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Measuring the Value of Software Patents Versus Innovation (editorial)

This article by Andy Updegrove originally appeared in The Boston Business Journal (BBJ)

Here it is in its entirety:

How often have you heard it said that “patents foster innovation?” That phrase rings true in pharmaceuticals, where investment requirements are enormous and failure common. But does it also apply in areas such as software? Does it really take the promise of a legal monopoly to motivate a typical founder or CTO to innovate? And what about the advantages patents give big companies over emerging ones, simply because the former can credibly threaten expensive patent litigation while the latter cannot?

I’ll talk about the negative impacts of software patents another time. But today I’d like to make the case that patents are irrelevant to software innovation, based on my 25 years of representing hundreds of startups, the largest number of which have been either pure software companies or other ventures whose value lay in the software at the heart of their businesses. That history tells me that if patents were to disappear tomorrow, the process of innovation wouldn’t skip a beat.

Here’s why: I can divide my experience with startups into three periods: In the first, software couldn’t be patented. During the second, it could but virtually no startups did. And in the third (aka the present), venture-backed startups that can file patents usually do, but most boot-strapped enterprises don’t. Did software startup activity increase when the Patent and Trademark Office opened its doors to software patents? Not at all. And I can’t recall a single client that ever decided not to proceed with a startup because an invention could not be patented.

You could fairly discount the last statement by observing that entrepreneurs fall in love with their inventions. But investors also recognize that copyright and trade secret laws provide ample protection against actual theft, and that patents are not credible weapons for startups. Instead, software patents today appeal mostly to large technology companies, which use them defensively to guard their entry into markets dominated by competitors, rather than offensively to keep competitors out of their own. Patents have become like Cold War nuclear weapons, kept in reserve to project power rather than to actually assert it. VCs encourage their portfolio companies to file patents as a result, because startups with patents are worth more to acquirers happy to add new patents to their own arsenals. But software startups without patentable inventions still easily attract VC dollars.

Would abolishing software patents, then, lessen innovation among large companies? Again, no. IBM, Microsoft and Oracle were founded before software could be patented. They couldn’t afford to quit innovating simply because patent protection became unavailable. In fact, Microsoft did not even file patents aggressively until quite recently. And Oracle’s fiercest competitor is SAP — a German company, whose home market is Europe, which does not accept patent applications for most types of software inventions. But all of these companies continue to find Europe a valuable marketplace worth pursuing.

I think we all recognize that talented people have an innate drive to create and to compete. Entrepreneurs expect the marketplace to measure their success, and not the number of patents they can hang on a wall. I believe that we perform to the peak of our abilities when challenged, and that the marketplace brings out our best when it makes us perform at the edge. As the world becomes increasingly competitive, we need to capitalize on our heritage of risk taking and not blunt our entrepreneurial drive with promises of artificial legal protection. Otherwise, we may one day find that those playing by tougher rules than we are setting for ourselves are outcompeting us — even in our own back yard.