I am blessed with a stoic endurance which would make Jonah look like a piker.I operate in a number of states but my favorite comparison is SC and TX and I can tell you that the legal environment is hugely different. TX under then Gov Bush enacted tort reform which makes it easy to actually get to court (mandates court ordered mediation) and resolve one’s differences while SC is trapped in an archaic system which takes 5-6 years to get to court all the time while unending legal discovery is going on at a huge cost in time, energy and money.Think about the comparative business climates of SC and TX and tell me whether you think this actually makes a difference? Well, it really does. Funny thing, the regulatory environments are a mirror image of the legal environments.We have got to get to a system wherein there is a cost penalty for a litigant to forego an equitable settlement and try to win an Irish Sweepstakes ticket. I’ve won some I should not have won. I’ve lost some I should not have lost. I’ve settled a boat load of stuff at far less than the cost of discovery.I am now an unabashed fan of binding arbitration before a single arbitrator in accordance with the AAA’s Commercial Rules with Expedited Procedures with a prohibition against consequential or punitive damage awards. I write it into every contract and after the initial angst of the lawyers (who hate it for the obvious reasons), I have been able to get it on asset purchases, equipment leases, loans, real estate leases and even employment matters. There is a reason why the ENTIRE securities industry mandates binding arbitration as its only dispute resolution technique. Perhaps the VC business should consider an industry wide compact mandating binding arbitration — which keeps the decisionmaking out of the hands of an otherwise ignorant jury who may decide to punish you because you look too rich or wise.Hey, maybe I could patent that? LOL

    1. fredwilson

      I love binding arbitrationI’ve saved countless hours and dollars with it

  5. zzgorme

    I also read through a lot of blog comments like this about a year ago when the patent office was trying to change some of its rules. My comments below are a summation of posts made by patent attorneys then as I understood them, so they may be helpful. Also not everyone might be aware the definition of an invention has changed drastically over the last few years, a blog called Patent Prospector estimated 80% of patents in some fields are invalid as a result of this.Most people’s ideas on patent reform are good but not possible to actually make clear law out of with sharp boundaries as to what is an invention and what is not. The critical thing about any law is you have to know exactly when you are breaking it. One advantage of the current system up until recently was this boundary was very clear, but at the price of making some obvious inventions patentable.You can’t have a patent law that makes something a patent or not based on how the judge feels that day. The previous law was basically that unless someone had actually published the invention idea before, or suggested a clear way to research and find that idea, it was new and therefore patentable. So all anyone had to do was look up the prior art, which could be anything available to the public, and if the idea had never been suggested before it was patentable.This led to a lot of silly patents because some ideas were so obvious no one would bother publishing them, particularly in the software industry. Nonetheless people knew where they stood, and most laws that have to draw a line somewhere end up making some situations look ridiculous. For example speed limits on roads often seem too slow or fast for road conditions, but the alternative is to have fuzzy limits that no one is sure whether they are speeding or not.The supreme court changed things recently by assuming the average worker in a field was somewhat inventive, and so some obvious inventions would have been solved by him even though they weren’t published. This is more sensible but it takes away the clear dividing line and how inventive the average worker is cannot be clearly defined.Likewise a patent troll is undefinable, as is the requirement for an inventor to build and market the invention. You can’t put a dollar figure on how much the inventor must invest or how many products they must sell. An inventor of computer chips can’t have the same rules as an inventor of fishing rods for example. You can’t force someone to license their invention (something I used to agree with) for a set percentage because some inventions are more important in a product than others. For example in computer chips someone suggested they were patenting a kind of branch prediction, and they might end up getting the same money as a thousand other patent holders in that chip. Since some inventions are better than others this is unfair. Someone for example might invent and patent a new kind of memory and have to take the same money as someone else who patented the clip to hold the ram onto the motherboard.Maybe a patent holder can be prosecuted as having a monopoly, which he clearly has because the definition of a patent is a monoply. Microsoft also has a monoply and can be prosecuted if they abuse that power. A patent troll extorting money for a simple invention is comparable to Microsoft intimidating companies to use only internet explorer. I like that idea because it doesn’t change the current law, it just makes abusing a monoply illegal as it already is in business.

  6. Bob Warfield

    A lousy patent system and Sarbanes Oxley are the two most damaging ways our government has hurt innovation by stifling small innovative companies and the ecosystem that feeds them.More on my blog: http://smoothspan.wordpress

    1. fredwilson

      Thanks for the link bobGreat post

  7. AK47

    The law is already changing in the way court treats non practicing entities in patent infringement suits. Parties always argue that the other side should pay legal fees, more so in patent cases than any other. Plus, there is already a system in place to avoid frivolous law suits: Rule 11 of the FRCP.Discussing the changes that the USTPO should make in awarding patents is an entirely new discussion that would need many many pages of commentary. Although, there is a new Patent Bill in Congress right now that may end up getting passed, so stay tuned.

  8. Craig Anderson

    I think, even without a change in the law, the tech and open source community can fight back too.An example would be that Linux could introduce a licensing framework that contained language that said “by using this software you agree to…”. They would need to carefully consider the restrictions they would like to place on users, but the end result would:a.) put companies at a considerable disadvantage in building products and running their business, unless they comply with a contractual framework collectively reached by the open course community, or;b.) force them to act in a way that the tech community deems fair and reasonable.The open source community, collectively, has far more leverage than they use. However, some might argue it goes against what open source stands for. I think if this avenue was explored, a lengthy consultation period would be necessary between all open source stakeholders. There is also no reason why any company could not make these part of the terms and conditions of using their service. Then, the open source community could keep a website with a list of all companies and individuals who have agreed to their usage terms. Much bigger things have been done before and will be done in the future.I think that approach could have huge benefits, but more so in tackling litigious companies rather than patent trollsMany of the suggestions made regarding changes in the law are great, but I think we need to also think about ways to fight this without changing the law too. I think one of the best ways to fight patent trolls directly would be to set up a central non-profit that organizations can join. This non-profit could buy and receive donations of patents that it in turn uses to fight off cases. Members of this organization could join by giving equity or paying a membership fee proportionate to size, and the organization would in turn fight like a bear to defend them in every single case. In the instance where they were sure they would lose, they could settle collectively on behalf of their members. This organization could, of course, lobby government and it would also do pro bono work as part of their charter. Or, in some cases, take on work without needing to earn a profit. They could also tie in with the open source players, and manage the approach mentioned above.The law should be changed, and perhaps it will under Obama. But, I don’t think we should sit around and wait for it to happen. I think we can take the fight to them.

    1. bfeld

      Craig, I think the dynamics around GPL (and the various derivatives) limit the effectiveness of “Linux could introduce a licensing framework that contained language that said “by using this software you agree to…”. The politics around this at this point are intense and I think it would be very difficult to introduce a change like this.That said, the idea of non-profit patent pools (and for profit) is right on the money. They are already happening – see http://www.openinventionnet… and http://www.patentcommons.org/ to protect Linux. There are challenges in the for profit model (incentives to overcharge to participation), but I think both can work.

      1. Craig Anderson

        Like you say, there would certainly be an uproar and it is not something that could be pulled off easily. Further to your comment, I was trying to find if there had been any attempts to do this to date. I came across this: http://news.zdnet.com/2100-…”Newer open-source licenses sometimes address the issue by requiring contributors to open-source projects to grant users and developers of the software a perpetual, royalty-free license to any patents that relate to the contribution.”I think it would, perhaps, be more palatable if it only applied to patents that had some sort of tie to open source. Something along the lines of: if the user owns patents that use ‘open source’ code or the application of their patents could reasonably be deemed to rely on ‘open source’ code at the time of registration, then the user…I agree I do not think it would be easy, and it would certainly require collaboration between all major open source players and perhaps companies like IBM to even stand a chance of working.Thanks for bringing those organizations to my attention. I hope they manage to work together and that they don’t pull in separate directions. Ideally, it would be better to have on strong organization I would imagine.I think you raise an interesting point about companies getting involved. This is something I have been thinking about too.One thing that worries me is that for their business to be a going concern, the issue has to remain in one form or another. It is possible that a well-funded non-profit could create exit possibilities for any companies that step up to the challenge.There is also a fine line between a product or service that is used to defend, and one that is used to attack. Market forces could pull in the opposite direction, making them counter-productive. It is at least a possibility. As any company’s success would probably rely on adoption, larger organizations could perhaps force them to agree to a perpetual obligation to conduct business in a certain way.