Venture Capitalist Explains How Patents Can Be A Tax On Innovation
from the not-all-vcs-demand-them dept
Whenever we get into discussions on the massive downsides associated with patents, someone has to chime in with some ridiculousness about how “venture capitalists won’t invest in companies without patents.” There are a few easy responses to that — including, if the VC you’re talking to demands patents to invest, he or she is probably so clueless you’re better off going elsewhere. That may sound flippant, but it’s not. Patents have so little impact on the success of a startup that anyone focused on patents before investing has probably never helped lead a brand new startup to success. If they had, they’d know that it’s execution that matters significantly more than any “patents.”
Besides, over the years, we’ve seen more and more venture capitalists come to the realization that in many cases, patents do a lot more harm than good. We’ve written about a few venture capitalists who have come out about problems with patents — and over the weekend Union Square Ventures’ Fred Wilson (a friend, and Techdirt reader), wrote about just how much damage patents have done towards innovation — specifically with some of his portfolio companies. Specifically, he’s talking about having those companies sued by non-practicing entities (he uses the term “trolls” which we like to avoid). He also mentions — in the comments — how USV doesn’t require companies to have patents, and he’s invested in plenty of companies without patents.
At one point, Wilson writes:
I’m a fan of allowing market forces to work in most cases, but not in the area of patents.
But, of course, patents are not a proper market mechanism. They’re the opposite of one. They’re about the gov’t creating monopolies. That’s not “letting markets work.” It’s declaring that the first company to claim an invention gets to control the market, rather than letting the actual market decide which company can best execute in delivering the product to the market. A supporter of free markets shouldn’t support the patent system. It’s not a free market at all.
From there, though, Wilson kicks off a good discussion on how to deal with such things. He points out that it’s often cheaper just to pay off the patent holders (and most companies do that), but that just encourages them to continue creating a “tax on innovation.” So, instead, he wants to discuss what reforms can be put in place, with two initial suggestions:
- If you sue someone for infringement and lose, you pay the defendants’ legal costs.
- “Use it or lose it.” If you’re not putting the patent into practice, you don’t get to use it.
There are problems with both of these, unfortunately. The first is utterly dependent on the already screwed up judicial process for patent lawsuits (hello East Texas!). There are plenty of awful patent lawsuits where the patent holder wins. So, I’m not against this proposal as a way of making patent holders think twice about totally bogus lawsuits, but it’s not going to stop a lot of suits. In fact, it may just encourage more suits in the hopes that hitting one “big one” pays for all the bad ones.
The second one is also a little troubling, because if a patent is valid (a huge if), you could potentially see a situation where it makes sense for the company to license it rather than develop it. Instead, however, I’d offer an alternative: if the patent holder is not developing a product based on the patent, then (a) the courts cannot issue any kind of injunction to stop the production of the product by others (which is the direction we’re moving in thanks to the MercExchange decision) and (b) any damages should be greatly limited to the cost of a reasonable license plus a small penalty.
However, if Wilson is serious about looking for ways to fix the patent system, he should look to support an independent invention defense that would invalidate the patent. This one change would solve so many of the problems with the patent system. Since the patent system was designed to encourage independent invention, it shouldn’t be discouraging it and denying those inventors who came up with an idea on their own the ability to commercialize their inventions. Furthermore, since patents are only supposed to be granted on inventions that are non-obvious to a person skilled in the art, the fact that multiple individuals came up with the same idea should be proof enough that the idea doesn’t pass that test.
It’s no secret that I’m not a fan of the patent system at all. There is so much evidence out there that patents do nothing to increase innovation and plenty of evidence to show how they actually stifle innovation, that I think the patent system actively works against its stated purpose (“to promote the progress of science and the useful arts”). However, if we must have such a system, then put in place an independent invention defense which also invalidates the patent, and we’d be a lot further towards a reasonable system — especially since it’s so rare to find patent infringement lawsuits that involve any actual copying.