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Patently Absurd or: How to Go From the World's Best Patent System to Worse-Than-Most in a Single Step

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When I talk with fellow Silicon Valley entrepreneurs, inventors and investors about patent reform, the universal response is "What's that?" They are unaware that the patent landscape -- which has helped make the USA into the most innovative country on the planet -- is about to tilt in favor of the large companies that have representation in Washington. This topic is unknown to most Americans due to its complexity -- and therefore difficulty -- in reporting on it (or even writing a succinct Op-Ed on it).

This week -- perhaps today (Tuesday) -- the Senate will vote on S.23, the America Invents Act. Its main proponent, Senator Patrick Leahy (D-VT), says that we are the last industrialized nation using the antiquated subjective First-to-Invent (FTI) system, instead of the First-to File (FTF) system, which awards the patent to the first one to submit an application, rather than the one who can prove having invented it first. Isn't it odd that ours is old, subjective and different, yet we are the world's leader in innovation?

Canada shifted to FTF in 1989, and a 2009 study found an "adverse effect on domestic-oriented industries and skewed the ownership structure of patented inventions towards large corporations, away from independent inventors and small businesses." The EU, which has had FTF for a while, last month declared an "innovation emergency" due to how far behind us they are falling in innovation and R&D investments. It's not working for them. There is even a movement afoot among small businesses in the UK and Germany to try to change their system to be more like ours!

This attempt to conform to other countries is called "harmonization," which is a melodious word for "succumbing to peer pressure." We tell our children not to do so when we know it's wrong. So should we. In reality, the FTF part of the bill only superficially harmonizes. There remain substantial differences, such that the claimed benefits of cost-reduction would not materialize. This bill "improves" so much on foreign law that it would make getting patents even harder here than overseas. For example, this potential law bars receiving a patent for inventions that were publicly used or offered for sale prior to filing. This rule, had it been in place then, would have prevented the Wright brothers from receiving their patent on their airplane due to its public use at Kitty Hawk. It is unconscionable that our government would intentionally establish trip-wires to eliminate the patentability of legitimate inventions in this way, and it's bizarre that they would make it more draconian than foreign laws.

Under current law, we have what's called a "grace period." That is the one-year between public use or sale, and the time by which the inventor must file the application. This enables entrepreneurs to present to investors, share plans with potential hires, or exhibit at trade shows during that time without concern that such acts would either preclude a patent or enable someone else to poison the well so that no one can get a patent. Under FTF, if someone else finds out about your invention, and if they apply first, they can win. Overturning that requires proving that they derived their idea from yours. This would be almost impossible to prove since there is inadequate right to discovery. What's most scary to me is that this creates strong financial incentives for usurping patents rights by hacking and industrial espionage, which is increasingly state-sponsored (think China). Through the new mechanisms of this new law, competitors could destroy nascent companies by using their own information against them. The flip side of the problem is that it will put a chill on the normal open discourse that occurs today between innovators, investors and customers.

The FTI regime was established in the constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." (Article I, Section 8, Clause 8). An inventor is defined as the first to CREATE an invention, not the first to FILE the forms. Overcoming a constitutional challenge may require legislators to engage in Orwellian doublespeak to redefine "inventor" or perhaps the concept of time embodied in "first" will be spread out to deem the same month as being "simultaneous." All scholarly publications on this have cast doubt on FTF in the USA without amending the constitution. The uncertainty of a constitutional challenge to this is yet another concern.

One of the great benefits of our FTI system is that inventors can refine and improve their inventions in private prior to filing for it. Under FTF, one should file early and often on each idea, however impractical it later proves to be. That burden falls disproportionately on smaller companies for whom patenting expenses are material. This will increase the workload of the Patent and Trademark Office (PTO), which will exacerbate their delays in processing patents. Those delays are probably the worst problem of the PTO. It now takes about twice as long to get a patent than it did 20 years ago. The main cause has been fee-diversion by congress to cover the national deficit. If ever there was an innovation tax, this is it. Ironically, one of the selling points of this bill to to reduce those delays, when all that is needed is to lay off their revenue. A simple bill to forswear taking the PTO's money would be universally accepted.

It is rare that both parties can agree on anything, so when they do, such moments would normally be worth celebrating. Unfortunately, this one is scary. During the six years that the Senate Judiciary Committee deliberated this and held hearings, they did not call any small company inventor or individual inventor. The one inventor that the House counterpart heard, Dean Kamen, was vehemently against the patent reform that was being proposed. They call them "hearings," but it's clear that few are listening. Senator Feinstein is one of the few who listened, and offered an amendment that would have struck FTF and solved many of the above issues, but it lost on Thursday by 87-13.

A year ago, one of my portfolio company founder/CEOs, Steve Perlman, was invited to present for one hour with a colleague -- Tim, a patent attorney representing a small company that is developing non-invasive glucose monitoring -- to a bunch of house and senate staffers. Unbeknownst to them, their slides were shared in advance with a representative of Johnson & Johnson who spoke both before them and after them and took up much of their time...prior to handing out laminated cards listing how to vote and misrepresenting the positions of Steve and Tim. (It has been captured on video if anyone is interested). The point is that small companies are no match for the maneuvers of large companies who have controlled this process and continue to. It is up to congress to actively seek out other voices to understand the counter-arguments to craft the most balanced path.

In the last decade or so, certain industries have found patents to be more of a liability than an asset. Software and internet companies are particularly vocal in this arena. IBM is now mostly a software company, and Microsoft always was. They have both been very active for years advocating patent reform. There are legitimate concerns that software companies have in this area, but I suspect that they can best be addressed by internal PTO processes to crowd-source for prior art and be vigilant about obviousness. The current approach of making patents harder to get and of lesser value is not a true solution and is a classic case of throwing the baby out with the bathwater.

The Obama administration espoused some wonderful ethical principles on the day it took office. In particular, it committed that all employees entering government agree to the "Revolving Door Ban" which stipulates:

"I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts."

That does not seem to have stopped a key advocate of patent reform from IBM, David Kappos, from being appointed to head the PTO or from continuing to lobby on behalf of patent reform. A Politico article touched on this fact and on Microsoft's former lobbyist, Marc Berejka, being appointed to senior role in the Department of Commerce, which controls the PTO, which could theoretically enable the company to pursue its agenda from within the administration. That article does not discuss Commerce Secretary Gary Locke's extensive ties to Microsoft. Senator Leahy's state's largest employer is IBM, but that is not as dispositive of ethical breach as the Commerce/PTO connections are. These people are probably not evil, but their view of what's best for America has been distorted by having seen it from one perspective for so long.

The rhetoric is that patent reform is about jobs, but the reality is that there is no legitimate reason given for why it would accomplish that. In fact, the evidence points to the opposite. The Kauffman Foundation's studies found that small companies are the primary driver of new job growth in our economy, yet this bill harms small companies and claims that it will help the economy. It is opposed by the National Small Business Association, the National Venture Capital Association, and many other organizations, but that does not seem to matter enough to the powers that be. One reason is that they are not hearing from constituents (hint hint).

It is extremely hard to succeed as an inventor and entrepreneur, but America has created the most fertile ground in the world for doing so. Maintaining that fertility enables Schumpeter's "creative destruction" to reshape our world for the better. Patents confer power to the otherwise powerless. Customers prefer established companies they know, not upstarts. The same is true for hiring, renting property and most other transactions that start-ups have to compete for. We should do all we can to increase the chances of their success. All of the companies that are advocating for patent reform were once start-ups.

In a decade or two when the post-mortem is written, it will be hard to disaggregate the relative contributions to our decline from patent law changes from our declining public education and the rest of the world's rising education quality, Sarbanes-Oxley, options expensing, immigration policy, the forced separation of research analysts from investment banking, decimalization of stock trading, and the myriad other forces that tilt the ecosystem against technology entrepreneurship. Since it's multifactorial, it's important to fight all steps in the wrong direction whenever and wherever they arise.

The above problems are complex -- as are most aspects of intellectual property law -- but they are solvable. If we do not appreciate the recipe for how we became preeminent in innovation, then we will lose the important ingredients. Private funding of innovation is one. Venture capital raised by funds has already shrunk by 70% since 2007, and are likely to shrink further if this bill becomes law. The innovation economy is a delicate ecosystem that should be operated on with a scalpel, not a machete. The law of unintended consequences has not been repealed.

This raises the natural question: why is Congress doing this? The answer is that Congress is responding to the ones who can afford to lobby and not bothering to seek the opinions of entrepreneurial inventors -- for whom the patent system was created over 200 years ago by a single sentence in the Constitution. Patents in England back then were used primarily for maintaining monopolies and status quo among the elite, so the founders of our country intentionally designed it to do the opposite: encourage innovation by the common man. This design has done well for America up until now. Whether that will continue going forward is in Congress's hands.

Gary Lauder has been a venture capitalist with Lauder Partners for 25 years. He is an inventor on 12 patents.