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Why ‘Patent Reform’ Harms Innovative Small Businesses


Written by Schmidt, Jacobus & Glover
Posted: April 25, 2014 @ 8:00 am
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The recent “Patent Reform” bills have an insidious effect on small businesses.  The proposed legislation ensures small inventors will never be able to get the best inventions to market by imposing: Fee Shifting “Joinder”, Loser Pays, Pay to Play, Covered Business Methods (CBM), Elimination of Post Grant Review Estoppel, Disclosure of All Plaintiff Interested Parties, Enhanced Pleadings and Limiting Discovery, and Customer Stay provisions that are so onerous, only large corporations will be able to commercialize inventions.  The provisions will make small inventing companies “Toxic Assets” to investors. Small inventors will likely need at least $5 million in the bank, not for their own use, but to cover the infringers’ costs.  This is part of the shift in Congress to cater to big money interests, leaving the middle class behind. The details of these legislative “potholes” will be explained in this five part series.

As the National Co-Chairs and Executive Director of the Small Business Technology Council (SBTC), a council of the National Small Business Association, we support the highly inventive firms that participate in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.  The SBTC is a council of the National Small Business Association (NSBA), the nation’s first small-business advocacy organization, advocating on behalf of America’s entrepreneurs. A staunchly nonpartisan organization, NSBA’s 65,000 members represent every state and every industry in the U.S.

Small business creates about 5 times more patents per employee than large firms and 20 times more than universities.[i]  The SBIR program delivers 58% more patents than all U.S. universities combined.[ii]  Furthermore, small firms patents are more important (more often cited) than large firm patents.[iii]

Small technology firms employ 38% of all scientists and engineers in America (54.8 percent of all industrial scientists and engineers). Yet these nearly 6 million scientists and engineers work with only 4.3 percent of the government R&D dollars. In contrast, firms with more than 500 employees account for only 27% of all scientists and engineers, but receive 50.3 percent of government R&D funds. Universities employ 16% of the scientists and engineers and receive 35.3 percent, non-profit research institutions 9.1 percent of R&D funding, and states and foreign countries 1.0 percent of R&D funds.[iv]

The Small Business Technology Council (SBTC) believes that HR 3309 and other “patent reform” bills in the Senate will cloud patent titles, making them weaker. For small business, patents will become mostly unenforceable due to the proposed much higher upfront cost of litigation, thus making small business patents significantly less valuable. Loss of patent value constricts new company formation, chilling new investments, and choking job formation.  Legislating disincentives for capital investments will result in the loss of many hundreds of billions of dollars of wealth in America and dry up the major source of new jobs, small inventing businesses.  Purporting to attack predatory trolls, the bills instead attack all small companies with legitimate patent suits to protect the interests of large infringers at the expense of new business job creation.  Furthermore, these bills do not specifically define or address “trolls” or “non-practicing entities,” but instead lump all patent holders together.  With the current patent legislation, we have a baby and bathwater problem, we are “throwing out” our small business inventors.

HR 3309 (“Innovation Act of 2013”) is anti-innovation and anti-job, and will further raise the barriers against small business technology development by making it yet harder to win and defend a patent in the U.S.  The House and Senate bills raise the costs of obtaining and defending new patents, which disproportionately empowers the largest firms while straining the capability of smaller firms.  Intellectual property is a key component to make and keep good jobs in America.  By raising the barriers to development and protection of intellectual property, the bills remove a key incentive to innovate, and provide large international manufacturers the ability to infringe with impunity.   Patents protect U.S. jobs, and these bills are anti-patent and anti-job.

  • By making it much easier for large integrated multi-national corporations to simply adopt new technology without consideration for patents, the resulting jobs will tend to flow overseas to the lowest-labor-cost location, rather than be held by U.S. workers defended by U.S. patents.  U.S. patents are a primary defense keeping U.S. jobs in the U.S.
  • Over time, these changes also reduce the incentives for American small businesses to continue their valuable innovation if their products can no longer be defended against appropriation by the large manufacturers.  Small businesses create and tend to keep their jobs in the U.S.

Furthermore, the bills do nothing to help reverse the most pressing need at the US Patent and Trademark Office (USPTO), Fee Diversion.  Over $1.7 Billion of patent fees has been withheld by the Treasury.[v]  As the patent office is self-funded using fees collected from inventors, withholding acts as a tax.  Thus, this “Invention Tax” is a $1.7 Billion disincentive for invention in America.  Even more importantly, since the withheld fees are not being used to modernize the USPTO technology or hire new examiners of the highest caliber to provide faster, better reviews, pendency remains near record highs,[vi] which delays issuance of patents.  This in turn retards corporate formation and funding, slowing the economy.

The U.S. innovation sector is responsible for 27.7 percent of U.S. jobs and 34.8 percent of U.S. GDP.[vii]   According to David Kappos, the former head of the United States Patent and Trademark office, when discussing the lack of focus on Trolls in the current bills,  “untargeted legislation puts in jeopardy U.S. technology leadership.”[viii]

Patents are the number one indicator of regional wealth according to the Federal Reserve Bank.[ix] Where do the best patents come from?  “SBIR-nurtured firms consistently account for a quarter of all U.S. R&D 100 Award winners,”[x]  on 2.5% of the Federal R&D budget.  Regions that increase their number of patents gain $4,300 more per worker over a decade’s time.[xi]  If these “Patent Reform” bills are signed into law, they will discourage small business patents, and the contrapositive indicates that we will be a poorer nation.  Changes in the law will also adversely affect the over 21,300 SBIR award winners and their over 112,550 patents.[xii] This will become even more critical over time as there has been a shifting in engineering talent from large businesses to small businesses.  (The employment share of American small business engineers grew from 6% in 1978 to 38% in 2005.[xiii])

The Small Business Administration’s Office of Advocacy has now warned what these bills will do to the economy.[xiv]  This is despite the fact that HR 3309 overwhelmingly (325-91) passed the House, and the President’s indication, including comments in the SOTU address,[xv] that he will sign a patent reform bill (such as HR 3309).

The President’s statements are inconsistent and appear to be at odds with his prior goals and statements, such as:

“President Obama has said, if we are to win the future and be successful in an increasingly competitive international market, the United States of America must innovate. … The Obama Administration’s determination to promote innovation and protect intellectual property (IP) rights will harness the inherent drive and ingenuity of the American people in meeting that goal.  … Innovation protected by IP rights is key to creating new jobs and growing exports.  … Protecting our ideas and IP promotes innovative, open, and competitive markets, and helps ensure that the U.S. private sector remains America’s innovation engine.” [xvi]

The America Invents Act (AIA) was fully implemented about 1 ½ years ago, and its effect on our patent system has yet to be fully understood.  One of the AIA’s requirements was to have a study performed by the Chief Counsel for Advocacy of the SBA on the effects of the Act on small business.[xvii]  This report was to have been completed by September 16, 2012, eighteen months ago.  We are very concerned that the Administration needs to be cautious before making additional changes to our patent laws, before the effects of the prior law have been evaluated.

We must be certain that changes that are made should not undermine incentives for developing new U.S. patents, their robust enforcement, or the existing economic incentives for companies of all sizes to invest in research, development, and new jobs. We encourage the Administration to request the Senate to hold additional hearings on the many different aspects of the legislation and its effects on small businesses.

The current Senate bills and HR 3309 have many items that we are concerned about.  These include but are not limited to:

  • Loser Pays.
  • Pay to Play.
  • Fee Shifting “Joinder”.
  • Covered Business Methods (CBM).
  • Elimination of Post Grant Review Estoppel.
  • Disclosure of All Plaintiff Interested Parties.
  • Enhanced Pleadings and Limiting Discovery.
  • Customer Stays.

Each of these will be discussed in detail in Part’s II, III, and IV.  Part V will summarize our discussion.

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[i] Small Serial Innovators: The Small Firm Contribution To Technical Change, CHI Research, Inc., under contract to the U.S. Small Business Administration, March 2003, www.sba.gov/advo/research/rs225tot.pdf.

[ii] SBIR patent database, Innovation Development Institute, www.inknowvation.com

[iii] Small Serial Innovators: The Small Firm Contribution To Technical Change, CHI Research, Inc., under contract to the U.S. Small Business Administration, March 2003, www.sba.gov/advo/research/rs225tot.pdf.

, page 12. “a patent from a small firm is more than twice as likely to be found among the top 1% highest impact patents than is a patent from a large firm.”

[iv] Science Foundation, Science and Engineering Indicators, 2006 (Figures are for 2005.)

[v] 2012 USPTO Performance and Accountability Report, http://www.uspto.gov/about/stratplan/ar/USPTOFY2012PAR.pdf

[vi] Id. at Figure 5.

[vii] Intellectual Property and the U.S. Economy: Industries in Focus, Economics and Statistics Administration (http://www.esa.doc.gov/print/Reports/intellectual-property-and-us-economy-industries-focus), April 10, 2012, page 2.

[viii] “Patent lawsuits: Senate legislation would seriously damage innovation sector”, OP-ED, San Jose Mercury News, Ben Pless and David J. Kappos, February 11, 2014.

[ix] “Altered States: A Perspective on 75 Years of State Income Growth,” Federal Reserve Bank of Cleveland, Annual Report 2006. For more detail, see Paul Bauer, Mark Schweitzer, Scott Shane, State Growth Empirics: The Long-Term Determinants of State Income Growth, Working Paper 06-06, Federal Reserve Bank of Cleveland, May 2006. http://www.clevelandfed.org/research/Workpaper/2006/wp0606.pdf

[x] “Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970-2006, Fred Block and Matthew R. Keller, THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION, July 2008.

[xi] Patenting Prosperity: Invention and Economic Performance in the United States and its Metropolitan Areas, Jonathan Rothwell, José Lobo, Deborah Strumsky, and Mark Muro, Brookings Institution, February, 2013

[xiii] National Science Foundation Science Indicators for various years.

[xv] President Barack Obama’s State of the Union Address, January 28, 2014, http://www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address

[xvi] Rebecca M. Blank and David J. Kappos Forward to the Intellectual Property and the U.S. Economy: Industries in Focus Report, Economics and Statistics Administration and the US Patent and Trademark Office, March 2012.

[xvii] Leahy-Smith America Invents Act, PUBLIC LAW 112–29—SEPT. 16, 2011, Section 3(l), p.291.

About the Authors

Robert N. Schmidt is Chairman and CEO of Cleveland Medical Devices, Inc., a company that develops, manufactures and markets sleep disorder products. Schmidt is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Heidi Jacobus is Chairman and CEO of Cybernet Systems Corporation, which is a leader in American research and development in the medical and defense fields and is one of the country’s largest Small Business Innovative Research (SBIR) contract winners. Jacobus is also the National Co-Chair of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).

Jere W. Glover is Of Counsel to the Washington, DC, firm of Seidman & Associates. Glover is also the Executive Director of the Small Business Technology Counsel (SBTC), which is a Council of the National Small Business Association (NSBA).


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Posted in: Congress, Government, Guest Contributors, IP News, IPWatchdog.com Articles, Legislation, Patent Reform, Patents

12 comments
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  1. Bob/Heidi/Jere,

    Thanks for pointing out why this so-called “patent reform” will be so detrimental to small business innovation where our future job growth lies. Unfortunately, Congress, as well as our current Chief Executive only pay lip service to small business innovation, and are totally beholden to the multinational Goliaths.

  2. Great article. Now, on the other side of the debate is this article from VentureBeat with its laughable use of debunked/false data and “the sky is falling” hyperbole.

    http://venturebeat.com/2014/04/24/waiting-for-patent-reform-is-costing-us-billions-here-are-the-numbers/

  3. Bemused,

    Calling that VB article a “laughable use of debunked/false data” isn’t an understatement. It cites to all the discredited and disingenuous data of “all the usual suspects”: Bessen, Meurer, Lemley, Chien, etc. Simply confirms my view that there is no “journalism” anymore in the media.

  4. Excellent article. Thanks for posting.

  5. Prior to founding VentureBeat, he covered venture capital for the San Jose Mercury News from 2001 to 2006. In 2002, Matt was awarded \”Journalist of the Year\” by the Northern California Society of Professional Journalists. Prior to working at the Merc, he was a correspondent for the Wall Street Journal

    That’s what there “about” page says re their CEO.
    Venture capital? Wall Street?
    Aren’t those about buying pieces of paper (shares) at a low price and selling them high?
    Isn’t that pretty much what investors in patent papers do? Buy them cheap and then turn them into gold?

    Hypocrisy, hallow be thy name.

  6. Proposed changes making USPTO process more difficult navigate for individual inventors to navigate seem to say “file with the WIPO first, the EPO regional second, and the USPTO national third, if at all’. What sayest thou ?

  7. ” easier for large integrated multi-national corporations to simply adopt new technology without consideration for patents, the resulting jobs will tend to flow overseas to the lowest-labor-cost location, rather than be held by U.S. workers defended by U.S. patents.”

    This statement, quoted from the article, is wrong. The logic that manufacturing jobs will be transferred to low-cost locations holds equally true for large and small entities (ever heard of sub-contract manufacturing? ), while the patents protect the markets, rather than the manufacturing location.

  8. post caught in filter – please release one and delete the other (preferably the one in the filter can be deleted).

    Benny,

    Sorry, but your “it’s wrong” is itself wrong. The logic you attempt does not ‘transfer,’ because the small entity does not control the decision point as to transfer of low-cost location. It is only the large corporation and its vertical integration that has that power, that control to unilaterally decide to move from one country to another in its cost-factor optimization power.

    Having worn that manager’s hat, I personally can speak to this point. I personally made decisions to move the manufacture of an imported item from one low cost country to another because we controlled the vertical integration aspect. Small entities by definition do not have such control – not in the meaningful sense of which this discussion has for its context.

  9. Benny,
    Your comment that “patents protect the markets” is correct.
    However, I would point out that smaller firms tend to outsource jobs overseas much less than larger firms. Thus, by protecting new technology for smaller firms with patents, more jobs will stay in America.
    There are many articles discussing the difficulties that small firms have in outsourcing. One such article is found at:
    http://www.academia.edu/2505500/Small_Firm_Entrepreneurial_Outsourcing_Traditional_Problems_Nontraditional_Solutions
    Thus, we see:
    “Small firms have far fewer resources and absorptive capacities than larger firms. Their scale of demand is small (Timmons and Spinelli, 2007). These characteristics offer few incentives to outsourcing suppliers. It is a weak market position that works against small firms when it comes to contracting with vendors. Further, the dynamism
    of entrepreneurial firm operations can complicate outsourcing partnerships (Arbaugh, 2003; Hamel, 1999). As such, although entrepreneurial firms can benefit from outsourcing in principle, the traditional notion of small firms using outsourcing to enhance operations is impractical.”
    Outsourcing is significantly more complicated for small firms when going offshore. Large firms can send entire teams of managers and quality personnel to sit in a foreign manufacturer’s plant. Smaller firms cannot; thus, the manufacturing tends to more frequently stay in the US for small firms.
    So, the point is, you are correct on the direct effects of IP, but it is the this secondary effect of less offshore contract manufacturing by small businesses that allow small business patents to create more US jobs.
    Robert N. Schmidt

  10. Anon,
    You appear to be explaining to me why. I, as a smal entity, cannot transfer low volume production of a device I have patented to an Asian. sub-contactor. Well, too late. We have already done it.

  11. No Benny, I am not doing as you think.

    I am explaining the reality of the legal notions involved.

    Once again, your lack of appreciation of the forum shows.

  12. Our political leaders are ill informed and under educated with the effect those so called reforms and their effect on our innovative dynamo. They are tying up our hands behind our back, the first time with the so called globalization and the second time with this reform.

    We are squeezing the control of innovation from the many (AKA Democracy) to the few (AKA Dictatorship). We all know that the few cannot decide for the many and as a result, the innovation dynamo will wither away while foreign market stay out of our reach by prohibitive cost and rules designed to make their nationals more competitive at home.

    Here is a summary: It takes and intellectual to protect intellectual property and our politician on the Right are not intellectuals and they are not right.

 

 


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