If patent reform goes wrong

Editorial Note: This column is based on remarks made by Joe Allen today to the Licensing Executives Society.

_______________

Let me start with a disclaimer that may soon become obvious to you all, I’m the least expert member of this panel when it comes to analyzing the specifics of the pending patent reform bills and how they will impact various constituencies. Luckily, the other panelists more than make up for my deficiencies.

If we try and look at the current patent reform debate objectively there are some overall themes it might be helpful to consider. One is what a poor job we have done as a community over the years presenting the importance of the patent system to the American public and our political leaders. That’s now come back to bite us.

The best analogies for politics are war or sports. Since war is pretty harsh, let’s use football. We’re like a team that begins every game on defense at our own 20 yard line. Most times if we just give up a field goal it feels like we’ve done pretty well given the circumstances. Unfortunately, if you give up field goals and never score, you lose.

A truism in politics is that issues are driven by stories. One of the most successful is the saga of the patent troll. That’s driving the current debate creating a sense of a malfunctioning patent system which is a danger to the public. If one side’s story frames the argument, those in opposition are at a real disadvantage and many times never recover. So let me ask you, what’s the snappy sound bite showing the value of a strong patent system?

As this is the Licensing Executives Society, I assume that you agree that promoting innovation is critical to our national welfare, that the creative destruction of capitalism is a good thing, and that small companies founded by entrepreneurs drive innovation. A strong, dependable patent system is crucial for all of that to occur, but it certainly feels like our system continues to unravel. Before we discuss some fundamental tests that might be helpful in weighing the various patent reform proposals, let’s back up a couple of steps.

I’ve always been fortunate to have been able to hang around with people who are smarter than me. One is Alfred Berkeley, former Chairman of NASDAQ, who the Wharton School lists as one of their 125 most influential people and ideas. I met Al when speaking on a panel about the Bayh-Dole Act years ago. He said that 30% of NASDAQ’s value came as a result of commercialized university inventions. I can’t remember a thing that I said, but Al’s remark sure stuck with me.

Later Al joined our Advisory Board when I ran the National Technology Transfer Center, created by Congress to help federal labs commercialize their research. He sent me a book that really influenced my thinking. It’s by Peruvian economist Hernando de Soto titled The Mystery of Capital. Its premise is that a determining factor between affluent countries and those who are perpetually struggling is whether they provide the secure ownership of property, both real and intellectual, to their citizens.

So here’s the de Soto metric: does a US patent still give you dependable ownership of your intellectual property?

An article titled “Toxic Asset: the Gradual Demise of the American Patent”  summarizes five recent Supreme Court decisions ranging from changing obviousness standards to how infringement damages are calculated, all of which went against patent owners. And the author wasn’t even including the Myriad decision.

In their letter to Congress a broad coalition of patent owners assert that 75% of the patent claims subjected to inter partes reviews (IPR) are thrown out and only 20% of patents survive unchanged. With odds like that, it’s no wonder that hedge funds announcing in the media that they are filing IPR’s against crucial biotech or pharma patents can cause a company’s stock to nose dive $150 M overnight.

[Joe-Allen]

The bills being considered don’t reverse the Court’s anti-patent decisions. Perhaps something can be done to curb abuse of IPR’s, but that remains to be seen.

Let’s look at another issue that’s a huge factor in the current debate: the view of the importance of patents in the IT and life science industries is not always the same.

Here’s how Patent Progress, a group backing the House Judiciary Committee bill, sums this up:

While the patent system may work relatively transparently and reasonably well in the pharmaceutical sector, it is hindering rather than supporting innovation in the information technology and software sectors. Patents may be appropriate grants for protecting the investment behind a single drug, but they too readily become outsized, dangerous weapons in sectors where products consist of tens of thousands of patentable functions. Large portfolios with a 20 year patent term favor incumbents, encourage the milking of old technology and disadvantage newcomers, who begin with few, if any patents.

Another group has joined the IT and software industry supporters driving the debate– those who don’t like the patent system and seek to undermine university/industry technology transfer. They have been particularly successful placing opinion pieces in prominent newspapers. Last year an op-ed in The Washington Post  claimed that universities are allies of patent trolls. A May 3, 2015 op-ed in The Wall Street Journal  attacks universities for opposing the House Judiciary Committee’s patent reform bill, and for filing infringement suits against IT companies before concluding:

The debate worth having isn’t about whether university patent rights are strong enough to suit the wishes of those running the existing system. What would be more productive is a discussion about when, and perhaps whether, it makes sense for universities to seek patents at all.

With that background, let’s look at last week’s Senate Judiciary Committee hearing on patent reform. Many of the Senators and witnesses had truly horrific stories about innocent Mom and Pop businesses who received outrageous demand letters from patent trolls. Sen. Blumenthal told an appalling story about a veteran who was bankrupted after defending his photography business against a troll, even though the photographer won the suit.

But as Senator Coons (D-DE) aptly pointed out, the pending legislation isn’t limited to the bad actors, but potentially affects all patent owners. It was also striking that when Senator Whitehouse (D-RI) asked the panel after hours of talk about trolls if they could actually define a patent troll, not a single witness would even try. We’ll have to keep our fingers crossed that the Senators are able to pinpoint the actual problem and focus their efforts on curbing the few bad actors, and not harm legitimate patent owners seeking to prevent infringements by dominant companies who view them as pests.

The dichotomy between the IT and life science views of patents was underscored during the discussion of how to address hedge fund abuse of IPRs. One idea was reversing the current burden on patent owners to prove to the PTO (which after all, issued the patent) that it was valid, onto the challenger to prove that it wasn’t. The Cisco Systems witness objected, saying that they like the current process that’s tilted against patent owners as a tool to weed out weak patents. The Bristol Myers witness took the opposing view. We’ll see how the issue of amending the IPR process plays out when the Committee marks up the bill.

There was one statement that really resonated on the de Soto scale. The witness from 3M said that he’d never seen a time when there was more uncertainty over the value of a US patent. As the PTO estimates that intellectual property contributes $5 trillion annually to our economy and supports 40 million jobs, that seems like a comment worthy of considerable discussion, but no one seemed to take note and the hearing moved along. The harm a weakened patent system can inflict on innovative small companies was the focus of the recent patent reform hearing in the Senate Small Business and Entrepreneurship Committee. Let’s hope some of that debate spills over into the Judiciary Committee when it begins marking up its patent reform bill. Fortunately, several Senators are members of both committees.

That hope leads to one more metric that should be on the table. One of the breakthroughs of US patent law is that it made the system accessible to the average person, but that’s fading away. A good illustration of the problem comes from an unlikely source.

I stumbled on Patent Progress when Innovation Daily flagged their story “If the Innovation Act is Bad for Patents, Why do Large Patent Owners Support It?”  They listed companies like IBM, Microsoft and Yahoo as supporting House Judiciary Committee Chairman Goodlatte’s Innovation Act. Patent Progress said opponents of the bill fall into two camps: those with valuable patents who don’t have a troll problem, and those who profit by trolling.

Actually, their own story reveals a third camp. There was only one comment posted under the article which came from someone named Danny. He says that he’s an inventor with a series of fundamental Internet patents. Even though Danny used a prominent law firm and paid a lot of money to secure his patents, when he approached them about suing potential large company infringers they declined saying that they didn’t want to be considered patent trolls.  Danny wrote:

“I don’t have the millions it would take to enforce my patents… So tell me what good is the new patent system as redefined? How will the law firms with resources suddenly be willing to take on such sweeping, risky projects on contingency? How will it suddenly not cost $1m to protect my patent? How will this new situation help me?

“The answer is that it won’t. Frankly, the ONLY solution for me is a patent troll, and I welcome them. I’m looking for one now. (If you are one, contact me).”

So here’s the Danny metric for patent reform: are we designing a system that’s out of reach for those who historically drive American innovation? It was people like Danny that the Founding Fathers had in mind when adding Article I, Section 8 to the Constitution, and Abraham Lincoln referred to when he said that the patent system “added the fuel of interest to the fires of genius.”

When I was at the Department of Commerce in the 1990’s some liked to say that the days of the “cowboy entrepreneur” were gone. They were giddy over the formation of consortia where dominant companies and government agencies boldly plotted the breakthroughs of the future. But can you think of a game changing invention that came from a consortium? And how many of the companies that dominated our economy 25 years ago do so today?

Microsoft 1978.

If you look at pictures of those who revolutionized America (like the founders of Microsoft in 1978 – Above) they look a lot more like the Danny’s of the world than the corporate executives who are lobbying Washington pushing patent reform. It sure would be nice if someone applied the de Soto/Danny test to what Congress may be about to do. President Lincoln said the creation of the patent system was one of the three greatest advancements of humanity.

If patent reform goes wrong, it’s going to hurt the U.S. for a long, long time. We can’t afford to give up any more field goals.