“If Contreras’ fallacies are accepted and Congress acts on them, patents will no longer attract investment. This will add enormous damage over the top of damage already levied on our innovation engine by Congress, the patent office and the courts.”
During the Senate Judiciary’s Subcommittee on Intellectual Property hearing, titled Protecting Real Innovations by Improving Patent Quality, held on June 22, Jorge Contreras, Presidential Scholar and Professor of Law at the S.J. Quinney College of Law of the University of Utah, testified under oath that patents are effectively the same thing as products, and seemed to suggest that executive fraud unrelated to patents must make the patents fraudulent too. This, of course, is a fallacy.
It shows a fundamental and deep misunderstanding of what patents are and how they work, and completely misrepresents law and logic. If taken seriously, Contreras’ testimony would destroy the value of virtually every patent portfolio and further chill investment in new technologies. It is an alarming position coming from a patent lawyer and credentialed law school professor who claims he is “intimately familiar with the topic of today’s hearings.”
The Fraud of Theranos
Much has been written about Theranos and its founder and CEO Elizabeth Holmes. In a nutshell, Holmes founded Theranos in 2003 at 19 years old. Theranos raised more than $700 million in private equity and had a $10 billion valuation by 2014. Theranos was a huge success and a spectacle of new technologies led by a dynamic woman CEO. Theranos and Holmes were media darlings.
However, it was later alleged that Theranos was built on a fraud. The products Theranos said worked, did not work. (It is important to note that Theranos technology actually did work, however it did not work consistently, and in medical fields, a lack of consistent results is fatal). Starting in 2014, Theranos began facing a whirlwind of legal and commercial challenges from investors, state attorneys general, the Securities and Exchange Commission, Medicare and Medicaid, business partners, patients, and others.
By June 2016, Theranos was in a full tailspin and on the edge of bankruptcy.
Theranos’ Final Attempt to Save Investors and Employees
In 2017, Theranos collateralized its patents (for brevity, I use “patents” to refer to both pending applications and issued patents) to secure a $100 million loan from Fortress Investment Group (Fortress). The funds were to be used to clean up the mess and find a buyer. Unfortunately, the plan failed, and in 2018, Theranos declared bankruptcy and Fortress foreclosed on the patents.
Fortress accepted the Theranos patents as collateral for the loan after it assessed the portfolio and determined it could license the patents to recover its value if Theranos defaulted. This is no different than a mortgage company assessing the value of your house to ensure that it has enough value to pay back your mortgage if you default.
At the time when the loan was made, Theranos was in the thick of fraud investigations and lawsuits, and there was a risk that Theranos could default, making normal financing arrangements difficult. But patents are assets much different than other company assets like customers, products, facilities, etc. The value of patents is independent of a functioning company. Because of the nature of patents, the Theranos patents were one of the few assets that could be collateralized to attract the funding Theranos needed to pull itself out of the tailspin. The loan could prevent the total loss of the company and the corresponding loss to their investors, employees, and engineers – people who did not engage in a fraud perpetrated by high-level executives and probably did not even know about it.
A loan collateralized by patents was a reasonable decision for both companies.
Contreras’ Senate testimony included background on the Theranos patents, and the suggestion that, because fraud was allegedly committed by executives of Theranos, the patents were certainly fraudulent too. This confuses law and logic and is unbecoming of a law professor to advocate such a fallacy under oath in Senate testimony.
First, there is no evidence and no allegations that any of the patents were fraudulently filed or obtained. Most of the approximately 1,100 patents were prosecuted by Wilson Sonsini, which for 60 years has been a reputable law firm heavily invested in patent prosecution and licensing.
One argument Contreras makes is that because Holmes is an inventor and she is accused of fraud, any patents that she invented must also be a fraud. While some of the patents list Holmes as an inventor, many do not. In addition, on many of the patents Holmes is but one of numerous inventors. But the argument is fallacy anyway because who invents something is immaterial to the invention disclosed in the patents. To stain the patents with fraud, the inventor(s) would have to lie, or convince Wilson Sonsini to lie, and thereby commit a fraud. There is no evidence and no accusations of this. Yet Contreras uses this fallacy to deride the quality of the patents by smearing Holmes’ alleged fraud onto the patents just because she is listed as an inventor.
To buttress this initial fallacy, Contreras creates a second fallacy. He contends that the proof that the patents were fraudulently obtained lies in the fact that the products did not work. Not only is this a logical and legal fallacy, it exposes a complete lack of understanding of the patent system, the role of patented inventions in commercial products, and the commercialization of products.
Commercializing Patented Inventions
Patented inventions are not the same thing as products that perform the invention. A patent only teaches how to perform an invention, while a product performing the invention actually performs it. An invention disclosed in a patent can be implemented into a product in many ways, but a product implements the patent’s teaching in one way only.
Commercializing a product is a risky and complicated affair aggregating many risks associated with engineering, manufacturing, distribution, sales, marketing, finance, and more, to produce a product mapped to the market at a certain price. These variables determine the way in which an invention is implemented in the product, and these implementation choices cause the product to live or die in the market.
Despite this, Contreras claims that he has pinpointed the failure of Theranos products to be the failure of Theranos patents to adequately teach the invention. Without the benefit of any facts that could lead him to rationally eliminate any factor, Contreras somehow eliminated all possible risk factors inherent in commercializing a product, except for the patent’s failure to teach an invention.
What Contreras does not understand is that the risk that a patent fails to teach an invention is the lowest risk factor of all. It works in the opposite direction – engineering, manufacturing, distribution, sales, marketing, and more, all control the product’s design, development and testing, and therefore control the implementation of the invention into the product. The act of commercializing an invention eliminates the risk of faulty patent teaching. Its operation is tested throughout the process and adjustments are made to make it work. The product’s failure was very likely due to some other risk or combination of risks.
In a related argument, Contreras contends that the Theranos patents are not enabled under Section 112, and this is also proven true because the products did not work. He again presents no analysis to prove his assertion. BioFire of Salt Lake City, Utah, Contreras’ hometown, was sued for infringement on two former Theranos patents – 8,283,155 and 10,533,994. What was not said in testimony is that BioFire was offered a royalty-free license. Unfortunately, the case ended before the patents could be challenged under 112, which would have allowed the litigation process to do the analysis that Contreras lacks. Then the court could have told us if Contreras’ baseless assertion is true.
Contreras also fails to address the broad range of Theranos inventions. Theranos was one of the early companies in the space. Many Theranos patents protect truly pioneering inventions. The inventions relate to medical diagnostic machines, point of care diagnostics, new PCR-like testing, disease survival technologies, doctor/patient communication technologies, and much more. Yet, Contreras fails to discuss any of the various technologies and instead mashes them all into a single blob as if they are some sort of fraudulent monolith. This shows another weakness in his arguments. Could all these inventions be fraudulent? Could they all fail under 112? He has no answer because he was not asked the questions.
The Danger of Patent Fallacies
To understand the danger of Contreras’ fallacies, it is important to understand his cure to fix his fallacies and what that will do to the patent system.
Contreras advocates to increase USPTO vigilance for inoperable inventions. Arguing the senseless notion that an inoperable invention can be made into an operable product, Contreras absurdly contends that thwarting inoperable inventions requires the USPTO to conduct background checks on inventors, including criminal background checks.
He advocates that the USPTO should require inventors to “demonstrate the practice of its invention to a third-party auditor or peer reviewer, or to convince the reviewer that reduction to practice is both feasible and likely.”
He advocates to enhance penalties for fraud, which may be a good idea if balancing criminal penalties are created for infringers.
The arguments he uses to support his cure are all fallacies. Moreover, his cure will accomplish nothing but raise inventor costs, elongate examination, and pile legal risks and entanglements onto inventors and patent holders. Not only will his cure do its damage during examination, but it will be litigated long after the patents issue and certainly when the patents are asserted against an infringer.
If Contreras’ fallacies are accepted and Congress acts on them, patents will no longer attract investment. This will add enormous damage over the top of damage already levied on our innovation engine by Congress, the patent office, and the courts. This will no doubt reduce investments into new technologies.