Does innovation lead to patents, or patents lead to innovation?

I recently had the opportunity to speak on the record with Matt Levy, current counsel with Wiley Rein and former patent counsel for the Computer & Communications Industry Association. To start reading our conversation from the beginning please see A Software Patent Discussion with Matt Levy. What follows is part 2 of our interview; the final segment. We pick up our conversation with me suggesting that there is a problem with claims being found to be abstract when the decision maker has been able to do a complete 102 (novelty) and 103 (obviousness) analysis. We then move on to discuss the meaning of “innovation,” whether innovation leads to patents or patents lead to innovation, and briefly touch on a long-time disagreement about whether patents are property rights.

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QUINN: I understand what you’re saying but I still have a problem and maybe it’s because fundamentally what I would say and how I would like to see the abstract idea exception implemented is that if you can do a 102 and if you can do a 103 then I would say that you have satisfied the minimum threshold of 101, which had always been the very lowest threshold. And if there are any problems they should be considered under 112. Because it seems to me that if it is concrete enough to evaluate the prior art that the examiner raised it can’t be abstract.

LEVY: That’s not necessarily the meaning of abstract in this context though.

QUINN: Well, and that’s again the problem. We don’t have a definition. So whoever is the decision maker gets to use their own definition, which I think is a real big problem.

LEVY: Well, that’s why I actually like what the Federal Circuit has been doing in the last year or so which is saying, okay, look, we’ve got this abstract idea, but we need to come up with something more practical. And so what they did is they flipped it around and basically they’re looking now to whether — they’re not looking to see whether there’s just conventional stuff, they’re looking to see whether there is something technical here that would improve the performance of the device. And I think that that’s fundamentally a good question to be asking, because that’s really what we’re trying to get at, right? It may seem like oh that’s the same thing but it’s not. If you’re actively looking to find the technical improvement that’s not the same thing as just framing it as well it’s a bunch of stuff and then this other stuff is conventional so there’s nothing new here. I think the way that you frame actually is important. I think that there’s a lot of physiological evidence for this, although I’m certainly no expert on that. Framing it as, “Let’s look to see if there are technical improvements,” is a good way to go and I think that’s why we now have more decisions like Enfish and McRo where the court is saying, well, look we can find it here. And I’m hoping that if we follow this approach and let it evolve some more, this will ease some of the pain that I know a lot of what you’re calling pro patent people feel. When you’re actively looking for the innovation instead of trying to find a way to not find the innovation it’s a bit different. You see what I’m saying?

QUINN: Yeah.

LEVY: I don’t know if that — I mean,, I think just if we — because that’s really what we should be doing, right? We should be looking to see what is the innovation that they’re trying to claim, and if we can’t find a technical thing here when we look for it then that’s a problem.

QUINN: Yeah. It is. Okay. So we kind of got far afield from where we originally started this and I don’t think we really wrapped it up because I didn’t even get out the Lincoln quote, you know “the fire of genius” quote. Because that to me I think is fundamental when you’re considering whether or not patents drive innovation or patents follow innovation. And to me I think in some cases when you’re talking about incremental innovation and you’re talking about large entities patents probably follow innovation. And I think when you’re talking about independent inventors, startup companies, and even large entities like maybe an IBM particularly when they’re dealing with a real speculative research budget, the type of budget that would lead to Watson, for example, I think patents drive it because without the patent you could never begin to go down that path and invest that kind of money to bring it into being, it just wouldn’t be worthwhile.

LEVY: Well, so maybe what we have here is a definitional problem, which is “innovation.” When does something become an innovation, how early? When is it still just sort of this nascent idea and when does it actually cross the line into becoming innovation? If that happens earlier, then patents definitely come afterwards because those initial steps, the inspiration for Watson had nothing to do with patents. But I think you’re right that they would never have spent the however many hundreds of millions they spent on that thing if there were no patents. So when, where is the innovation? Is it in the completed product? Is it earlier? I suspect that there isn’t one, of course there’s not one, innovation, there are thousands of innovations that go into something that complicated. So the initial ones happen, I think is my theory, happen whether they’re patents or not. And then in order to move forward you do need some kind of intellectual property protection like patents because otherwise you’re just not going to invest that kind of money. Then of course as you develop the product, further innovations are developed because that’s part of making a final product especially in the computer space. And then those probably also come with patents, so the patents that led you to protect the thing and go forward with development arguably drove the innovations, the build-on innovations that came later as you were developing the product further. Does that make sense?

QUINN: Yeah, yeah.

LEVY: It sort of goes back and forth.

QUINN: Yeah.

LEVY: Right. Except I think that at least the initial innovations come first. Nobody says in my mind nobody says, hey, you know, patents gave me this — because I can get a patent I have this great idea for a thing. The idea for the thing is there’s a problem that needs to be solved. Somebody comes up with a solution for the problem. That’s where the innovations come in. The patents are what lead them to actually develop it further and do something with it rather than just keep it in their head or making it for a few friends or something.

QUINN: Yes and no. And I suppose this is again where you run into problems because of the complexity of the patent system and what motivates people. I think for companies that are research and development companies that innovate if there were no patents those companies wouldn’t exist and they wouldn’t be looking for the solutions to the problems because you couldn’t protect it and monetize it so there would be no reason to invest in looking for solutions to problems.

LEVY: Well, but that’s after they’ve always established the business model. So I think when they started they were looking for solutions to problems. I mean, that’s why they wanted to form a business in the first place. And patents enabled them to follow this business model. But they still were, I mean, I was in academia for a while so I did do that other side. Part of being a PhD student is looking for a problem, and once you’ve found a problem you try and find a solution to it. It’s only after you think you’ve got a solution that you start thinking about patenting or any of that other stuff. Now once you’ve got an R&D company that’s already doing it well, yeah, then the fact that patents are available allows them to follow that business model of just being an R&D company and not having to make products. But I don’t think it was patents that started them on the path to innovation, again at some point it become — ideally it becomes a virtuous circle. Or virtuous cycle.

QUINN: Right.

LEVY: Where the innovation caused them to develop something which then caused them to, you know, they want to get patents, which then leads to more stuff and on and on.

QUINN: Yeah.

LEVY: So if it works it’s a great thing.

QUINN: Yeah. And that’s the problem I think we have right now. I think to a large extent the patent system isn’t working, it’s not providing the incentives that it needs to provide and it’s creating too much risk. I think that there are other countries where you can get better protection and I think people are going to start to locate there and that really worries me because fundamentally the reason that the biotechnology industry in the United States is because of Diamond v. Chakrabarty. The biotech industry didn’t really exist prior to that, and today for many biotech related inventions you can get better protection outside the U.S. Much better protection in some cases.

LEVY: Well, that’s unfortunately out of my area so I’m not really qualified to talk too much about biotech. But I will say this: I think we both agree that patent law right now is definitely in a state of uncertainty and flux. I mean, it’s changing, it’s developing, there’s definitely some discomfort in a lot of sectors. There are some who are very concerned that it’s moving at all.   They want things the way they used to be. There are some who want it to shift. Whatever camp you’re in, things are changing. Whether they will go so far as to drive companies to move, I don’t know. It depends on the industry I guess, and it may be that biotech companies are going to move. Or it may be that they’re just very nervous and they’re expressing that as “We may have to move.” Whether they actually do or not, I don’t know. Clearly there’s a lot of innovation that’s going on in the biotech sector. So to simply throw up your hands and say well those aren’t inventions, that seems kind of disingenuous.

QUINN: Right. There’s certainly innovation that’s going on. The thing that I worry about here is, however you cut it more innovation is going underground, they’re staying underground and being protected as trade secret. I just think that is a negative for society.

LEVY: Well, so here’s an interesting thing. I’m not sure that that’s a bad thing in certain spaces. So I’ll tell you I was talking to some folks in biotech back when the patent reform debate was really hot. I actually went to a BIO conference, because they wanted to hear from the tech sector about why we were pushing for these things. Also, I really wanted to hear from them why they were so terrified of them. It was interesting in the biotech space. It’s extremely competitive and there’s a lot of concern about giving away too much information.

For example, when they sue each other, this is what I was told so I can’t vouch for this personally, the negotiations are very different than what we do in tech. In all the negotiations that I was ever a part of as a litigator you would pretty much lay out your case, both sides would. Lay out why you think that the other side infringes, the other side would lay out the art that they think makes the patent invalid and you have these meetings which were covered by Rule 104 so that they’re negotiations. Everybody pretty much knows, at least at a basic level, what the case is when you’re having real negotiations. In biotech that doesn’t happen at all. They feel like they’re going to reveal some secret about what they do and they just don’t want to do that. Negotiations are much less open than in tech. So there’s I think at least in — let’s just say there are some sectors where there’s a real tension between the public disclosure part of the patent and the protection part and it may be that they really should be using trade secrets rather than patents. So that may not be a bad thing.

QUINN: Yeah. I don’t know.

LEVY: I’d rather have them use trade secrets rather than have them give really an inadequate disclosure and get a patent to protect something. That’s, you know, that’s not right.

QUINN: No.

LEVY: And there should be trade secrets in that case.

QUINN: Yeah. I get that.

LEVY: Because they’re concerned about disclosing.

QUINN: I would prefer that the information would be public so that people can stand on the shoulders of those who’ve come before them. And I understand that some trade secrets are always going to be held. But once upon a time the patent system was a different path, a different choice. And I wonder whether in the minds of some people it’s not a choice anymore; going trade secrets is the only option. And if that is the case, which I think it is, that’s bad. But going back to what you were saying, I think clearly the patent system and patent laws are in a state of flux. And any time you have matters of business and business law that are in a state of flux it creates a certain unease and a climate that is not conducive to growth. Business people don’t want to be risk takers or trendsetters, generally. Sure, great success can be had when you are a risk taker and when you are a trendsetter and that’s why a lot of innovators really succeed, but at the same point in time business thrives when there’s a certainty of the foundational rules and in the patent system right now the most foundational of all rules – what is patent eligible – is in a state of flux and I don’t think that’s good.

LEVY: Well, so here is the thing. Uncertainty, I agree, makes businesses nervous. That’s obvious. But, and again, I’m speaking only for myself here, it seems to me that for many businesses there is a desire to have the benefits of taking the risk without the down side of taking the risk. And one of the downsides here is that the law can change. Patents are not — even if we didn’t change the law — patents are no guarantee of anything. Once you get an issued patent, that patent could be found invalid. It’s in the law that a patent can be challenged and that it can be found invalid. No one should think that once I have this patent that’s it, it’s good for all time and I can take on all comers and they’re going to have to pay me regardless. I have heard too many times people thinking that this is some sort of guarantee and any sort of challenge is a violation of their Constitutional rights. And I’ve heard them say that. And I know you’ve heard it too.

QUINN: I understand that. But where I will agree with them is I think that once you get a property right that the law shouldn’t change retroactively and in the patent space it certainly does. The Supreme Court would never, never do these types of things with retroactive application and legal changes to real property assets.

LEVY: Yeah, but you see I don’t agree that it’s a property right in that sense. It’s something that we treat as a property right but it’s not. You know, the statute says it shall have the aspects of personal property.

QUINN: Yeah. But I do think, and this probably has to be another conversation we’re going to have to have for another day.

LEVY: We can’t do those now. Let’s —

QUINN: I, again, think this is something where we fundamentally disagree, and actually I think we agreed about a year ago to have a conversation on that point.

LEVY: I think we did.

QUINN: So we need to come back to that because it is still a very important issue, and I’m always fascinated when we have these conversations. We do seem to agree on a lot but there are these critical points where we disagree. And I always want to try and figure out where is the point of disagreement. Let’s talk about that and see if there’s any reason that we can come to some kind of commonality or at least common understanding.

LEVY: Yeah, I agree completely. I think that fascinating. And I agree with you. I think that at its core there is some fundamental point where you and I just start from a different place, and then that explains most of the difference if not all the difference.

QUINN: Right.

LEVY: But there’s still a huge overlap in where we basically agree on the purpose of patent law, how it should work.

QUINN: There is, I think. And I know that there are people out there that say just what you said, that any challenge of a patent is unconstitutional. Those are extreme views. Clearly the system has always anticipated and accepted challenges to patents. We can talk about whether that should change to some extent. I thought maybe with the post grant process what we were going to do is get more like the trademark system where if you bring your challenges early you can challenge absolutely anything, you know, full menu. Bring them a little bit later a slightly reduced menu. And then you bring them late then it’s a really reduced menu. But we didn’t go that path. I think maybe we could have that conversation about whether, at some point in time, patent titles should quiet, but Congress didn’t choose to have that conversation in the latest round of patent reform.

LEVY: That’s an interesting point and definitely that’s a deep conversation for another day.

QUINN: Yes. But where I think most people, and me included, get upset is if you told me what the rules were going to be when you’re going to evaluate this invention I can draft the application today to satisfy those rules. Now I’m talking about real innovations and not the type of innovation from Perfect Web, where that which was new was simply resending e-mails. But with a real innovation, if you tell me the standard I can describe it to satisfy that standard. I just think it is fundamentally unfair to have shifting standards applied.

LEVY: Well, so here’s my response to that. Yeah, it’s unfair but that’s life. As lawyers we always face the possibility that the law is going to change.

QUINN: Yes.

LEVY: And that’s just the nature of the business. And if I were going to say — there’s no way to say oh yeah that’s completely fair. No, no, it sucks for the person who just lost a patent that they invested thousands of dollars in. It absolutely sucks and they wouldn’t have written it that way if they’d known what the law was. But we can’t keep the law exactly the same for that reason. If the law is going to change it has to change at some point, and whenever you make that change there are going to be some people on the borderline who unfortunately take it on the chin. And it’s not fair, but it’s life. And it would be nice if everybody could be all happy about everything, but sometimes we get the losing hand; I’ve had it happen to me. It just happens sometimes.

QUINN: No, I hear you. And as much as I’d like to keep going, I’m going to have to end it there. Good news is there’s much more for us to talk about next time. I really appreciate you getting on the phone and having this conversation, Matt, thank you.

LEVY: You know, Gene, I know that people are always surprised when I tell them that you and I get along really well, but I think we need to have more discussions like this, not just you and me but, you know, it’s that ability to find areas of disagreement peacefully that’s really important. Because when people start hyperventilating about “you’re taking away my constitutional property right,” that just shuts down all the discussion and then we can’t get anywhere.

QUINN: I hear you. We have to have these kinds of conversations and hopefully we will more frequently. And I really appreciate the article that you wrote for us a while back and please if you have anything in the future we’d love to have it.

LEVY: Sure. I got some flak for posting on your site but —

QUINN: I bet you did.

LEVY: — I still think it’s good to reach out to that audience. Yeah.

QUINN: All right.

LEVY: All right, Gene, well, thank you so much for giving me the opportunity.

QUINN: No problem. Thanks a lot, Matt, I really appreciate it.

LEVY: All right. I’ll talk to you soon.

UPDATED Thursday, April 20, 2017 at 11:30am ET to fix errors in the transcript.