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Is Obama's Patent Reform Hurting American Small Businesses

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Last September, in the midst of yet another instance of typical partisan politics in Washington where there was a complete inability for Congress and the president to get anything productive done, one significant piece of legislation did get passed. It was a bill reforming the patent laws called the America Invents Act and in his nationally televised address to Congress on September 8, President Obama used it as an example of how Washington could accomplish something. In his remarks made at the bill's signing, President Obama said:

It will help startups and small business owners turn their ideas into products three times faster than they can today. And it will improve patent quality and help give entrepreneurs the protection and the confidence they need to attract investment, to grow their businesses, and to hire more workers.

The America Invents Act will indeed most likely result in the Patent Office issuing more patents (it already issues about 4,500 per week), but one has to ask if that's really a good thing, and in particular if it's a good thing for small businesses here in America, as President Obama proclaims.

My answer to that question is that the president has a fundamentally naive understanding of the patent system today, because getting more patents of their own will not help American small businesses if everyone else is getting more patents, too. In reality, an enlarged patent system with more patents being given out by the Patent Office gives a huge relative advantage to larger competitors who have teams of patent lawyers that can file dozens of patent applications for every one filed by a small business. The phrase "Don't take knives to a gun fight." comes to mind.

The issuance of more patents by the Patent Office also does not protect small businesses from being sued by the growing contingent of patent holders who offer absolutely no product or service to the American people, but instead exist solely and exclusively to threaten and sue as many productive businesses as they can in order to extract hold-up payments for licenses to their patents.

Lastly, because American patents can be applied for and owned by foreign corporations (about half of all patent applications today are filed by foreign companies), having the U.S. Patent Office hand out more patents to any and every one will provide more opportunities for Asian and European firms to use those patents to knock American small businesses out of the marketplace and thus export the dollars of American consumers overseas.

I'm not the only one concerned about President Obama's patent reform backfiring on American small businesses. As the Washington Post recently reported,

The president is mistaken -- at least when it comes to the patent system as it relates to software patents. These patents -- and the patent system -- aren't creating innovation, they are inhibiting it and, by extension, job creation. ... Because of flaws in the patent system and government leaders' misunderstandings, there is an arms race of sorts happening in the tech industry that is sapping billions out of the economy and crushing technology startups.

But this phenomenon is not just limited to software companies. It is occuring throughout all industries today.

Even the self-made billionaire Mark Cuban has identified the issue, which he discusses in his colorful blog post from last month, The Greatest Business Risk You Don't Know About -- Your Business Will Be Sued Over Patents. As Mr. Cuban puts it,

Your business is at risk. For a lot of money. No matter what type of business you are in, you are susceptible to a patent infringement lawsuit. The worst part about this risk is that there is nothing you can do to protect yourself.

Mark is right. Most people think patents are absolutely great until they are accused of patent infringement themselves. Then their eyes open really wide and they begin to see all of the problems with America's patent system today, including the fact that it is overpopulated with meritless patents.

Peeling back the layers of our patent system reveals some disturbing problems. First, the U.S. Patent Office is incentivized to grant patents, as it recieves 10 times as much in fees when it grants a patent as opposed to when it denies one. Even patent examiners themselves are incentivized to grant, rather than deny, patents, because they are under a quota system and it is easier for them to make their numbers if they grant a patent application (because that makes the applicant happy and no third party can object), as opposed to denying an application (because the patent applicant can endlessly appeal a denial, which creates a lot more work and headache for the examiner).

Patent holders also have vast incentive to acquire as many patents as possible, even bogus ones, because they can still be used to threaten small businesses who often can not afford the expense of defending themselves in litigation. Until the patent system adopts measures to disincentivize the issuance, acquisition and assertion of undeserved patents, they will only continue to multiply, and the largest relative victims of a polluted patent system are the very small businesses that President Obama says the America Invents Act was meant to help. To be fair, there are some provisions included in the America Invents Act that aim to improve patent quality, but they were so whittled down through the legislative process by pro-patent special interests, that they will provide at most only trivial benefit to addressing the patent quality crisis.

This Friday, Princeton University's Center for Information Technology Policy is hosting a conference called Patent Success or Failure? where commentators will provide their thoughts on the America Invents Act. I, along with the Senate Judiciary Committee's General Counsel and an attorney from private practice, will be part of the second panel discussing the ways the AIA is and will affect America. In short, for those of you who can not attend, my position will be simple. More government regulation is bad, not good, especially for small businesses, and patents are just another form of government regulation that interferes with free markets and competition. While I would never -- and have never -- advocated for abolishing the patent system, because that would be throwing the baby out with the bath water, we do need to fix our patent system so that it rewards innovation, not manipulation. Unfortunately, the America Invents Act will not do that. It may actually result in making things worse.