Patents - Great News and Not So Great

Today, the news below is GREAT news.  One of the worst Patent Trolls (it's synonymous with scum bags) has finally been thrown down the toilet where it belongs along with all its peers "non practicing entities"

The Web’s longest nightmare ends: Eolas patents are dead on appeal

Web pioneers united to stop "interactive web" patents at an East Texas trial.

For entrepreneurs pitching investors the glories of their patents, filed and issues, however, the news has also another slant. It reminds investors that even issued patents can be disallowed if prior art is brought to the PTO. It is a tough and expensive battle, so a patent is still well worth having.  However from the many instances similar to this one (some reported in this blog) investors have learned that patents have also real costs beyond filing and prosecution. They need to be defended, and that is expensive, or they need to be enforced, even more expensive.  Are they ready to see their investments re-purposed to IP litigation fees?  Probably not and certainly not before our company has grown very fat cash reserves.

Conclusion: if you have a patent it is better than not, point it out as an asset, but (outside the pharma sector) do not count on it making the impression it used to.

Marco Messina

Apple - The Great Innovator Or a Bully And a Con?

Check the below article reprinted from ReadWrite.com.  
Apple's glorious "pinch and zoom" patent just got invalidated.  Only a company with the deep pockets of Samsung could pursue the fight all the way to "invalidation", and even after paying Apple about $1 billion awarded by an incompetent jury.Something is profoundly wrong.  Ask yourself how many smaller companies have been put out of business by similar Apple tactics? The irony is that consumers have been bamboozled into believing that Apple is the great innovator on account of these cons.  Was Jobs brilliant at seeing value in other people's ideas and make something of it with brilliant repackaging? Yes absolutely, all the way back to the mid 80's when he ripped off Xerox PARC's mouse, icons and windows UI (Gates and others that saw exactly the same stuff, could also have done the same, but did not "get it" for a few years longer than Jobs).  Unfortunately Apple's deep pockets also allowed it to become a destructive IP bully for which all consumers pay a price.  Small startup innovators cannot defend, they just get put out of business.  The optimist in me likes to think "all cons come to an end", to wit some companies like GM sold junk and lost shareholders value for years but eventually came to their deserved end (unfortunately we also bailed it out and now taxpayers are losing 1/2 their investment thanks to Treasury's decision to unload the stock - but that's another story).

Next time you hear that Apple is king of innovation, remember the story below and ask how many true innovators have been squashed by their con.

Another Apple Patent Gets Smacked Down, And Its 'Thermonuclear War' Becomes Even More Of A Farce

Dan Lyons yesterday

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This time it's the so-called "pinch and zoom" patent getting rejected by the US Patent and Trademark Office (USPTO), and this is a big deal since that patent was one that Apple used to achieve that huge $1 billion verdict against Samsung in a California kangaroo court last summer.

Now what happens? Does the court in California go back and subtract all the damages that the jury awarded to Apple based on this patent that Apple should never have been granted?

Apple took a big victory lap after that ruling but it's looking like maybe it popped the champagne too early.

The ruling by the USPTO is not final, and no doubt Apple will appeal the decision, but suddenly Apple isn't looking so powerful. In fact, it is looking a bit, well, ridiculous. (And  that's the kind word for it.)

The patent was struck down because the USPTO found prior art. Meaning Apple didn't actually invent the stuff it claimed to have invented. It copied it from others, then went and got a patent on it anyway, and then used that bogus patent to sue rivals.

Worse yet for Apple, this new ruling from the USPTO comes just two weeks after the USPTO smacked down another of Apple's patents, one that related to multitouch and was known as the "Steve Jobs" patent.

I wrote at the time that Apple's "thermonuclear patent war" was a farce. Now that farce seems even sillier.

These Ideas Were Around Long Before Apple 'Invented' Them

Patents and Due Diligence

I frequently run into investors that seem to find a great deal of confidence in the fact that the company the are doing due diligence on has an "issued" patent.  They seem to believe that once the PTO issues it we are in Safe Land.  I wish I could be that optimistic, instead I often find myself "raining on the parade" suggesting that there are still big questions to be addressed:

Markets covered

If the projected market is global, but the patent is only issued in the US, what will the cost be to cover other countries?  

Is there still time to file abroad in desired markets? 

The rest of the world works on the basis of "first to file", so if someone invented well after the US inventor, but filed first in the country in question, it would be quite hard (not impossible) and expensive to contest the foreign filing.

Cost and means cost of enforcement

The PTO issues a patent but does no enforcement. Protection and enforcement of the rights implicit in the patent are up to the inventor/holder: Does the holder have the means to enforce its rights?  No cash to pay for litigation is about good as no patent.

If a company is granted a permanent irrevocable exclusive license to the patent by the inventor, the holder is the one that has to protect it through litigation, unless the right to prosecute infringers is granted along with the license, which normally isn't since the licensor is expected to protect the patent rights as consideration for the royalties received.  Does the holder have the ability, financial means and will to protect the patent rights? If not and the company does not either, it may have no means to prosecute infringers and in practice have no patent at all.

How "real" is the patent?

This is the question that seldom seems to be considered. In "Patents: what do they mean to you" I referenced the debacle of Research In Motion (RIM the maker of Blackberry) whose issued patent had one claim  invalidated years after being issued.

Another interesting case is that of so called "bogus patents" as this "Must Read" case reported by ReadWriteWeb.com: 

The notorious U.S. patent 6,411,947, a broad "method" for automatically classifying and responding to email inquiries known as the Firepond/Polaris patent, has finally been invalidated after 12 years on the books. (continue)

The warning here is: if it looks to you to be too easy, too obvious to be patentable, have an expert check the details, not just validate that the patent is issued. If it does not quack like a duck, it may not be one regardless of the stamp put on by the PTO or it may be so only for a short while.

Are patents useful?

Of course they are.  They certify to a good degree the novelty of an idea if not to its economic value. By virtue of the prior art research done, they attest to the difficulty of finding competitors.  Competitors could well exist that have prior art but never bothered to file a patent and they could come out later as they did for RIM.

Should inventors file them? Of course, but with the awareness that they grant no explicit protection. They only give one the right to spend money in litigation  to protect the rights implicit in the patent. 

Should investor value them?  Certainly, but, in my view, subject to the above considerations and making sure that due diligence includes looking carefully under the hood.

Marco Messina

Fishing for Angel Fish

The scarcest resource of entrepreneurs is not money, is time.  Money, when you can get it, is just a means to increase available time by hiring outsiders to do for you whatever you are smart enough to delegate and manage.  Conversely, all the money in the world will achieve nothing more than the going rate of interest in a bank account (3%) unless one puts it to work with time and energy. SO, NEVER WASTE  TIME.


One way I see many entrepreneurs wasting time is chasing funding from angel investors with propositions that do not come close to having any chance of success.  It is like going fishing for the wrong fish in the wrong pond with the wrong bait - most unlikely to make dinner tonight.

So in the interest of better fishing let's study the angel fish.  It is easy because: 

• these days most angel fish school in groups 
• most states and regions have well advertised (web) ponds, 
• the fish have the kindness to spell out in advance what bait they will strike

Here is an example taken from "one billboard at a well known California pond":
      Tech Coast Angel members invest in southern California companies, only. We look for products and services that can achieve rapid adoption in very large markets. Some of our criteria: 

• Scale: annual revenue potential of at least $50 million
• Market: a compelling, well articulated strategy for capturing and defending a significant market share
• Barriers to entry: patents or proprietary technology
• Team: a strong, not necessarily complete, team
• Exit strategy: some idea of who will eventually acquire your company
• How we fit: a desire for advice and coaching
• Valuation: you must fit within our risk/reward expectations

At other ponds the billboards list:

• specific industries (because the fish have expertise in them)
• level of business development (no pre-revenue plans)

So, figure out what business (bait) you have and decide if you stand a chance to catch angel fish.  If not, go fish for other species that bite on different bait, presumably the one you have. Here are examples:

Friends and Family:  this species bites on you personally and your trust factor with them.  Returns are hoped for but often the motivation is to help you along with the world changing idea you shared with them.

Banks: They still have money and do lend it if your business is the right bait for them. You'll need collateral and cash flow to have an chance. Beware of lines of credit that appear to be a strike, but you cannot count on for very long. 

Factors and Receivable Discounters: They bite on (and take a good chunk of) invoices you carry as receivables from financially reliable customers (they bite on someone else credit). 

There are many more, each specialized in different aspects and needs of your business.

Back to that favorite species: the angel fish.  The words that carry value with them (shiners in the fishing parlance) include:

Scalable: 1. the business can grow into a big business, 2. you and your team are capable to grow it

Market size and dominance: "1% of the world" is probably meaningless, "80% of left handed investment bankers with an income over 500k" is a concept one can measure and relate to. Attractive markets have size and allow some level of dominance.

Early Exit: a plan with an Exit is a requirement (remember: angel fish get to eat only at exit time). Early Exit is golden. More on this in a forthcoming post.

Barrier to Entry: the stronger your position, the less spooky the fish will be

Risk: This is the monster from the dark depths that scares angel fish away. They know it is part of the game, but they hate it. To manage their fear, show that you have identified fall back positions and fail safe conditions at every step; be able to simulate the cash flow projections accordingly. 

BE BRIEF: this is the most impatient fish in the world 

Happy fishing.  There is fish in that pond for the right bait. Do not waste time otherwise.

Marco Messina

The Myth of The Outsider

Innovators are by nature curious people with a strong desire to improve the world around them.  Upon encountering a problem, an inconvenience, or a task too cumbersome, instinctively they seek to find a remedy for it.  That drive has been at the foundation of innovation since the invention of the wheel, the first disruptive technology shaped by man (fire and stone tools were not invented, were "found" and nurtured).

Since then, innovators have nurtured the romantic idea that a single bright mind can find an answer to a vexing need and be recognized (financially or otherwise) for it.  Over the centuries it has certainly occurred, but in modern day, that notion may not hold as well. I lost count of the many ventures I have seen presented whose business plan calls for commercializing  Joe-Invenor's "idea or solution" the viability of which has was vetted only by Joe's friends and other supporters devoid of domain knowledge and experience.

Indeed, "people from outside the industry" have, occasionally, succeeded in seeing solutions insiders did not, but I believe those were the exceptions, or, more often, that conclusion was reached with incomplete information.  For instance, in the popular culture many believe the myth of: "bright college drop out (Bill Gates) develops a computer operating system that mighty IBM could not, thereby creating a bright new world".  The reality, however, is that Gates, due to a most unlikely coincidence, had over 10,000 hours of programming experience before going to college, was indeed very bright, and dropped out to make a microcomputer version of a programming language (BASIC) previously developed by others when Gates was 9, not an operating system.  The staggering success that followed came thanks to a lot of hard work to be sure, but also more coincidences, personal and family connections, quick thinking and, in the end, the wisdom of assembling a team with the brightest industry experts. IBM conversely had all the resources and talents to make their own solution, but simply chose the buy vs. make route. Due to more coincidences it unwittingly helped a major competitor to be born. A similar review would correct the popular myths on the birth of Google or Netscape or Apple and others.

If we dig deep enough for details, there are very few demonstrable cases of successful innovation by an "outsider" blessed with "new eyes" vision. Invention is another matter since invention (including a patent) requires only a "novel idea" with no consideration to any practical implementation potential, let alone actual implementation.  The world is covered with ideas. Most do not see even an attempt at implementation because that requires hard work well beyond "imagineering". A few ideas see implementation only to die early for lack of  practical underpinnings, or of a value proposition that moves customers to act (these are the solutions in search of a problem).

Today, innovations cannot stand alone.  They have to integrate in a complex web of interfaces, other products, services, regulations, business processes, cultures, vested interests, user habits, etc.  On its own each "new idea" may be commendable, but, if its implementation requires changing the world all around it, it is probably dead on arrival.  The same goes for creating new standards or modifying existing ones.

New eyes may appear to see new solutions, but, often, only because they do not see the reasons why the new idea cannot interface well enough with the reality around it.  The only fix for that blind spot is to bring into the team the best domain experts available.

Experts are those that through practice had the opportunity to learn all the interfaces required for any system component to fit its ecosystem. Often they will show why "it" won't work.  I those cases, be grateful: avoiding wasted time, which is even more important than avoiding wasted money.  In the best cases the domain expert may suggest modifying the "new idea" and make it possible to be more than a flash in the pan.

Inventiveness creates ideas.  Innovation creates results through inventiveness checked by practicality.  Beware the single minded genius, particularly yourself.

Whether the entrepreneur or the an angel investor doing due diligence, involve domain experts if you are an outsider. It will lower your risk.

Marco Messina

Patents - What do they mean to you?

If you are interested in this subject you probably fit one of the following classes:

1. You are an expert angel investor with IP due diligence experience - your comments would be most welcome.
2. You are a potential or new angel investor (bless you for helping to grow our country). In this case you might be interested in one (mine) practical view of what protection a patent gives you.
3. You are an entrepreneur that could use some financial help to get your invention (IP) to market (bless you for helping to grow our country too). In this case, you should know what questions to expect from your angel investor and have good answers.

This post attempts to share, for the benefit of the last two groups, my experiences over twenty-five years as an inventor, patent holder, investor in technology ventures, an acquirer of intellectual property (IP), licensor of IP, entrepreneur commercializing my own or someone else's IP. If you want legal opinions or legal advice on this, call your attorneys. If they are IP specialists they'll have legal details and perspective far more reliable than mine. However, beware: because they are so familiar with the domain, they will often presume that you understand the nuances of IP legal protection principles and legal practice, not necessarily the practical aspects of it, which is what I am focusing on here. Mine is a "business" view of patents, not a "legal" view and therefore focuses on what is practical not only what is legally rightful.

What does a US patent give the inventor?
In simple terms, the RECOGNITION by the US government that he/she is PRESUMABLY the inventor of a certain concept, product or process and therefore has the EXCLUSIVE RIGHT to practice the invention for a certain period of time (e.g. 17 years) without competition. Note that contrary to public perception it does not give the inventor any real protection (with one exception) unless (s)he takes steps to enforce that right. The exception is that the Customs Office will do their best to stop an infringing product from entering the US if they are provided with a suitable request, documentation and proof of patent infringement. Otherwise, the inventor is solely responsible to enforce his patent rights, which implies taking legal action against an infringer generally at some considerable protracted cost.

Against the above background then a number of questions arise:

Can one afford to sue the infringer?
Practically speaking, only if the practice of the invention has a cash flow worth protecting in an amount that covers the expenses, distraction, aggravation, etc. associated with a litigation. Winning the case may not produce cash flow or a significant pay off; it may produce only an injunction against the infringer, which by the way does not preclude another one from coming along.

What if in the course of litigation one discovers that other aspects of the product infringe on patents held by the infringer or someone else?
This is very common in the electronics industry where frequently patents have great value to counter-sue and eventually settle by reciprocal licensing. Much of this jousting is now going on and reported in the press involving Apple and their iPad against various competitors among which only one (the smallest and weakest) was actually sued for infringement. In these cases there may only be legal expenses and the benefit of upsetting a competitor's product development road map.

If one has a validly issued patent, how much protection does it provide?
Better than none to be sure, but hardly a guarantee. The case of RIM (Research In Motion), makers of the Blackberry, is very instructive (details): It started in 2000 when RIM was a startup with strong beliefs that their issued patents covered their products well. After a surprising chain of events, by 2006 they settled for $650 million with NTP (plaintiff) after a court injunction forced the Blackberry network dark for one day (RIM by then had a $2 billion business at risk of going dark worldwide, hardly a desirable bargaining position). Since 2006 and continuing to this date "patent reexamination" action by RIM has sought to void NTP's prior art claims; NTP is responding in kind. One can hardly imagine the costs involved (at $500 or more per hour). Needless to say RIM investors had been confident of their IP position and of the issued patents. Conclusion: even ISSUED patents are no guarantee since prior art can be submitted at any time and re-examination requested.

Is a patent much ado about nothing?
Definitely not. A Provisional Patent filing, if properly written and searched, tells potential investors that there may be more than just an idea. It says that the company and the inventor understand the IP implications of their business and have invested time and money to protect their innovation. If a patent is issued, it tells investors that a pretty solid stake is in the ground that proves innovation, at least from a theoretical and PTO standpoint. If potential competitors exist, they are obviously not easy to find and on the time-line may be behind the current inventor and therefore not innovators in the PTO sense. Of course they could still come out later with proof of "prior art" and open the RIM type can of worms.

It should be noted that claiming infringement while holding an issued patent has risk. The "infringer" may turn up to have prior art and that may invalidate the patent. To wit, I had occasion of working with a small manufacturer who was an outstanding and recognized innovator but never filed a patent. He explained that, not being interested in having investors or selling the company, patents to him were a cost and of no value. His strategy was to practice whatever innovative process he devised without fear. If anyone came to try and stop him he depended on his meticulously documented prior art files from many years back to trump the action. Furthermore he had no interest in licensing his own inventions and felt that since issued patents files are open to the public, they are more risky than helpful unless one deals with fundamental inventions. By those strategies, his company never grew to dominate his markets, but he was happy with his lifestyle company; my lesson was to beware that prior art occasionally may come out only when one "kicks the beehive".

Why uncertainty cannot be eliminated
In the US the PTO operates on the doctrine of "first to invent". This means that anyone can come and claim to be THE inventor of anything if he can show with a preponderance of evidence prior art precedent to that of any patent filed. If a patent had been issued, reexamination is the cure. Documentary proof of prior art can be from most kind of documents, preferably lab books (numbered non-removable pages), dated and witnessed affidavits, etc. Elsewhere in the world the "first to file" rule is followed therefore it is imperative to not delay a viable filing and one can depend on the value of an issued patent to a greater degree.  Even there a patent can be contested with suitable evidence that the prior art was "published" and therefore in the public domain prior to the filing of the issued patent. Demonstrations of preponderance of evidence of prior art are not easy to do, so an issued patent is still a strong stake in the ground, but...


Conclusion
Beware: from a business viewpoint, the value of a patent is not an absolute one. It depends on the circumstances of the business, the market, the product, the objectives of the inventor, the objectives of investors and many other factors. Deciding to file a patent (the inventor) or to assign a value to a patent (the investor) is a problem without an optimal solution. Clear understanding of options, implications and trade offs is the best one can achieve in reaching an entirely subjective decision.
My "Should I get a patent" Roadmap may help with that analysis. Read more about my Roadmaps

By the way for my own IP I still file patents, but I am cognizant of how thin the ice is that I stand on.  If I cannot justify a costly fight to defend it, my patent is not more than a feather in my cap.

Marco Messina