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Patent Reform Passes: Who Won?

Jonathan Ortmans, President, Public Forum Institute

Last week, a patent reform bill, the America Invents Act (H.R. 1249), passed the House of Representatives. On March 8, the Senate passed a similar patent bill (S. 23) by a broad margin. There is no doubt our patent system is broken with backlogs and litigation, but the bill’s net effect on innovative entrepreneurship is still unclear.

In a nutshell, the legislation will change the system of patent award from “first to invent” to “first to file.” It will also extend the time when a patent may be challenged after it has been approved.

In a piece titled “Patent Reform is Patently Offensive to Start-ups,” Valerie Gaydos, chairman of Private Investors in Entrepreneurial Endeavors, argues that the first-to-file system would represent a financial roadblock for innovative startups by making it harder for early stage companies to raise capital. A race to the Patent Office would reduce the time that a company can perfect their product and generate revenue. “Thus, investors will be unlikely to invest in a company or technology that doesn't have some market acceptance,” argues Gaydos. Furthermore, she argues, the extension of post-grant review increases the risk for investors, who might have to see their funds exhausted in the opposition.

But in the Kauffman Foundation’s Rules for Growth, a collection of essays promoting innovation and growth through legal reform, we find additional perspectives to consider. For example, a post-grant opposition process (though not synonymous with a mere extension of the post-grant review period) that further scrutinizes a patent and can harness private information from patent competitors, would signal to the Patent and Trademark Office (PTO) which patents are the most serious and important. The intent here is to weed out bad patents, thereby reducing litigation and, most importantly, avoiding wasting resources.

This approach to solving problems within our patent system suggests that the Patent Office should focus its examination resources on important patents (those of highest technological and commercial value). And to know which patents are likely to be important, information from competitors, as well as patent applicants, is crucial. To harness information from the latter, many suggest a tiered patent examination.

The USPTO has recently implemented such a tiered-version. Since May 4, 2011, applicants are able to choose to pay a higher fee for more expediency. The accelerated examination costs an additional $4,000 on top of the standard examination fees. This higher amount is taken as a signal of validity. Note that the intensity of review remains unchanged, however. Critics of a tiered system point out that applicants do not always have accurate information about the future value of their applications. After all, entrepreneurs are risk-takers. There is also the concern that bootstrap entrepreneurs will be at a disadvantage. It seems to make sense to allow small businesses and individual applicants to pay lower expediency fees, which the bill just passed authorizes.

Hence, two perspectives on patent reform continue to emerge. Those that focus on the individual entrepreneur and those that emphasize innovation at large (i.e. IP rules may be at the expense of one entrepreneur, but it will likely benefit another). It will take thoughtful attention to strike a delicate balance.

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