Why the America Invents Act is Bad for Startups and Bad for America by David Boundy
As a patent attorney, I have helped many early-stage inventors, entrepreneurs, and investors build successful American companies offering good jobs. I’ve discussed the needs of startups and investors with many knowledgeable proponents of the bill, including Director Kappos. I’ve explained two typical startup scenarios that affect most startups, and how the Patent Reform might affect them. After discussion, every proponent conceded, “Oops, we didn’t think about those. The bill doesn’t work.” These are not oddball out-of-the way cases—almost every startup goes through one of these two, many through both. Because these two scenarios occur before a patent attorney gets involved, “out of sight” has become “out of mind.” If the proponents of the bill “didn’t think about” these two, what else didn’t they think about? How do we expect the new bill to foster American innovation if the proponents admitthat it doesn’t work for startups?
In one scenario, an entrepreneur with a great idea needs to find an investor. Usually the entrepreneur also needs one or more partners for manufacturing, marketing, or some other function. Almost all entrepreneurs have to present their idea to several dozen investors and potential partners before a new company can form. Often these investments begin when an inventor makes a presentation in an open “inventor’s forum” meeting where many potential investors hear from many inventors. In other words, the inventor has to disclose to many people with only the “handshake” level of confidentiality that is just enough under today’s law to preserve patent rights. Most investors and established companies will not sign confidentiality agreements for these situations—for example, essentially all venture capitalists have a blanket policy of never signing confidentiality agreements for first meetings. These meetings work under today’s law, but as we’ll see below, they can’t happen under the new law.
The second scenario involves a company that’s identified a need and sets out to invent a solution. Once the company is formed, the hard work of research and development (R&D) begins. Many high-tech products require long trial-and-error: the inventors conceive and discard dozens of ideas before hitting the magic combination that results in a commercially-viable product. The work-and-rework for a commercial product often takes several years. Dozens of approaches, sometimes a hundred inventions, are tried, explored, and mostly discarded. A company may pursue one for a year or more before finding that it doesn’t work, then go back and try one of the discarded ones modified by an insight from other work. The final product may embody only a tiny fraction of all of the inventions. Again, as we’ll see, today’s law fosters this R&D, but the new bill squelches it.
Unfortunately, the America Invents Act makes these two fact scenarios nonviable for startups—because the proponents concede that they “didn’t think” about them.
Today’s patent law, particularly the § 102(a) prong of today’s grace period, lets inventors talk to potential investors and strategic partners, conduct trial-and-error innovation, and deal with departing employees, and leaks (both benign and malicious), because commercially-important patent rights are determined by ordinary, non-burdensome business activities, under the rubric of “conception” and “diligence.” Today’s law gives companies easy ways to deal with everyday occurrences like employee departures, secrets that aren’t kept, trash that isn’t shredded. Today’s law is structured around real business activities to incentivize invention, thought, and care. Inventors wait to file quality patent applications until they have quality inventions. America’s unique and strong right to file in the future, after the inventor and investor know whether the invention is valuable, makes business easy, and prevents wasted costs for inventions that prove worthless.
The “America Invents Act” entirely repeals today’s § 102(a), and the time that § 102(a) gives everyone to think before acting. Under the new law, ordinary-course business activities are no longer legally relevant. Instead, rights turn on legal technicalities for the benefit of bureaucrats. These new technicalities will cost $1 billion annually. The bill requires a company to file premature, hasty, and expensive patent applications on every baby-step idea to preserve rights against third parties who are dabbling in the field without intent to develop a commercial product.
The two features of the bill that create the problem are (a) the total repeal of the § 102(a) prong of today’s grace period, and (b) to replace it, a far-stronger protection if all business activitiesoccur within the four walls of a single company. Obviously this substitute is essentially useless to small companies that need investment and partners from outside their firm, and shifts great market power to big companies. This shift of the law, and the disparate treatment the bill gives to intra-firm and extra-firm activities, is the reason that this bill would be fatal to American innovation that arises at small companies and startups.
It’s indisputable that the bill will stymie startups and small companies before they’re even formed. For example, Europe’s similar system requires inventors to file expensive patent applications before beginning to talk to investors and potential partners. But many inventors can’t afford to file patent applications until they already have investors. U.S. law gives good avenues around this catch-22, and lets things happen in their natural order. The bill takes these options away. The European system, with which this bill seeks to “harmonize,” creates circular dependencies that kill businesses. Second, in Europe, patent applications have to be filed shortly after an idea is conceived, before full vetting, before testing outside a company’s four walls. European hasty applications are far lower in quality than the American standard. Good patents only emerge after testing, and valuable patents emerge only after enough information exists to sort good ideas from bad ones. The bill forces patent quality to degrade.
Why are we proposing this change that will kill startups? Because the “experts” didn’t think about it?
Proponents offer several arguments, none of which survive scrutiny:
First, proponents suggest that the bill does away with complex and costly interferences. That’s irrelevant. It’s a totally separate issue that affects only 100 patent applications per year. In contrast, the change to today’s “§ 102(a)” grace period affects commercial decisions for hundreds of thousands of inventions per year. Tails should not wag dogs. Further, the proposed replacement, “derivation proceedings,” are the most costly disputes in patent law. “Prior user rights” in the new bill require basically the same evidence as an interference. To my knowledge, the proponents have never acknowledged the new costs that will be created, let alone compared new costs to purported benefits to assess whether any genuine savings will accrue.
Second, proponents contend, “The Patent Office charges only $110 for a provisional patent application.” Cheap provisionals have legal and business value under today’s law, because they can be used to document “conception” and “diligence,” that is, ordinary business activities, which are important under today’s law. But under Patent Reform, ordinary business activities don’t matter, only steps taken within the patent bureaucracy. Under the new law, a provisional application only provides legal benefit if prepared with full care and expense approaching that of a full-blown non-provisional. For a typical startup invention, a provisional application averages $10,000 or more in attorney fees and inventor time—a formidable barrier to an entrepreneur’s first conversation with an investor. Proponents forgot to think about the change in legal relevance of provisional applications.
Third, proponents argue that a company can lock in a grace period by publishing a full description of the invention. But no business publishes its future business plans at the very outset of a project—that’s suicide! The big-company proponents of the bill fully recognize the business importance of confidentiality during early stage research and development (R&D)—they’ve been pushing for a decade to strengthen the provisions that protect early-stage R&D activities that occur within the four walls of a single company, to provide a power of market entrenchment far stronger than any other country’s. This grab for entrenchment of market incumbency was rejected by Congress in 2002 for a more nuanced change, but now it’s back, coupled with a complete stripping of the provisions that startups and disruptive innovators need and use.
Fourth, proponents suggest that an inventor prove “derivation,” that a disclosure by another was obtained directly or indirectly from the inventor. But the drafters forgot to update two sections of the statute, today’s 35 U.S.C. §§ 23 and 24, to provide any procedure for inventors to use this provision. Without a practical procedure, what looks good on paper can’t work in practice—it’s a right with no remedy. I’ve asked about this several times; everybody says “We didn’t think about that.” Director Kappos said “I’ll get back to you,” and never did. Further, what the proponents never mention is that a derivation proceeding is even more expensive than an interference—in other systems that have derivation, derivation proceedings are the problem, not the solution.
The proponents’ other arguments fail as well, but are not addressed here for the sake of brevity.
The “harmonization” rationale is entirely illusory. Partial harmonization creates almost no benefit—for example, even though European countries closely harmonized their laws under the European Patent Convention, small differences persist. Because of these small differences, a U.K. attorney will not opine on a French or German patent, even when the patents are identical between countries. The bill’s proponents concede that the new bill creates a major difference in obviousness law from international norms, a “disharmony” that affects about 20% of patents. This bill’s partial harmonization creates huge transition costs within the U.S., but is not close enough to create any significant savings by permitting legal analysis to be leveraged across jurisdictions.
In summary, startups use and need the options and protections of current law, but the new bill cuts them away, and the substitutes just don’t work. There is some small benefit to the Patent Office in isolated errors, but the overall effect will be to increase work and decrease productivity and efficiency for the office, and create far greater costs for business.
The only response from proponents has been to change the subject, to discuss issues that aren’t in dispute. If the proponents “didn’t think about” these two issues that affect almost all startups, what else didn’t they think about? The way the bill repeals several features of American law that discriminate in favor of U.S. inventors, and replaces them with asymmetries that discriminate against U.S. innovation, and in favor of foreign inventors. Repeal of laws against acting with “deceptive intention,” and without perjury—creating options that are very attractive to non-U.S. parties who are not subject to U.S. attorney ethics rules, and practitioners of state-sponsored industrial espionage. Redefinition of established legal terms like “public use” and “on sale,” that will take decades and tens of millions of litigation dollars to sort out, creating hundreds billions of dollars of commercial uncertainty. Shorter, sharper deadlines, and dizzying complexity, that create immense malpractice risk for attorneys, decreased value of patents, and far more attorney hours. In addition, there are clear constitutional problems. For example, the repeal of the Metallizing Engineering bar, despite multiple Supreme Court decisions holding that it is Constitutionally mandated. Once these features are pointed out, almost everyone agrees that they’re bad. Apparently they’re in the bill only because the gatekeepers didn’t think about them.
In 2010, the Kauffman Foundation and Census Bureau released two studies on job creation. Both found that net job growth occurs in the U.S. economy only through start up firms. In many conversations, the proponents have admitted that they “didn’t think about” the needs of startups, small companies, and investors that create jobs. The bill is tailored to multinational firms that have been exporting jobs, and to government bureaucrats. The America Invents Act is based on illusory promises, and is full of unintended negative consequences, because “nobody thought about it.”
David Boundy (these are my views, not those of any client)
Vice President for Intellectual Property, Ass’t Gen’l Counsel
Cantor Fitzgerald, L.P.
Boston MA and New York NY