Results tagged “silicon valley”

Of Trolls and Leeches

Note: This post is cross-posted from Mike Dillon’s personal blog

Silicon Valley. It’s a place emulated around the world as a continuous source of innovative thought spawning new products, companies and industries. More importantly, this innovation is a powerful economic and job-creation engine for the Digital Age.

Unfortunately, there are a group of individuals and entities that are constantly siphoning fuel from this engine. They go by a variety of names. Some people describe them with polite terms like “non-practicing entities” or “NPEs”; others refer to them with more subtly negative names like “patent trolls”. I prefer to be more blunt: they are leeches; leeches that divert capital investment and innovative energy away from job creation and, instead, to litigation.

leech

Much has been written on this subject, but in general this is what is happening. An individual or small group of investors purchases a patent on the open market. Often it is a weak patent that shouldn’t have been issued by an overworked examiner at the U.S. Patent Office or it could be a strong patent that may have been interpreted incorrectly in the judicial process. The owners of these patents then file lawsuits against any company where they can even remotely make a claim of patent infringement. In years past, the focus of these suits was primarily technology companies, but that is no longer the case. Recently, on a single day, more than twenty retail companies, including J.C. Penny, Dick’s Sporting Goods, Men’s Wearhouse, Walgreens and Pier 1 Imports were all sued for patent infringement in this type of case.

Every company that I have worked for has been on the receiving end of these lawsuits.  Most of these cases begin with a demand letter in which the plaintiff doesn’t even bother to specify the allegedly infringing feature of the product, or the precise part of the patent that is claimed to infringed. The letters just list one of many patents, refer nebulously to a company’s products, and say “pay up.” And, when you don’t, your company finds itself receiving a visit from a process server, delivering a similarly vaguely worded complaint and lawsuit.

Recently, for example, one of these entities filed suit against comedian Adam Carolla, alleging infringement of a patent that appears to describe a way of disseminating episodes of content in a serialized fashion. First question: Really? You can patent that? Second question: Why are they suing Carolla, a comedian who is best known for his free podcast?

The answer is that it’s all about economics.  In the U.S. we have a judicial system in which each party pays its own legal costs and attorney fees.  The plaintiffs in this type of case uses this to their advantage. They know that when faced with even a specious patent infringement lawsuit, a company will be inclined to settle because if it wins the case, it loses from a financial standpoint. On average it cancost between $3 – $5 million to defend a patent infringement lawsuit. So, if a company wins at trial, it gets nothing other than a large legal bill and a verdict of non-infringement. Thus, it’s a financially rational decision to raise the white flag as long as the settlement amount is less than the anticipated legal cost of going to trial. Knowing this many companies elect to settle as soon as they face one of these lawsuits and incur significant costs in defending it.

Now, you may ask, why don’t companies use their own patents and sue these entities as a form of deterence? Good question. This intellectual property equivalent of “mutually assured destruction” is the reason that patent litigation between competitors across all industries is relatively rare. If you intend to sue a competitor over a patent, you had better be prepared that your company will face the downside risk of being sued for infringement in response. What’s different in these cases is that the entities that file them don’t actually make anything. They are instead, just litigation shell companies. Because of this, their tactics can’t be used against them – i.e. they have no products that a company can claim are infringing.

This all plays to the plaintiff’s benefit because if they file enough cases, some percentage of companies will settle. The proceeds from these settlements are then used to fund litigation against other companies and the purchase of additional patents to be used in future lawsuits. In order to obtain an ROI, plaintiffs only have to cast a broad net and manage their legal costs efficiently.

Often the plaintiffs defend their actions by saying that they are “standing up for the sole inventor.” Well, we like sole inventors. Adobe was founded by two guys in a garage. (The name of the company originated from a creek near where they lived.) But the plaintiffs in these cases are not standing up for quality patents, and getting meaningful value for these patents. They are, instead,  just holding companies up for the cost of litigation. It doesn’t even matter what the patent is about. The only people getting wealthy from this system are the lawyers (and that’s coming from one).

At Adobe the vast majority of the litigation against our company are patent infringement cases of this type. We fight all of them because, quite frankly, they’re bullshit.

But this doesn’t mean it’s an easy decision because we don’t measure our defense costs in dollars; we measure them in jobs. When we fight a case through trial it is the equivalent of 15 to 20 forgone engineering positions. Positions that could be creating additional innovation and job growth.

Now, what if in this area of litigation only, we changed the economics? What if instead of each side paying their own fees and costs, we changed to a “loser pays” system as it is in much of the rest of the world? This wouldn’t prevent anyone from bringing a patent infringement suit, they would just have to be very confident that they would prevail at trial.

Last year, Congressmen Peter Defazio and Jason Chaffetz introduced a piece of bipartisan legislation called the SHIELD Act (Saving High-tech Innovators from Egregious Legal Disputes Act). Although various business, legal and government constituencies are still negotiating the details, in concept it is as I have described above – a shifting of economic incentives so that in this type of patent litigation, the losing party would be required to pay the prevailing party’s fees and costs. Under this system, the true “garage” inventors would still be able to use the courts to enforce their patents,  but plaintiffs would face more risk when they bring a poorly founded lawsuit.

While not a perfect solution, the SHIELD Act would go a long way to helping companies spend more on creating jobs, rather than fighting litigation. It’s legislation that matters to employers, shareholders and consumers.  For more information and to show your support contact Congressman Defazio here.

The Valley

Earlier this week, Adobe celebrated its 30th year in business. In its storied history, it has grown from a small private company focused on developing and promulgating a common way to exchange documents – a major problem during the advent of the PC era – into a wellspring of innovative technologies that enable people to create digitally and to receive more tailored and personally relevant digital marketing.

When I interviewed for my new role, I had the opportunity to meet with the two founders, John Warnock and Chuck Geschke.  At the end of our conversation, I couldn’t resist the opportunity to ask them a distinctly non-interview type question: “Do you ever take a look in the mirror in the morning, consider Adobe’s size, the jobs you have created and the technological impact you have had on the world, and wonder – how did this happen?”

The immediate response from both: “Every single day.”

While Chuck and John are legendary in the tech industry for many reasons, including their warmth and humility, another way to understand their response is as an acknowledgment that there are many external factors that are determinative of a company’s success.  For inchoate technology businesses, one of the most important is whether they are located in Silicon Valley. With all deference to Seattle, Bangalore, Tel Aviv and even Des Moines there is something truly unique about this thirty mile stretch of the world. Countless MBA students, journalists and consultants have tried to analyze why this area has spawned so many successful global companies. Some say it’s the result of ready access to capital flowing from Sand Hill Road. Others attribute it to the proximity of educational institutions like Stanford, UC Berkley and the University of Santa Clara. For others, it’s the cultural and intellectual diversity.

Most likely it is all of these. Longtime residents (I’m one of them) tend to take it all for granted as the innovation surrounds us.

Take a day I had a few weeks ago, as a case in point:

  •  I started the morning having breakfast with a board member of a company where I had previously worked. He wanted to move back into an operating role and was trying to decide whether he wanted to go to a large public company or a small, pre-IPO, start-up.
  • At lunch that day, I spoke with a friend who had spent the last 10 years working as a senior engineer at a half dozen companies in the Valley, including a couple of start-ups and several technology behemoths.
  •  Driving back to the office, I passed the campuses of Oracle, Facebook, Intel and Cisco representing a collective market cap of over $400 billion and employing over 600,000. At one point along the drive I was passed by a Google’s driverless car. We see them so often now during rush hour that they are often unnoticed.
  • When I returned to the office, I exchanged emails with a couple of former colleagues. One has created an interesting social networking company for people who are caring for loved ones with medical conditions. The other works for a private company  that has developed a small, unmanned, self-propelled, ocean going device that can be used for an array of tasks ranging from mapping the oceans to monitoring oil spills and the effects of climate change.
  • To close the day, my wife and I attended the Tech Museum’s Tech Award dinner as guests of some friends, one of whom is an entrepreneur with a company that has developed an application that provides users with awards for the miles they walk, run and cycle, which they donate to the charity of their choice. If getting healthy isn’t enough of a motivation, how about exercising to help others?
  • The Tech Awards is an impressive event where several thousand people come together to celebrate entrepreneurs who are creating technology to solve some of mankind’s more pressing problems. Three award winners that stood out included: Simpa Networks, a company that has created a pay-as-you go mobile payment system permitting people to access affordable solar energy in areas lacking access to reliable electricity; Professors from UCDavis who received an award for developing a rice gene that permits crops to be grown even in flood-prone areas (Rice, a key dietary staple for much of the world, is grown in areas that are susceptible to flooding, which, given the impact of climate change, will only worsen); and the developers of the BioLite Home Stove who received recognition for their solution to health problems impacting rural citizens of the world who rely on indoor fires for cooking. The BioLite stove uses an innovative design to deliver a low cost, highly efficient, wood burning stove that not only greatly reduces smoke and other harmful emissions, but also generates electricity to power cell phones and LED lights.

Driving home from the event at the end of that day, I felt profoundly inspired (and wishing I had gone to engineering school rather than getting a law degree). Looking out at the lights from the office buildings around me, I decided that what’s truly unique about Silicon Valley isn’t days like this, but rather that every day is like this.

Note: This post is cross-posted from Mike Dillon’s personal blog

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