I want to thank Mr. Quinn for graciously inviting me to write a post on my forthcoming book The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, which should be available on Amazon.com in December 2009.
This book started as a project based on my observations. I deal with technology start-up entrepreneurs everyday as a patent attorney. I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the previous decade. Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary. The underlying technologies of these companies often held the potential to completely redefine a market. This energy was infectious and the potential implications of their work was mesmerizing. However, the technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans. I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world.
I am still waiting. Most of the start-up companies I have come into contact with are looking for narrow niche markets. Instead of trying to change a whole area of a technology and go public, these companies are looking to develop incremental changes and be bought out by an existing company as soon as possible. I started wondering if other people in the technology world were seeing similar trends. My informal surveys centered around the question of whether this decade (2000-2009) was as innovative as the 90s. While I would say that most people I surveyed felt this decade was not as innovative as the 90s, there were people who disagreed.
Some dissenters pointed to were the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry. While certainly innovative, these innovations did not drive the whole economy like the Internet of the 90s. The Internet affected almost every business in the U.S. The personal computer revolution of the 80s had a similar, although somewhat less pronounced effect. The iPod is clever, but hardly effects the whole economy. In fact, it doesn’t even drive the electronics or software industries. The same can be said of Intel’s gigantic investment in a new microprocessor or social media web sites.
I began to wonder about the reasons for the differences in the 90s and this decade. What were the causes and implications for these differences? My investigation centers around differences in the level of innovation, so I began to explore some the structural drivers effecting innovation. As well I began to explore in depth what the implications of innovation were for the U.S. economy.
The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. These three pillars have been under attack since 2000. Our patent laws have weakened, reducing the value of intellectual capital. Sarbanes Oxley has made it virtually 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.
How important is innovation to the economy? Modern economists have studied this issue and found that increases in capital goods are not nearly as likely to result in economic growth as innovation. (See Clark, Gregory, A Farwell to Alms: A Brief Economic History of the World, Princeton University Press, 2007, p. 197.) Robert Solow won the Nobel Prize in Economics because of his work on the causes of economic growth. His model suggests that fourth-fifths of the economic growth of the U.S. is the result of technological progress. Real per capita increases in income can only result from innovation.
While a number experts are pointing out that the U.S. in not innovating and this is hurting the economy, the usual solutions offered are large government projects such as returning to the moon. Patents are the free market process for encouraging innovation. The evidence is clear that a strong patent system does more to encourage innovation than any NASA-like program at less than 1% of the cost. A strong patent system mobilizes the private sector to focus on innovation in ways that dwarf projects undertaken by the government both in the quantity of innovation and resources devoted to innovation.
People who follow IPWatchdog are certainly aware of the changes in patent law that have affect technology entrepreneurs, however the scope of the changes may not be clear – it has been a death by a thousand cuts. Here, a short list of some of these changes;
1) Patent Publication: While it is possible to opt out of publication in the U.S., the publication rule betrays the fundamental social contract underlying patents. With the publication rule, the public receives the benefit of the patent system – disclosure, even if the inventor receives nothing in return. The U.S. has traded away its traditional system of keeping patent applications secret until they issue in return for vague promises from other countries to speed up their patent process. A poor trade, even if other countries had lived up to their side of the bargain.
2) PTO Rejection=Quality: This policy has bankrupted the Patent Office, significantly increased pendency times and the backlog of patent applications, and most importantly destroyed dreams of thousands of entrepreneurs. Recently we have heard positive signs that this policy has been rejected, but even if completely reversed today, it will take several years to undo the damage.
3) The eBay Decision: A patent is a legal right to exclude, 35 USC 154, others from making, using, selling (offering for sale), or importing the invention. The Supreme Court’s eBay decision denies a patent holder’s right to exclude others and substitutes monetary damages even if the patent holder prefers to enforce their right to exclude. The Supreme Court’s eBay decision overturned 20-25 years of jurisprudence, which recognized an injunction was the only relief the court could provide against an infringer that was consistent with a patent holder’s “right to exclude.”
4) The KSR Decision: The Supreme Court overturned 20 years of jurisprudence associated with an objective test of obviousness and substituted a subjective test. This subjective test increases the uncertainty that an inventor will receive a patent and increases the risk that their patent will be held invalid if they have to enforce their patent against an infringer. Now there are increased costs associated with obtaining a patent and in enforcing a patent.
The Supreme Court in the last 100 years has a sad history of supporting technology thieves and throwing U.S. inventors to the wolves. From the “flash of genius test” to a Supreme Court justice statement that the only valid patent is “one that this court has not seen”, to its complete lack of understanding that a patent is a “right to exclude.”
A thriving technology community is key to economic growth, real per capita income growth, and a better future for our children. The laws and regulations killing innovation in the U.S. fall below the radar screen for most Americans. The technology community must advocate for policies that are necessary to a thriving entrepreneurial economy, because no one else will.