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The last couple of years I've been observing an exponential growth in the news related IT companies and individuals taking their cases to court, on one side, and the questions concerning legal matters everywhere on the web, on the other side.

I very much doubt people and companies have suddenly started stealing each other's ideas, but something is different. Is it that:

1) IT people on average are getting more legally-educated?

2) Some changes in legal systems of various countries I have missed are causing that phenomenon?

3) IT is now being perceived as the source of potentially unlimited revenue and the trolls and lawyers have turned its attention to it?

4) Any other development in place?


The first part of my question is how should an average developer react to this perturbing trend:

a) Continue on as before and ignore everything legal

b) Educate themselves in local and international laws related to IT

c) Always get a professional legal advice before venturing to do anything programming related

d) For any kind of project register an LLC to protect himself even for the most basic and harmless projects


A second part is a bigger one: how does this all affect IT companies and start-ups:

e) Is any new company at potential risk? If so, is this risk local like in US with all of its software patents or global?

f) Can any new company survive without getting lawyers from the start and applying for all possible patents?

g) Is it a risk factor for the registration of a new company to choose a location which supports software patents in its legal code?


I admit my question is complex but the matter at hand is even more complex. If you see any restructuring potential, it'd be welcome.

I'm also seeking any input either global or related to local markets. We'll figure out the common ground from particular cases.

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2  
Exponential? Really? ;-) –  Gary Rowe May 9 '11 at 12:15
    
Great question!! To be sure, our whole western culture tends to get more and more litigious - the U.S. being the leader once more. To me, this is the manifestation of the crude beleif that one can gain control with mountains of paper - paper money, paper laws, directives, contracts etc. nobody can count anymore. It's the perversion of the rule of law - how can the law rule if nobody knows it? Even lawyers do only know a tiny fraction. –  Ingo May 9 '11 at 13:25
    
I have no legal background but I thought that SLA statement such as "this software is provided as is without any responsibility ..." is sufficient - Is this not the case? –  Emmad Kareem Dec 9 '11 at 4:50
    
If you think it's bad now, you should have been around in the '80's. Now THAT was a seriously litigious time in the software industry! –  Brian Knoblauch Dec 30 '11 at 15:51

8 Answers 8

up vote 13 down vote accepted

First the obligatory disclaimer: I'm not an attorney. Nothing I say can or should be construed as legal advice. What I'm saying is purely descriptive, not prescriptive (i.e., telling what I've seen, not telling you what to do).

The short answer

The situation has changed very little for quite a while. I suspect a large part of what you're seeing is simply a difference in reporting, or perhaps even just a difference in what you're noticing.

The long answer

In reality, the number of patent lawsuits in the US grew almost linearly up until 2003, then dropped (quite a bit) for a year or two. Since then, it has grown, but the rate has been sub-linear. Statistics tend to be somewhat out of date though -- it's hard to get them for really recent activity. My guess would be that much of the recent lull is related to the slow economy, and when it recovers more fully, we'll see something close to linear growth again (though some recent court decisions have trimmed it a bit, such as making many "business method" patents unenforceable).

It's harder to get statistics on the percentage of those related to software (software and hardware are largely just classified as "computers", which is itself just a big chunk of the "electronics" classes), but at least in the spot checks I've done, it seems to be pretty close to constant (about 10% devoted to electronics, and somewhere in the vicinity of 5-10% of that devoted to software) for quite a while now.

A patent lawsuit is expensive enough that small companies don't get sued very often. Almost no company is going to sue you if your total sales are less than the lawsuit would cost them. That's not to say you can/should knowingly infringe on patents or anything like that, but it does mean that it probably doesn't make much sense to put a huge amount of time and effort into researching every patent that might be relevant either.

As far as writing your own patents goes, it's open to a lot of question. If your strategy is to be bought out by a larger company, then having some patents can help. If you're just a small company planning to make a decent living for a few people, chances are that almost anything related to patents is/would be a waste of time and effort.

There are a few other forms of "intellectual property": Copyrights, trademarks and trade secrets. For more companies, protecting copyrights and trademarks should be pretty much a given. In the US, you'd want to register your copyright. You'd want to mark appropriate names (e.g., name of your software) as a Trademark, and after you've used it long enough, register the trademark. That's all pretty straightforward, and all honesty unlikely to ever be much of an issue -- if somebody really does infringe one, it's usually a pretty straightforward matter of showing that they used your (code|name) or a close derivative (e.g., in the case of trademark, something close enough that a consumer might buy their product thinking it's really your product).

Trade secret cases typically involve one of two situations: 1. Somebody leaves your company and takes things they know to some other company. 2. You form a partnership with a company, and they continue to use your information after the partnership dissolves.

These can be pretty big, but (again) don't seem to be a very close fit with what you're talking about.

One big difference between patents and either Copyright or trade secret infringement is that it's pretty easy to infringe a patent "innocently", where copyright or trade secret infringement usually involves something that's pretty clearly "wrong".

Trolls

When questions about patents arise, "patent trolls" (aka "non-practicing entities" or NPEs) will be brought up. These are companies that (in most cases) do nothing but own patents. In particular, they don't create/sell any products based on those patents. Quite a few people really dislike this general idea. From a practical viewpoint, however, this trend is interesting primarily to large companies.

A patent holder that makes products is often restrained from suing other companies because those other companies also hold patents, and are likely to counter-sue (and probably win) if somebody sues them. Just for example, let's assume that some of IBM's Java "stuff" infringed on some Oracle/Sun patents. Oracle probably would not sue IBM, because IBM holds more US patents than any other company, and there's a pretty fair chance that in the end it would turn out that Oracle infringed at least as many IBM patents as vice versa; about the best Oracle could hope for would be coming out about even, and there's a pretty fair chance they'd end up owing IBM some money. A patent troll is more or less immune to that: since they don't make anything, they never infringe on any patents, so IBM's traditional recourse doesn't work. For a small company, this is largely irrelevant. Most don't own enough patents to represent any major danger of counter-suit in any case.

There are a few other differences. First, traditional patent holders tended to "use" their patents in dealing with relatively direct competitors. As long as you didn't compete directly with somebody chances of them suing you were pretty minimal. Second, patent trolls often seem to deal more in sheer numbers -- they own enough patents on a general technology area that they assume everybody in that technology area must infringe at least a few. This makes defense much more difficult. It's almost impossible to describe how you don't infringe on each of, say, a quarter of a million different patents.

Summary

A lot less has changed than it probably looks like. All but the very tiniest companies will need to consult an attorney now and again (and even they might), but chances are pretty good that most of it will be about things like contracts, not about intellectual property.

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That was a very good explanation. I must thank you for your efforts. –  user8685 May 9 '11 at 18:09
    
All of the answers are interesting, but this is the most complete where patent lawsuits are concerned. –  Michael K May 9 '11 at 19:40

I don't think it is becoming worse, there have been software patent trolls as long as I have been a developer. The first big one I remember is the LZW patent when Unisys started charging websites $5000 to have gifs.

In the most general case, you aren't going to get sued unless you have money. Patent trolls sue to make money, not to terrorize.

The problem is once your company makes it big, you will get sued by several patent trolls, trying to get a piece of your pie. By this time however, you should be able to afford lawyers.

My advice is B. Learn about software patents and the ones that are most commonly enforced, as well as trademark and copyright law. However, once you know that basics, follow a relatively safe set of rules and don't worry about it too much.

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The Australian Computer Society has helped get IT Professionals recognised as the same professional level as engineers, solicitors and accountants in Australia.

This means that as long as you meet certain criteria, you can get limited occupational liability just like solicitors.

So, as to your first question, you may see more ICT professional bodies around the world working towards something similar. Depending on what you are doing, it might be worth looking up if you are eligible to something similar in your country. I doubt 'continue on as before and ignore everything legal' will ever be a good option (or ever really was).

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I don't think individual developers should worry about litigation. There is no use for Apple to sue Joe developer because Joe Developer does not has any money, and it makes apple look like bullies. It's much better for software giants to wait for a start up to grow significantly before they take them to court.

1) I don't think that IT people are any more legally educated than before. IT Companies now are just having bigger legal departments. If anything, the legal world is becoming more tech savvy.

2) Legal systems are changing, but as far as I can see it is primarily due to the US or pressure from the US to enforce their brand of intellectual property.

3) I think that patent trolls are doing exaactly this, however I do not think that this is the case most of the time. Most of the time it is about messing with the competition by either making them pay for something that can hardly be classified as an invention or squeezing them into a box where they are unable to innovate.

4) I Think that these law suits have been coming along for quite a while. The media are just focussing on them more because people, especially those in IT have become aware of the problems of patents and copyrights. It may just be that people are more interested in it, and that is why we see more of it in the news.

Another development has been the now hotly contested portable device market. There is not much differentiation in hardware because often the hardware of different devices are even made by the same manufacturers, so legal wars are waged on the software front.

To your second question:

The first part of my question is how should an average developer react to this perturbing trend:

It depends on the size of your outfit. If you are writing a little application at home I'm sure (a) will be okay for you. If you are working for a medium sized business with some external applications (b) would be good.

A second part is a bigger one: how does this all affect IT companies and start-ups:

I can't speak for the US, but I think small businesses fall under the radar. The licensing fees for a patent may be so small that it is not worth taking that company to court. Bigger companies could strong arm them into settling or paying royalties, but all in all I think that even trolls want to take on the giants.

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On the other hand, Sony did sue George Hotz over DMCA violations. –  David Thornley May 9 '11 at 14:30
    
You're right. Some small businesses and persons have been sued, but it's not difficult to see why. I believe there was a company not so long ago that sold mac clones, and also got sued. –  Tjaart May 10 '11 at 7:17
    
Psystar. They took a copy of Mac OSX, modified that, and distributed the copy, which is a clear copyright violation (even though they did pay for a pristine Mac OSX copy for each of them). It would be interesting to see if a Mac clone could be done cleanly, and what the courts would have to say about that. –  David Thornley May 10 '11 at 14:29

Intellectual property issues have existed in most industries - if you wanted to make a serious generalisation, you could claim that the increasing use of litigation to enforce rights is evidence that the tech industry is maturing in much the same way as previous killer industries before it.

3) IT is now being perceived as the source of potentially unlimited revenue and the trolls and lawyers have turned its attention to it?

This may be part of it but I don't think it's quite that simple. I haven't the data to hand and I haven't time to look for it, but I think you'd find the motivation may be slightly different from case to case; certainly in the large scale high profile cases. For some companies it may well be a question of expected financial survival, in others it may be a way to destroy competition. On lower levels, it may well be an attempt at a financial smash and grab.

The extent to which any individual developer should get himself protected depends on whether he is employed (in which case, generally the employers will or should have legal controls in place to handle this) or independent/freelance in which case it would be well worth having access to legal advice and, additionally, becoming familiar with legal concepts in the area.

Regarding the scale of international liability, I'm really not qualified to answer that and given that there is still an argument against the creation of software patents and in favour of the use of copyright, there may not be a clear cut answer.

In the US though, I would familiarise myself with the process of getting a US patent if you're a developer. While I don't consider patents to be the most appropriate IP protection in this case, that appears to me to be the most commonly used.

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I see few core reasons for more litigations:

  • more component reuse;
  • more crowded product space;
  • easier to actually find ripoffs;

For the first, it's like years ago it would be usual for a company to build their products from ground up, using basic tools and libraries. Now they will create product using dozen of libraries, which in turn depend on another doze more each. It's not that hard to imagine, that some license of some indirectly used library might get overlooked.

More crowded product space — well, basically unless you come up with really innovative thing, there is very high chance, that someone somewhere in the world already created app like that. And even with innovative solutions, there are very high chances that you have few companies that are working on solving same problem and will come up with exactly the same solution.

And last but not least, having everything Googleable and having app stores, makes it much more easy to spot potential rip-offs.


On the other hand few years ago EU rejected software patents. So there is hope still.

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I hope judges never learn component development! –  Emmad Kareem Dec 9 '11 at 4:55

how does this all affect IT companies and start-ups:

From my german perspective: To me it looks like the U.S. is obsessed by their latest invention, the so called "intellectual property".

It is clear that upcoming cultures that don't give a sh.. about it, will have a huge advantage.

Therefore, I expect that in a few decades, no U.S. software industry will exist anymore. Perhaps even earlier, when the paper- and debt monetary system breaks down, followed by a huge economic downturn of the west.

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2  
The Wright Brothers, Thomas Edison, and Henry Ford all patented their inventions. There's nothing new about it. You've failed to understand the past; I doubt you have any idea what is going to happen in the future. –  JeffO May 9 '11 at 13:20
    
I somehow feel the same way what concerns specifically IT. It's already crossed the border of common sense. Patents for basic ideas like ordering stuff online by clicking on a button is not an invention for all intents and purposes. –  user8685 May 9 '11 at 13:24
    
On a side note, I read some somewhere that among many patents registered in US there is one that describes nothing else but a way of applying for a patent. I'm not sure if I should laugh or cry. –  user8685 May 9 '11 at 13:25
    
@Jeff, at their time patents were understood to being what they really are grants of monopoly. When I refer to "intellectual property" as invention, I do mean of course the euphemistic propaganda that is quite successful in hiding the facts and make people believe it's about moral or ethics. –  Ingo May 9 '11 at 13:30
    
This is pure speculation and I see no facts or evidence presented to support the claim. I also find it personally odd that someone who apparently lives thousands of miles away from the U.S. would claim to be such an authority on it. –  Aaronaught May 9 '11 at 20:36

I'm going to echo a previous poster and preface this by saying I'm no legal authority, nor should I be seen as one. Please consult with a legal professional for legal advice that would apply in your own personal circumstances.

I recently heard this story on This American Life (TAL from this point forward) and I was left with a lot of questions that were quite similar to yours, Mr. Art. So I came here, and lo and behold, here's your post with plenty of good questions! On a side note, I quite like the structure =D


For the Average Developer

a) Continue on as before and ignore everything legal
I'd think this is pretty dangerous. To paraphrase Wikipedia, the legal concept "ignorantia juris non excusat" holds that a person will be held liable even if said person claims ignorance to the law that they have infringed. True, IP laws and Patents are convoluted cesspools, but an aggressive Prosecutor likely won't concede that when he's after your money.

Along with this, Non-Practicing Entities (NPE's) have every incentive to pursue litigation: they've got investors to make happy. The specific subject of TAL's story, Intellectual Ventures (IV), a prominent NPE/Patent Troll, has $5 billion invested into it, but has only earned $2 billion in revenue since 2000 (it's founding year). Over the next ten years, Mr. Tom Ewing projects IV's revenue goal to be at $35 billion, since the investors want high returns, but he predicts that licensing alone will not be able to bridge the enormous gap. So what's an NPE to do? Well, with plenty of attorneys available and many more targets, it would make sense to pursue the higher-yielding, litigation warpath. The vast majority of those working in software development are likely going to be affected by this at some point, so it's in one's own interest to keep aware of it, the amount of concern varying based on one's future plans in software development (see the answer to the next question).

b) Educate themselves in local and international laws related to IT
I think a familiarity with the law is certainly helpful, but to what extent?

I don't know.

Between raising your family, studying/improving your professional practice, sleep, food and recreational activities, where will you find the time? Would you cut into the time of tinkering with xyz language/algorithm/concept for the sake of legalese? You could justify that it falls into "improving your professional practice", but it's more of a meta than it is a central body of what you really want to do, isn't it? Unless, of course, you want to become a Software/IP/Patent Lawyer...

I guess this one requires each individual to consider what they're doing now and what they plan to do, i.e. a QA Analyst moving toward a Software Engineer position probably doesn't need to know as much as an executive manager or a start-up owner would.

c) Always get a professional legal advice before venturing to do anything programming related
Now that's gotta be expensive. I guess that depends on how much money you have and how much you feel your project/product has the potential of being profitable (not just revenue generation, but profit). This question has a close relationship with the answer to the next question.

d) For any kind of project register an LLC to protect himself even for the most basic and harmless projects
I've been at a couple business seminars, some with legal advice, others with more anecdotal experiences, and the general rule of thumb seems to be that you don't set up an LLC until you actually start making money. If you're really interested in protection, then it's often suggested that one should also get liability insurance for the LLC too. That was general business practice, so I'm not entirely sure if it would apply in this paradigm, but it seems reasonable. I say this considering this quote from the TAL story:

"Patent lawsuits are so common now that it's hard to find even one semi-successful startup in Silicon Valley that has not been hit with a suit, which slows innovation, makes it harder for companies to prosper, hurts our global competitiveness (is this getting big enough for you?), costs us all more money when we buy the stuff these companies sell."

I added the italics to emphasize the ideal targets of Patent Trolls: companies actively making money.


For the Macro Economic View

e) Is any new company at potential risk? If so, is this risk local like in US with all its software patents or global?
This is extremely complex and, quite obviously, beyond me. I do have some thoughts, but that's all they are. There are a few instances that come to my mind concerning locale and law applicability: Russia, China and Germany.

In Russia, Copyright Laws have plenty of loop-holes, causing many in the entertainment industry to suffer much anxiety. It's been moving in the right direction, but only after much pressure from the international community, which set it's sights on Russia because of the numerous small-time infractions to the high-profile cases like allofmp3.com. I'm certain you're more aware of the problem than I am, as you're currently residing in Moscow.

Source :

The US has had ongoing disputes with China over the loose copyright laws employed in Big Red, again much to the $3.7 billion chagrin of the entertainment industry. What's been done and being done? Well, the US introduced the World Trade Organization into the mix in 2007, with both success and failure. To be honest, it's more on the failure side, considering that both Russia and China are in the top five of the US' Anti-Piracy "Watch List" for 2011; interestingly enough, Canada ranked right along with them. Intellectual Property violations have been going on for many years in these countries, yet there's anemic progress being made from the US' standpoint.

Sources:


Finally, something on the more positive side: Germany and LibreOffice. Not exactly directly related to what we're talking about here, since LibreOffice is of an Open Source nature, but it's worth mentioning. LibreOffice, as the Foundation, is centrally located in Germany due to it's legal construct for "stability", both for the Developer Community and the Users. There are several other reasons why, but a fair portion of the reasons fall within the legal domain.

Source:


Of course, these citations don't directly address Patents, but I think it gives us a good snapshot of what the Intellectual Property, and more generally the legal, landscape looks like internationally: it's all over the place. Certain legal precedents may be acknowledged by one sovereign nation, yet those same precedents are ignored by another. I guess this is really something that ties in closely with how much due-diligence any new company is willing to put in (this would be closely tied in with point b of our discussion).

The first part of this question, "Is any new company at potential risk?", has been partially answered in the previous question d), the one about LLCs. Another part of the answer is related to the next question, so you'll get part of it there too. So what's to be said about it here? Well, there's been many variations of this said, but I think it bears repeating: there's no such thing as 0% risk. If we didn't take risks, we'd never drive our vehicles, swim or eat at a restaurant. You already knew this, whether conciously or subconciously, so this naturally segues into the more general business practices of due-diligence, calculated risk management, etc.

f) Can any new company survive without getting lawyers from the start and applying for all possible patents?
Again, I'm going to quote the TAL story:

"It's such a mismatched fight that your best defensive option is security by obscurity. They have the potential to literally obliterate startups."

That was Chris Sacca, a Silicon Valley insider, but from an entrepreneurial/investment background.

So, from a business strategy standpoint, it seems to return to the principle of "don't get the extra fluff until you're making money". You want to keep overhead low by refusing to employ services or products that are not beneficial until you start turning heads, otherwise you'll be bankrupting your company before you even get it off the ground. Morris Rosenthal, author of Start Your Own Computer Business: Building a Successful PC Repair and Services Business by Supporting Customers and Managing Money, concurs with this thought by drawing on his personal experience of seeing how consultants (replace with lawyers for our discussion) had leeched a company dry of all it's money, yet provided very little in solutions. Unfortunately, Mr. Rosenthal was subjected to witnessing a long, drawn-out death of the company, yet at least there's a silver lining here: a lesson for aspiring entrepreneurs.

It would be wholly unfair to say that all consultants/lawyers are out to rip everybody off, but this experience speaks to a broader point: timing and circumstance. Bring them in too early and you burn through your start-up capital (personal savings, in most instances). If you introduce them into your operations too late, then you're buried in problems, whether legal, managerial, financial, marital/familial, or any combination of those. If you hire a consultant to implement a 3rd-party software package for you, yet your company infrastructure/business-practice isn't compatible or is still undergoing "on-the-fly" changes, then you've wasted money for a solution you didn't need. Bottom line: you probably don't need legal help or patents/licenses at the start, but at some [successful] point, you likely will. Consider Mr. Sacca's characterization of NPE/Patent Trolls:

A mafia style shakedown, where someone comes in the front door of your building and says, “It would be a shame if this place burnt down. I know the neighborhood really well and I can make sure that doesn’t happen.” And saying, “Pay us up.” Now here’s, here’s what’s funny. If you talk to ... when I’ve seen Nathan speak publicly about this and when I’ve seen spokespeople from Intellectual Ventures, they constantly remind us that they themselves don’t bring lawsuits, that they themselves are not litigators, that they’re a defensive player. But the truth is that the threat of their patent arsenal can’t actually be realized, that it can’t be taken seriously unless they have that offensive posture, unless they’re willing to assert those patents. And so it’s this very delicate balancing act that is quite reminiscent of scenes you see in movies when the mafia comes to visit your butcher shop and they say to you, “Hey, it would be a real shame if somebody else came and sued you. Tell you what, pay us an exorbitant membership fee into our collective and we’ll keep you protected that way.” A protection scheme isn’t that credible unless some butcher shops burn down now and then.

Harsh comparison? Maybe, maybe not, but at least it gives us an idea of the nature of the risk and it's implications.

g) Is it a risk factor for the registration of a new company to choose a location which supports software patents in its legal code?
I'm really not sure how patent law works outside of the US (there's the Patent Cooperation Treaty, but it also has non-participating nations along with different nuances in comparison to direct US patent laws - Patent Cooperation Treaty), but if a nation were to use and implement a system that was closer to the purpose of promoting innovation and securing the patent holder, rather than as a vehicle for unrestrained, litigious money-grabbing by NPEs, then it would make sense to go to such a locale. This would have to be measured against the other risk-factors, such as tax liabilities, company structuring mechanisms, exchange rates, [ideal] labor force availability, natural language barriers (albeit, you seem to be approaching the capability of a hyperpolyglot), distribution channel arrangements, regional stability, cost of moving operations, and so on and so forth.


There have been interesting reactions to the story that TAL aired, as noted on their blog.

The Forbes link has a refreshing proposition for a permanent solution, yet it seems that it's a pipe dream in consideration of the influence that NPE's have in patent legislation. It doesn't really answer any of your questions, nor does it provide start-ups with the tools to effectively work with patents and NPEs, but I think it's still worth a read.

The IV link defends it's interests in patents and their current uses; first time I've heard of the term "disruptive innovation", but it certainly is another way of describing changes to an established system, whether for better or worse (I keep thinking of the caboose and the controversy of change there). At least their use of the euphemism makes clear their future interests.


Thank you for posting a meticulous question, as it gave me an opportunity to research the topic with more focus and to post my conjectures here. Also, I apologize to everyone who read this long-winded post, especially since it's a post filled mostly with hot air, as I'm not capable of providing any real legal assistance nor a panacea (then again, there's no such thing as a "cure-all" for the world of business and law). I also compound the aforementioned apology with a request for forgiveness from those who feel that I'm kicking the dead horse (seems that most of the activity flared and died on May 9th). Furthermore, I hope I didn't come across as a harbinger of FUD, but if I did, then allow me to slightly redeem myself with two suggestions:

  • Look for a, hopefully free/cheap and unbiased, seminar that addresses the specific concerns that a start-up would have about software patents
  • Search for free, initial consultation time with some of the hungrier attorneys (just try not to get sucked into the sales pitch of "further research" they can conduct at a price you can't afford)

Well, mon ami, it seems that the current state of affairs in patent laws are pas bon, but hopefully we'll see a l'arc en ciel somewhere in our lifetime ;D

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