“All of the businesses that I have started over the last 28 years have been based on intellectual property,” Louis Forman explained on Monday, May 11, 2015, at the Patent Reform 2.0 event I co-hosted with Bernie Knight at McDermott, Will & Emery. “I started my first business in my fraternity room in college. I have never been anyone’s employee. I have created jobs based on intellectual property. And that intellectual property is the incentive for me to take risks, to go out there and risk everything that I have.”
The purpose of the panel discussion was to have a frank discussion about patent reform by taking a look at the major pending bills currently working their way through Congress. Chief Judge Paul Michel (CAFC, ret.) explained that he thinks Congress is in a time warp, completely ignoring the significantly changed patent landscape, which has become increasingly inhospitable to entrepreneurial innovators like Foreman.
“It is disturbing to see what is happening right now around intellectual property,” Foreman continued during his opening remarks. “I am not sure there is anything wrong with the patent system except for the uncertainty that something is going to change, which has a chilling impact on business creation.”
John Whealan is a former Solicitor at the United States Patent and Trademark Office (USPTO), and the current Dean for Intellectual Property Law Studies at George Washington University Law School. Whealan spent time discussing his concern with the new administrative proceedings taking place at the Patent Trial and Appeal Board (PTAB), which came into being as the result of the America Invents Act (AIA).
Whealan asked the audience: “How many owned a home?” Nearly every hand went up. I bet all of you did a title search when you bought your home. He then asked: “What if years later someone challenges the title and your ownership of you home, by initiating an administrative proceeding (or maybe two), which will cost you several hundred thousand dollars and you lose?” If you lose the first proceeding maybe you buy another house, but then it happens all over again, and you lose again. “What are you going to do the third time,” Whealan asked. “Are you going to buy a 3rd home? I don’t think so. Many of you are going to rent.”
The mortgage illustration Whealan provided is particularly insightful because it explains the plight of patent owners in a visceral way that is easy to understand by even those not deeply familiar with the patent industry. American’s have a love affair with owning a home. Owning a home has been part of the American Dream for generations.
We take the certainty of home ownership for granted, but what if someone could just start a proceeding against you to take your property? After paying whatever amount you paid to acquire the home you now have to spend a minimum of several hundred thousand dollars (likely much more) to keep it. That can’t be fair, but that is exactly what is happening at the Patent Office. The challenger doesn’t even need to be interested in taking a license, approached to take a license, or even have any reason to believe they will be sued. For a variety of reasons, including making money in the stock market based on negative news created by the uncertainty, someone who doesn’t want you to have that patent can suck you into an administrative proceeding at will.
At some point patent owners need to be able to rely on the patent the USPTO issued to them or the entire system will collapse. If there is a two-thirds (or greater) likelihood that the patent will be invalidated by administrative judges at the USPTO why would anyone continue to use the patent system? Indeed, it seems more now than ever that a U.S. patent is not a property right at all.
In a property rights based regime title to property quiets. Owners can have confidence that they own the property, and other interested parties also know. No property right regime can survive open-ended uncertainty. We know this to be true based on the long history of uncertain (at best) property rights in countries that refuse to adopt strong individual property rights regimes, such as in communist countries. Where is no certainty of ownership rights property is not maximized. Instead property wastes.
“One of the first questions that any VC or potentially investor asks of a start up is, ‘What is your intellectual Property? Do you have patents?,’” Foreman explained. “Patents are the foundation, they are the infrastructure on those investments. People invest in something stable, something solid and a patent is that property right that the owner of that business has that they can use to raise capital, to really incentivize and go out and start a business.”
Foreman is, of course, correct. Those who are familiar with the popular television show Shark Tank know that a common, recurring question asked by the investors is: “Do you have a patent?” It is true that there is this popular myth on the Internet, and in some real world circles, that investors don’t like patents, but that is really nothing more than urban legend. Investors love patents. To the extent investors don’t care about patents it is because the company they are contemplating investing in is one that can’t be expected to have patents. But make no mistake – if investors are going to invest in a true technology company they are going to demand patents. Just ask Twitter.
Foreman went on to explain that there is a growing resentment of patent owners as if the people who invent are somehow not important for the innovation ecosystem. “I have a couple of companies where we design and we engineer and we invent and license intellectual property that we create to companies that are actually good at making things, companies that have established brands and infrastructure and distribution in place,” Foreman explained. “What we do is we invent the products that they ultimately go and sell. So in many respects we are a non-practicing entity by definition and therefore a patent troll. But we do not litigate. We do not try to extort. What we do is we play a roll in this ecosystem of invention.”
Most of the recent changes that have been made to the patent system have been as a result of so called litigation abuses by people who couldn’t care less about the patent system. These bad actors have unfortunately tarred all innovators and made those who invent Public Enemy No. 1. But Whealan says we need to be careful.
“Let’s be careful about changing the entire patent system based on the abuses that happen on either side,” Whealan explained. “Let’s keep our eye on the ball; there have been many great inventions and improvements to technology in the last few decades – just look at the computer (i.e., smart phone) you now carry in your pocket, which did not exist 8 years ago. I think we want to protect the technology.”
Indeed. It would be wise to take a holistic view of the innovation ecosystem, the role patents play and ask whether patent reform is wise. If patent reform is appropriate it would be wise to ask what reforms are necessary to lead to a better system, and how can reforms be narrowly tailored to focus on the problems identified. Taking out an elephant gun to kill a mosquito is just plain stupid. Yes, you kill the mosquito, but you are going to do a lot more harm than good.
Sadly, at hearing after hearing Congress has heard from witnesses that represent those who are demanding patent reform, but the voices of those who require patents to move forward with their business have been largely absent in the debate. “What I see in a lot of the current bills is… large corporations advocating on behalf of smaller entrepreneurs and innovators,” explained Phil Harstein, who is CEO of Finjan. “As an inventor I am not sure I would look to a large tech company to represent my interest in reform initiatives.”
If a better system is what we want Congress needs to consider the proposed changes from the vantage point of innovators, not just those who take or use the patented technology of others.
“When you take away incentive to an entrepreneur or inventor by weakening the patents, the ability to enforce those patents, what you are really doing is you are robbing society of those innovations,” Foreman explained. “You are taking away the creativity, the ingenuity and really the catalyst that creates all of the products and the services that we take for granted today.”
Sadly, what seemed so evident to Abraham Lincoln is now all but lost on many elected officials. For over 200 years the U.S. patent system stoked the fire of creative genius by enticing creative persons to innovate by giving them incentive to do so in the form of a patent. Increasingly over the last 10 years the U.S. patent system has chipped away at that incentive. How far rights can be eroded without completely compromising the entire system is a question we shouldn’t have to ponder, but these are not ordinary times.
“You have 225 years of history with the US Patent Office,” Hartstein explained. “ To think that you can make some tweaks around the edges to a system with so much history and legacy – I just do not think it works.”