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Need patent reform to drive innovation again

We are venture capital investors. Every year, we put millions of dollars to work backing entrepreneurs who are passionate about creating new products and services that millions of people will use. Companies like Netflix, Twitter, Facebook, Fitbit, and Kickstarter all were at one point beneficiaries of venture capital investment. Many people would assume that, as investors, we would only invest in a startup that had a strong patent portfolio, because without patents, how else would a small undercapitalized startup compete with an established global enterprise who could easily copy our products? But from our perspective, the patent system has grown into a tool of abuse rather than innovation, and we believe it needs to be reformed immediately.

Patent trolls—companies that seldom make nor sell anything—were once merely a thorn in the side of tech companies. Now they present a barrier to investment and startup growth in the United States. No company is safe. Some survive by diverting scarce resources from creating value to paying off the troll or defending themselves in court. Others are forced to leave promising innovations on the shelf. And those without the resources to defend themselves and compete effectively simply go out of business. And yet, despite all of the patent assertions we have seen, we have yet to see a single instance of a legitimate company using the patent system to protect a novel invention. Instead, we see bad actors, armed with low-quality patents, extorting young companies that would otherwise be focused on innovating and creating new jobs.

{mosads}That’s why we, along with 140 other investors, sent a letter to Congress asking their support for legislation designed to restore balance to our patent system. Patent trolls have had a disastrous effect on many startups. We have witnessed firsthand good companies shut down because they fell victim to abusive patent assertion. We are not alone.  A recent survey revealed that 70 percent of venture capitalists have portfolio companies that have been threatened by patent trolls. This trend cannot continue.

It is true that patents have been important in protecting the inventions of young companies in areas like semiconductors, biotech, and materials science. In those sectors, innovation is expensive, and copying is relatively cheap. But in software and Internet services, where we invest, innovation is relatively cheap and patent protection is almost never the most important form of defensibility. The first version of Twitter was created by a small team of coders in a short period of time. Its functionality was transparent to anyone using the service and could be easily reproduced. Twitter’s value is not in proprietary technology. It is in the network of users who have chosen to express themselves on that platform because it is there that other users can most easily find their work.

When the modern patent system was designed, computing had not yet even been imagined. Patents take years to get and then grant a 20-year monopoly on a discrete invention. Software life cycles are now measured in months, most systems today are built on publicly shared open source software. There are many improvements in software, but few discrete inventions, and 20 years is a ridiculously long time in the software industry. How many of us had even heard of the Internet in 1995, much less Google, Facebook, or Amazon. Tumblr was conceived, built and sold faster than the patent office could have issued a patent. The patent system is just not well suited to protecting the value created by software engineers.

Unfortunately, software and business method patents have become central to another “business”, one that does not create anything, one that has become a tax on innovation – the business of patent trolls.  One recent study found that between 2007 and 2011, software and business method patents were involved in 46 percent of patent assertions, and responsible for 89 percent of the increase in litigation during that period.

Currently, legislation is pending in Congress that would help curb some of the worst abuses. Effective legislation should: 1) require patent trolls to tell the companies that they target with lawsuits and demand letters what patent and how they are allegedly infringing; 2) limit overreaching discovery requests so that companies are not strong-armed into exorbitant settlements; 3) empower courts to require the patent trolls to pay the legal fees incurred by a winning defendant; and 4) protect individuals who have done nothing but use a technology–a printer or wi-fi router– from allegations targeted at technology manufacturers.

We believe these changes are necessary to make the patent troll “business” less lucrative. Something has gone seriously wrong when the vast majority of the growth in patent lawsuits and almost 90 perrcent of those brought by patent trolls involve software and business method patents – ‘inventions’ that should never have been considered patentable. Some worry changing the current system could hurt legitimate and responsible patent owners. We’d argue that the status quo is unsustainable. These common-sense proposals will restore balance in a system that has been hijacked by a few bad actors, returning it to it original purpose: to incentivize innovation and benefit all Americans. We urge Congress to pass comprehensive patent reform this year.

Mendelson is a managing director at Foundry Group and has co-chaired the National Venture Capital Association’s general counsels group. Burnham is a managing partner at Union Square Ventures.


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