Making Sure That Patent Law Doesn't Suffocate Innovation

As an early-stage investor in technology companies, I’m used to many kinds of risk. Does the new technology actually work? Is there a market for the new product, the new device, the new drug, the new process? Is there a business model to get a return on the investment needed to bring the product to market? Is there an entrepreneur and a team in place that can actually make the business plan happen?

To those four tough questions every investor might ask, Congress has added a fifth: will the good new idea be able to get and use a patent before its competitors, or worse, financial speculators, use the new patent laws to prevent the product from ever reaching market?

In the start-up world, when an original business plan doesn’t work, we do it over. When it comes to the patent process, it is time for Congress to do-over the 2011 Leahy-Smith America Invents Act (AIA) before it stifles innovation and investment so broadly as to diminish America’s competitiveness in the global economy.

With the AIA, Congress provided a new pathway for patent challenges known as inter partes review (IPR). The initial purpose of IPR was to discourage “patent trolls” – those who secure overly broad patents for the sole purpose of extracting settlements from innovators via litigation.

Unfortunately, a new form of abuse has emerged. IPR has been exploited by those who simply seek to attack legitimate intellectual property, notably in the biopharmaceutical sector, to drive up their own profits.

IPR creates a parallel track for patent challenges to the pathway that has existed for over 30 years – challenges via the Hatch-Waxman framework, which was created in 1984, are heard in federal district courts. But for the last five years, even patents that had been upheld via the judicial process – with its higher standard of proof –are now also susceptible to a follow-on challenge through IPR, an administrative process. Patents that have already been litigated and found valid in the courts have been thrown out via IPR anyway. Through the Hatch-Waxman pathway, patents are presumed valid, and the burden is on the challenger to prove otherwise. The opposite is true via IPR, stacking the deck against legitimate patent holders.

This new process has emboldened those with financial incentives to challenge even legitimate IP. Hedge funds, for example, have used the process to challenge the patents of some publicly held pharmaceutical companies, while taking short positions in those companies in hopes of profiting as their stock prices fall. Generic pharmaceutical companies have also seized on IPR to dispense of the patent exclusivity earned by innovator companies that have invested significant resources in developing new branded drugs.

Facing IPR challenges to some of its patents, one pharmaceutical company, Allergan, has decided to transfer patents for its Restasis medicine to an American Indian tribe, which would exclusively license those patents back to its company. The reason for the transfer is that the tribe, the St. Regis Mohawks, are granted sovereign immunity against IPR challenges, thus invalidating frivolous challenges to Allergan’s IP. Allergan’s logic is that after just wrapping up Hatch-Waxman litigation in federal court over Restasis, it should not be subjected to a follow-on IPR challenge.

Allergan’s move has generated controversy from some corners, but praise from others: intellectual property is the lifeblood of a branded pharmaceutical company. With IPR stacked against companies like Allergan, the company has a fiduciary responsibility to its shareholders and employees to protect its IP at all costs. And its status as an innovator, investing billions in new drugs that make people’s lives better, is dependent on a reasonable, predictable patent system that maintains incentives for robust R&D spending. IPR upsets that balance.

For the start-ups I usually see, the “all costs” resources just aren’t there to fight this kind of battle. When the Constitutional guarantee that invention can be protected becomes the litigious sport of kings, progress is endangered.

Near Lands End in Cornwall, I recently visited a telecommunications museum where many of the oceanic cables reached England. I was reminded that a painter, Samuel F.B. Morse and his start-up investor, Alfred Vail, son of an ironworks owner in Speedwell, New Jersey, had competitors in commercializing the telegraph, and that dozens of approaches were tried after discoveries of electromagnetism led to the idea that information could be sent down a wire. Moreover, just as today, we saw that inventors in one part of the world don’t always know what inventors in other parts of the world are doing.

Our patent process needs to promote innovation and to help the little guy. At the time the telegraph was developed, if we’d had a process where every inventor could take the other apart, we’d probably still be using the Pony Express and Yankee Clippers to get word around the world.

There are Wright Brothers yet today, perhaps pulling all-nighters in a bicycle shop, ready to liberate us with invention. As long as humans don’t run out of inspiration – and imagination – we’re going to have a busy patent office for years to come. But Congress needs to make sure now that its venue for protecting intellectual property is used to promote innovation and investment, not to dampen it.