Protecting the Patent System for Entrepreneurs

Do the Math

Recently, a number of companies from the information technology and financial services sectors have been pushing Congress to change the patent system.

The companies have been seeking passage of the Patent Reform Act of 2009 (H.R. 1260 and S. 515). So far, the legislation has been introduced in both the House and the Senate, and the Senate Judiciary Committee has reported out the bill.

Among the most important aspects of the proposed legislation are, one, a change in the way damages are calculated that would reduce the amount that a patent holder could collect in the event of infringement and, two, the creation of a mechanism for third-party-initiated administrative review of issued patents. These changes, though they may sound arcane, are not good for entrepreneurs. (Full disclosure: companies opposed to this legislation have financed some of my research.)

According to economists Jean O. Lanjouw and Mark Schankerman, small firms are more likely than large firms to litigate to protect their intellectual property. Therefore, efforts to reduce the size of damages would hurt small companies more than large ones. (Here’s a small-business guide to intellectual property.)

Moreover, as the National Venture Capital Association and others have explained, smaller damages would most likely motivate large companies to infringe on start-up companies’ patents since the potential of large damages is one of the key deterrents to patent infringement. (See the movie “Flash of Genius” for an example of this story.)

Large, established firms could use the proposed administrative review system to undermine new companies’ intellectual property because the latter simply lack the resources to defend their patents. In fact, analysis by Mario Calderini and Giuseppe Scellato of a similar system in Europe shows some disturbing evidence of the tendency of large companies to use the proposed administrative review process in just this way.

Research shows that having patents helps young technology companies get venture capital financing. The proposed changes to the patent system might undermine investor confidence in the effectiveness of patents, which could cause them to cut back on the financing of new companies that depend on patents to protect their products and services.

Finally, the proposed changes to the patent system might make high-tech start-ups less eager to innovate. If patents are weakened, entrepreneurs will have less confidence in their ability to use the patent system to protect their new products against imitation and may respond by cutting back on their research and development spending.

Maybe Congress will realize that its time is better spent solving the problems that are ailing this country than on changing our patent system in ways that will hurt entrepreneurs.

Scott A. Shane is a professor of entrepreneurial studies at Case Western.

Comments are no longer being accepted.

As a technology entrepreneur. Patent reform including the steps proposed in the act discussed are highly needed.

The largest threat to entrepreneurs is not that their patents will be ripped off. Rather it is that a submarine, frivolous or overly broad patent will surface which makes their very real innovations illegal. These entrepreneurs are then held hostage by the patent holder until exorbitant license fees are paid.

I am no friend of Microsoft’s. But the recent court decision that they must stop selling Word because it’s XML features infringe on a overly broad patent (which will likely be rejected at some point in the future) is a travesty.

A patent protecting a significant innovation, which is actually novel, will withstand any possible documentary evidence (required) of non-novelty presented by a third-party in a review, and will be strengthened, thereby increasing investor confidence in this patent. Third party initiated administrative review will also help remove progress hampering invalid patents, or overly broad patent claims, from the playing field.

The present “patent reform” proposal is just another attempt to further weaken our patent laws. Since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. For more information see //hallingblog.com/2009/05/26/innovation-regulatory-road-kill/.

google-knows-all-about-you September 4, 2009 · 11:34 am

The reduced damages is a catch-22.

On one hand it will allow the big boys to imitate the small guy’s patents for less damages, but on the other hand it’ll also be less threatening when the big boys come after the small guy’s with BS patents (e.g. amazon’s previous 1-click patent).

In regards to large patent damages, I often remind myself of the blackberry case (several hundred million damages), when they were initially sent a letter of complaint of a patent violation – yet they chose to ignore it – as the patent holder was just a small guy.

The proposed changes to the statutory basis for damages are necessary as a matter of sound economic policy.

The current proposed legislation, if enacted into law, would require district court judges to apportion damages so that the patentee is awarded no more, and no less, than the economic value the patented technology contributes to the overall product into which it is incorporated.

This is entirely reasonable, and it will only impact patent valuations where the claims of the patent cover only a small piece of a product. Industries like IT, which make complex products comprised of hundreds, if not thousands, of patented technologies will be most affected by the new damages provisions. Less so, industries like pharma, whose most valuable patents are on the active ingredients contained in drugs.

Ultimately, the effect on good start-ups will be benign, even on those that play in industries that produce highly complex products. Start-ups and their investors will be compensated commensurate with the extent to which their patented technologies have progressed the art. Those start-ups that invent a truly disruptive technology, and that are smart enough to patent it, will be richer than those that simply bring to market an incremental improvement of an existing technology.

This is the way our patent system is supposed to work. The damages reform taken up by the Congress represents a much needed fine-tuning of the incentives for innovation.

The patent legislation before this and prior two Congresses (109th and 110th) is primarily focused on reducing the costs of infringement and providing new means for infringers to attack the validity of patents.

The principal advocates of this legislation are 15 Big-Tech corporations that have been sued by patent owners for patent infringement more than 700 times between 1996 and 2008. These companies have also been indicted or sued for antitrust violations more than 600 times during the same time period.

Overall, these corporations have paid out a collective $4 billion in patent settlements between 1996-2008, as reported in their SEC filings. While large in absolute terms, this is trivial when compared to their total revenues. Indeed, $4 billion in fines and settlements equal barely one-tenth of one percent of their collective revenues

A principal reason these corporations are sued for patent infringement is their reaction to a seeming pathological fear of being found guilty of knowingly infringing and thus made to pay treble damages if found guilty by a court — something termed willfulness. In a debate I had with David Simon, Intel’s chief IP lawyer, at an EEE Times forum in April, he told the audience that Intel instructs their engineers and scientists to avoid examining whether the technology on which they are working infringes on that owned by others. The process is termed “engineered ignorance.” Interviews with people employed by other of the 15 corporations behind this legislation reveal that most also refuse to do clearances (due diligence).

Yet, the Internet and publication of patents by USPTO makes clearances easy. Plus, there are specialized firms that will do the work inexpensively.

The real problems at the USPTO are too few resources, a high personnel turnover rate, management that amazingly equated high rejection rates as a measure of patent quality, antiquated computers, old search software, a management hostile to USPTO work force,
and the growing inability of many patent examiners to understand nuanced English. This legislation addresses none of those issues.

Indeed, the legislation before Congress will divert the Patent Office’s limited monies to operation of a new quasi-judicial process inside USPTO. The pendency rate (processing time) now requires an average of 33 months, up sharply from 17 months in the early 1990s. This legislation will result in a larger not a smaller backlog, which now exceeds 1 million patent applications waiting processing in USPTO warehouses.

Professor Shane is correct in his conclusion that this legislation will discourage more investment in innovation. One need look further than repeated statements to Congress by the National Venture Capital Association and private investors urging that this legislation be rejected.

The new head of the USPTO needs a year or more to identify and implement basic management reforms before Congress enacts any new patent legislation. And Congress needs to conduct balanced hearings that take testimony from all interested parties, including small entity inventors, something it has not done either in this or the proceeding sessions in which this legislation has been considered. This is a technical arena in which the interests of the nation will be harmed greatly if a few companies are able to bias the patent system in their favor at the expense of all others, which is the case with this proposed legislation.

In the interim, a media and legal spotlight needs to be put on the aggressive management practices of the 15 large corporations lobbying for this legislation and the massive infringement and antitrust violations in which they are involved. For Congress to rely on many of the most reckless patent infringers for advice in shaping national patent policy and laws is beyond foolish.

Pat Choate

Patent reform is a fraud on America…
Please see //truereform.piausa.org/ for a different/opposing view on patent reform.

the problem with software patents are that they are all about patenting a common sense idea or strategy before someone else does. the only thing this innovates is a perversion of the legal system.

I am a software entrepreneur and patent author.

For the industry I work in – the computer industry – the current patent system does great harm to innovation and does the greatest harm to small businesses who can’t afford to litigate.

Issued patents are of wildly uneven quality. Every piece of technology one could imagine creating is in violation of many previously issued patents. If anyone attempted to track down all the patent holders and enter the legal negotiations to license them all (which no one does, not even the big guys like Intel and Microsoft, as the author points out), it would be prohibitively expensive and effectively impossible for small entrepreneurs.

As an entrepreneur who has seen the all sides of how patents play out for companies – it’s clear the patent system is harming, not helping, innovation and innovators. It is in desperate need of reform to reduce litigation and make for a more rational, predictable system.

Many issued patents are a joke. They have been given only a cursory review by a non-expert and the claims are unreasonably broad. They are commonly issued to large companies who have good lawyers. Many are simply dog-in-the-manger patents–the holder never intends to do anything with them and may not even have an idea of how to do so, but they keep anyone else from innovating. There is a third party initiated review system now, but you can bet that anyone with deep pockets will nuke a small company initiating such a review. The ability of a true expert in the field to uncover prior art in the literature as well as in patents should be utilized to make sure patents are truly innovations.

I am a patent attorney and inventor. Over the years I have represented Fortune 500 companies and solo inventors both as an outside attorney and in house attorney. I have represented patent owners/inventors in litigation, patent prosecution and in issuing opinions. Each and every preceding comment has value as it relates to different patent owners and the desire for further innovation. With all due respect to Prof. Shane, his article shows a lack of understanding the patent system and all of the players involved. For example, Prof. Shane is likely correct that a number of large companies will take advantage of the damages reform to infringe patents – the smaller damages being built into the initial ROI analysis. On the contrary, it seems unconscionable that a small solo inventor, with a questionable patent, should be able to threaten, i.e., exhort, millions from a large corporation with the mere threat of an injunction and hundreds of millions in damages. And as further explained in the various comments, such scenarios play out very differently when the patent dominates the product such as with a pharmaceutical patent as compared to a computer/software product that has dozens of patents covering various parts of the product and its uses. The patent system operated for years on inventions being basic designs, apparatus and chemical compounds. Technology has outgrown the system and there is no longer a “one size fits all” answer to fixing the system. Patent Reform needs many voices to reach a solution that benefits all Americans.