The Patent Quality Improvement Act

This week, Senator Schumer introduced legislation that would take a whack at patent trolls: the Patent Quality Improvement Act aims to make it easier and cheaper for companies facing spurious infringement suits to defend themselves. This is not a complete fix for the software patent problem, and we absolutely need go further (more on how, below), but it’s a step forward and we wholeheartedly support the Senator here.

For those who are new to this problem: patent trolls are eating internet startups. “Troll” is another word for “patent assertion entity” (PAE) or “non-practicing entity” (NPEs) — i.e., a company that owns the rights to patents, but rather than innovating on top of them, simply uses them to sue real innovators and extract rents.

In the particular case of software patents, this is compounded by the fact that many of these patents are so broad as to be ridiculous. Here are just a few examples (someone should make a tumblr of these – is available…).

But this is no laughing matter — it’s a huge, expensive, and potentially deadly problem facing anyone building software applications. In the USV portfolio alone, roughly 1/3 of our companies have been attacked by trolls, and have spent millions of dollars and countless hours defending themselves. It’s a tax on the entire sector, and it’s particularly problematic for small startups who have limited time and resources.

Patent trolls operate in a pernicious way: they start by preying on small companies (55% of companies attacked have $10mm or less in revenue), and target their settlement fees at just under the cost of litigating. This puts small companies in a difficult position: spend time and money fighting in court (which can take years and cost millions of dollars), or just pay the troll and get back to work. As trolls collect settlements from small companies, they go after bigger and bigger targets.

To make matters worse, trolls often go after the customers of their target companies, blackening reputations and damaging businesses before anything has been proven or settled. So even the threat of action is enough to put companies in a serious bind, and as a result, many simply choose to just pay up, irrespective of the merits.

All of this is undergirded by two major problems: 1) software patents are too easy to get; and 2) defending yourself against trolls is outrageously expensive and time consuming. We need to fix both problems.

The Patent Quality Improvement Act is an attempt to fix #2. It allows suits over “Covered Business Method patents” (which describes most software patents wielded by trolls) to be taken out of court and fast-tracked through a USPTO review process. In cases where the patents at hand are likely invalid, this will provide a necessary short circuit to the time-consuming and expensive court process.

While we are very excited to see this moving forward, we also want to be clear that this doesn’t fix everything. We must still figure out how to make it harder to win bad patents (problem #1), and to continue to make it easier and cheaper to defend oneself against trolls (problem #2).

One idea for solving problem #1 is to crack down on the phenomenon of “functional claiming”, or patenting the problem, not the solution. Professor Mark Lemley of Stanford Law School has identified this as a key driver of the software patent / trolling problem:

“This is a problem that is unique to software. We wouldn’t permit in any other area of technology the sorts of claims that appear in thousands of different software patents. Pharmaceutical inventors don’t claim “an arrangement of atoms that cures cancer,” asserting their patent against any chemical, whatever its form, that achieves that purpose. Indeed, the whole idea seems ludicrous. Pharmaceutical patent owners invent a drug, and it is the drug that they are entitled to patent. But in software, as we will see, claims of just that form are everywhere.”

According to his report on the subject, this can also be fixed relatively easily through simple clarification and enforcement of existing rules, not new law.

On problem #2, continuing to drive down the cost of defense, and drive up the cost of patent trolling, there are several ideas out there. One is the SHIELD act, which would institute a “loser pays” model for frivolous patent suits. Word on the street is that this is a non-starter in the face of opposition from the trial lawyer lobby. Other ideas include accelerating discovery, including the details of infringement claims (which are often withheld until later in the case, increasing costs); increased disclosure of the real parties of interest (who often hide behind shell corporations or licensees); and exempting end-users from infringement claims (offices using networked scanners shouldn’t be sued for $1000 per user). All of these ideas seem reasonable, and would continue to take bites out of the problem.

The Patent Quality Improvement Act is one of these bites. We’re happy to see it move forward and we’re in full support of Senator Schumer for taking this issue seriously. If you want, you can give him some twitter love here.