In the past decade, the patent system has been turned on its head. Inventors are now villainized as cartoon characters called patent trolls simply because they assert their hard-earned patent rights against corporations who steal their inventions. These infringing corporations have cleverly cultivated the myth that all patent owners are patent trolls by engaging high-powered lobbyists and public relations firms to loudly attack inventors. This toxic concoction of myth, media and money has gagged opposing voices effectively creating political cover for the government to make rapid and fundamental changes to patent law that skew the field toward big corporations at the expense of inventors and small innovation companies, including those high tech start-ups that are responsible for creating high paying jobs.
The Obama Administration, the courts and Congress have destabilized the patent system for the least able to withstand instability – inventors and small innovation companies. A quagmire of confusing and contradictory law has rendered tens of thousands of legally and rightfully granted patents to become unenforceable. These changes are certainly riding the system of those who abuse the litigation process for profit, but not without slaughtering an entire generation of inventors and innovative companies along with them. One pro-infringer lobbyist has even informed me that harm to inventors is acceptable collateral damage in their war against patents. As remarkable as that admission was, at least he understood the damage that would come to inventors. Sadly, it seems our government is missing the point. It is hard to know whether our leaders are in denial, they simply don’t know any better, or if they don’t really care. Whatever the case may be, they continue to hip shoot at patent trolls in the dark.
Many pro-infringer Congressional offices have argued that a “good” patent (whatever that means) is still enforceable. While that may be true for big corporations it is absolutely not the case for inventors and small innovation companies. Indeed, this thinking clearly illustrates how little the government understands about what makes a patent enforceable in the real world, and thus valuable on the market. They don’t understand the differences in scale, resources and motivation between the big and the small. Sure, a big corporation with deep pockets, such as Apple or Samsung, can afford to pay lawyers hundreds of millions of dollars to fight over the course of a decade. Individual inventors and start-up companies simply cannot afford to play high stakes patent litigation games, and the chipping away of rights has made it virtually impossible for patent owners to find contingency legal representation, or to borrow money to pursue an infringer.
A patent is nothing if it cannot be defended. If there is no disincentive for a big corporation to steal the invention, they will steal it and then using their deep pockets and market power, massively commercialize the innovation that was not their own. Defending a patent, whether at the United States Patent and Trademark Office (USPTO) or in federal courts, costs millions of dollars. While this may mean little more than a rounding error in the greater scheme of a big corporation’s financials, for inventors and most small innovation companies it means they need investment. Patents are but one investment opportunity available to investors. Investors are a smart lot. They diligently evaluate investment opportunities before they write checks, examining fundamental investment concepts such as level of risk, potential return and timing. An inventor must be able to convince investors that putting their money at risk in a patent related investment is better than putting it somewhere else. Our current patent system makes that impossibly difficult.
An investor may wait as long as seven to ten years as the lawsuit works its way through the courts, the Patent Trial and Appeal Board (PTAB) and multiple appeals before any investment is returned. The investor must be willing to accept the very high risk that a patent will be invalidated at some stage in the litigation, which will cause a total loss of the investment. Even if the patent survives litigation, the investment may not be returned in full because nobody can project future damages now that injunctive relief is highly restricted and court ordered damages are falling as the result of decisions from the United States Court of Appeals for the Federal Circuit. What this means is the current patent system actually encourages infringement, which is deemed an appropriate risk given the low likelihood of risk of loss and no real risk of an injunction.
Given how the laws have been tilted so far in favor of infringers it is unlikely that an infringer will settle early on in litigation, which means investors must commit significantly more money up front and money remains at risk much longer. There is no way show with reasonable certainty that the investment will ever be returned, let alone at a profit. Given this reality it is practically impossible to show that investing in a patent is better than most other investment opportunities. As bad as it is now things will only get worse if Congress passes the Innovation Act (H.R. 9) or the PATENT Act (S. 1137).
It should surprise no one that most investors have left the patent business for other types of investments. Many contingent fee lawyers have left it too. Even Ray Niro, the granddaddy of contingent fee patent defense who built a storied career and a highly successful law firm defending inventors against large infringing companies, has largely left the business, opting to take on patent defense work instead. Today, an inventor is not likely to find money or legal representation to defend a patent, nor are they as likely to find investors as willing to invest in early stage start-up companies. The net effect of this investor reaction is that most patents simply cannot be enforced no matter how “good” they are.
There are multiple causes contributing to this catastrophe. To name just a few, the severe loss ratios and high costs of PTAB procedures created under the America Invents Act of 2011, the increasingly hostile environment within the Federal Circuit to patents, the technically illiterate Supreme Court, the overworked USPTO, and a string of pro-infringer case law decisions starting in 2006 with eBay v. MercExchange, which all but eliminated injunctive relief, continuing to the present with Alice v CLS Bank scrambling the definition of what is patentable. Just the fact that new patent reform legislation is brought up year after year in Congress creates chaos in a patent system already plagued by chaos.
Of all this damage, Alice v CLS Bank is the primary showstopper in terms of harm to innovators.
In Alice, the courts disorganized the definition of what is or is not patentable subject matter by expanding an exception to patentability called the “abstract idea”. If the invention encased in a patent is deemed to be an abstract idea, it is no longer patentable and will be invalidated. Poof, the property right is gone. This Supreme Court decision is extremely troubling because although the Court applies the “abstract idea” test they have never defined the meaning of “abstract idea.” To have and apply an undefined test is absurd. Further complicating matters is the very real truth that at some basic level every invention, no matter how complex, started off as an idea. In the wake of the Alice decision the “abstract idea” test has swallowed many areas of innovation whole, and is being misapplied to a logical extreme by patent examiners, Administrative Patent Judges and Federal Court Judges alike.
It should surprise no one that an abstract idea cannot be reasonably defined in concrete terms. The courts and the PTAB have left a trail of confusing and often ridiculous rulings that have invalidated a large percentage of challenged patents. The definition is now so scrambled that courts mix analysis of what is abstract with analysis of what is obvious or anticipated, something that prior to the Supreme Court’s decision in Mayo v. Prometheus in 2012 was absolutely prohibited. Alas, in their infinite wisdom, despite many generations of law to the contrary, the Supreme Court for the first time in 2012 decided it was appropriate to conflate patent eligibility with anticipation and obviousness. Whether or not the invention is abstract and therefore patent ineligible has become wholly dependent on the subjective opinions of whatever judge(s) assigned to the case.
What is or isn’t abstract is no longer generally understood by inventors, investors, or even lawyers. What is abstract can’t be understood because nobody knows what means. From the perspective of an inventor or small innovation company, the consequences of this jurisprudence are enormous. For reasons not explained the Supreme Court has substantially deviated from many generations of well established patent law, bringing extreme uncertainty into a business context that demands both scientific and legal certainty to survive.
Today, a patent is effectively presumed to be invalid with only a small chance it will become valid after millions of dollars are burned over many years of litigation. Because nobody can figure out in advance if any particular patent will pass muster, the abstract idea exception has effectively wiped out the presumption of validity for all patents in the eyes of investors in small innovation companies. This means when an investor looks at an early stage company with a patent as its primary asset (in many cases, its sole asset), the patent cannot realistically be valued as collateral for investment purposes. Investors rightly understand that their dollars invested in the new product can no longer be protected from big corporations simply copying it and overwhelming the startup in the market. Big corporations are simply responding rationally to changes in the law that are designed to allow them to misappropriate innovative products from inventors and innovative startups. It is just too risky to place any value on the patent, which means there is nothing to invest in from the investors’ perspective.
The abstract idea has proven devastating to inventors and small innovation companies. Until Alice and Mayo are corrected, the show stops for inventors and small innovation companies who happen to need investors. In the meantime, we should all be concerned. More companies are going out of business than are starting up for the first time in U.S. history. Thanks to bad policy decisions and awful Supreme Court decisions, America is killing the very engine that made us the greatest economic power in history.