How Congress Can Ensure the Patent System Protects Inventors and Entrepreneurs
Tuesday, May 24, 2016
How Congress Can Ensure the Patent System Protects Inventors and Entrepreneurs
By Brian O’Shaughnessy
This article was originally published on IPWatchdog.com
Patent protection promotes invention and discovery, and the formation of new businesses. Patents are often the principal asset in the start-up portfolio, and a reliable indicator of its ability to attract capital and investment. Patents are the currency of the innovation system. As with conventional currency, we must ensure that patents issued by the U.S. government are reliable, durable assets that can be utilized for many, diverse purposes. This is imperative if we are to keep the wheels of our innovation-based economy turning smoothly.
Patents are critical to the growth and viability of any innovation-oriented start-up. The MIT Innovation Initiative recently reported that the likelihood of growth of start-up firms is thirty-five times greater for those that avail themselves of the patent system. Similarly, a study from Harvard Business School and NYU’s Stern School of Business, reports:
We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors. Exogenous delays in the patent examination process significantly reduce firm growth, job creation, and innovation, even when a firm’s patent application is eventually approved. Our results suggest that patents act as a catalyst that sets startups on a growth path by facilitating their access to capital. Proposals for patent reform should consider these benefits of patents alongside their potential costs.
Forming a start-up is easy. The real challenge comes in turning it into a viable, scalable enterprise for the long-term. There are innumerable challenges following invention. The enterprise must convert the invention into a product, devise means and materials for manufacturing that product, and move the product through marketing and distribution to what is hoped to be a receptive customer base. In most cases, that involves considerable third-party investment. Investors look for durable assets likely to survive even if the enterprise itself fails. Patents provide those assets.
Patents benefit society and individuals alike in fostering new markets and new products. Patents enhance specialization. Inventors need not morph into fully integrated manufacturing concerns to realize the commercial value of their inventions. They can use patent portfolios, per se, as assets; and derive revenue by selling or licensing those assets. We must preserve the value and liquidity of those assets if we are to realize the full potential of the public and private benefits of our patent system. If, for example, modest litigation reforms are found worthy, those reforms should be applied universally, not by imposing peculiar burdens on America’s inventors.
Despite the meritorious role patents play in innovation and economic development, recent changes have diminished the patent right. Patent-related transactions are in decline, patent valuations are down, and patents continue to be struck down at alarming rates by the USPTO Patent Trial and Appeal Board in Inter Partes Reviews.
Our patent system is in trouble. An entire class of legal instruments, once lauded as worthy and essential elements in a free-market economy built upon innovation, has become suspect. What’s worse, these instruments are now susceptible to revocation – following grant – by the very agency that issued them, and by resort to the same standards by which the agency granted them in the first place. Imagine the effects on our economy if any other substantial legal instrument or property right – duly issued by the U.S. government – were so susceptible to challenge and revocation.
This scenario is especially harmful to the small business, for whom IP is often its principal asset. Congress must restore public trust and confidence in our patent system, and in patents as a meaningful property right. It might well start by ensuring that the seal the USPTO affixes to an issued patent in the first instance is meaningful, durable, and worthy of investment.
Congress can, and should, take at least four steps in restoring the health and vitality of our patent system:
First, Congress should ensure that the patent grant is meaningful and valuable in the first instance. That is, when the USPTO issues a patent, it should stand behind its work, and it should be presumed to have done it competently. The current Inter Partes Review, and other post-grant review processes, undermine public confidence in that work, and puts the claims of a patent at risk of challenge, and ultimately, of revocation, almost as though the patent had never issued in the first place; and, in the case of IPR, for the duration of the patent. The patent owner thus never comes out from underneath that cloud.
As described in my earlier testimony, the evidence shows that in the majority of cases, accused infringers are exploiting these post-grant proceedings to play out the clock with serial, duplicative proceedings in the USPTO, and then in court, and thereby delay a decision on infringement. It isn’t hard to imagine how these proceedings can be exploited to exhaust the meager resources of the small business or entrepreneur.
This is still more problematic in view of the standard of review the USPTO applies in IPRs. During examination, the USPTO considers the terms of a claim according to “Broadest Reasonable Interpretation” (BRI). This is as it should be. In seeking valuable rights, applicants are obligated to spell out those rights with demanding specificity; and the USPTO is obligated to fulfill its role in protecting the public interest by ensuring the applicant has met that standard. However, when the USPTO has examined, and ultimately issued, that patent, it should likewise be held to a demanding standard.
Our precedent has long since held that, once issued, the claims of a patent are to be interpreted by Article III courts according to the ordinary and customary meaning of claim terms as per one of ordinary skill in the art at the time the invention was made. Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005).
The USPTO’s use of BRI in IPR proceedings means that claims that have been examined and issued are nonetheless interpreted by the USPTO almost as though examination had never taken place. Moreover, in an IPR, the patentee is not entitled to the presumption of validity to which an issued patent is otherwise entitled, and which would prevail before an Article III court. The result is that the claims are interpreted broadly, without deference to prior examination, and without regard to the ordinary and customary meaning the terms would have to one of ordinary skill in the art at the time the invention was made.
Congress should clarify that an issued U.S. patent has value and merit, and that a challenger must prove it to be invalid according to the standard enunciated in Phillips v. AWH Corp.,rather than under the BRI standard.
Second, Congress should reaffirm the exclusive nature of the patent grant. In eBay, the Supreme Court held that patent cases must meet conventional requirements for injunctive relief. As a result, since eBay, injunctive relief in patent cases has become more difficult to obtain, and thus less likely to be requested and granted. This outcome overlooks the fact that the patent right is, at its very essence, an exclusive right, i.e., the right to exclude others from making, using, selling, offering for sale, or importing into the U.S., the claimed invention. Congress should clarify that the patent right includes the right to exclude others, and should provide for injunctive relief under a specific standard consistent with that right.
Third, Congress should clarify, and perhaps legislatively overrule, the cases addressing patent eligible subject matter, Alice, Mayo, and Myriad. While the Supreme Court was measured in its holdings, and sought to restrict the deleterious effect on patent eligible subject matter, lower courts and the USPTO have construed the cases broadly, and in a manner inconsistent with longstanding precedent (and, some say, inconsistent with Supreme Court precedent itself). Together, the lower courts and the USPTO have effectively written out of the language of both the Constitution and the statute an inventor’s right to his or her “discoveries.” As a result, patent eligible subject matter in the U.S. is suddenly of dramatically reduced scope, and by such means that its remaining contours are highly uncertain.
The lack of certainty as to patent eligible subject matter is harming the U.S. innovation ecosystem, and is driving research and development offshore. While our scope of patent eligible subject matter has traditionally been broad, inclusive, and predictable, most other patent regimes have been constrained and limited. On witnessing the impressive record of U.S. innovation, and the associated enhancements in public welfare and economic development, many industrialized nations have shifted patent eligible subject matter toward our more expansive view. Now, however, we are retreating from that expansive view, and ceding ground to foreign jurisdictions. As noted above, this has caused an increase in patent filings overseas, and particularly by U.S. companies.
If U.S. companies continue to move their patent filings overseas, their research and development efforts and investments are sure to follow. Innovation is a skill, and, like any other, withers for want of use. As our innovation capital moves offshore, so too will the corresponding skill set. Our patent system has the potential to reverse that trend, and to restore America as the premiere destination for innovation. It is incumbent on us to realize that potential.
Fourth, and finally, Congress should tread extremely carefully in the realm of so-called patent litigation reform. Amidst the many changes imposed by the AIA, the associated administrative proceedings in the USPTO, recent judicial precedent (and administrative interpretation thereof), and changes to the rules of civil procedure, the very nature and extent of the patent property right is up in the air, and its value has diminished. With that, the value of America’s core competency – innovation – is likewise diminished. Any further changes to our patent system should be directed to shoring up the patent property right, not further diminishing it. Thus, so-called reforms that would prejudice America’s patent holders relative to other rights holders, should be considered with a most critical eye.
 Fazio, C., Guzman, J., Murray, F., & Stern, S., A New View of the Skew: A Quantitative Assessment of the Quality of American Entrepreneurship, MIT Innovation Initiative, 2016
 Farre-Mensa, J., Deepak Hedge, & Alexander Ljungqvist, The Bright Side of Patents, USPTO Office of the Chief Economist, Working Paper No. 2015-2 (Jan. 2016), Abstract. See also, Id., at 2 (“We focus on startups both because they are a key source of innovation, economic growth, and job creation, and because the literature on the dark side of patents portrays small inventors as suffering the most from the shortcomings of the patent system: they likely face the greatest resource constraints when applying for patents, enforcing their patent rights, and defending themselves when sued by larger rivals.”); at 3 (“patents facilitate startups’ access to capital by mitigating information frictions between entrepreneurs and potential investors. Access to capital in turn sets startups on a growth path that transforms ideas into products and services that generate jobs, revenues, and follow-on innovation.”); and at 5 (“we provide the first causal evidence that patents help startups grow, create jobs, and generate follow-on innovations and that they do so by facilitating access to capital.”).
 35 U.S.C. § 112(b).
 Cf. 35 U.S.C. §282.
 eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).
 Gupta, Kirti and Kesan, Jay P., Studying the Impact of eBay on Injunctive Relief in Patent Cases (July 10, 2015).
 U.S. Constitution, Article 1, Sect. 8, clause 8 (“Congress shall have Power: … 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;”); and 35 U.S.C. § 283 (“The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.”). Presumably, injunctions “to prevent the violation of any right secured by patent” includes preventing infringement under 35 U.S.C. §271.
 Id.; and 35 U.S.C. § 101 (“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter….” (emphasis added)).