1. Nov. 17, 2006Software Patents1 ENTREPRENEURS AND SOFTWARE PATENTS Pamela Samuelson Conference on Software Patents Nov. 17, 2006

2. Software Patents2 WHY FOCUS ON ENTR’RS? Important contributors to economic growth as they become successful Arguably more innovative than established players –We should want the patent system to work for them May be more vulnerable to dysfunctions in the intellectual property regimes (e.g., patents) than established players who have resources to adjust Kauffman Foundation grant to Berkeley Center for Law & Technology to study impacts of patent reforms on entrepreneurs

3. Nov. 17, 2006Software Patents3 PATENTS & STARTUPS Software entrepreneurs have many things to do & worry about (e.g., hiring excellent engineers, managing employees, finding capital, making payroll) Intellectual property rights are generally not all that high on their list, at least initially –Copyrights, trade secrets, and licenses taken for granted –They expect that being first to market or having a superior product will be their key advantage But they know that patents are important to venture capitalists, other investors, and potential acquirers Likely to seek patents for core technology because resources are scarce and believe the invention story

4. Nov. 17, 2006Software Patents4 OTHERS’ PATENTS In the initial startup phase, entrepreneurs worry very little about others’ patents –Too small even to be noticed –Thin resources from which to pay royalties or do patent searches –More likely worried about whether an established firm will move into the niche they are aiming for and throw massive resources to become successful there Most vulnerable to challenge just before or just after a successful IPO –VC funding may enable royalty payments –Patent litigation will distract the firm, drain resources

5. Nov. 17, 2006Software Patents5 PATENT REFORM ISSUES Which ones are most important for entrepreneurs? –High invention standard? –Meaningful and low cost post-grant review? –Ability to interoperate? –Withholding injunctive relief if challenged by trolls? –Damages proportional to innovative contribution?

6. Nov. 17, 2006Software Patents6 HIGH INVENTION Entrepreneurs are innovators, willing to invest in innovation, and take risks They are likely to focus their own patenting activities on the most inventive parts of their core technologies –don’t waste time on the small stuff Unlikely to count on patents for initial product launches given long pendency of patent aps But won’t want to be foreclosed from the market by holders of weak patents TSM test should be repudiated in KSR

7. Nov. 17, 2006Software Patents7 POST-GRANT REVIEW Current re-examination system is not effective as a post-grant quality control system Focusing quality control on post-grant review is more cost-efficient than on initial grant because these patents are valuable, contested, likely to confer market power Improved post-grant review may be cheaper, better way than litigation to challenge weak patent, relieve burdens on trial courts Better review process may deter bad applications, may deter threats of litigation by holders of weak patents

8. Nov. 17, 2006Software Patents8 POST-GRANT REVIEW Creating a meaningful and cost-effective way to review weak patents will benefit IT industry generally But it may be even more important for entrepreneurs than for others because of lesser resources, greater risks, and distraction of litigation –True whether entrepreneur is the one whose patent is being challenged or the challenger

9. Nov. 17, 2006Software Patents9 INTEROPERABILITY Strong incentive for firms (including trolls) to patent interfaces because this gives exclusive right to control product & complementary markets –Strong presumption of validity –Very costly to litigate –Unlikely that outsiders can work around the patent, as can with other weak patents –Can’t make competing or complementary product without patentee’s permission (which it is free to withhold) –If defendant’s product successfully interoperates, easy to know of and prove infringement of interface patent –Interface element patented may be arbitrary, not meaningful innovative advance Withholding injunctive relief and permitting reverse eng’g are key reforms that would facilitate interoperability

10. Nov. 17, 2006Software Patents10 TROLLS They have leverage now because: –Low invention standard –High presumption of validity –Post-grant review process is ineffective except through litigation and that is extraordinarily expensive and risky –Until recently, CAFC mandated injunctions Will the CAFC really follow eBay? Established firms are probably more vulnerable than entrepreneurs to trolls; eBay big win for them, but may also be a win for entrepreneurs –Are trolls looking for relevant patents for YouTube?

11. Nov. 17, 2006Software Patents11 DAMAGES Market power of certain patents (e.g., interfaces) may be out of proportion to the intrinsic value of the innovation –Tiny, arbitrary, trivial component of an interface may, if patented, have a market value that derives mainly from being a chokepoint once the interface has been widely adopted and irreversible investments have been made to implement the interface standard –Disproportionate rent can be captured from this patent as compared with the degree to which it is intrinsically valuable because it improves functionality –Example: Rambus charges > 4X more if standard

12. Nov. 17, 2006Software Patents12 DAMAGES As CCIA report recommends, patent damages in complex systems technologies should be pegged to an assessment of the value of the patented component to the product as a whole, not based on a % of the products’ sales –This affects all IT firms –But entrepreneurs may benefit particularly

13. Nov. 17, 2006Software Patents13 CONCLUSION Patents matter to software entrepreneurs (even if they might be better off overall if software had never been patented) Worth thinking about how patent reform affects entrepreneurs –In what respects are their interests coincident with IT industry interests overall? –In what respects are they particularly affected by dysfunctions of the patent system? –Entrepreneurs generally don’t have a seat at the patent reform table, but their concerns should be recognized and heeded –Hopefully the BCLT studies will help with this