Why Patents Matter for Job Creation and Economic Growth
|Written by Gene Quinn
Patent Attorney & Founder of IPWatchdog
Zies, Widerman & Malek
Follow Gene on Twitter @IPWatchdog
Posted: Jan 2, 2011 @ 9:01 pm
We have all made the arguments — the issuing of patents leads to job growth. The nay-sayers would have people believe, however, that the issuing of patents is a drag on the economy. The factual realities are stark and tell a clear and unmistakable tale: patents are good for the economy and promote job growth.
Those who are not fond of the patent system like to pretend that innovation is free and will happen despite funding. Purveyors of extremist anti-patent rhetoric even go to the extreme of saying that we can expect the same level of innovation as we enjoy now absent a patent system. There is always one who is a software programmer who says that he or she could just work non-stop for six months, suffer many sleepless nights and wind up with a killer application, program or service, all at no cost and despite any patent protection. Of course, this proves the point for those who believe in a patent system, which is clear to all rational thinkers. Nothing in life is free. Opportunity costs are costs, and exactly how do you plan on taking your application, software or service to market? At some point every business will need funding to grow, it is just that simple. Patents and the rights they provide are extremely attractive to investors, so attempting to grow a business without a strategic patent portfolio means you are building obstacles and hurdles to success rather than removing them.
Mario W. Cardullo is a distinguished engineer and someone who knows a thing or two about innovation, inventing and entrepreneurship. Cardullo has been a founder or principal various technology companies and is the inventor of one of the basic patents for the RFID-TAG devices (i.e., E-Zpass), for which he was nominated for the Lemelson-MIT Prize (2003) and the Presidential National Medal of Technology (2004). He was served as the counselor on technology and entrepreneurship to the Under Secretary of Commerce for the International Trade Administration, and has consulted as a technology advisor for the governments of China, Japan and Italy. In an essay titled Intellectual Property – The Basis for Venture Capital Investments he wrote:
One of the major problems faced by new technology seed and start-up enterprises is access to the first round of funding, either through debt or venture capital investment.
Venture capitalists want to know where an invention or innovation fits in the marketplace with reference to existing and potential competitors. The potential investors also want to know if the invention or innovation offers a dramatic and sustained advantage, and whether there is compelling evidence to warrant building a business based on the invention or innovation. They seek to evaluate both the strength of an innovation and the ability of the entrepreneur to motivate commercialization…
One of the most important issues evaluated by venture capitalists is the security of intellectual property. Normally, a strong patent position is desired and the issues of ownership of intellectual property need to be well understood…
But what difference does it make whether businesses get funded from venture capitalists? Roughly 600,000 new businesses launch in the United States each year, with about 1,000 new businesses receiving their first venture capital funding each year. See Connecting the Dots. What that means is that .167% of new business receive venture funding. So the deck is enormously stacked against you if you are planning on starting a business and raising venture capital. That being the case, you certainly don’t want to make it more difficult to acquire VC funding.
According to a Patent Survey conducted by the University of California Berkeley Law School, many investors place a premium on patents when making investment decisions. In fact, 67% of firms surveyed indicated that the existence of patents were an important factor in their investment decisions. And for those software folks who always want to incorrectly believe they don’t need funding, the figure was 60% for software companies. Higher were biotech companies (73%) and medical device companies (85%), proving that it doesn’t matter what industry you are in, significant percentages of VCs place a premium on patents when making funding decisions.
The fact that VCs place a premium on the existence of patents makes all the sense in the world. The patent grant provides to the owner of the grant the right to exclude others from making, using, selling, offering for sale or importing in the United States anything that would infringe one or more of the claims contained in the patent. The patent provides absolutely no affirmative right to do anything; that is save exclude others. So you cannot get a patent on a pharmaceutical and start selling it without FDA approval, but you can prevent others from making, using, selling or importing. The patent right is an exclusionary right, which by its very nature means the owner of the patent has a competitive advantage. Now all the owner of the patent needs is for there to be consumer demand for that which they have claims on, making them the sole supplier.
According to Pascal Levensohn, Managing Partner of Levensohn Venture Partners, the problem with the US economy is the lack of Initial Public Offerings. He opines that without an increase in IPOs in the United States it will be difficult, if not impossible, to see the economic growth that we want. Without economic growth there will be no job creation, and the sluggish US economy will continue on its anemic path. He suggests that the best way to increase IPOs is to increase venture capital and make it more attractive. He writes that is our leaders really wanted to fix the job problem in America “there would be no higher legislative priority than promoting regulatory and tax reform to stimulate new capital formation and venture capital in the U.S.” See Connecting the Dots.
The importance of increasing venture capital is clear when you understand that since 1999 some 60% of IPOs have been from venture capital funded companies and, according to Levensohn, “92% of the job growth in venture-backed companies occurs AFTER their IPO.” See See Connecting the Dots.
Let’s assume that Congress will not do much, if anything, useful to attempt to create a more friendly VC climate. While not a sure bet, Congress has been incredibly ineffective at doing the business of the people and has shown an amazing ability to get bogged down in small issues — small at least compared with the laser focus they should have had on the economy and jobs. What can be done to help the venture climate with minimal assistance from Congress? How about issuing more patents! Since VCs overwhelmingly place a premium on patents when making funding decisions the enormous backlog of unexamined patent applications presents a tremendous burden on the formation of funded businesses.
Looking at data since 1989 shows the problem.
The number of patents issued has not grown appreciably over this time, but the number of patent applications has grown appreciably, as have the number of applications awaiting first action and the number of patent applications pending. Between the above chart and the chart below it becomes clear that in about 1998 things started to get out of hand, with demand for patents growing and the Patent Office unable to keep up with the pace.
The United States Patent and Trademark Office is at the root of our economic problems and our leaders in Washington, DC don’t even get it. How sad.
Presently the leadership at the Patent Office is making headway, but like start-up businesses they cannot do as much as they could or should without funding, and the battle for an adequately funded Patent Office is constant. During fiscal year 2010 Congress siphoned of some $70 million from the Patent Office, and this year the Patent Office is collecting more than $1 million a day it cannot use. You see, the Patent and Trademark Office of the United States government is a revenue generating entity. User fees are supposed to go to the administration of the Office, but amounts over and above what Congress appropriates does not go back into the Office to invest in people, systems and infrastructure, but rather it goes to things that have nothing to do with innovation and the patenting thereof.
Congress is derelict in its duties to the American people, which is hardly a surprise I know. What is disgusting, however, is that one agency — namely a division of the Department of Commerce called the United States Patent and Trademark Office — has the ability to create wealth out of whole cloth by recognizing that an innovation worthy of protection has been disclosed to the public. Because of the incompetence of Congress when it comes to innovation policy that mission is being thwarted, assets are not being created, VCs are not backing start-up companies because they don’t have any competitive advantage without issued patents and the cycle that could and should lead to growing companies that employ hundreds, thousands, tens of thousands of people is stopped because it is more important for Congress to siphon user fees away from the Patent Office. There is only one word to describe this — PATHETIC!
About the Author
Gene Quinn is a US Patent Attorney, law professor and the founder of IPWatchdog.com. He is also a principal lecturer in the top patent bar review course in the nation, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam. Gene started the widely popular intellectual property website IPWatchdog.com in 1999, and since that time the site has had many millions of unique visitors. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, USA Today, CNN Money, NPR and various other newspapers and magazines worldwide. He represents individuals, small businesses and start-up corporations. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.