Obligatory Disclaimer: I presently serve as an in-house lawyer, but this is my personal blog and the views I share below are my personal opinions, which may or may not be shared by my employer. Don’t be surprised if I later say or do something inconsistent with the opinions expressed below when representing my clients. What makes sense for a particular client in a particular case may be very different from what makes sense for the overall patent system, and whoever insists upon perfect consistency is denying themselves the opportunity to learn and evolve anyway.
Diagnosing the Problems
As a registered patent lawyer who has worked in the field for more than two decades, my view of the patent system has changed dramatically. While it wasn’t love at first sight, early in my career as a patent lawyer I was a true believer in the promise of the patent system to add, as Abraham Lincoln famously declared, “the fuel of interest to the fire of genius.” But over the years evidence has accumulated that the patent system is failing to keep that promise, both in the general sense of not obviously promoting “the Progress of Science and Useful Arts” and in the specific sense of not providing enough interest to inventors. The purpose of this essay is to share some of the evidence I see through a story about how the patent system has evolved over the past five decades, and to offer a tentative diagnosis of its problems. While solutions to these problems may be hinted at along the way, I plan to describe in detail potential solutions in future essays. The purpose of this essay is to suggest a diagnosis.
For comparison to the patent system, this essay also tells the story of how the venture capital system and open source licensing have evolved over the same five decades. Unlike the patent system, the venture capital system has no constitutional basis, and no direct ties to government. The venture capital system emerged in response to a need for capital to fund new technology companies, which we now call “startups.” Despite its differences from the patent system, the venture capital system has served a purpose — similar to the purpose of the patent system identified in the United States constitution — of promoting commercialization of new technology. Yet in contrast with the patent system, there is hardly anybody who would question whether the emergence of venture capital-backed startups has helped promote technological progress. The venture capital system thus offers a useful point of reference for comparison. Similarly, the system of open source licensing that has evolved over the last five decades has also had obvious success in promoting the progress of software development, and offers another useful point of reference for comparison against the patent system.
The conclusion I reach is that the incentives offered to inventors by the patent system, both monetary and non-monetary, are too attenuated at present to have a significant impact in promoting technological progress. Inventors who want non-monetary recognition have more compelling alternatives in the form of academic research or open source contributions. Inventors who want monetary rewards have more compelling alternatives in founding or working at venture-capital backed startups. Moreover, while securing exclusive rights to a technology may be necessary in some industries due to the large capital investment and long time period required to bring a new product subject to government regulation to market, the rate of development of new hardware and software products and services is so much faster than the rate that patents issue, and the twenty-year term of patents so long, that even if engineers and scientists had no reason not to consult published patents, published patent specifications are more useful to historians than active engineers and scientists. For both startups and mature companies, patents remain an ex post deterrent against the copying of new products and services (or at least new features of products and services) by incumbent competitors, but there is little evidence that patents ex ante promote the development of new products and services, much less provide meaningful incentives to inventors to do the same. In contrast, the venture capital system promotes the development of new products and services through the promise of outsize rewards in the form of equity appreciation, which extend even to inventors of products and services who may not have been among a startup’s founders. Academic journals, conferences, and open source communities promote the development of new technologies, products, and services by providing inventors direct recognition for their contributions. At least with respect to software technology, the patent system has become almost irrelevant to most would-be inventors.
Caveats: The stories told here are drawn mostly from the software industry in Silicon Valley because that’s what I’m most familiar with and that’s where I’m from. I do not present these stories as a comprehensive or exhaustive history of all relevant facts about patents and venture capital — even patents and venture capital within the software industry in Silicon Valley. Rather, these stories are my highly personal and prejudiced view of these systems as I have experienced them, directly and indirectly, during my lifetime. I welcome others who read this essay to share their own experiences and thoughts on their own blog or social media site, especially if they differ from mine.
The Patent System in Silicon Valley from 1980 to 2022
Patents in the 1980s: Institutionalization
Prior to the 1980s, the patent system was a relatively quiet area of law. Although the Patent Act of 1952 had unified the patent law into a coherent and cohesive set of rules (thanks in no small part to the efforts of talented mathematician Pat Federico and jurist Giles Rich), the number of patents issued (at about 100,000 per year) was almost the same in 1980 as it was in 1970. In fact, it was in 1975 that what had been since 1836 the Patent Office was renamed the Patent and Trademark Office, demonstrating how interest in branding was waxing even as interest in inventing seemed to be waning. Due to an oil crisis and inflation, the 1970s were not a great time for capital investment in general, but to be flat over a ten year period is still surprising, especially given the many inventions that were made in the 1970s, including video games, email, the floppy disk, cell phones, VCRs, digital cameras, GPS, portable music players, and the Apple personal computer. A comparison of numbers for the period from 1970 to 1980 with the period from 1980 to 1990 is dramatic. Rather than staying flat, by 1990 the number of patents issued per year had grown by almost 60% (to almost 165,000). What changed?
What changed is that patent law was institutionalized into a more uniform body of law decided more consistently in favor of patent owners. Three key events helped accomplish its institutionalization: first, the establishment of a new appellate court for patents, second the expansion of subject matter eligible for patenting, and third the passage of the Bayh-Dole Act. Here's a quick summary of each.
First, through an act of Congress in 1982, the United States Court of Appeals for the Federal Circuit (often abbreviated to “Federal Circuit”), was established. Before the Federal Circuit, appeals of patent infringement cases were heard by regional circuits all over the United States. After the Federal Circuit was established, all appeals of patent infringement cases went to the Federal Circuit. This procedural change in how patent lawsuits were heard on appeal brought about a dramatic substantive change in patent law: Instead of each regional circuit developing its own precedents and doctrines (as is the case, for example, with copyright and trademark law), with differences in opinion among the circuits (a/k/a “circuit splits”) being decided by the Supreme Court from time to time, patent law had only one source of precedents and doctrines governing its application. Moreover, that one set of precedents and doctrines was being set and developed by a group of judges (including Judge Rich who helped draft the Patent Act of 1952) who had volunteered to serve on the Federal Circuit, believed in the promise of patents, and wanted the patent system to succeed with its purpose. By 1990, thanks to the unification of patent law into a more stable, predictable, and patent-friendly set of doctrines, it was clear that patents had become a more reliable capital investment for corporations than they had been in the 1970s. On October 13, 1990, Polaroid won a verdict of $909 million (or almost $2 billion in 2022 dollars) against Kodak. On an inflation-adjusted basis, this is still one of the largest damages awards for patent infringement ever won at trial.
Second, at least for the computer industry another important part of the story is the 1982 decision by the Supreme Court in Diamond v. Diehr, the last of a triptych of early cases heard by the Supreme Court on the question of whether software is patentable. In a unanimous opinion, the Supreme Court found in favor of the patentee, who had claimed software used to control a machine for curing rubber. While some observers saw little difference between software algorithms and mathematical equations (which had long stood unpatentable), the Supreme Court held that the claim in Diehr was patentable because the software was used in a process that solved a technological problem (curing rubber) by “transforming or reducing an article into a different state or thing.” The precise limits of this decision remain mysterious to this day, but the ruling was sufficient for the Patent & Trademark Office and Federal Circuit to expand the scope of eligible subject matter to cover both hardware and software. I will come back to the patentability of software again when we get to the 2010s. Diehr turned out not to be the final word from the Supreme Court on the patentability of software.
Third, the Bayh-Dole Act was passed in December 1980, allowing universities and government labs to take title to patents on inventions that were made by inventors in university and government labs that had received federal funding. Before the Bayh-Dole Act, few patents were filed by universities or government labs because it wasn’t clear who would own a patent that had resulted from federally-funded research. Why pay to prepare and file a patent that the federal government could just take away? After the Bayh-Dole Act, universities started filing patent applications and earning revenue through patent licensing. Every research university and government lab in the United States now has lawyers and business people on staff to assist with “technology transfer,” which includes patent licensing. Patents were becoming big business, not just for corporations, but for the research universities and government labs that had been a raging torrent of new technology during the 1960s and 1970s. Fast forward to present, and perhaps unsurprisingly universities and their endowments have consistently and loudly been proclaiming the success of the Bayh-Dole Act in encouraging innovation thanks to the hundreds of millions of dollars that flow back to universities and government labs through patent licensing every year. I will come back to the Bayh-Dole Act when we get to talking about the venture capital system, but for now it’s worth noting that some of the most important inventions in biotechnology, including the University of California patents on human growth hormone, the Cohen-Boyer patents on splicing recombinant DNA, and the Axel patents on cotransformation, were all filed before the Bayh-Dole Act was passed. Of course many other important biotechnology inventions, including mRNA vaccines and CRISPR, have been invented since.
Patents in the 1990s: Treasure Hunting
During the 1990s, I was a witness to the impact of the institutionalization of patents. While I was still a kid at the time, my late father was serving as an in-house patent attorney at IBM’s Almaden Research Center in San Jose (or “ARC” as it was known then). A patent on carbon nanotubes my father prosecuted during this period ended up being named one of IBM’s top ten patents. ARC at the time employed hundreds of Ph.D. scientists doing cutting edge research that was more basic than applied. I am aware of at least one Nobel prize (to W.E. Moerner) that resulted at least in part from work done at ARC during that period. I visited many of the labs on site, including Don Eigler’s lab, where IBM had been spelled out with 35 xenon atoms. As a boy growing up in a suburb of St. Louis, I remember reading in textbooks that we knew atoms existed even though we had never seen an atom before. Now not only were we seeing atoms, we were moving them around, spelling things out with them! The early exposure I had to research through visits to my father’s office led to a fascination with quantum mechanics, which continued through an undergraduate degree in Physics at UCSD, where I also served briefly as a volunteer in W.E. Moerner’s lab. W.E., along with many other scientists at IBM Research, had moved from industry to academia during the 1990s. They had many reasons to do so, including the slashing of R&D budgets at the largest R&D labs (IBM and AT&T), and the promise of greater freedom to publish and pursue more basic questions of science at universities. The existence of the Bayh-Dole Act and the potential to earn at least some money through a share of the royalties on their inventions through patent licensing certainly provided some additional incentive for scientists to leave corporate R&D for academia, and there are tenured professors at research universities around the country, such as strawberry geneticist Douglas Shaw, who have earned millions through sharing of patent licensing royalties to their inventions. But as explained in more detail below, equity appreciation in venture capital-backed startups has far outstripped the value of royalty sharing, even for university faculty.
While scientists were migrating from corporate R&D labs to startups and universities, CEOs and Boards were looking upon their patent portfolios in a new light. The 1990 verdict in Polaroid was a rising sun, shining light onto the potential for their patent portfolios — many of which had been accumulating dust for decades — to contribute to both top and bottom line, and with huge profit margins compared to lines of business that required capital investments in land, tools, materials, and an army of labor. Even as it cut back on the budget for its R&D labs, IBM reported billions in revenue licensing its patent portfolio in its financial statements in the late 1990s. Yet it’s important to note that much of that licensing revenue came in through deals that also included the purchase of IBM hardware or services, or licensing of IBM enterprise software. It’s important because selling a patent license when all the customer is getting in return is the ability to do what they had already been doing is very different from selling a patent license along with hardware, software, and services that the customer wants.
Successes like IBM’s were catching the attention of business leaders in many different industries. Simultaneous with these trends in patent law was the rise of the world wide web and the first wave of web startups. There was a sense in the air that the intangible value of the “new economy” had somehow transcended the tangible and boring factories and labor of the old. Optimism about the patent system may have reached its peak around 1999 when Rembrandts in the Attic was published by the Harvard Business School press. As the Amazon review explains:
If you think patents are just about protecting inventions such as the film projector, you're missing the big picture. Now that ideas can be protected—for example, Priceline.com's business model—patents can be wielded to intimidate competitors, uncover their strategies, capture market segments, and, for many companies, generate millions in licensing revenues.
The patenting of ideas and business models may seem a far stretch from software used to control rubber curing, and indeed it was. But the Federal Circuit in State Street Bank (1998) had ruled that a claim to a system for managing mutual fund assets in accordance with IRS regulations was patentable, an opinion widely understood to render business methods in general eligible for patenting so long as they met other requirements (including novelty and non-obviousness).
Outcomes like the 1990 verdict against Polaraoid had kicked off a treasure hunt for value hidden in patent portfolios, the reigning metaphor for patents being the valuable heirlooms that had been left in the attic too long and forgotten. Like antique dealers on the Antique Roadshow, patent lawyers who had been left alone to work in their niche for decades were suddenly celebrities, commanding higher hourly rates and unable to cope with client demand. Sleepy patent boutiques started to get snapped up by large, general service firms, which saw the revenue to be gained not only from advising clients on patent prosecution and licensing, but also on litigation and appeals. By the end of the decade, a patent practice was a “must-have” for any general service firm that presented itself as having a national presence.
The 1990s might also have been the best decade for a software startup to rely on patents in defending itself from large incumbent software giants. My late uncle was a VP of Sales at Stac Electronics when Bill Gates approached its CEO in November 1992. Stac had been founded by a group of engineers from Caltech where Doug Whiting, the CTO, had been a valedictorian. In a pivot, what began as a consulting shop turned into a product for data compression. At the time, hard drives stored 10s of megabytes, and fast, lossless data compression was a magical way to make more out of less storage capacity. When Gates approached Stac’s CEO in 1992, Microsoft’s flagship product was MS-DOS, but a competitor had emerged in DR-DOS, which was rapidly eating up market share. A key feature of DR-DOS was compression, which had been licensed from what Doug Whiting told my uncle was a “clever, albeit undisciplined” group of engineers at a company called Addstor in Europe. Gates wanted compression in MS-DOS, and he could see Stac had the best compression software. But after months of negotiation the deal fell apart. The manager who had been negotiating the deal left Microsoft, and the new manager offered a one-time $250,000 royalty and the option to do two mailings to MS-DOS customers. “The product we choose will be the standard,” Stac was informed. “Take it or leave it.”
Stac didn’t take it, and Microsoft bought another startup called Vertisoft, which offered a slower, buggier compression software, and shipped that with its next beta of MS-DOS. The development community squawked, and lo and behold when the next beta was released, the software had been fixed. It is likely that nobody except the engineers and business people at Microsoft who were involved will ever know exactly what happened, but as Stac’s engineers probed deeper into the product, what they found is that much of the Vertisoft code had been replaced with code that looked remarkably similar to Stac code. Doug and his team were of the opinion that the Microsoft engineers had made a managed copy of the Stac code that Microsoft had obtained during the due diligence phase of their failed negotiations. What could Stac do? Fortunately for Stac, they had just gone public and had $35 million in the bank. They went out and hired Morgan Chu, brother of Nobel laureate in Physics Steven Chu, and sued Microsoft for patent infringement. Microsoft responded as you might expect, with counterclaims that threatened not just Stac, but their mutual customers. Microsoft also seemed to control public perceptions, loudly accusing Stac of infringement (of patents Microsoft had just acquired from yet another startup based in New Zealand). In private, many in the industry expressed their support for Stac, but public support was more limited. Nobody could afford to burn bridges with Microsoft. A climax was reached in a $120 million verdict for Stac in March 1994, but that wasn’t the end. Microsoft had won a counterclaim against Stac — not for patent infringement, but for unauthorized use of the Microsoft API. Both sides had the potential threat of injunctions. Stac played its hand here well: millions of units of an infringing version of MS-DOS had already shipped all over the world. Stac went to the largest OEM customers and offered a license. If they didn’t agree, they would be enjoined from shipping their PCs. Microsoft tried releasing an updated version that didn’t include compression, but it was too late. Some of the smaller OEM customers were happy that Microsoft had lost and agreed to pay Stac for a license, planning to announce that they were selling the only “legal” PCs on the market. But most, of course, were not. Stac was asking for hundreds of thousands of dollars for software that the OEMs had already paid Microsoft for dearly, and the OEMs wanted Microsoft to make Stac go away. Mike Maples (senior, not junior) called Stac’s CEO and a deal was hammered out: Microsoft made a $40 million investment in Stac and paid $43 million in royalties at a rate of $1 million per month for 43 months. The patents were cross-licensed and all litigation dropped. At least for Stac in the 1990s, the patent system had sort of worked the way it was supposed to. Which isn’t to say it was easy.
Patents in the 2000s: Patent Trolls Turn Pro
In the early 2000s, just before September 11 to be precise, I got my first job in patent law. Having recently been married and earned a Master’s degree, I was unsure about spending the next decade in grad school necessary to earn a Ph.D. My wife was in law school, and it was through her classmates (not my father!) that I learned how I could dip my toes in the water of patent law without actually becoming a lawyer. With the help of my wife — who, remember, was in law school at the time — I typed up, stuffed, and mailed about 150 cover letters and resumés to law firms small and large all over the Chicagoland area. In the end, I got three interviews, the first turned into a rejection because I was from California and they thought I would move back. The second turned into an offer that I accepted. The third came after I had already accepted the offer so we’ll never know. And thus I was hired out of grad school to work as a technical advisor and patent agent at a general service firm in Chicago. The partner who hired me had done the same thing after earning his Master’s degree, understood what I wanted to do, and helped me learn the ropes. It was a great deal for both of us because he got lots of work at a low hourly rate and I got a whole new set of skills and experience.
Patent law can be a lot of fun. What my father never really explained to me, but my first manager explained very well, is that the name of the game is the claim. For the uninitiated, a patent claim is a numbered paragraph that comes at the very end of the patent. Although the full set of rules for interpreting claims is complex and arcane, it is often reasonable to interpret a patent claim as a checklist of things (in the case of a system claim) or steps (in the case of a method claim). For the lawyers who get patents — the patent prosecutors — a big part of the fun of the game is in scoping the claim to the precise things (or steps) that are necessary to the invention without sweeping in anything extraneous or old. If you claim what is extraneous, you get a claim that is easy to avoid infringing. If you claim what is old, then at least in principle you shouldn’t get a patent on the claim. Claim drafting is an art which, practiced at the highest level, is not unlike the construction of a physical model or mathematical proof. To this day my favorite patent lawyers are the ones who most enjoy this part of the work, although success in getting and enforcing patents requires skills that range far beyond claim drafting alone.
And so it was that in 2002, after drafting patent applications to protect a new digital in-flight entertainment system, I got pulled into a lawsuit brought by the same client against a competitor who had hired an employee away, the employee having emailed key technical specifications for the system to his new work email address. (Kids don’t try this at home.) The result was a trade secret misappropriation lawsuit with patent counterclaims, and I was there in the boardroom as the settlement was negotiated. The litigation did make it into the discovery phase (in which 100s of boxes of photocopied documents were sent to my firm for review), but it was settled relatively quickly. In the 2020s this would surely have turned into a major fight (because who cares about facts these days?), but this was the 2000s, and back then if you were a defendant in a case like that you settled.
I was hooked. Learning new technology and drafting claims is fun, but patent litigation is sexy! Tense negotiations over millions of dollars! Existential threats to businesses worth even more! The same set of skills I had been using to draft claims were even more valuable in patent litigation. So with a fond farewell to the cordial group of lawyers with whom I had worked in Chicago, I went back to law school and California. When I interviewed again, this time in law school, instead of patent prosecution and transactional work, I went straight for a job doing patent litigation at a litigation boutique with a strong patent litigation practice.
The mid-2000s were a good time to be getting into patent litigation. In the aftermath of the dot com bubble, the number of lawsuits filed and defendants accused of patent infringement had exploded. To a significant extent, these lawsuits were being filed by companies that did not themselves make or sell anything — a practice that came to be known, pejoratively, as “patent trolling." The practice had started with pioneers like Jerry Lemelson in the 1980s and 1990s. By 2000, the business model had been tested and refined and its profitability established. Among other advantages, a patent plaintiff who does not themselves make or sell anything (less pejoratively known as a “patent assertion entity” or “PAE”) does not have to worry about counterclaims. Being a PAE, at least back then, was also cheaper than being a patent defendant. While plaintiffs are required to do some work in order to bring a complaint for patent infringement, once that relatively low threshold is met, the burden shifts to the defendant to produce documents and testimony showing that they do not infringe, that the patents are invalid, or both. The asymmetry of risk (no ability to counterclaim the plaintiffs) and costs (fees and expenses for discovery are more expensive for defendants) presented a lucrative opportunity for patent plaintiffs. Valid or not, infringed or not, for many defendants the risks and costs of defending a lawsuit were at least an order of magnitude larger than what most plaintiffs were asking for a license to settle. A settlement might not be more than tens of thousands of dollars per defendant, but the lawsuits were being brought against dozens of them at a time. Entrepreneurial plaintiffs' lawyers in Texas were making millions on patents that had never been tried. Getting cases moved out of Texas was difficult. After more than a few settlements with the same plaintiffs’ lawyers, defendants were starting to feel like ATM machines, and stopped settling. There was more than enough patent litigation work to go around.
By the mid 2000s, the activity of PAEs was starting to attract more attention. An in-house lawyer at Cisco started blogging anonymously as the Patent Troll Tracker, documenting the activity of some of the serial patent plaintiffs. This ended with a famous plaintiff lawyer from Chicago (who has since passed away) offering a bounty for his identity, which was never paid because the in-house lawyer revealed himself. Cisco let him go, but also indemnified and defended him in a defamation suit brought against him and Cisco.
One cannot talk about the patent system in the 2000s without talking about the largest PAE of them all: Intellectual Ventures. Intellectual Ventures’s co-founders were people who had worked at companies that were becoming PAE targets, including former Microsoft CTO Nathan Myhrvold and former Intel Legal VP Peter Detkin. At least one version of their vision for Intellectual Ventures was the reduction or avoidance of patent litigation by acting as a market maker, offering both patent owners and potential licensees a more convenient and efficient way to transact. Structured as a venture capital fund, Intellectual Ventures deployed billions of dollars of capital committed by both strategic and financial investors into buying patents off the secondary market, many of which might otherwise have been asserted in lawsuits by plaintiffs’ lawyers. Over the course of the 2000s, tens of thousands of patents were accumulated. At the same time, a team of lawyers and business people went to work signing up licensees, following an approach not dissimilar from the approach taken by IBM in the 1990s. Up to a point, this worked. Unlike IBM, Intellectual Ventures wasn’t selling software along with its patent licenses, but the sheer size of the portfolio was sufficient to convince most potential licensees that there was no way to avoid at least some liability. But by the end of the 2000s, the winds had begun to shift and fewer potential licensees were willing to pay upfront for a license to patents rather than pay to defend themselves in litigation. Finally, Intellectual Ventures started filing lawsuits. On the same day in December 2010 three lawsuits were filed, each one against multiple defendants in three different industries: security software, standard and flash memory, and field-programmable gate arrays. While the outcomes of the lawsuits and the performance of Intellectual Ventures funds is not public, some sources have reported that the funds have failed to meet their targets. More below on the legal reforms in the 2010s that helped determine their fate.
Intellectual Ventures was the biggest, but the 2000s had other large PAEs, like NTP, which licensed its portfolio of mobile patents to then industry leaders, including Nokia, Palm, and Research in Motion (or “RIM,” maker of the wildly popular BlackBerry mobile device), along with the major telecoms (Verizon Wireless, AT&T, Sprint, and T-Mobile). RIM went to trial and lost, with a verdict of willful infringement. The jury awarded $33 million, but the judge increased the award to $53 million, ordered RIM to pay NTP’s legal fees, and issued an injunction that threatened to shut down BlackBerry systems throughout the United States. RIM finally settled the case for a lump sum of $612.5 million. I don’t know the history behind the NTP patents as well as the history behind the Stac patents, but here again the story is that the patents originated at a startup called Telefind, which tried but failed to license the industry before bringing its lawsuits. From what I can tell, and unlike the Stac case, RIM at least was not suspected of copying anything from NTP directly, although other defendants may have been. NTP instead sought a royalty from RIM and everybody else in the industry simply because they had been first to get the patent claim to what at least RIM appears to have independently developed around the same time. In fact, it’s not even clear that NTP was actually the first because some of the NTP patents were found invalid under a procedure for reexamination of issued patents revamped by legislation passed in 1999. I doubt that anybody at NTP is bothered by whether they get the historical credit for having invented the technology, but this seems like an important shift from the circumstances facing Stac when its deal with Microsoft fell through ten years earlier. Instead of patents being used to prevent or punish copying, they were being used to charge a royalty to everybody who ended up within the scope of the claims, regardless of whether they had learned anything from the inventors or their patents.
“Oh, one more thing.” In 2007, Apple launched the iPhone, turning the smartphone industry and later the computer industry upside down, setting the design patterns for the billions of smartphones that have sold since then. While touchscreens had been tried before, including by Apple itself, in 2007 the most popular designs for smartphones included a keyboard. After the iPhone launched and customers experienced for themselves how well the touchscreen and high-resolution display worked together, every smartphone device maker needed to offer their own version. Here again only insiders are likely ever to know the full story, but after a tense meeting between Steve Jobs and then Apple Board member and Google CEO Eric Schmidt in March 2010, Apple went “global thermonuclear” on Android, filing lawsuits all over the world. For some observers, this was a departure from precedents for company vs. company patent lawsuits. In most cases, patent infringement lawsuits had been brought by a smaller competitor against the company with market share. If not the first, these lawsuits were certainly the largest scale patent infringement campaign ever launched by a company with market share. I have no personal knowledge of what happened in these cases, but the explanation seems pretty clear: Steve Jobs felt like Android was a copy of iOS. Compare this to Steve Jobs’s approach to licensing patents from Qualcomm. Jobs and Qualcomm CEO Paul Jacobs apparently had a cordial relationship, with Apple paying $7.50 per iPhone for Qualcomm’s patented chips. It was only after Steve Jobs died and Paul Jacobs stepped back from his role as CEO and their deputies took over that things got ugly. Beauty is in the eye of the beholder when it comes to patents, as it is for everything else.
Another interesting development around this time involved Oracle and its founder and CEO Larry Ellison. Larry Ellison and Steve Jobs were close friends until Steve’s death. Oracle, which happened to complete its acquisition of Sun in January 2010, sued Google, accusing Android of copyright and patent infringement of Sun’s Java APIs in August 2010. The case went through several trials and appeals before an opinion issued from the Supreme Court in April 2021, finding in favor of Google. During the litigation Oracle had dropped its patent infringement claims and stuck with copyright infringement of the Java API. The Supreme Court ruled that Google’s copying of the Java API was fair use. This was an important precedent not only for Android, but for the entire open source ecosystem, which had been concerned that by extending copyright to the more functional aspects of an API, the Supreme Court might enable copyright owners to accuse any company that had replicated any part of an API, even if only to ensure interoperability. Oracle and Google are much different companies than Microsoft and Stac, but it’s interesting to compare the decision here (i.e., no patent infringement and no API copying) against the decision in Stac v. Microsoft (i.e., patent infringement by Microsoft and API copying by Stac). Was Oracle’s decision to sue Google for patent infringement due in part to Larry’s personal loyalty to Steve? I’m sure that wasn’t the only motivation. Thanks to its database-centric business model, Oracle was missing out on most of the exploding revenue from smartphones and licensing Android was one way to get a piece of the action. But I’m sure it didn’t hurt that Steve hated Android.
Patents from 2010 to Present: Software Eats the World, but Spits Out the Patent System
To recap, by 2010 the names from the software industry, which in 2022 we recognize as those of the largest companies in the world, had recovered from the dot com bubble and started what seems like an inexorable march to global (or at least national) dominance. It wasn’t obvious in 2010 that any of these companies would one day have a market cap of over $1 trillion. But there were enough early hints that when Netscape co-founder turned venture capitalist Marc Andreesen wrote in August 2011 that “software is eating the world,” its appetite looked unquenchable. Not every bet Andreessen Horowitz has made since then has turned out well, but even a glance at their exits should be enough to demonstrate how well his celebrated words have been borne out over the last decade. I do not know of an industry whose growth exceeds that of the software industry over the last decade.
Meanwhile some of the largest new software companies, including Google, had relatively few patents. And so it was in July 2011 that Google found itself bidding pi billions of dollars at an auction for the Nortel patent portfolio. Unfortunately for Google, they were outbid by a syndicate that included Apple, Microsoft, and Research in Motion. If you’ve been paying attention up to this point, you can sort of imagine some reasons why these companies might have wanted to keep these patents away from Google. Regardless of the reasons, they had more patents and Google still had few patents. No matter. Google went out and bought Motorola for $12.5 billion in August 2011. The deal included a portfolio of 14,600 issued and 6,700 pending patent applications. Motorola was also an operating business, so Google wasn’t paying only for the patents. But were the patents an important part of the deal for Google? One imagines so.
At this point the battle lines were drawn, and the smartphone patent wars began in earnest. Everybody wanted a royalty from everybody else, and nobody wanted to pay. The ensuing fights among device makers and suppliers are still ongoing, with no consensus emerging over whether or how much in royalties should be paid for patents, including patents infringed by industry standards (i.e., “Standards Essential Patents” or “SEPs”) that are subject to a commitment to licensing on terms that are “fair, reasonable, and non-discriminatory” (“FRAND”). There isn’t even agreement that patents subject to a FRAND commitment should not be eligible for the remedy of injunctions. Many of the patents covering 4G technology have been cross-licensed, but the licensing of 5G technology remains very much in play in 2022.
So what happened to the PAEs? The last decade must have been a field day for them too, right? Not exactly. Patent law has changed more in the last ten years than it has in any decade since the 1980s. First, in 2013 the America Invents Act was passed, moving the United States away from a first-to-invent and toward a first-to-file system, and revamping the procedures for challenging the validity of issued patents before the United States Patent & Trademark Office through what are called inter partes review proceedings. The introduction of inter partes review, in particular, brought about a major change in the patent litigation landscape. By statute, a patent, once issued, bears a presumption of validity. A defendant who brings an invalidity defense must carry the burden of showing that the claims are invalid with “clear and convincing evidence.” This is a higher burden than the “preponderance of the evidence” burden that the plaintiff must carry in showing infringement of the same claims — something like 80% likely rather than 51% likely, although not the 99% likely “beyond a reasonable doubt” burden on the prosecution in criminal cases. With such a high burden of proof and the knowledge that an Examiner trained in science or engineering at the United States Patent & Trademark Office had allowed the claim, many generalist judges and juries have been (quite reasonably) reluctant to find that the Examiner and United States Patent & Trademark Office had made a mistake. Invalidity defenses were weak in district court. The introduction of inter partes review proceedings gave defendants a more viable mechanism for attacking the validity of issued patents by going back to the United States Patent & Trademark Office, presenting prior art that had not been considered before the patent had issued, and asking for a second opinion. Even better, many district courts will stay litigation pending the resolution of an inter partes review proceeding. What’s the point of hearing a case about infringement of a patent that turns out later to be found invalid? The pattern that has emerged in many PAE campaigns is for a single defendant or group of defendants to trigger an inter partes review of the asserted patents and then ask for a stay. The inter partes review process is supposed to happen fast, but it still ends up taking more than a year, and often many years, for these proceedings to be completed. Only then does the litigation in district court proceed, and only on whatever claims survive the review.
As if that weren’t enough for PAEs to deal with, the Supreme Court added rulings on fee shifting (making it easier for winning defendants to recover legal fees from losing plaintiffs), venue transfer (making it harder for plaintiffs to keep cases in Texas), and eligible subject matter (making it easier to invalidate software patents). The last ruling, in a case styled Alice v. CLS Bank at the Supreme Court, seems to have reduced the value of software patents to a small fraction of what they were worth, in part because the ruling is so fuzzy that there is often disagreement even among patent law experts over whether a given claim falls inside or outside the scope of what is eligible. Software ate the world, and Alice ate software patents. The consequences for software patent valuations have been dramatic, and not just for PAEs. Had Stac brought its claims of patent infringement against Microsoft post-Alice, it is questionable whether there would ever have been a trial. But the reforms accomplished their purpose to the extent that patent lawsuits have dropped by about half from their peak when the first reforms were enacted in 2012.
What about operating companies suing operating companies? Yahoo sued Facebook in 2012 as it was preparing to IPO, but that lawsuit settled quickly after Yahoo’s CEO was ousted by the Board for lying on his resume, and there really hasn’t been a big patent infringement lawsuit brought by a software company against a software company since. One potential explanation for that is that the patent reforms that were effective at discouraging PAEs were effective at discouraging competitor lawsuits, and there is probably something to that. Another is that software companies have found other ways to deal with competitive threats, including acquisition of venture capital-backed startups and open source licensing, which are next up for discussion.
Before moving to the parallel story of venture capital, let me summarize the last five decades of patent law. The institutionalization that took place in the 1980s enabled the powerful struggles and billions of dollars in royalties paid in the 1990s. The burst of the dot com bubble changed things. After a proliferation of lawsuits brought based on patents that had originated with startups that went bust in the dot com bubble, the software industry got tired of the game, and advocated for and got patent reforms that made being a plaintiff harder. Hardware companies, especially mobile device makers, have kept their hand in the game. But by 2020 it had grown difficult for software companies to rely upon the strategic value of patents the way that software companies like Stac had in the 1990s.
The most important observation I have to offer about this story of the patent system over the last five decades is that the work of an inventor is not more fun in 2022 than it was in 1980. For inventors who had an interest in working independently, doing research and development at universities or public and private labs, things seem to have improved modestly through the 1980s and early 1990s. That trend of improvement seems to have ended by 2000. In the 2000s, PAEs started licensing campaigns, many of which were based on patents that had originated with inventors at universities, public or private labs, and startups. Yet few inventors saw any rewards from these licensing campaigns. Rather, the rewards went more and more to lawyers and investors who had no connection to the research and development behind the patents. Is it any wonder that software inventors started to lose interest in patents? The game isn’t fun anymore. Meanwhile there were new games in town.
The Venture Capital and Open Source Systems from 1980 to 2022
Venture Capital and Open Source in the 1980s: Carving a New Career Path
Venture capital wasn’t invented in the 1980s. Some accounts trace the history back to ancient Rome, where a rich man named Crassus financed a fire department that would offer to buy the building when they showed up and leave if the owner refused their offer. That may be a fine analogy for private equity more generally, but joint stock companies in Europe in the 17th and 18th century seem to me more analogous to startups. In any event, I’m not sure anybody knows who raised the first venture capital fund in Silicon Valley, but everybody agrees that Arthur Rock was one of the first. After meeting eight employees from Shockley Labs in Palo Alto in 1957, Arthur tried to help them find a new employer, and when that failed convinced them to start their own company with funding from Sherman Fairchild, the owner of Fairchild Camera & Instrument. There were precedents for this even in Silicon Valley, but for good reasons the founding of Fairchild Semiconductor is often identified with the origin of Silicon Valley. Robert Noyce, one of the founders of Fairchild Semiconductor (and in 1968 Intel) helped set the pattern of Silicon Valley startup culture that remains to this day — think flat hierarchies, cubicles, casual dress, management by walking around, and status based on having built cool things rather than ostentatious displays of wealth. Nonetheless as wealth started to accumulate among the founders and early employees of Fairchild and its progeny, these founders and early employees started to form limited partnerships for the purpose of investing together in startups. Don Valentine who founded Sequoia Capital in 1972 had been a salesman at Fairchild Semiconductor. Eugene Kleiner who founded Kleiner Perkins in 1972 had been a founder at Fairchild Semiconductor. Venture capital was born. And thanks to the exponential growth of compound interest, it didn't take long to attract interest from the rest of the financial world.
Jerry Neumann did a fantastic job telling the story of venture capital in the 1980s on his blog in 2015, so if you’re interested in a more detailed account you should go and read his story to get the full scoop. I wasn’t around in Silicon Valley until the end of the 1980s and had no personal connections to anybody in the industry until much later, so there’s nothing personal I can add. In a nutshell, the 1980s were better than the 1970s, with lots of Initial Public Offerings (“IPOs”). Apple kicked things off with its IPO in December 1980. Amgen, Compaq, and Lotus followed in 1983, and Microsoft, Oracle, Sun, Adobe, and Cypress Semiconductor all in 1986. Electronic Arts squeezed into the 1980s with its IPO in 1989. As Jerry explains well, the 1980s were not uniformly great for investors in venture capital funds, but there is no question that by the end of the 1980s a new career path had been carved out for engineers, scientists, and salespeople: found a startup with venture capital funding, grow it over the course of a decade or more to an IPO or acquisition, then either stay and keep running the company or (more likely back then) hand off the reins to a professional manager and move onto the next startup. The path got rockier in the late 1980s and early 1990s as the larger economy sputtered and stalled out, drying up venture capital funding. But the path was still there, ready for traffic as fresh capital and new opportunities presented themselves.
Free software advocates also began carving out a new career path for software developers in the 1980s. Following the release of software in proprietary and closed-source form by IBM and AT&T in 1983 and a lawsuit brought by Apple for the copying of binary code onto machines sold by a competitor, Richard Stallman announced the GNU operating system. Following early experiments with copyright notices for Emacs in 1985, GNU released the Gnu General Public License (“GPL”) 1.0 in 1989. A few years later, a recent college graduate in Helsinki who had built his own version of the Unix operating system decided to release the source code for that operating system to the public under the GPL. Linus Torvalds still needed a day job when Linux was first launched, but that was going to change.
In the 1980s, there was no such thing as “open source.” As explained below, the term wasn’t coined until 1998. But even in the 1980s, the contours of a new career path for software developers had begun to take shape: Publish your code under a permissive copyright license and let a community grow around the code.
Venture Capital and Open Source in the 1990s: The Boom
The 1990s got off to a slower start. A mild recession was followed by the Gulf War in 1991. There were a few tech IPOs, including Qualcomm in 1991 and Intuit in 1993. Then Netscape had its IPO in August 1995, about a year after it was founded. Debuting at $28 per share, Netscape stock went on a tear, rising as high as $174 per share before the end of 1995. Suddenly everybody was talking about the world wide web. I was finishing high school around this time and the trainer who had been helping the athletes with physical therapy (Russ whose last name I have forgotten) left in the middle of the school year to join Netscape. My twin brother and I played water polo, and he set up a web page about water polo and then submitted it to http://akebono.stanford.edu/~yahoo, which at the time was operating out of a trailer on Stanford’s campus. He got an email back from Jerry Yang, his page went up in the Yahoo directory, and he started getting email from other water polo players all over the world. I don’t have any comparable stories from the period. I had spent my middle school years dialing into Bulletin Board Systems with my 2400 baud modem, downloading games like Scorched Earth and playing around with Turbo Pascal. In high school, I found that playing water polo and dating were more fun as hobbies. I still had a late 1990s startup experience working at a company called Vividus the summer of 1996, before I left for college at UCSD. The founder was a charismatic and optimistic man who had earned degrees in theoretical physics from Harvard before getting an MBA at Stanford and working jobs at HP and Apple after graduation. He started the company with the vision of giving kids tools to play on the web. A beautiful vision, but not especially lucrative. My memories of the crew in the office and the feeling of being not so far from the edge of chaos are still vivid today. The company sold shortly after that summer, and by then I had gotten more and more interested in studying physics. I was always at ease with computers, but UCSD was a little more isolated from the boom in Silicon Valley, and I somehow managed not to get sucked into any startups after that summer.
I was one of the few. After Netscape’s IPO, the number of startups grew and grew. Working at startups, which in the past had been a less conventional and risky career path, suddenly became sexy. And the IPOs followed: E-Trade, Infoseek, Lycos, Ubisoft, Yahoo (1996); Amazon, CarMax, Ciena, EarthLink, FranklinCovey, Rambus, TiVo (1997); Arm, BlackBerry, Broadcast.com, DoubleClick, EBay, Inktomi, MicroStrategy, MIPS Technologies, NTT Docomo (1998); Akamai, Ask.com, Brocade, Charter Communications, Expedia, F5, Juniper, Nvidia, Prodigy, RedHat, TIBCO, Webvan (1999). Estimated total assets under management at venture capital funds in the United States had gone from about $30 billion in 1990 to about $230 billion in 2000.
I won’t recapitulate the many stories that could be told of the “irrational exuberance” of this era. Even for the most optimistic, many of the “business plans” that were getting funding seemed questionable. Toward the end, there were very few reasonable people who believed that the way things were going would last. The question wasn’t whether it would last, but how and when it would end. Yet the lure of getting rich overnight working for a startup was enough to pull engineers and scientists from all over the world into Silicon Valley. Working at a startup was now a thing that your parents had heard of, although not necessarily something of which they would approve.
Meanwhile the popular embrace of the internet and the web changed how software was distributed overnight, which meant that the copyright licenses that had been relied upon by free software advocates in the 1980s had to change too. By some accounts, the term “open source” was coined on February 3, 1998, after the announcement that Netscape was releasing its source code. Some software developers felt that the terms of free software licenses like the GPL were not business-friendly enough in the sense that the licenses could be used under certain circumstances to force a business to disclose proprietary code. Other copyright licenses, including the Apache License, which was used with releases of the Apache HTTP Server, began to catch on. The term “open source license” eventually came to be defined by the Open Source Initiative — also founded in February 1998 — as a license that complies with a set of criteria including freedom to redistribute or modify source code under the license. In March 1999, a 501(c)(3) organization was incorporated to support a number of open source projects, including the Apache HTTP Server. Linus Torvalds still had a day job in 1999, but at least as of March 1999 there were eight software developers working full-time on open source projects at the Apache Software Foundation. Working on open source software as a career was now a reality.
Venture Capital and Open Source in the 2000s: The Bust
At the 1999 Allen & Co. meeting in Sun Valley, Warren Buffett laid out the situation in the stock market. He acknowledged that decreasing interest rates and increasing corporate profits had made equity an attractive investment in the 1980s and 1990s. But, he added:
These dramatic changes in the two fundamentals that matter most to investors explain much, though not all, of the more than tenfold rise in equity prices—the Dow went from 875 to 9,181— during this 17-year period. What was at work also, of course, was market psychology. Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. Like Pavlov's dog, these "investors" learn that when the bell rings—in this case, the one that opens the New York Stock Exchange at 9:30 a.m.—they get fed. Through this daily reinforcement, they become convinced that there is a God and that He wants them to get rich.
After raising interest rates six times in early 2000, the boom turned into a bust. The NASDAQ finished the year down about 40%, and the IPO market was almost closed in 2001 and 2002, leaving merger or acquisition with a public company the only alternative for venture capital investors to get to liquidity. There were a few big technology deals in the early 2000s, including HP’s acquisition of Compaq and eBay’s acquisition of PayPal in 2002. But for the most part M&A at least in the early 2000s wasn’t providing venture capital fund investors liquidity to make up for the lack of IPOs. From this you might have inferred that total assets under management at venture capital funds had also declined. If so, you’d have been wrong. Assets under management were basically flat over the course of the decade, holding at around $230 billion through the end of the decade. The 2000s were not necessarily a bad time to be a venture capitalist, even if your portfolio was imploding!
The 2000s were also the time when venture capital and patent law met, both for investors and for me personally. I’ve told the story of how Intellectual Ventures raised capital to buy patents as a venture capital fund above. For me personally, venture capital and patent law met when I took a job as a Chief Financial Officer at an early stage venture capital fund in San Francisco. The first-hand experience for me was not unlike the startup experience I’d had in high school, but with much fancier offices. Recall that in law school I had decided to work at a litigation boutique and do patent litigation. The work was fun and the money was great at the litigation boutique, but expectations for my annual billable hours had gone from the 1750 minimum required at the firm I had worked at in Chicago to something closer to 2400, and at times I felt like I was getting hazed. Having been married for over 6 years and about to turn 30, I took the job at the venture capital fund, figuring it would be a good way to learn more about business and investment if nothing else. I was not wrong about either of those things, although with the benefit of hindsight I can say that I did make a career in patent law much harder for myself than it might otherwise have been by stepping off the patent law career track when I did. The fund I worked for has been successful since then, but I’m not going to name it because it would only distract from the purpose of this essay. What matters for this essay is that I learned how venture capital funds were structured and how venture capitalists got paid because I helped them through the negotiation and close of an institutional fund while we were also closing deals with a number of startup companies and finding liquidity through a few acquisitions. It was a firehose, but the experience opened my eyes to the much larger world of capital markets. The major patent litigation I had been working on prior to joining the venture capital fund eventually settled for about $100 million after years of litigation between a research university and a global technology company. The venture capital fund I saw raised closed at over $200 million after about a year of fundraising. The partners’ expenses were paid by their investors, including an annual management fee of more than 2% of that $200 million and a carried interest of 20% of whatever profits they returned to their investors. What a business! Even if you made nothing for your investors, you got to take home whatever was left of $4 million you got every year after paying for the lease on your office and the salary of a few professionals (like me) who helped run the office.
In early 2008, after one of the partners agreed to back me if I could find another investor, I gave up my job as CFO at the fund in order to raise my own venture capital fund to invest in university patents. The observation I made then was that the most valuable patents were originating at research universities. The engineers and scientists that had been at places like IBM and AT&T labs had moved to research universities, and any patents filed for their inventions would have to be prosecuted and licensed by the research universities. A casual comparison of the number of patents filed versus the number of papers published at these research universities showed that an enormous number of patents were never being filed, much less licensed. The business model for what I called Venetian Capital was to bundle up patents on similar subject matter from research universities across the United States and then offer the same for licensing to large corporations. Sound familiar? Around the same time I started working full-time on fundraising for Venetian Capital, Intellectual Ventures closed its second fund. I spent over six months networking with investors and technology transfer managers at research universities, including Stanford and Berkeley. In the end, it was a now-retired manager of the Stanford Office of Technology Licensing that helped me to see what was wrong with my business model in a way that nobody else could. Stanford, she explained, didn’t want to push harder for more patent licensing. They were making more money from alumni donations than they were in patent royalties. What she didn’t say, but which I had already learned first-hand, is that they were making even more money than either of those through the venture capital investments of their endowments.
Now I saw the matrix: The venture capital system and patent system were functionally alternative mechanisms for engineers and scientists to make money and become famous. Top research universities, whether intentionally or not, had already decided which alternative they favored. These same research universities were not going to encourage more patent prosecution and licensing unless that was going to encourage more venture capital-backed startups. At least from the venture capitalists who were funding software startups the answer was clear: more patents and patent licensing were not wanted. The only thing that having more patents was going to do was bog them down in patent licensing negotiations with the universities, eating up management fees, and distracting the startup founders from building things.
As I was having this revelation in late 2008, the global financial crisis was unfolding. I briefly flirted with the possibility of joining my competition at Intellectual Ventures, but ended up taking a job at the same firm I had worked at before law school, in a San Francisco office that had become part of the firm through its merger with a larger Philadelphia firm. My job has been patent law ever since. In hindsight, I’m not sorry that I didn’t stick with the business plan I had for Venetian Capital. There are funds out there that have emerged to do very similar things, but in every case their profitability depends upon a credible or actual threat of bringing lawsuits. I am not somebody who believes that lawsuits should never be filed. I am not even somebody who believes that patent lawsuits should never be filed. With rare exceptions, under the current patent system filing lawsuits against anybody who infringes a claim is legal, regardless of who it is or why they’re doing it. And if I were to represent a plaintiff, who better than taxpayer-funded research universities? But what I have learned about myself after many years of doing both transactional work and litigation is that I have more fun with the transactional work. Litigation is a zero-sum game. Transactional work, done well, is a positive-sum game.
How was open source affected by the dot com bust? The 2000s were the decade in which many people first heard the term “open source,” the decade in which working on open source full-time went from being theoretically possible to a day-to-day reality. This was true not only for Linus Torvalds, who quit his job at startup Transmeta to work full-time on Linux in 2003, but for thousands of software developers working on projects like Firefox, Wordpress, and — toward the end of the decade — Android and Chromium. What the success of the open source Linux-Apache-MySQL-PHP (“LAMP”) stack on the web had proved is that a healthy open source community around key platforms is necessary to exponential growth. Although unsurprising given how historical business models had depended on closed-source software licensing, incumbent software companies were slower to grasp the significance of open source, but even before the end of the decade had begun to reverse course. GitHub, launched in 2008, became a social network for software developers to share code and show off their skills on the web. For the first time in history, software developers could demonstrate their skills to potential employers without a resume, and many startups (and, increasingly, established larger companies) in the 2010s ended up staffed with software developers who had built popular open source projects, but had never earned college degrees. At the same time, more and more software was made available as a service over the web, avoiding legal worries about “viral” copyleft licenses that apply only when code is actually provided to users. The 2000s were the start of an open source boom that still hasn’t gone bust.
Venture Capital and Open Source in the 2010s: The Boom 2.0
It didn’t take very long for me to realize that there were far more employees working on open source than there were employees working on patents. Now if I had been a “normal” patent lawyer, I might then have concluded that software developers are communists or had been brainwashed by the open source community into believing that patents were evil. We were offering an incentive payment for any invention disclosure approved for filing as a patent application. Why would these software developers want to spend their time giving away their work for free? Fortunately or not, I was never really properly socialized into the profession. Although I love patent lawyers, deep in my heart I’m not sure I’ve ever really felt like I belonged among them. I understood without having to be told why the software developers were spending so much time on open source, and relatively little on invention disclosures: they could not do their jobs without it. Having built even the rudimentary websites that I had built, I had seen first-hand how impossible it would be for anybody to build any kind of software — at least any kind that anybody except they themselves could be expected to use — without using open source. I understood too the desire to contribute and publish open source. If the time required to fix a bug for everybody using an open source project was no greater than the time required to fix the bug for yourself, then why wouldn’t you contribute the bug fix? If nothing else, you don’t have to worry about fixing it again when the next version of the project is released.
It was around the time that I was having these revelations that ethereum launched. The bitcoin whitepaper had published in 2008, and by 2010 bitcoin was already on a trajectory of exponential growth. As fascinating as the blockchain and proof of work technology behind it is, bitcoin is limited to serving as a store of value. Ethereum, in contrast, represents a platform based on similar technology, but with smart contract functionality. With smart contracts, open source developers have been able to form decentralized autonomous organizations (DAOs), issue tokens, and bootstrap their way into operating independently. Most software developers who wanted to work full-time on open source in the 2000s had to wear a hair shirt. They could make enough to support themselves, but they were never going to get rich. That changed in the 2010s thanks to ethereum and other blockchain-based platforms. Software developers were making so much money and so fast through crypto, that even some people in financial services on Wall Street were starting to leave their posts to work in the field. This represented a complete reversal from the trend that had been in place at least since the end of the Cold War in the 1990s, when the mathematicians and physicists who had been working on defense and aeronautical technology started working as quants on Wall Street.
And how did the venture capital system fare in the 2010s? Recall that venture capital assets under management had grown from about $30 billion in 1999 to about $230 billion in 2000, and then stayed there through 2010. The 2010s were more like the 1990s, with assets under management finishing 2021 at just under $1 trillion. (Yes, you read that right.) What was driving growth in the 2010s? The same dynamics Warren Buffett described in 1999. Low interest rates, high corporate profitability, and extreme optimism. Even after the global pandemic struck in 2020, the extreme optimism seemed to have become a self-fulfilling prophecy, with over $500 billion raised in IPOs — enough to return most of the venture capital invested in the 1990s.
The different scale of venture capital in the 2010s required different types of investors. The Softbank Vision Fund and Tiger Global Management helped change the game of venture capital investing — and, in turn, the expectations of Boards for the founders and operators of venture-capital backed startups — by deploying $10s of millions into single rounds of even relatively early-stage startups. In many cases, these bets seemed prescient: ByteDance (TikTok), Compass, Flexport, FTX, Slack, Square (now Block), and Uber. In others, such as WeWork, the sense (at least in hindsight) is that Softbank wasn’t investing so much in promising visions of new technology as in charismatic founders. To be fair, that worked spectacularly well for the leader of Softbank, Masayoshi Son, when he invested in Jerry Yang & David Filo at Yahoo and Jack Ma at Alibaba. The question, which remains unresolved, is how well that approach to investing scales from $100s of millions to $10s of billions. Regardless of how the question is resolved, the fact remains that working at later stage startups in 2022 is little different from working at a large public company in the decades prior. Startups can now go from founding to valuations in the $10s of billions without an IPO thanks to the amount of money available for venture capital investing. If in the 1990s working at a startup became something your parents had heard of, and in the 2000s, working at a startup was something your parents wanted you to do, then by the 2010s, it was something the parents themselves were actually doing. Both the venture capital system and the open source system had evolved to the point where engineers and scientists didn’t need to explore alternatives for getting wealthy or famous. Everything they could want from a career was already there in startups and open source.
A thoughtful reader might wonder in response: Don’t startups file patent applications? The answer is "some." But as assets under management at venture capital funds quadrupled in the 2010s, the number of patents issued at the United States Patent & Trademark Office grew by about 25%, not as much as you might expect given the explosion in the number and size of startups. Why aren’t they filing patents? Part of the reason is that, as explained above, software patents got much weaker in the 2010s. Part of the reason is that in 2016, a Defend Trade Secrets Act was passed, giving the owners of proprietary and confidential technology federal claims against those who steal technology, including technology that could have been patented. Trade secrets cost nothing to maintain except the “reasonable measures” taken to keep the trade secret and never expire. The only way you lose a trade secret is if the trade secret becomes public. By keeping technology developed proprietary and confidential, startups can avoid the overhead of a patent program while maintaining the option to bring trade secret claims should key employees later leave for a competitor. Trade secret claims are harder to prove and nastier to former employees, but to the extent that technology embodied in products and services made by the startup is not easily reverse engineered, maintaining trade secrets also increases their value to potential acquirers, and talent acquisitions indeed became an important alternative to IPOs for venture capital-backed startups in the 2010s — to such an extent that government regulatory agencies have begun to question whether these acquisitions might not be unhealthy for competition. For decades patent and antitrust scholars have debated whether patents are pro- or anti-competitive. At least compared to trade secrets in 2022, the answer seems to be pro. Employers, like the universities where many of the best engineers and scientists work, can coax and cajole. But there is no way to force a person to share what is in their mind. The engineers and scientists who have invented the technology that in 2022 many of us take for granted have always had it in their power to decide to whom they would give their ideas. For many software developers in 2022, there is no way for the rewards and recognition offered by the patent system to compete with the rewards of startup equity or the recognition of contributing to open source.
The purpose of this essay is to diagnose problems with the patent system as it exists in 2022. The conclusion I reach based on the economic history and personal experience I’ve shared in this essay is that the patent system is broken because so many of the engineers and scientists who used to be named as inventors in patent applications have opted out in favor of building products and services for startups or, to a lesser but not insignificant extent, open source communities. While working at a startup or working on open source are not mutually exclusive to submitting invention disclosures and filing patents, the rewards and recognition provided by working at a startup or working on open source are sufficient in themselves to provide these engineers and scientists incentive to tackle their technological challenges. The patent system, in contrast, provides relatively humble rewards and recognition, and combines any rewards and recognition with risks, including the potential need to negotiate for licenses to your own patents and the possibility of spending months or years involved in litigation. Many would-be inventors have decided instead to forgo the patent system entirely. Without the fuel of interest, the fire of genius has dwindled to embers.
The Oxford English Dictionary apparently locates the earliest use of the word "startup" in its business sense in 1976. This fits nicely in with the timeline covered in this essay from the 1980s to 2022. ↩︎
Unfortunately, they have plenty of reasons not to do so under the current law, including: (1) thanks both to Patent Office Regulations and case law that does not require measurements and discourages explanation of the motivations behind an invention, patents not being drafted or published in a format that lends itself to use as a how-to manual; (2) in no small part because of (1), identifying potentially relevant patents is difficult even with the most sophisticated search tools available; and (3) statutes and case law that threaten a penalty of up to trebled (3x) damages for “willful” infringement, a claim made in every patent infringement suit, seemingly without regard to (1) and (2). There is no safe harbor for engineers and scientists to avoid claims of willful infringement even if the only reason they had seen a patent was because they were searching for prior art that might anticipate their own patent claims. The end result is that patents today are written for and read by patent lawyers. Compare that to the circumstances in the late 19th century when Scentific American magazine published summaries of patents for its readership. ↩︎
They were correct about this, but their timing was off. The same firm hired me as a summer associate two years later, and I had to tell them I was moving back to California (where they had no office) at the end of the summer. They should have made me an offer the first time but not the second. ↩︎
The patents on CRISPR were filed just before the change in the law, making the fight between the University of California and Harvard over that technology the last big fight over who was first to invent. But it’s worth noting that at least the latest round of the fight was decided in favor of the party who was first to file anyway. Historically, this was the result in the majority of priority disputes, which are known as “patent interference proceedings.” ↩︎
For the record, even with hindsight this seems not to have been a mistake. My senior year I was a water polo team captain. I was likely at the most physically attractive I will ever be at that point in my life. My wife and I started dating that year, and fortunately I had dated enough other women before then to recognize her as a keeper. We celebrated our 20th wedding anniversary during the pandemic. ↩︎
If this sounds familiar to investors in 2022, it’s not by accident. Corporate profits made up a record 10% of GDP in 2021, which is nearly double the average that Buffett had calculated from 1929 through 1998, interest rates have been lower than ever before in U.S. history, and (at least retail) investor psychology has never been more bullish. Buffett’s message for stock market investors seems more timely than ever. ↩︎
Buffett used corporate profits as a percentage of Gross Domestic Product in the United States as his metric. ↩︎