Archive for the ‘Intellectual Property’ Category

GREAT New Blog – IP Law for Startups

Today, I learned that former classmate of mine at the University of Michigan has started a blog for startups dealing with intellectual property issues.

Jill Bowman is a great person and her blog is not only informative, but is also written in her voice, not legalese.  (Her husband says it’s too “girly” but I totally disagree). 

Jill promises to dish on IP “train wrecks” (her words) that she’s seen over the past decade and hopefully her wisdom can save some folks future headaches.

She also promises to talk about costs savings in IP controversies and expose how some big firms are ripping off their clients. 

Her first post is Ten Smart Reasons to Learn About IP Law.  Jill, welcome to the blogosphere.  We are happy to have you. 

How Did We Get Our Idea For Our Startup?

Q:  We just started looking for venture funding and I have a question. Why do VC’s ask us how our idea came about? Are they looking for an emotional and inspiring story or are they worried that we may have taken our idea from someone else or, what I believe is the case, do they want to see if we were driven by an opening in the market that we observed? Of course, if we are giving our answer in a way that addresses one or two of these issues then you are probably missing the third.  Please help!

A: (Jason)  Without sounding too glib the answer is "all of the above and maybe more, probably."  Your guesses as to why are probably accurate and it, of course depends on to whom you are speaking with.  I’ll address each of your guesses individually.

1.  "Emotionally and Inspiring Story" -  Without getting all Sally Struthers-like, it is nice to see engaged and passionate entrepreneurs.  Building a successful startup is really, really tough.  If you aren’t in love with the company going in, it will not turn out well for you or your investors.  That being said, don’t put on an act.

2. "Taken Our Idea from someone else" – This is a big one.  If you come and pitch a next-generation social networking site and previously worked at Facebook, we are going to have an in-depth discussion.  Maybe you didn’t steal it, but maybe your former employer will have a claim on the intellectual property developed while you were employed. 

3. "Driven by a new market" – This also might be part of the question.  Whatever VC you speak to, you should know more about your market than they do.  I, personally, ask many questions and rely on them as part of my education.  Maybe you really have found an "unscratched itch."

One other potential reason is to see how you sell the vision and product.  You are going to get this question often from potential customers and this is a way to see you sell and see how efficiently you can answer a potentially complicated question. 

Or, perhaps it is just a trite icebreaker and the VCs are just asking you this so they’ll have time to answer emails on their blackberry while you wax poetically. 

Should I Protect My IP Before I Try To Build My Product?

Q: I’ve got a software startup that has a novel approach to solving a market problem. However, the solution stems from the nature of the process, not from the code per se. In terms of trying to finance the venture, would this necessitate getting enough funding to be first to market and just try to grab validation/market share before the copycats (especially those with deeper pockets) come around, or is there actually IP that can be protected within the design of the process?

A: (Brad) As a deep cynic about software patents and IP protection around process technology in software, my short answer is that it’s better to go build the product (and the business) rather than spend your limited time and resources on the IP protection.  My position is not a uniform one – many people would encourage you to put real energy and time into trying to protect your IP before you build the product. 

In almost all situations I’ve encountered, I encourage the entrepreneur to just go build the thing.  I continue to be amazed that the number of entrepreneurs searching for money who want me to sign a non-disclosure agreement before they will tell me what they are working on, or who think they have a truly novel (and non-obvious) approach to something where the patent is the key to the long term value of the business.  There are lots of ways to protect your software ideas – the best way to do it is to get on with building something that it truly valuable for your customers.

Should Startups Invest In Patents?

One of the issues that we debate internally is regarding the value of patents.  We’ve written a lot about the subject over the years and those of you who are regular readers know that Brad hates all software patents, and I’m fairly close to that line as well.  Last night, our friend Rob Shurtleff sent us an email asking the question “what is the value to startups in filing patents?  Do VCs really care?”   

Rob’s take (and he is a VC) is that:

“1:  Software patents have in our experience not added significant value to early stage companies when they are acquired;

2:  Early stage companies can’t afford to use granted patents as an offensive weapon (this is equivalent to the rules of Mutually Assured Destruction), a few nukes isn’t going to cut it when fighting a super power;

3:   It costs a huge amount of time and money to do a high quality patent filing, there are a lot better things to spend your time and money on; and

4:  The rules are changing and making this whole area less predictable.”

I think Rob is pretty dead-on accurate.  In fact, I think patents are probably the most overvalued “asset” that startups promote when raising funds. 

Now, let me caution everyone on a couple of things:

1.  There are some business plans that absolutely require patents:  anything in the biotech / medical space, new hardware technologies, semi-conductor, new computing or interfacing languages, etc.  In other words, much of this post assumes that you are an early stage software company, or a business based on business methods; and

2.  These opinions are mine alone (although I’m betting that at least Brad and Rob won’t put up much of a fight) and some VCs may care very differently about this.  Whether they SHOULD is another issue, but I know of VCs that do exhaustive patent reviews of all of their deals.  If you are seeking funding from them, you better have your turkeys in a row.  (Happy Thanksgiving, everyone).

I’m going to get a lot of hate mail from patent attorneys.  Sorry guys, but I have to agree with Rob’s first point, above and to me that is the deciding factor.

Also, don’t underestimate Rob’s fourth point about the changing of the rules.  “Patent Reform” is becoming a sexier topic in the legislature.  “Something” will change soon.  If Google, Microsoft and others get their wish, they’ll trumpet around that they’ve fixed much of what is wrong in the system – just be prepared for the “first to file” standard that they are proposing the effects this may have on the ecosystem.  If anything, it will just further reinforce my opinions above.

All That You Wanted to Know About GPLv3 and Open Source Issues

Jason Haislmaier of HRO and I have gotten to know each other over the past few months due to the Boulder OpenCoffee Club.  He’s a smart guy and spends a ton of time with open source issues.

He’s started a blog called Thinking Open.  I’d encourage every developer who is using open source in their development ecosystem to subscribe.

Jason is also hosting a webinar on the topic of GPLv3 with OpenLogic tomorrow, July 19th at noon MDT. 

Welcome Jason to the blogoshere! 

Open Source Discussion

We get a lot of questions about open source software.  Today at our Boulder OpenCoffee Club meeting, we had a presentation by Doug Young regarding his thoughts on open source issues that developers face.  It was a great discussion.  (Unfortunately) every developer needs to keep their open source “house” in order and to that affect, I thought that I’d pass along some good links to those interested in the subject.

Doug highly recommends a book by Lawrence Rosen called “Open Source Licensing.”  The very cool part is that the book is open source itself and available here for download.  I took a quick look this afternoon at it and it looks great.

Another attendee this morning, Ari Newman wrote a cogent summary of this mornings highlights on his blog today.  One interesting factoid that he brought to my attention was the availability of a software platform to keep track of one’s open source code.  Check out OpenLogic, if you are curious.

Bottom line, know your licenses and don’t get caught surprised at the time someone performs due diligence on your company for a fundraise or acquisition. 

Microsoft – The New Destructor of Innovation?

If you read our blog from time to time, you’ll know that Brad and I dislike the U.S. patent system with a particular distate for software patents.  Two weeks ago, the Supreme Court issued a couple of rulings that seemed to be nudging the system in the right direction.

Today, Brad sent me an article regarding Microsoft’s claims that free software infringes upon as many as 235 of its patents.   The article talks about how Microsoft filed nearly 3800 software in 2004 and is a vertible software patenting machine.

Now Steve Ballmer is seemingly on a press tour saying that Microsoft deserves royalites from anyone who uses free software and yes, this includes Linux.  He is quoted as saying “what’s fair is fair.”  What’s fair is that people can create innovative software products and bring them to market to keep our economy competitive.  What Microsoft has apparently done is rushed to “patent” everything in the world without any intention of bring any of these products to market.  Apparently Microsoft has “patented” software. 

Is Microsoft really this desparate in it’s battle with Google?  Can they not compete, so that their options are buying Yahoo! and / or trying to raise revenues holding innovation and corporate America hostage?

Whatever the reason, they ought to know that their behavior will do nothing more than potentially raise short term revenues and help destroy innovation and competitiveness of our country. 

Shame on you Microsoft.  If this isn’t anti-competitive behavior, than what is?

Supreme Court Issues Two Important Patent Decisions

Clearly, the Supreme Court read my patent rant.  Okay, maybe not, but I’d like to claim that they did.  As many of you know, I have a real issue with the entire patent litigation system.  As many of you also know, Brad and I are huge proponents of invalidating software patents, in general.  We feel that they stiffle innovation and are used mostly by unsavory folks trolling for dollars.

Today, the Supreme Court issued two important rulings.  The first opinion deals with the concept of what is “obvious” under patent law.  In a rare, rare situation, the court was unanimous.  I haven’t read the opinion (yet), but the news is reporting that they slapped down a federal appeals court that went too far in providing patent protection.  Clearly the court is sending a message to the PTO office that it believes there are too many patents being granted. 

In the second case, the Supremes endorsed US law that says US patents are not infringed upon if the products at issue are made and sold in other countries.  In other words, foreign law pertains to goods sold in foreign countries.

It will be some time until we know how / if this actually affects our patent system as it stands today.  For now, it’s a step in the right direction.

Patent Rant

A few of you asked what I would say if I were to rant about the current state of affairs of patent law in the United States.  The patent litigation systems is screwed up beyond belief.  Thank your local congressman (probably a former plaintiff attorney) and the state of Texas.  Here are some sobering statistics.

- Most cases are brought in the Eastern District of Texas these days, regardless of where the companies in question are located;

- The Eastern District of Texas likes this “cottage industry” and therefore the courts never (to my knowledge) allow folks to transfer out of the E.D. of Texas;

- The advantage for plaintiffs to file in Texas is that the courts never (to my knowledge) invalidate a plaintiff’s patent during the course of events. In all other jurisdictions, when a plaintiff sues a defendant for infringement, there is always a chance the plaintiff loses its patent on a counterclaim – not here;

- According to my friends at Cooley Godward Kronish, the plaintiff wins 92% of the time in E.D. of Texas for cases that go to the jury; and

- Costs are completely out of control to defend these types of cases.

The following data is from the 2005 Report from the American Intellectual Property Law Association Economic Survey.

For controversies involving counsel from any major metropolitan city, the 75th percentile number below is the price tag you should be looking at. Bottom line, these are expensive, expensive propositions.

Litigation costs of controversies where $25M or less in damages is concerned:

Through close of discovery (pre trial)

75th percentile: $2M

Median: $1.25M

25th percentile: $600k

Through trial and appeal

75th: $3.5M

Median: $2M

25th: $1.2M

Litigation costs where the controversy is over $25M in damages:

Through close of discovery (pre trial)

75th percentile: $4M

Median: $3M

25th percentile: $1.4M

Through trial and appeal

75th: $6M

Median: $4.5M

25th: $2.5M

Do I even have to rant?  Isn’t it obvious what’s going on here?  The E.D. of Texas has decided that it wants to be the forum of choice for plaintiffs and patent trolls.  It’s completely stacked the deck in favor of one side. The federal government (run by a bunch of former plaintiff attorneys) turns a blind eye to the constitutional issues. 

It doesn’t matter who is right and who is wrong, defendants must settle of incur crushing legal costs.  

Brad thinks that software patents should be abolished.  I used to think he was crazy and mumble something about protecting our rights in Asia and elsewhere.  Maybe he’s right.  This is a total resource suck, business tax and reallocation of wealth. 

What really burns me is that all of this seems completely unconstitutional, but I’ll admit that I didn’t attend that class in law school as diligently as I could have. 

Before I get 100 comments on “What about the company who has a valid complaint?”  I’ll tell you two things about my experiences:  1.  “real” patent cases don’t get litigated in the E.D. of Texas and 2. the vast majority of patent cases I’ve seen in the past decade were all “shakedowns” to me.

Rant over.

Should Entrepreneurs Avoid Examining Patents? – The Sequel

The best thing about having a blog is writing about a topic and then watching the email comments and questions flow in. I especially love the comments that disagree with what I write, as I usually learn more than I expound.

My post yesterday regarding whether or not entrepreneurs should review patents in broadening their knowledge of their ecosystem definitely struck a chord. If you want to see the full comments, check out the original post. In summary, though, I got a lot comments similar to these:

Investors are not going to put money into your company if you face potential litigation, and you are unable to tell them if you infringe or not. This will definitely be covered in due diligence. Likewise, you would be doing your shareholders a disservice by not understanding and evaluating your risk.

The problem with this approach is that you look uninformed when VC’s ask you to explain the IP landscape when they are performing due diligence.

Further, you need to get comfortable that you have freedom to operate, and the only way to do this is to review other’s patents.

If you know and understand the patents in your field, you can frequently design around the narrow patents, making sure you don’t infringe.

As a biotech entrepreneur, intellectual property is a major part of my day-to-day work. You need to monitor patents (and journal articles) in your ecosystem. Many strategic decisions are based on if you believe you can get protection for a certain idea. The only way to know that is if you have done your research and know what else has been patented.

These are all good points. Let me make something clear: just because I advised not to become a patent searcher, does not mean that you don’t have to know what’s out there. You can know a ton about your IP situation by monitoring other companies in your ecosystem, trying out their products, talking to their customers, reading reports, etc. This is all very different than personally searching through the patent filings.

I wholeheartedly agree that one should be knowledgeable, but if you are going to do this, do it before you start the business, make sure it’s clean than go full speed ahead. If you are worried, then get patent counsel involved, have them (not you) review the patents and write you a non-infringement letter to give you comfort. By having counsel monitor, this work is privileged and can’t be used against you later. Again, what we are trying to protect against here is willful infringement, not trying to keep you completely blind.

As for bio-tech, I’ll admit it’s a different animal and one, frankly, that I’m not an expert on. If this is what is standard in your industry, this is news to me. In the software / tech world, most patent attorneys that I know don’t want their clients out there searching around.

Thanks to everyone who has participated in the conversation. I also got support to blog again (call it a rant) on what is wrong with the patent system in our country. Stay tuned…