How the U.S. is Killing Innovation and why it Matters for Entrepreneurs

By Paul Morinville
October 24, 2015

uncle-sam-skull-monster-copy Over the last ten years, the U.S. government has dealt serious damage to American innovation by altering how our patent system has worked for more than two hundred years and shifting it in favor of large corporations at the expense of small inventors. Today, inventors cannot reasonably defend patents and most patents are no longer capable of attracting capital to build the next generation of American innovation.

The plain words of the U.S. Constitution constructed a patent solely as an exclusive right, a property right. Like any other property right, patents were used as collateral to attract investment thus capitalizing new companies to commercialize new innovations. The genius of the Founders quickly became clear. Within just a few of years, American innovation surpassed every other country. For the next two hundred years, patents fueled the greatest innovation engine known to man and drove the greatest economy on earth. The right of a normal American to own what they invented, and therefore the tools to compete with entrenched corporations on an even playing field, became a key pillar of the American Dream and a major theme in the American story.

The courts, Congress and the Obama Administration, have changed all that.

In 2006, a Supreme Court case called eBay v. MercExchange effectively eliminated a patent’s exclusive right changing a patent into some thing other than a property right. A property right that is not an exclusive right is not a property right and cannot attract investment. After all, if anyone can infringe why risk money on it?

Today if a big corporation infringes a patent, it is impossibly difficult for an inventor to stop them. Instead, courts force inventors to grant a license to infringers at prices set by the court with no real connection to the free market. Not surprisingly, the value of patented property has fallen significantly and many patents have been made worthless.

Property rights must be durable. If a property right can easily be taken away, nobody will risk investing in it. Patents are presumed valid in black letter law. Up until 2011, the only way to invalidate a patent was through an Article III court, which was very difficult and this difficulty kept squatters from infringing on patent rights.

New procedures created by the America Invents Act of 2011 allow infringers to challenge a patent in the United States Patent and Trademark Office (USPTO), an administrative court – not an Article III court, using completely different standards and shifting the financial burden on the inventor. These administrative proceedings, which have been called fundamentally unfair to patent owners, now invalidate the vast majority of patents they review.

Another Supreme Court decision in 2014 called Alice v. CLS Bank all but eliminated patent protection across many fields of innovation, including software related inventions that make up over half of all patents issued. In many areas of innovation, especially software, the risk that any given patent will be invalidated is as high as 80%.

There have been other damaging changes in the last ten years. The financial penalty against an infringer who is caught infringing is all but eliminated. It can take ten years for the USPTO to issue a patent. What is considered obvious to patent, and therefore not patentable, has become a subjective test that is invalidating a large number of patents. Many other long settled legal constructs of patent law have been altered – virtually all of the changes have tilted the patent system in favor of large infringing corporations and against inventors.

Not surprisingly, most contingency fee attorneys and most investors have left the patent business altogether. It takes millions of dollars to defend a patent, so without the help of contingency fee attorneys and investors the vast majority of patents cannot be defended at all. This has proven fatal to most inventors.

While the changes have obviously proven devastating to inventors who license their patents for others to commercialize, it is equally devastating to inventors who attempt to commercialize their own inventions, often known as a seed-stage company.

Small, early stage investors called “Angel Investors,” or simply “Angels,” provide seed funding to build the company to a point it can attract larger investment from venture capitalists and banks, thus bridging the gap from idea to fundable company. Venture capitalists and banks usually require a product, a management team and/or customers to manage. For an investor, whether Angel or VC, it is all about managing risk. The more tangible the company the more likely investors will be interested, but without strong patent rights even the best early stage company can look unacceptably risky, which means it has become difficult to attract Angels, which in turn makes it even more difficult to attract venture capital. When early investors steer clear this creates a funding gap between seed-stage companies seen as too high risk, and an early-stage companies with products, customer and a team with manageable risk. Essentially, changes to the patent laws have cut the critical early stage funding, which is the lifeblood of any new technology venture.

Because seed-stage companies only have a patent to leverage as collateral, strong patent rights are critically important to attract seed funding. First, a patent’s exclusive right helps keep competition at bay long enough for the seed-stage company to get a toehold in the market. Unfortunately, eBay effectively eliminated the exclusive right making it impossibly difficult to stop a big corporation from saturating the market with infringing products and killing the seed-stage company.

Seed investors also view a patent as a floor to losses thus limiting downside risk. If the invested company goes out of business, the investor can take control of the patent to return at least part of the investment by defending it in court or selling it to someone else that does. Regrettably, neither option is a good option anymore.

Most patents cannot be sold and the best only bring a small fraction of their value in the market. If the investor chooses to defend the patent in court, the only way to prove the patent is actually valid property right is to spend seven or more years and millions of dollars with a very high likelihood that the patent will be invalidated. Even if the patent survives, there is no way to know what the court will award as damages in a forced license because the free market is not considered. With no contingency attorneys and no other investors, the seed investor will have to foot the bill in its entirety.

Our government has dealt fatal damage to both inventors who license their inventions and seed-stage companies attempting to commercialize a new technology. It is no wonder that more companies are going out of business than are starting up for the first time in U.S. history. We are killing the very engine that made America the greatest economic power ever known. We should all be very concerned.

The Author

Paul Morinville

Paul Morinville is Founder and former President of US Inventor, Inc., which is an inventor organization working in Washington DC and around the US to advocate for strong patent protection for inventors and startups. US Inventor has been walking the halls of Congress knocking on doors and sitting down with hundreds of offices to explain the damage suffered by inventors due to patent reforms. Paul is President of SemiComm HK, a Hong Kong company licensing patents in China, and an independent inventor with dozens of U.S. patents and pending patents in enterprise middleware.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 23 Comments comments.

  1. angry dude October 24, 2015 11:35 am

    It is also worth reminding that it was an irrelevant *e-commerce* patent that was used by SCOTUS in Ebay decision to hugely devalue real patentable engineering and technical breakthroughs of small inventors and seed-stage companies in this country.
    And this is just unacceptable for the country as a whole.
    This leads to nowhere.

  2. David October 24, 2015 3:10 pm

    “New procedures created by the America Invents Act of 2011 allow infringers to challenge a patent in the United States Patent and Trademark Office (USPTO), an administrative court – not an Article III court, using completely different standards and shifting the financial burden on the inventor. These administrative proceedings, which have been called fundamentally unfair to patent owners, now invalidate the vast majority of patents they review.”

    There are also a number of challenges which will likely ask the SCOTUS to review this delegation of (potential) Article III power to the executive and legislative branches. If the challengers are unsuccessful, the claim of patent validity will remain (per the CAFC’s characterization as a public right) administrative, and with time, the bulk of that power will shift to the Article I tribunals.

    Please, pay attention people.

  3. Edward Heller October 25, 2015 6:21 am

    Paul, Do you have any examples of a court imposing an ongoing royalty on an unwilling patent owner?

  4. Ned Heller October 25, 2015 6:26 am

    From the thread linked here: http://www.ipwatchdog.com/2015/03/06/ptab-proceedings-unfair-to-patent-owners/id=55397/

    Roger Meyer said, “[A] high-level former USPTO official who had considerable input on the creation of the AIA and the administrative patent trials in particular, mention that there was considerable concern that the APTs might be susceptible to a strong constitutional challenge and that the ability to amend the claims was added so as to give the trials some aspect that would distinguish them from an Article III court. Of course, now we’ve seen the nigh impossibility of being allowed to amend in any event.”

    Interesting —

    Were you aware that that challenge is now before the Federal Circuit for a decision in MCM Portfolio LLC v. HP, No 15-1091?

  5. Paul F. Morgan October 25, 2015 12:00 pm

    If you want to do something effective rather than just complaining you should be supporting amicus briefs to the Sup. Ct. in Halo Electronics, Inc. v. Pulse Electronics, Inc., S.Ct. No. 14-1513 and Stryker Corp. v. Zimmer, Inc., No. 14-1520. If, as hoped from these cert grants, the Supremes will unleash D.C. treble damages awards from Fed. Cir. imposed restraints, the incentive to negotiate in good faith for a license to a valid patent [vs a vis those companies we all know that regularly blow off license offers] should substantially increase. Continuing-infringers are unlikely to make any profit by infringing with trebled infringement damages. Of course this cert grant just happened, after this article was written.
    But if this complaint is directed at the pending patent legislation, note that nothing in that proposed legislation will overrule eBay. Nor is Congress likely to have forgotten the patent owner who almost got an injunction to shut down all their then-vital Blackberries. How likely are they to vote for a non-producer of smart phones to be able to shut down all their smart phones?

  6. Anon October 25, 2015 12:37 pm

    Edward Heller — The obvious one is eBay v. MercExchange. P wanted an injunction and was denied that remedy (which somewhat fraudulently is what is printed on the cover page of patents to this day — see e.g. http://www.nature.com/ni/journal/v14/n6/fig_tab/ni.2618_F1.html). Court awarded monetary damages which could be thought of as an NPV of an “ongoing royalty.”

  7. Paul Morinville October 25, 2015 12:40 pm

    Paul @ 4, US Inventor, me personally, and many other inventor groups and inventors signed on to briefs supporting cert for those cases. There is a different case coming up having to do with laches. We hope to support that one too.

    You’re right – nothing in any proposed legislation overcomes eBay. In addition, nothing is in there on willfulness, laches, obviousness and a host of other problems our activist courts legislated. However, patent reform in congress has slowed down. Now is the time to make damage known so that congress rethinks its mistakes and those of the courts, and hopefully comes to its collective senses.

    eBay is a outright disgrace. It is against the plain words of the Constitution and highly damaging to those least able to withstand the damage – small inventors and seed companies. I’d rather not throw in the towel just because congress loves their smart phones and I think we can’t overcome that. I have no idea how it will be fixed, but it must be fixed. At some point, congress will be compelled to return the patent system to what it was just ten years ago. I’m willing to keep raising hell until that happens. I want my country back.

  8. Ned Heller October 25, 2015 1:00 pm

    Paul, Since you did not respond, I will assume that you have no examples of a court imposing an ongoing royalty on an unwilling patent owner.

  9. random October 25, 2015 1:28 pm

    The EDTX imposed a compulsory ongoing royalty in VirnetX v. Apple. It was vacated by the Fed. Cir., but it can happen as an alternative to an injunction.

  10. Edward Heller October 25, 2015 1:41 pm

    From eBay, “Although the District Court recited the traditional four-factor test, 275 F. Supp. 2d, at 711, it appeared to adopt certain expansive principles suggesting that injunctive relief could not issue in a broad swath of cases. Most notably, it concluded that a “plaintiff’s willingness to license its patents” and “its lack of commercial activity in practicing the patents” would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not issue. … To the extent that the District Court adopted such a categorical rule, then, its analysis cannot be squared with the principles of equity adopted by Congress. The court’s categorical rule is also in tension with Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U. S. 405, 422-430 (1908), which rejected the contention that a court of equity has no jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use the patent.”

    From Continental Paper Bag, “From the character of the right of the patentee we may judge of his remedies. It hardly needs to be pointed out that the right can only retain its attribute of exclusiveness by a prevention of its violation. Anything but prevention takes away the privilege which the law confers upon the patentee. If the conception of the law that a judgment in an action at law is reparation for the trespass, it is only for the particular trespass that is the ground of the action. There may be other trespasses and continuing wrongs and the vexation of many actions. These are well-recognized grounds of equity jurisdiction, especially in patent cases, and a citation of cases is unnecessary.”

    eBay/Continental all but hold that if an infringer is unwilling to stop infringing, an injunction should issue. The court particularly condemned the District Court that had all but eliminated injunctions for patent owners willing to license for a royalty (that they agree to, remember).

  11. Edward Heller October 25, 2015 3:31 pm

    Paul, you have a good point about “complaining.” Paul M. links a thread here where even the administration worried about the constitutionality of IPRs. He complains bitterly about them. But when our challenge to the constitutionality of IPRs went before the Federal Circuit, he did nothing. He still does nothing, not even here. He just wants to complain. Guys like this make me want to vomit.

  12. angry dude October 25, 2015 6:12 pm

    What upsets me the most about Ebay decision is not that it’s just blatantly unconstitutional, but that Scotus used some irrelevant business method patent on performing some type of e-commerce transactions to revoke exclusive rights for the rest of us…

    Just read the US Constitution:

    “…to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and DISCOVERIES.”

    The Founding Fathers obviously had some higher standards of patentability in mind when they specifically put the word “discovery” in this clause.

    In my world, some method to buy-it-now on the internet auction offered by Ebay is NOT a *discovery*

    The Ebay decision has to be reversed because this is the root of all evil – it undermines the very nature of patents

  13. Edward Heller October 25, 2015 7:54 pm

    angry, did you read the direct quote from eBay at post 10? What does it say?

  14. angry dude October 25, 2015 8:28 pm

    Edward Heller@13

    “…a patent holder who has unreasonably declined to use the patent…”

    I am really struggling to understand this passage 🙂

  15. Edward Heller October 25, 2015 9:20 pm

    15. Why don’t you read Continental Paper Bag. It says the patent owner has a right not to license or exploit his patent and he has a right to injunction nevertheless in the face of continued infringement. The only exception is public interest.

    I am not so certain as to why eBay has been so misinterpreted.

  16. Paul Morinville October 25, 2015 9:56 pm

    Edward/Ned, If you are involved in an appeal that is beneficial to inventors, I am happy to join the appeal and will help round up other inventors and inventor groups. We have done this in the past and are actively seeking opportunities. You must know though that we are inventors and as such don’t have much money.

    eBay is certainly in conflict with a lot of precedent – Continental is just one of the many rulings in the first 200 years of the patent system that absolutely upheld the exclusive right. Despite that quote from eBay, SCOTUS defined a test. The courts following SCOTUS use that test to determine if injunctive relief granted. The eBay test means that commercialization of the invention (having a product on the market) is almost always required. Inventors who invent stuff to license for others to commercialize do not have a product. Investors who take control of the patent from a failed investment do not have a product. Companies that purchase a patent from an investor or inventor do not have a product. None of these folks will likely pass the eBay test.

    This means that when contingency attorneys and investors think about whether or not to spend millions of dollars in litigation, they cannot reasonably project damages because the most likely remedy is a forced license at a price determined by the gut feel of a court somewhere in the US. Injunctive relief allows a free market to arrive at a price by ensuring a willing buyer and a willing seller – this method of determining a price has been used for centuries and can project a price much more accurately than one set by the gut feel of a court and appealed to judges who use a gut feel considered much more accurate than the first judge.

    While it is still theoretically possible for the eBay test to allow injunctive relief, it is not rational to bet millions of dollars that you’ll get it. Investment is patents is all about betting and the odds have shifted so far toward large infringers that nobody bets on the little guy anymore.

  17. angry dude October 25, 2015 10:21 pm

    Edward Heller@15

    Using/exploiting your own patent AND exploiting your patent commercially are two VERY DIFFERENT things.
    Just where does it say that you have to exploit your patent commercially ?
    I use my patent all the time: writing software for my own usage, getting some nice results, presenting those results at international conferences… just not selling anything to other companies or to the public…
    Does this constitute a legitimate use of my very own patent ?

  18. Anon2 October 26, 2015 9:32 am

    angry dude@17

    If Patents were the enshrinement of protections for individual rights to property, rather than permissions and directives from the State then your question would not even come up.

    Morally, you have the right to exclude others from making, using, selling your invention… full stop. Whether the State recognizes that right and under what conditions… well that’s another question.

  19. Edward Heller October 26, 2015 12:26 pm

    Paul, thanks. Pay attention to the case I cited. It involves the constitutionality of IPRs. It is currently pending decision.

    On eBay, I know people are pessimistic about injunctions, but the court did note that a patent owner did not have to be reasonable in not exploiting his patent. Continental, which has not been overruled, did say that in continuing torts that injunctions were normally available.

    That is why I was asking for any case where the patent owner had refused to offer the losing defendant an ongoing license and the court nevertheless imposed on him a royalty bearing license.

    If the case is over, all appeal are done and the defendant is still infringing and still refusing any license offers by the patent owner at a royalty he is willing to accept, then the patent owner sues again. This time, the infringement clearly is willful. What is the court going to do? Grant him an untrebled reasonable royalty that the patent owner finds unacceptably low?

    In the end, this dance shows why the calculation of a reasonable royalty from hypotheticals is wrong. I the patent owner has a licensing program and is willing to offer all comers a royalty at X, that should be the reasonable royalty.

  20. Edward Heller October 26, 2015 6:11 pm

    Paul M., while I was on the boards of the IPO and the AIPLA, mostly during the ’90s, we filed quite a few amicus briefs typically paying only the printing costs. Firms competed for the honor of drafting the briefs.

    (I assume that this practice was unchanged.)

    I think inventors groups might think of adopting the same approach that they be better able to participate in our nation’s patent policy debate.

  21. Paul Morinville October 26, 2015 11:24 pm

    Edward, Thank you. Inventors have never been organized enough to make this sort of thing happen other than by happenstance. US Inventor was only founded in January, and at that point it was primarily just me and Randy Landreneau. We are learning a lot about how to advocate effectively, but we’re still learning.

    This round of patent reform has helped bring a lot of inventors and inventor groups together forming a unified voice. We are taking steps to expand on that through US Inventor and other inventor organizations and I think the next few months you will see many positive results.

    So far, we helped bring together the Inventor Caucus in Washington. We’re putting on classes in Congress for Members and staff to teach about early stage entrepreneurship and how patents drive capital to them. We work closely with the IEEE and the Robotic Caucus to do the same. We’re politically active in IA, IN, TX, CA, FL, UT, VA, MN and few other states attending town halls and encouraging local inventors and political groups to contact Congress and write to their local newspapers. We speak at local political groups. We’ve put on many panels in Congress. We sat down with almost 350 congressional offices between January and June turning one office after another. We have rounded up inventors nationally and brought them to Washington to make their case.

    One of those steps has been to find relevant cases and submit briefs, which we have done on a couple of cases. It’s good to know that there are some firms willing to help. Please keep us informed of issues you think are important to inventors and seed companies.

    We did the majority of this with no financial help. We’re all volunteers and we pay our own expenses or find a friend to pick it up if we can’t. We’ve pooled together to pick up some costs for inventors from time to time when it is necessary.

    I’m all ears for suggestions to improve our effort. This is a lot bigger than I ever expected and I have a lot to learn.

  22. Ming October 27, 2015 12:04 pm

    We really need is to vote all these stupid politicians out of office and rebuild America great again with more common sense and logic with better rules of law.

  23. step back October 28, 2015 9:08 am

    Ming @22

    Are you running for office yet?
    More common sense?
    More logic with better rules of law?
    Rebuild America [to be] great again?

    All fine buzz-slogans.
    Maybe the first rule of fight politics club should be that we never talk about fight politics club?
    (Second rule is the same.) 😉