In part 1 of my post last week on patent reform, I identified several ways in which the new Patent Reform bill (S.B. 23 and H.R. 1249) is better for big business than small business. And I’m disappointed in that. One big change is going from First-to-Invent to First-to-File. In First-to-File, big companies with teams of patent attorneys will find it expedient to rush to the patent office, filing patents that may not have even been fully baked in their labs.
Preposterous, TechonomicMan! Why would big companies spend resources on useless patents? Well, they already do it and this legislation will encourage more of it. Many big companies have lots of patents and never commercialize them. Sometimes they later give them away for tax considerations. Usually, though, they’ll file many patents in order to protect a general technology area by making it complicated compete in an area without infringing on something they’ve patented. File lots of patents surrounding some important general technology and you can 1) use those patents offensively to tangle up competitors trying to win your customers and 2) use the patents to tie up technology space so that competitors can’t commercialize competitive technologies that have even won their own patents. Let’s look at each problem.
Big businesses can already intimidate small businesses in the marketplace. One of my clients is in this position. A very large company has challenged a patent of theirs, and it is unclear whether or not this challenge is valid. Nevertheless, a whispered word from BigCo, which supplies the customer with lots of other products as well, is all it took. The customer doesn’t want to jeopardize its relationship with BigCo and that’s it. Game over for smallco.
Now, not only is First to File more favorable to BigCo, but so is the portion of the legislation that makes it easier to challenge patents. You don’t think little start up with 2 months of cash left can defend infringement suits and defend patents against unrelated 3rd party suites, do you? This is hard ball business after all! But the second problem is worse for us as a country.
Big businesses don’t commercialize small market opportunities. This is pretty simple economics. Small companies start, generally, by providing solutions for niche markets. Let’s say a $10 billion revenue company spends $500,000 and two years of scientist and lab time to solve a particular technolgical problem. While they’re preparing patent paperwork, they discover that even with $5-$10 million in investment in commercialization, the most they could realize is $75-100 million per year in revenue and, generously, $10 million in added EBITDA. It would be extraordinary if that $10 billion revenue company pursues any commercialization of the technology. Spending time and money on finding a partner or licensee won’t be cost effective either.
But a $100 million opportunity for a start-up with IP? Yeah, that would be huge and could easily launch a venture. Big companies are slower to innovate because it costs too much and too often, the opportunity doesn’t clear their IRR or EV hurdle rates. But small companies don’t measure things that way. They measure things by one customer win at a time.
Enlightened self-interest built this country. And frequently big things are needed from big companies. But, I believe, that big companies come from little companies. And little companies, still, generate most of the innovation and jobs in this country. So, I offer a few amendments to S.B. 23 and H.R. 1249. Without the amendments, I don’t support the bills.
TechonomicMan Amendment #1: Promote Big Company technology spinouts. Back in the 1980’s, the Bayh-Dole Act set into practice a requirement that universities receiving federal funding for research needed to actively seek licensees for their IP. BigCo’s that receive patents would presumably benefit financially by licensing out technologies they aren’t going to commercialize. I’m happy providing extended patent life for BigCo patents licensed to small businesses.
TechonomicMan Amendment #2: Renewal Fees. Big companies should pay more in renewal fees for patents not commercialized or licensed. If First to File happens, I think big companies are going to file more frequently…fine. The whole point of the patent system is to spur innovation, not patent hoarding. It should cost BigCo more to sit on uncommercialized patents.
TechonomicMan Amendment #3: Technology Ombudsman. I just love the word Ombudsman. Especially when it is capitalized. The USPTO should be authorized to develop a system for matching SmallCo’s with BigCo’s. Utilize smart, contextual searching engines to attempt to agglomerate similar technologies and work with the inventors, big or small, to facilitate commercialization. This could be done through incentivized, private third parties.
The US has been considered the most innovative country in the world for decades. Our existing patent system that bends toward small companies has had a major hand in that. I think the little companies in this country come up with the best ideas and, later, big companies maximize their value. We should recognize this at a variety of levels within government, none more central to the issue than our patent structure.