PublishedNovember 6, 2013

VCs, Who Know Innovation, Support Making Covered Business Method Review More Available

[Updated 11/7/2013; see below]

I’ve written before about the importance of the covered business method (CBM) review program in fighting trolls. One of the big claims against making CBM review more widely available is that it will somehow stifle innovation. Turns out that venture capitalists (VCs), who make their money by funding innovation, don’t agree.

Today, 39 venture capitalists signed a letter supporting patent reform and supporting a cheaper alternative to litigation at the PTO, which CBM review provides. This is in addition to the letter signed by nearly 250 small app developers supporting CBM, as well as the letter supporting CBM signed by two dozen industry organizations representing a variety of innovative industries.

And there’s more evidence showing that venture capitalists don’t think that patent assertion (that is, using patents just to make money by threatening or suing with them) is a good thing for innovation. Professor Robin Feldman just released a study exploring the opinions of the VC community about patent assertion. 72% of the 200 venture capitalists surveyed did not agree that patent assertion is positive for startups. And 65% of the venture capitalists surveyed disagreed with the statement, “As a venture capitalist, in making funding decisions, I consider the potential for selling the patents to patent assertion entities if the companies fail.”

Even more interestingly, 100% of the venture capitalists surveyed said that if a new company had an existing patent demand against it, that “could potentially be a major deterrent in deciding whether to invest.”

That’s not exactly supportive of the idea that patent trolls help small inventors.

Oh, and the PTO supports making CBM more widely available, too. As does the White House.

So who are you going to believe? Big companies talking about helping small inventors, or people whose business is actually helping small inventors?

Show your support for making CBM review more available:

[tweetbutton hashtag=’fixpatents’]VCs, @USPTO, @WhiteHouse support more CBM review as litigation alternative. So do I.[/tweetbutton]

Update (11/7/2013): Joff Wild at IAM Magazine questions whether Prof. Feldman’s study has much to tell us (free registration required):

While these responses could be considered proof that VCs do not like patent assertion entities (and patents, for that matter) very much, it is also possible to take another view: that the self-selecting group of VCs that took part in Feldman’s research may not actually know that much about what they are commenting on.  Why do I say this? Well, could you look at a finding that 64% of those surveyed do not consider the potential for selling patents to patent assertion entities if their portfolio companies fail and think otherwise? In essence, what most VCs who responded to Feldman are saying is that they have never really given much thought to working with PAEs, or that they are so ideologically opposed to PAEs that they would rather suffer financial harm than work with them. Neither is a very good basis from which to construct a meaningful piece of research.

I would also question the idea that the participating VCs are actually that well-positioned to make judgements about whether those asserting patents against their portfolio companies are “entities that license or litigate patents as their core activity”. Although Feldman did make sure that she had a definition of PAE tied down for respondents, what she does not seem to have done is tested respondents’ abilities to identify PAEs. She really should have done. Thinking someone is a PAE or a troll does not mean that they are – just ask Neuroptics. The fact is that it is very tempting to consider any suit directed at you or a company you have invested in as “frivolous” “malicious” or “troll-like”. But just because you want it to be so, does not make it so. There needs to be a level of disinterested investigation undertaken before you can come to such a conclusion. And you need a nuanced understanding of what it is you are investigating. It could be that VCs who have never even considered working with PAEs have that level of expertise, but I cannot see anywhere in the study where Feldman shows she has ascertained this.

Wild’s first charge is that the fact that 64% of the VCs surveyed don’t consider the potential for selling patents to PAEs when considering whether to invest actually shows that the survey group is not representative. This seems to be reasoning backwards from Wild’s own apparent belief, which seems to be that VCs should consider the potential of selling patents to PAEs when deciding whether to invest. Feldman actually addressed this:

These results are consistent with comments I heard from venture capitalists as I was designing the survey. As one venture capitalist noted, “VCs swing for the fences; they are not interested in pennies on the dollar.”

Just because you don’t like a conclusion doesn’t make it wrong.

As to the second charge, which is that Prof. Feldman should have tested the accuracy of VCs’ determination of the source of the patent demands they experienced, I think Wild is missing the point of the survey. The point was to determine the attitudes of VCs towards patent assertion, not to determine as a factual matter the extent of PAE activity among startups.

I encourage you to read Prof. Feldman’s paper for yourself. She lays out very clearly her methodology and how she came up with it.

Matt Levy

Previously, Matt was patent counsel at the Computer & Communications Industry Association

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