USIJ Report Reveals Consequences of a Weakened U.S. Patent System

There is a symbiotic relationship between innovation and patents. The innovation that we say we most want is cutting-edge innovation that requires time, money and determination to bring into being. This paradigm shifting innovation or technology that can be characterized as disruptive creates the leaps forward and solves society’s greatest problems. Witness the race for vaccines and treatments to address the COVID-19 pandemic gripping the globe.

Innovative leaps forward lead to the formation of new startup companies and, frequently, to the birth of entire new industries. It is with this type of most desirable innovation that we see enormous job growth, and the greatest benefit to society.

A Major Shift

Unfortunately, paradigm shifting innovation does not come cheap. And patents are the lifeblood of this type of disruptive innovation. Those within the industry know this to be the case, and today the Alliance of U.S. Startups and Inventors for Jobs (USIJ) released a report detailing a comprehensive study that confirms the importance of patents and the consequences of a patent system in the United States that has veered away from strong protections for innovators and toward rules and laws that make it ever easier for implementers to copy the innovations of creators without remuneration.

The report finds that the slanting of the U.S. patent system against venture capital (VC)-backed startups in R&D-intensive industries has resulted in a major shift of venture capital away from life sciences, semiconductors, core wireless, medical technologies, and other capital intense industries to social media, consumer finance, hospitality, and other sectors where reliance on R&D is nonexistent or insignificant.

Indeed, interviews with leading inventors and investors conducted by the USIJ for the report show that changes to the patent system are causing VC investment to flow away from key life sciences investments. “We are less likely to address issues such as cardiovascular disease and chronic diseases such as diabetes and kidney conditions,” explained one VC. “These high-impact types of diseases are not being addressed like they would have been previously.”

Innovation Unfriendly Terrain

Why is that the case? Undoubtedly, because of the uncertainty of U.S. patent law as pertains to patent eligibility. Since the U.S. Supreme Court decided the quartet of cases in Bilski, Mayo, Myriad, and Alice, the interpretation and implementation of the law as applied to medical diagnostics, biotechnology and software has been oppressive. Even innovators in the areas of artificial intelligence and machine learning innovations have found difficult, if not impossible terrain. And it is impossible to patent medical diagnostics in the United States, period.

The draconian shift away from the world’s most permissive and welcoming patent system has been stark. It has had a disproportionate impact on startups, universities and smaller entities focusing on research and development. It has affected these entities most because larger entities are risk averse and the very act of innovating requires asking new questions with an open mind and attempting to improve or disrupt existing markets. Smaller entities take risk, which is why when patent law and policy cuts against the risk takers the consequences for the future of innovation are severe.  And those responsible for funding startups and R&D intensive companies have noticed.

According to the USIJ report, 74% of those surveyed said that patent eligibility is an important consideration in firm decisions whether to invest in a company, and 62% said that their firms were less likely to invest in a company developing technology if patent eligibility makes patents unavailable.

Money in Flight

Obtaining funding is already difficult enough, and startups that are most likely to engage in the type of paradigm shifting research that will lead to real disruption in wide swaths of the U.S. technology sector are immediately behind the eight ball, so to speak, because a significant majority of VCs that would otherwise be interested in investing are not, because of U.S. patent eligibility laws.

Other findings in the USIJ report confirm this bias, and flight of money away from innovation and into safer investments not based on research and development:

• The share of money invested in patent-intensive startups that develop critical technologies such as medical devices pharmaceuticals and biotechnology has declined, dropping from over 50% in 2004 to about 28% in 2017.
• Less patent-intensive sectors such as social networking, consumer finance, food and beverage, and restaurants, hotels and leisure have attracted a significantly larger share of venture capital in recent years.
• There has been a precipitous decline in the relative share of funding going to companies developing products in the pharmaceutical and biotech sectors. Overall, the sector experienced a 20% decline in share of funding.
• VC investment in pharmaceuticals went from a 7% share of all investments in 2004 to a 0.79% share in 2017.
• In 2008, the share of all VC funding going to medical devices was nearly 12% of all VC funding. By 2015, the share halved, dropping to less than 6%, where it currently remains.
• The share of funding for businesses developing patent-intensive high-tech hardware, such as computer hardware and semiconductors, has dropped significantly.
• Startup companies creating semiconductors now receive less funding in both relative and absolute terms, as they received not just a smaller share of funding but about $1 billion less in funding from 2013–2017 than they did from 2004–2008.