Bilski and Patent Reform

Those us of who are ardent supporters of patent reform were hoping that the Supreme Court's opinion on the Bilski case would strike down the notion of business method patents, the worst kinds of patents out there and a huge tax on the innovation sector. Unfortunately we did not get that outcome, the Supreme Court basically punted on taking any stand on business method patents. Bilski did not get his desired patent on hedging energy risk but that decision was based on fairly narrow and technical grounds. Here is a thorough analysis of the Bilski decision.

Regular readers of this blog know that I believe patents, particularly business method and software patents, are largely a negative for the startup sector. While patents are often thought of as protection for "the little guy", the truth is most patents are owned by large companies and increasingly by patent trolls. As my partner Brad talks about in this post on the USV blog, almost a third of our portfolio is under attack by patent trolls. 

A startup that becomes successful in this day and age will most certainly face a number of patent infringement cases. A perfect case in point is this patent infringement suit against Twitter by TechRadium that makes messaging systems for public safety, the military, and utilities. Twitter will spend untold sums defending itself against that suit.

What I am doing and many others are doing as well is educating our government about this issue. If the US intends to remain the best place in the world to do a tech startup, it needs to address patent reform. At least one Senator agrees. Pat Leahy put this statement up on the Internet yesterday. The money quote is:

The courts, however, are constrained by the text of our outdated statutes, and it is time for Congress to act.

So the Courts turned out to be a false hope for patent reform. It is time to turn our efforts to Congress. I hope you will all join me in reaching out to your representatives and explaining what is wrong and what has to change.

#VC & Technology

Comments (Archived):

  1. Tereza

    I like the post, hate the news. Grrr.Such a frustrating issue.

  2. George A.

    Totally agree with you on this Fred. Where is this on the NVCA priority list? IMO, this is a far more pressing issue than carried interest taxation.In 1971, Congress banned tobacco ads on television against the universal objections of big tobacco. It wasn’t long before big tobacco realized that this universally improved the economics of the industry. While the analogy is far from perfect, I often think about it when this topic comes up about business method patents.Large technology companies tend to object to any proposed changes in legislation, but I don’t think they realize the inherent tax that it has on day to day business. There are very few cohorts of society that universally benefit from the existing system: vulture funds and their legal entourage.

  3. kidmercury

    the only solutions i see are1. the US govt collapsing, which is in the midst of occurring as govt at all levels continues to go bankrupt. not sure how long this process takes. it is reversible, but as no one is trying to reverse it, that seems unlikely. once the collapse of the system is complete than we won’t have to worry about this (lots of other stuff to worry about though, especially since everyone by and large sat there and did nothing while the problem grew)2. this is why the “get a lot of users and create a big company” approach is going to be increasingly difficult IMHO. twitter might as well rename itself to target, because that’s what it is. a target for spammers, for patent trolls, and probably lots of other types of terrible stuff. a network of smaller companies acting as a secret society united by secret oaths will be in a better position to defend itself against a legislative system increasingly void of any morality. federation ftw!

    1. Mark Essel

      Anonymous society of startups:ASS :)Success brings the attraction of parasites. It’s a natural process. We either learn to remove the pests or fall prey to their “superior” fitness

  4. Gerald Buckley

    Fred – Some of my funding came from the State of Oklahoma venture fund and I’ve just put in a request to figure out how our US reps are being lobbied on patent reform. My “in” is OCAST. They’re largely involved in Oklahoma tech transfer (bio-med, agriculture, internet, etc).Will update once I have a read of things.

  5. Scott Carleton

    Definitely in need of reform. Good post.I remember, when I was starting out, being told to patent an idea not for the defense of the idea itself but for the defense of the startup. Common practice being I could trade away the patent if the company was under attack. It became very clear that I would not have the resources to waste suing someone else over infringing on my patent.

  6. Andy Ranley

    Is there any irony when, on the one hand, the venture community stands to vigorously pursue more patent protection for their own technological innovations while, on the other hand, the venture community produces technologies that tear down the value of audio/sound/song-writing copyright protection? 🙂

  7. LIAD

    Supposing the tables were turned, things weren’t corrupted and the majority of patents were held by small companies and did perform their original role of protecting innovations and innovators. would you hold the same view on them?

  8. Fred T

    I’m all for patent reform. It’s definitely unnecessary time and expenses for a startup/enterprise to spend on just because others want to claim it as their own.

  9. Avi Deitcher

    I just finished rereading (lost count of how many times) Eric Jackson’s “The Pay Pal Wars.” Although there are lots of reasons for the sale to eBay, he is pretty clear that being a target of litigation once they were well-covered was a major reason. I don’t want to pass judgment on that sale, but selling just to avoid legal costs as a target is really bad for innovation.Fred, start a movement. Pat Leahy agrees Congress needs to act, you have the weight and connections in finance/tech/VC/politics, and lots of Internet tools out there. Set up or something similar and set up an online petition. You have presented to Congress, do it again… with 1MM or more valuable signatures behind you.

  10. Alex Urevick-Ackelsberg

    I own a start-up that deals almost completely with Open Source Software, and while we generally feel (or is it hope?) that the GNU-GPL will protect us against frivolous IP lawsuits (we generally refuse to work outside of the GPL), I have to say that patent law and frivolous patent lawsuits are a huge concern to me. We’re looking to release a new Open Source Software project later this summer, and I’m actively talking to an IP lawyer to see if we should patent our work *in addition* to applying the GPL to it, as I’m very worried that others will try to claim they own a patent on parts of our work or the business processes that underly some of the logic of the app (at the moment it’s a queuing/fail-over/backup/SSO system that integrates Drupal, Alfresco, Salesforce and a few smaller cloud apps).Anyway, I don’t know if there’s enough content or people willing to create content to justify a website, but if there are folks willing to create content on why this issue is important and post articles they find on the interwebs, then I’d be happy to volunteer our services to put the power of Drupal behind an effort to bring these laws into the 21st Century. At the very least a Drupal site would ensure that searches for relevant terms would lead to the inventor/investor’s view of the situation (Drupal pwns ‘SEO’). I’ve been jacking search terms for political (for example:… as well as prank-ish (i.e.:… reasons since 2004 and I’d be happy to do the same for an issue which could threaten the life of the company I’ve spent the last 2+ years building…

  11. Mark Essel

    Black market stealth startups anyone?

  12. mit100k

    This is a fantastic write-up as always, Fred. I’m a Sloan student and many of my classmates (myself included) are seriously pursuing a startup during / after completing our program. I don’t generally get too fired up before 9AM, but your post somehow did the trick this morning. It is inconceivable to me that a third of your portfolio is under siege by patent trolls / infringement cases. A total bastardization of an antiquated legal system.

  13. Max Kennerly

    Be careful what you wish for. Although Bilski presents a clean issue — whether or not you can patent a business method — most patent issues do not. If we just are generally lobbying for “reform” without a clear vision of what reform means, we’ve got good odds of having the bills distorted by special interests like patent trolls.For example, not too long ago, Congress allowed patent defendants to request an adversarial re-examination of the patent, but they attached a very thick string: if you lose an adversarial re-examination, you can’t reargue the issue again in court. Consequently, in a lot of patent defense cases (like one I’ve just started defending recently), the defendants don’t use this option, even though it is technically available.As I wrote before ( ), one method for separating the wheat from the chaff would be to shift the burden back upon the plaintiff to demonstrate the “nonobviousness” of the invention at trial.

    1. Evan

      the fact that you can’t get rid of Esq in your display name kinda worked for you in this comment, huh? 😉

      1. Max Kennerly


    2. ShanaC

      What’s very interesting about this case and the summation from Groklaw (awesome choice, I grok it) is that it looks like the SCOTUS is trying to play out what they think will happen to patent law in the future. It seems like they are waiting for some more not clean issues to has business patents and software patents out.It’s not a step back, it’s also not a step forward. It’s clear they understand where the bar should be, it’s also clear they want more information on the subject.

      1. Max Kennerly

        Justice Stevens’ dissent addresses a number of those issues. Though courts should be hesitant to set down broad and sweeping rules, the two biggest problems with the majority’s decision to wait for more cases are: first, the fact that business methods patents were clearly invalid all the way up until the last decade, when a handful of Federal Circuit opinions questioned that rule; and, second, the fact that patent cases are so expensive, and the stakes are so high, that uncertainty in the law can create a substantial ripple effect across society. As Fred notes (through Brad), a third of their portfolio is under some form of patent attack or another, and that uncertainly plays into both their decisions as a venture capitalist fun and the decisions of their portfolio companies as businesses. Uncertain it patent law is thus different from, say, uncertainty in tort law, which usually just changes the amount that insurers eventually pay out, rather than changing whole business models.

        1. ShanaC

          I haven’t read the entire set of opinions, nor am I lawyer- it would definitely be useful to know how the dissent will be used from a legal perspective.If David B. Halling comments are true (and there have been comments here to suggest that is the case, about the very physics of software vs hardware)- we have some very severe philosophical problems about how we understand the concept of machines since moving away from the industrial age of gears and leavers and ball bearing (not that they aren’t if say you are going to build umm an arm for a robot, you are still going to need a lever- but that won’t make it move). It seems as we get a deeper understanding of math (the pure kind) it becomes applicable nearly immediately in the “impure” world in multiple ways. patenting it closes off some ways. Yet it stands on its own as mathWe need to sort out the patent system so that the math only closes off the use case and not the math. It’s not the algorithms that are the problem at all- it’s the problem that now machines have parts that work a lot like Whitney Armory/Winchester Repeating Arms (of Eli Whitney fame).You can now make very new, very different machines from the same parts. The machine itself is probably patentable- the parts are probably not.

          1. Mark Essel

            Nice way to put it Shana.Just to clarify, patenting an implementation of an algorithm in an application is ok but not all the component services or smaller effects (iOS is patentable, multi-touch is not)

          2. ShanaC

            iOS is patentable, the component algorithms that cause it to work is not. The fact that you strung them together is.I realize this breaks down on a mathematical level.It’s the fact that there are coding patterns that makes all of this problematic. A pattern is a sub-machine- that should probably not be patentable. It’s equivalent to your gear. The fact that you string it together in some new or novel way that should makes software patentable.

          3. Tomd

            ShanaC”You can now make very new, very different machines from the same parts. The machine itself is probably patentable- the parts are probably not.”This statement is perfectly on point describing business method patents. The SCOUS got it right by going back to State Street and slapped down the Federal Circuit that more times than not, get’s it wrong.As an inventor of a portfolio of method and technology patents most everything spoken and pontificated about on this issue is from a side defending their patent rights. If big corp or VC , who own most of these method patents, complain softly as they litigate as part of their revenue model.This ruling does nothing to stymie innovation, same old story, but give inventors incentive to keep inventing and investing. At best 1 out of 1,000 patents owned by the individual inventor or startup ever move the courts and chase infringers to risk their patents and face catastrophic financial legal costs.Read more: http://www.businessinsider….

  14. Evan

    lawyers like litigation because it’s a cash cow. lawyers write the rules — trial judges, appeals courts, Congress — that continually favor more litigation.The startup community often exhibits naivete about political issues. Just because you’re right doesn’t meant that you’re going to win. And going and testifying in front of Congress is merely symbolic.

    1. Suzanne Lainson

      “The startup community often exhibits naivete about political issues.”I’d expand that to the anti-IP protection folks in general.Most of the anti-IP advocates talk in terms of what is in it for them or their companies. Not what is in it for average Americans.

  15. Michael Langer

    Fred do you advise entrepreneurs to budget for IP battle by patent trolls? Would you avoid funding a company you thought may come under a legal attack?

  16. Dale B. Halling

    Fred,On what do you base your antipatent ideas. It is well known in modern economics that technologic growth is the only way to increase real per capita income. A patent system is the only free market system of encouraging people to invest in inventing new technologies. The facts coincide very nicely with the advent of increasing technology that results in increase in real per capita income and the advent of the modern patent system. This is not simplistic, it is logic and evidence.The arguments against software patents have a fundamental flaw. As any electrical engineer knows and software developer should know, solutions to problems implemented in software can also be realized in hardware, i.e., electronic circuits. The main reason for choosing a software solution is the ease in implementing changes, the main reason for choosing a hardware solution is speed of processing. Therefore, a time critical solution is more likely to be implemented in hardware. While a solution that requires the ability to add features easily will be implemented in software. Software is just a method of converting a general purpose electronic circuit (computer) into a application specific electronic circuit. As a result, to be intellectually consistent those people against software patents also have to be against patents for electronic circuits.Since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. For more information see….

    1. ShanaC

      It’s a really odd way of defining a machine though. And it’s an idea I think we are all struggling with.It would mean that we can create a hardware foursquare machine- it seems frankly weird, and very 19th centruy victorian, even if it is doable.Here is the question- would that machine be patentable? Or are only ferris wheels (because of size) patentable. Think of neo-Victorian. I think we need a neo-Victorian punk way of understanding all of this.Just instead of electricity, we have the internet and computers and phones…

    2. Tomd

      The best post of all and written as a consise description of how requlation and constriction from KSR, Sarbanes Oxley, FASB (ever changing) have stymied innovation, investment and job creation.

  17. giffc

    Can’t agree with you more, and it drives me nuts when I see startup people perpetuating the myth that software patents are good for inventors/startups. They are a negative-value tax on our innovation economy and new job growth. Congress is bombarded with outdated reasoning from the pro-patent camp, which makes it easy for them to remain undecided. I would like to see more VCs and more large tech companies, who obviously carry more influence, join the battle to kill these nonsense patents for good.

  18. jeffyablon

    Fred, I have nothing to say other than: WOW do I agree with you.Software Patents stifle innovation and protect . . . nothing. Process Patents at least attempt to describe something when they include the machine-inclusion caveat, but yeah, the Court punted even on that element.I’ve been plenty busy ranting about this issue . . . take a look if you’re so inclined:This issue:…Amazon’s non-patent from a few weeks ago:…Facebook’s Ridiculous Social Network Patent from February:…Yikes. Lawmaker intervention time is right . . . err . . . I think.

  19. paramendra

    Pat Leahy was also my favorite person on the Hill when I was doing do or die work for the Nepal democracy movement a few years ago. http://demrepubnepal.blogsp

  20. Mike Villalobos

    As background for my comments I am in the business of commercializing healthcare technologies. My personal opinion is that many of the business method patents could, or should have been, rejected by the USPTO based on obviousness. I am hesitant to endorse changes to legislation that has served multiple technology fields (e.g. software, therapeutics, diagnostics, etc.) with overall outstanding results as the unintended consequences could be dire. Of course strenghtening the non-obviousness requirement would increase the patent prosecution costs of getting a business method patent, but the increased cost may cause the entity pursuing the patent to think about the cost to benefit provided.Overall the value a patent provides to software is debatable, because the product time to market is short when compared to that of the healthcare industry and by the time the patent issues the marketplace has moved on the the next best solution. However where the product time to market is very long and large sums of investment are required, such as pharma/biotech/diagnostics/med devices, the limited monopoly that the patent affords its investors is crucial to the companies success and without strong and broad patent protection investments will not be made.Largely I see this issue as being the same reasons that Tort reform is needed. In both instances the original intent of the law is being exploited to benefit unethical behavior. The overall caution is that we as a community do not throw the baby out with the bath water.

  21. Morgan Warstler

    It is doable. One issue I fear is that the copyright crowd does not distinguish, perhaps rightly in their own interest, between these types of intellectual property.I think we’d strengthen our case by putting MORE weight and belief in NDAs with pre-defined license terms, which VC’s would hate. Something like “I will show you this thing, but if you use it, I get 10% of revenue derived from the idea.”By effectively saying, prove you showed this to X, and if they can’t prove they had the idea first, then you have a pre-built contract if they use it…. we create an incentive for inventors not to patent something and file it away, but become responsible for putting the thing into as many NDA’d hands as possible.It is a shift in our thinking, and VC crowd will moan at bit, but as someone who routinely puts things into people’s hands they have never seen before (insert joke here), it’s all the protection you need.And it incentivizes people in the right way. We do not need to worry about people being afraid to look at things… people are desperate for things that will work, this simply forces people to document their own IP along the way, and accept it when they see something privately for the first time… that it never happens for free. Think Jobs, Gates, and Xerox.

    1. ShanaC

      Copyrights could be worse, much worse, and you are right, that they could be confused.

    2. Mark Essel

      I have at least 50 entrepreneurial ideas a day, they cost me nothing to think up. I do it because I can’t help myself. I have to restrain myself not to spam my co-founder’s inbox with ideas all day. Right now we need to focus on only one (at a time).Most of the time, the idea is .01% and the execution is 99.99%, I have to wonder at the 10% revenue split.Who uses NDAs anyway?I wouldn’t sign an NDA, I’d be like “go piss up a rope”.Have you ever signed an NDA?

      1. Morgan Warstler

        I just signed one today. Last week as well.I completely get the anti-NDA theory at least at VC level, and I meant nothing by 10%, just used it as an example.But, I make a distinction between the common rapid fire of “ideas” which entrepreneurs have all day long, and we’re better off willing tossing out vs. the thing thats fully new, completely architected, demoable / prototyped… and gives a standing company something truly new, worth investing their time and their resources to do it.

        1. Mark Essel

          Whoa, nice counter. What area do you work in where NDAs are so popular?

  22. William Carleton

    Fred, regarding going to Congress on this, it will be important that the reform not be a half-measure. Those can backfire.The Bilski opinion used a principle of statutory interpretation to actually turn one reform effort arguably against its intent, saying, in effect, “the fact that Congress in 1999 provided a limited defense to infringement of business method patents means Congress must have been acknowledging that business method patents are okay under the original 1952 Patent Act.”

  23. Chris

    I’m surprised chef’s do not apply for patents on the process to make new or creative dishes and enforce those on other cooks. What is the difference?

  24. ShanaC

    I have a friend (or a friend of friend, a bunch of single guys who live in an apartment together)I heard about this case and mentioned it to him.This is his one liner”That was a pretty much useless decision”Doesn’t give them much guidance. So reforms are necessary, but I don’t even know if they know what they should be.

    1. Mark Essel

      Hehe nice way to describe your friend (of a friend or single guys who live in an apartment)

  25. SAL-e

    If you spend some time learning about the history of science you will find out that science did not made big progress while the scientists kept their research exclusive. Once they started freely to share their findings the science accelerated exponentially. Based on this history lesson I believe all form of Intellectual Monopolies (a.k.a Intellectual Property) are bad for our future. But no reform will happen until current society that created patents, collapses because its inefficiency. Just like any other monopoly it helps to conquer the new market, but then it stifle the same market as quickly as well.

  26. riemannzeta

    KSR (Supreme Court) raised the bar for valid claims through obviousnessIn re Seagate (Federal Circuit) raised the bar for willfulnessIn re TS Tech (Federal Circuit) reformed venue rules, dampening forum shoppingAnd I could go on. The majority in Bilski wisely recognized that a one-size-fits-all rule does no justice to the diverse economics of all of the technologies embraced by the patent system. I hear the pain of your portfolio companies, but it is wise to take a larger and longer view. The common law process of rulemaking is more flexible, adaptable, and ultimately more fair.

  27. James Alonso

    i wonder if some progress could be made by linking the length of patent protection to the amount of time the technology spent in development. so a tech company with code that took 6 months to develop would only be eligible to get protection for, say, 1 year, and wouldn’t even bother applying, where as a biotech that spent 5 years developing a new compound could get perhaps 10 years. i’m sure it would present evidentiary problems, but seems like it might be more fair than everyone getting the same term regardless of the work that went into the idea.

  28. Sebastian Wain

    It’s strange that US didn’t addressed this issue yet, since many countries in Europe, and countries like Argentina are more progressive about this.I really can’t understand how thousands of companies in the US with a common interest against patents and enough cash to put efforts on it can’t move forward.

  29. Prokofy

    I’m good with this. We need to prevent unfair subsidies by the government and the public of the technocommunist sector claiming they represent “innovation”.Those lobbying on this need to register as lobbyists and stop pretending that i-phoning it and Facebooking it is accountable.Also still waiting for all the “expropriate the expropriator” “innovators” to give us examples of where there actual innovation is actually thwarted by others who…innovated before them, first.

  30. Shaun Trennery

    Testing out

  31. Aaron

    hoping someone will start a congressional petition for patent reform

  32. KN

    The court decisions from the last 2 years have largely reformed the patent system and have put a damper on the rights of patent trolls and patent owners in general. The need for statutory patent reform by Congress has decreased significantly, that’s why there are other priorities in Congress right now….And, let’s not forget that in the last 20 years the USA has been an innovation powerhouse. All under the very patent system that people are now complaining about…..

  33. ayo

    John Gapper’s piece in the FT re; Viacom v. Youtube is also a great read in this arena: