Creating the “Good Old Days” Via Patent Reform:First-to-File Issues

by Gary Lauder

US Patent Reform Forum 2012Panel: First-to-file system: Implications of a

significant change in the lawWashington, DC 3/27/12

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Preamble• Spare mental cycles => multitasking• Multitasking leads to poor retention• Since this pres. has to be short• Speed talking solves all of above• In lieu of taking notes, this PPT on my web site

LauderPartners.com (Patents link) (URL shown again at end of this presentation)

• As Henry VIII said to his wives…– “Don’t worry. I won’t keep you long.”

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Intro• I’m a venture capitalist (Lauder Partners LLC)

– Have invested over $300M in VC over past 26 yrs.• In > 75 companies and > 50 VC funds

• Not a lawyer• Co-inventor on a dozen patents• My Expertise: VC & tech entrepreneurship

– The role that patents (issued & applied) play in that• Studying patent reform for the past 5 years,

…in my spare time. ≠ day job.• I’m pretty horrified

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Impact of patents• America became most innovative country• Not all due to patents, but they helped a lot• Technology entrepreneurship blossomed here• 11% of private sector workforce employed by VC-backed

co’s• We invest 10X more VC & angel capital /capita than next

best place: Europe• But this has been waning over last decade• AIA will be another nail in startups’ coffins

– The ones that rely on patents (not all)

• Let’s look at a startup from long ago…

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Hewlett & Packard (HP)• They exhibited first product at trade show• Resulted in first order (from Disney)• Key innovations concealed inside box• Applied for patent after (w/in grace period) &

were fine (old rule)• New rule: trade show demo = “on-sale” or

“public use,” so no patent issuable• Worse: patent issues, but years later,

invalidated in suit after discovery5

Huh?• Trade shows = great place for entrepreneurs to

get potential market and investors’ feedback – AIA: triggers both on-sale and/or public use

• If someone else likes the idea, that person can:– Fraudulently apply for a patent first– Write about it w/o attribution such that derivation

can’t be proven

• Same phenomenon at angel investor meetings• Startup inventors always going outside org for:

– Financing, hiring, market research, manufacturing6

More FTF/Grace Period SNAFUs• Contract manufacturing, even of prototypes

– Can trigger “on-sale” bar to patent– Comes in many forms: foundry, laboratories, etc.

• Kickstarter.com = site to fund making stuff– Takes orders for products not yet created

• Publication grace irrelevant outside academia= Publish and perish

• Grace period more harsh than other countries’• FTF gives giant cash register to hackers

– Try to prove derivation from Chinese hackers!7

Investor Perspective• Much more risk (if business needs patents)

– Senate colloquy notwithstanding, I am legally advised to assume no practical grace period

– Can’t tell if they tripped public-use or on-sale– Will have to file earlier & more often– Greater risk of someone stealing idea & patenting or just pre-emptive

publishing

• Additional (often prohibitive) investments required for making non-public experimentation or in-house pilot production.

• Even if patent is validly issued, PGR can tie up• Will shift investing to fewer patent-dependent

companies/innovations

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Individual inventor share in U.S. and Canadian patent grants during Canada’s transition to FTF

U.S.

Canada25% decrease

Upper graph is US. Lower is Canadian. Canada’s decreased by 27%.

State of Canadian Venture Capital

Canadian Venture Capital Industry Review (2010):“long-term returns in the Canadian venture capital industry are such that capital has fled the market.“•At least we have slightly “harmonized“ w/them!

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The next best region for VC• Europe 1/10th as much VC & angel inv/capita• European study (2009): "Lost property: The

European patent system and why it doesn't work.”

• Last May, U.K.’s Small Medium-sized Entity Innovation Alliance letter to prime minister complaining that they “know only too well the failure of the patent system and have given up.”

• 2/11: EU declared an “innovation emergency”• At least we are slightly more harmonized!!

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Sage opinion from on high

Chief Judge Rader & Pauline Newman, Circuit Judge in Classen Immunotherapies v. Biogen:“Europe lost innovation investment to the United States. Our country became the world leader in biotechnology innovation. Nevertheless, the tide can turn against us, too.“

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Purpose of patents

• To encourage innovation among those who lack market power & adequate resources

• To do the above with the most justice & fairness• Perfectly just system probably not possible• Therefore society should choose to encourage

innovators at the expense of incumbents• Other countries subsidize start-ups…

– Complete failure compared to our private sector inv.

• AIA seems to go in the other direction13

Hope?

• The next time you are in a hospital room w/ dying loved one, think about the cures that might have been if our patent system had continued to deliver the right incentives

• Not all is lost: anything congress does, congress can undo … or the courts can

• Lets hope it happens in our lifetimes…– so our lifetimes can be extended and improved

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Thank you for your attention

Gary LauderLauder Partners

Gary@LauderPartners.com(650) 323-5700

www.LauderPartners.com/PatentReform

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Commitments TO funds is leading indicator of funds flowing out to startups

Last 4 years is down by about 2.5X due to “small changes to ecosystem”

Many causes of decline• Mostly self-inflicted wounds• Harder to go public or be public

– Sarbanes-Oxley– Accounting changes (e.g. options expensing)

• Slower FDA• Patent office delays (average time about 4 yrs)

– I have seen allowances after 7 & 8 years

• AIA will be another nail in startups’ coffins– The ones that rely on patents (not all)– Today’s passage of the JOBS Act helps … a bit

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Example of startup “Best Practices” from invention to product launch

CONCEPTDESIGN

PRIOR ARTRESEARCH

REQUIREMENTSRESEARCH

CONCEPTIONSYSTEMDESIGN

HARDWAREDESIGN

FPGA DESIGN

SOFTWAREDESIGN

PROTOTYPEBUILD & TEST

MODIFY

DEMOPILOT

PRODUCTIONDESIGN

TESTINGPRODUCTLAUNCH

PAT. APP.

PAT. APP.

SYSTEMALTERNATIVESEVALUATION

PATENTINGACTIVITIES

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Current patent law is geared around innovators’ “best practices” that focus scarce resources on minimizing total development time and reducing technical risks

Source: Ron D. Katznelson, SBA Presentation, (2010).

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The loss of a grace period under the AIA forces costly deviations from “Best Practices”

CONCEPTDESIGN

PRIOR ARTRESEARCH

REQUIREMENTSRESEARCH

CONCEPTIONSYSTEMDESIGN

HARDWAREDESIGN

FPGA DESIGN

SOFTWAREDESIGN

PROTOTYPEBUILD & TEST

MODIFY

DEMOPILOT

PRODUCTIONDESIGN

TESTINGPRODUCTLAUNCH

PAT. APP.

PAT. APP.

PAT. APP.

PAT. APP. PAT. APP. PAT. APP.

SYSTEMALTERNATIVESEVALUATION

PATENTINGACTIVITIES

Buy SmartDraw!- purchased copies print this document without a watermark .

Visit www.smartdraw.com or call 1-800-768-3729.

Under the AIA, innovators will be required to spend scarce financial resources on premature and more frequent patenting, instead of advancing toward product development

Source: Ron D. Katznelson, SBA Presentation, (2010).

IP and all Federal civil suits filed

0

2,000

4,000

6,000

8,000

10,000

12,000

0

50,000

100,000

150,000

200,000

250,000

300,000

1970 1975 1980 1985 1990 1995 2000 2005 2010

YEAR

All Federal Civil Suits IP Suits

PatentSuits

Copyright & TrademarkSuits

All FederalCivil Suits

Source: Administrative Office of the United States Courts Annual Reports

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22

10

15

20

25

30

35

40

1969 1974 1979 1984 1989 1994 1999 2004 2009

Fiscal Year

USPTO Total Patent Application PendencyAverage Pendency (months)

Surces: USPTO Annual Reports

USPTO total patent pendency

2323

EPO Patent Application Abandonment Stages(Euro-Direct filings in 1997-1999)

25.7%

32.2%

9.5%

6.6%

11.1%

2.6%0%

10%

20%

30%

40%

50%

60%

70%

EPO 1st Filings EPO - 2nd Filings (Claiming Earlier Priority)

After First ActionAfter SR, before Exam.Before Search Report ("SR")

Fraction of ApplicationsAbandoned

Applications with priority dependent on filing date are less mature and are more likely to be abandoned

Data Sources: EPO Data from G. Lazaridis et al. World Patent Information 29, pp. 317-326, (2007). “After SR, before Exam” and “First Action” here means the withdrawal components (2)+(3) and (4) respectively, as defined in the heading of Table 2. Chart Source: Ron D. Katznelson, FTC Presentation (2009).

Priority is determined by filing date Priority is NOT determined by filing date

Ask an inventor: Ben Franklin (1755)

“One would not, ... of all faculties, or qualities of the mind, wish for a friend, or a child, that he should have that of invention.For his attempts to benefit mankind in that way, however well imagined, if they do not succeed, expose him, though very unjustly, to general ridicule and contempt; and,if they do succeed, to envy, robbery, and abuse.”

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What Just Happened?• Many changes in new law

– from First-to-Invent (FTI) to First-to-File (FTF)– Inside FTF: “grace period” change:– Was: 1 year from “enabling disclosure”– Will be: immediate bar if in public use or on-sale

• Example 1: Science Friday Video Podcast:• “Young Inventors Soup Up A Wheelchair”• Many innovative improvements

– Example:

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Can move sideways

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At end of video it said

• That summer, they could do it, but not 2013– They would have lost the right to patent it due to

their “public use” of their technology

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Similar Stories From Past

• If this law had existed at time of Wright bros…• Public use at Kitty Hawk would have precluded

patenting it• Patents must be useful, non-obvious & novel• Novelty means not anticipated by “prior art”

– New rule is your own invention is deemed prior art the moment you publicly use it or offer it for sale.

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Why I’m so bothered

• The above examples are just one problem of many with this bill:– Failure to fix “fee-diversion”– FTF rewards theft of IP– “Post-grant review” (PGR) potential for abuse

• Lying and intentionally misleading statements• Systemic dysfunctions: complexity vs. ADD

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“Creating the ‘good old days’”?

• The ‘good old days’ are times in the past when things were better

• The AIA has so many things wrong w/it that it will make the IP future worse in some ways

• Q: Why complain if it’s a fait accompli? – A: the 2 lobbying orgs need to justify existence

• Will continue to try to “improve” patent laws

– Similar to how trade unions serve themselves by appearing to serve their members

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Lying & misinfo.: grace period

• Provision is confusing w/triple negatives, so hard to interpret

• Colloquy = staged conversation meant to clarify– Colloquy stated opposite of actual bill– When conflicting, courts go with bill, not colloquy

• Senators & staffers misleading each other

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