The Implications of the America Invents Act on Innovation in America

The Implications of the America Invents Act on Innovation in America by Jerome Gentolia: Venturestab

Photo taken from opensourceway via Flickr

The US will transition to a new patent system effective March 16, 2013, with President Obama’s signing of the America Invents Act (AIA) on September 16, 2011.

What are the implications of this new law on the trailblazing spirit that has come to signify the American way of life? Are the patent reforms a step in the right direction, bringing forth a new golden era in American inventions? Or will it curb American innovation, as some sectors believe?

Patent History

Let us trace the history of our patent system a bit. The Patent Act of 1790 tasked a Patent Board composed of the Secretary of State, Secretary of War, and the Attorney General with issuing patents. This was supplanted by the Patent Act of 1836, which established the practice of examining patent applications before a patent can be issued. The Patent Act of 1836 will remain in place until 1952, when President Harry S. Truman signed into law wide-ranging patent reforms, including the requirement that an invention must not only be new but must be original as well before it can be granted a patent. This so-called invention requirement remained in place until the AIA was signed into law.

The recent patent reforms date back to 2003, when the Federal Trade Commission (FTC) recommended modernizing the patent system. The National Academy of Sciences seconded the FTC findings in 2004 and, one year hence, the movement for patent reform gained traction until both houses of Congress passed their respective versions of the bill this year.

During the deliberations, proponents argued that AIA will streamline the patent application process, improve the quality of patents, and give opposing parties in a litigation equal opportunities to be heard. On the other hand, opponents of AIA said that the First-to-File patent regime it will favor big corporations with the manpower and money to keep the patent process moving, and stifle innovation among small enterprises and individuals.

The AIA’s Main Provisions

With AIA, the US now has a First-to-File patent system, meaning that patents will be granted based on the date of filing with the US Patent and Trade Office. This is in contrast to the old First-to-Invent rule, which grants patents based on the date of invention.

The second most important provision in the AIA is a post-grant review period of nine months. What this means is that anyone can challenge the patent on any ground for a period of up to nine months from the granting of the patent. After the nine-month period is up, a patent can only be challenged on the basis of patents or printed publications only.

This blog will focus on the ramifications of the First-to-File patent system. We will discuss the impact of the post-grant review period in a separate blog.

The Ramifications of the AIA

With the AIA now part of the law of the land, what will be in store for innovators in the years to come?

Most countries today are governed by a First-to-File patent system. In fact, one of the reasons the US moved to a First-to-File regime is to ensure commonality with the patent systems of other countries. But moving our patent system in line with the prevailing patent systems in most countries a wise decision? Well, no, at least according to a few of our allies.

In “New Patent Law Means Trouble for Tech Entrepreneurs.” Forbes.com’s Gary Lauder writes that:

“In May (2011), the U.K.’s Small Medium-sized Entity Innovation Alliance sent a letter to the  prime minister complaining that they “know only too well the failure of the patent system and have given up.” Two years ago, a European research organization published a  study entitled “Lost property: The European patent system and why it doesn’t work.” In February, the EU declared an “innovation emergency” due to how far behind us (the US) they are falling in innovation and in R&D investments. This is whom we are “harmonizing” with? Our government has not done its homework.”

Lauder adds:

“After getting an idea and doing some Web research, an entrepreneur vets her idea by talking with others (potential customers, experts, potential co-founders, etc.). If it seems worth pursuing, she will usually look for financing from angel investors or venture capitalists. Successful entrepreneurship is a highly social activity that puts one’s ideas out there — and good ideas spread like wildfire. Under the existing system (which will remain in effect until 18 months from signing), if someone applies for a patent and you have evidence that you invented it first, you can institute an interference proceeding. This is a rare event (less than  100/year, and less than 0.05% of patents issued/year), but this system gives proper recourse and therefore discourages theft more than FTF. Under FTF, theft is much easier, rewarding  hacking and other bad behavior, and, most important to me: will suppress the openness on which our innovation ecosystem thrives.”

Thus, First-to-File does not align with angel investors and VCs. Investors invest on working prototypes, not ideas, which is what First-to-Invent is all about. With the new patent change, inventors will find it difficult to approach investors for fear of patent theft and investors will not have an interest in an inventor’s patent that has yet to be implemented or proven.

For the above-mentioned reasons, Lauder concludes that:

“this law will undermine one of the things that has made America unique and our economy strong: technology entrepreneurship.”

In their study entitled “Priority Rules: An Impirical Exploration of First-to-File” University of Pennsylvania law professors David Abrams and R. Polk Wagner concluded that:

“the rule change (moving away from the current “first-to-invent” system to the “first-to-file” system) is not free — it is likely to result in reduced patenting behavior by individual inventors. Furthermore, “data on all patents granted by the Canadian Intellectual Property Office and the US Patent and Trademark Office” show “a significant drop in the fraction of patents granted to small inventors in Canada coincident with the implementation of first-to-file. We also find no measurable changes in patent quality.”

Inventor Steve Perlman sums up the whole argument against First-to-File in a letter he wrote to Senator Barbara Boxer (see How S.23 Severely Disrupts America’s Unique Process of Invention). Narrating how the Mova Contour, a technology that won for the film The Curious Case of Benjamin Button an Academy Award for Best Visual Effects, was invented, Perman writes:

“In total, about 100 inventions were conceived over the 5 years of development, but (the) only 6 inventions were actually used in the final system, filled in green, and those are the only inventions for which we filed patents. The reason we did not have to file patents on the other 90+ inventions is because the US is a “First-to-Invent” country and so long as we carefully document each invention, we maintain priority to the date of conception. This gives us time to determine which inventions are needed for the product, and it also gives us time to get a working prototype before we file patents so that we have something to show when we seek venture funding to cover the cost of the filings (the US system allows a 1-year grace period after disclosure to file a patent). Lastly, by only filing patents that matter, we minimize distractions to our key engineers and scientists in working with patent attorneys.”

Perlman continues:

“If the US were not a “First-to-Invent” country, and instead was a “First-to-File” country, then the process of invention would be completely different. To preserve defensible priority, every one of the 100 inventions would have to be filed as a patent immediately upon conception (which is why inventors throughout the world refer to “First-to-File” as “Race-to-the-patent-office”). Also, before a disclosure to investors (who rarely will file non-disclosure agreement) could be made, the patents would have to be filed, so venture dollars could not be used to file the patents. And lastly, the key engineers and scientists would be constantly working with patent attorneys to explain every idea they come up with as soon as it is dreamed up and have far less time to do development.”

Perlman goes on to say that:

“it typically costs us $20,000-$30,000 to obtain a commercial-grade patent. As you can imagine, in a First-to-File country, as a startup, we could only file patents on a small fraction of the inventions at the time of conception…It is no surprise that the US is by far the leading nation in the world when it comes to startups and, since its earliest days (when “First-to-Invent” was established), has been known as a mecca for invention.”

On the argument that First-to-File will lead to a smoother and less contentious patent process, Perlman states that:

“Under “First-to-Invent,” there are only about 200 “interference hearings” a year to resolve priority disputes, out of hundreds of thousands of patents filed. In short, “First-to-Invent” works exceptionally well in actual practice. Why risk changing it?”

Developer-turned-patent lawyer Mason Boswell has this to say about the AIA, particularly  its impact on patent quality:

“For those that want to see higher quality patents, I hardly see how forcing inventors into a rush to the Patent Office rather than letting them perfect the invention before filing is going to lead to anything other than more hastily written patent specifications. There will be a need to file earlier and do more “guessing” about how the invention should work rather than waiting (as you can today) to complete all of your experimentation before filing (see Developer Turned Patent Lawyer’s Rundown of the New Patent Reform Law)”

For his part, Robert Nelsen, in American Innovators Lose Big in Newly Passed Patent Bill, states that the AIA gives:

“some real competitive advantage to Europe and China…Now big companies and foreign firms with fleets of patent lawyers can “scoop” university professors and independent inventors by filing first. Our national investment in research and development has been devalued.”

Conclusion

Suffice it to say, that with the passage of the AIA, the above will all come to pass. Thus, the AIA does not bode well for the future of American industry and innovation. I’m hoping that I, and the naysayers above, will be wrong. But the future isn’t looking too bright

  • Pingback: Post-Grant Review under the America Invents Act: Good or Bad?VentureStab | VentureStab

  • http://twitter.com/borisfowler Boris Fowler

    It seems like the patent system we currently employ stifles innovation and will eventually slow down technological innovation and improvements. 

    Instead of defending our innovations and inventions, we should be looking towards the greater good and seek improvements for the collective good. I know this would cost people money, and I am not in favor of surrendering all ideas and inventions to the public, but we should be more concerned with the good of the whole instead of the success of the few. 

    http://www.caycon.com/blog/2011/10/software-patents-are-becoming-a-tax-on-innovation/

  • Kevin

    Mr. Gentolia,
         Thank you for the informative article.  Would you object to me sharing your information via a link. 
    Kind Regards,
    Kevin Wolff

    • http://www.venturestab.com/ Jerome Gentolia

      Kevin,

      Not at all. Feel free to share the link. Thank you for visiting my blog!

  • Alan Ronan

    Thank you for an insightful disclosure about why “FTF” should not have supplanted “FTI” as federal law.  This is an example of the desire to be like the world has insinuated itself into the fabric of U.S. innovation.  Especially clear is how FTF will complicate the valuable processes of evaluation of inventions and raising capital to bring them to market, especially for the small business entrepreneur.

  • Alan Ronan

    This is a valuable revelation into the new patent law and the way the desire to be like other countries has subtly insinuated itself into one of the best historical defenses to U.S. innovation.  “FTF” should be repealed as soon as possible!

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