Making the Case Against First to File

NOTE: This was originally written as a comment to my article Much Ado About Nothing Over First to File.  It is posted here as an article with the permission of Ron Katznelson.

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I generally respect those who have the capacity to change their opinions based on substantial relevant evidence and a compelling underlying factual record that supports such a change. And I know you to be one who had made shifts in the past based on such sound bases, and you earned all of our respect for that. However, this one is a surprise to me, as I now see you change your mind over mostly irrelevant facts and over what appears as a profound misunderstanding of the adverse effects of transitioning to a First-To-File (FTF) system. There has been much folklore and obfuscation about FTF and you may have fallen for it based on, what I believe to be genuine, but tangential experience. You and others are missing the point by looking only at a formulated invention and whether it takes three months or one year to file it. You are missing the point if you believe that the stakes are solely related to the quality, content or the submission speed of an application that is ultimately filed with the USPTO. Rather, the harmful effects of FTF for small startups and early-stage patenting firms is in losing patent protection on inventions for which applications will not, or could not, be filed. Harm will not merely arise due to the “race to the patent office”. Harm will be inflicted due to the race to the patent office with the wrong application, for the wrong invention, and for the wrong reasons, while exhausting precious resources in the process. As David Boundy correctly points out, “First to File” vs. “First to Invent” is a misnomer and the use of these terms is mere obfuscation. Interference priority contests at the USPTO and their numbers under current law are entirely irrelevant for assessing the effects of FTF on important inventions that I’m afraid will never reach the USPTO. Several facts, some of which have been touched on in prior comments, can help in appreciating these pernicious aspects of FTF.

The proposed transition to FTF had undergone no study or evaluation of the expected effects on U.S. patenting practices, the balance of costs and risks for small and large U.S. businesses, or of the adverse effects on patent quality and the increased USPTO workload. Do you not think that we ought to see such studies and projections undertaken prior to any enactment of FTF that overturns more than 200 years of American patent law? Noteworthy is the recent McGill University study of the Canadian transition to FTF in 1989, finding resultant adverse effects on small businesses in Canada and negative effects on patent quality. Should we ignore such evidence?

While I acknowledge that FTF would provide the administrative convenience of improved certainty as to patents’ priority date, a U.S. transition to FTF will shift costs and uncertainty risks from large firms to small patenting firms, for the reasons I explain below, (and I apologize if some of these have been articulated by prior posters above). This is because establishing patent priority under FTF will require a “race to the patent office” with every new important idea, which would be resource-prohibitive for small startups. Currently, important new ideas that gestate during months or even years are often fleshed-out, vetted, eliminated or reduced to practice prior to filing. Steve Perlman’s example above shows that his company’s yield of important inventions that were ultimately worth filing amounted to less than 10%. This is not atypical. R&D inventive work at the previous company I founded, Broadband Innovations, had generated approximately three times more important inventions than those for which we ultimately filed an application. Millions of our investors’ dollars had been spent on such explorations, and they were all documented contemporaneously in internal memos and engineering notebooks with the full understanding that corroboration was required. Your anecdotal experiences that inventors “simply are incapable of keeping appropriate records because they do not understand the evidentiary standards by small R&D” are not from the startup world that I know. Perhaps yours are experiences from some dysfunctional entities that would not attract investment capital. I caution you to refrain from jumping to conclusions based on such anecdotes.

Our invention-prospecting experiences described above are not unique to startup companies in our times and there is a paucity of general knowledge about these pre-filing activities even for the most famous inventions in history. For example, apart from the vacuum and glass improvement experiments, Edison’s success in incandescent lamps came about only after he and his assistants spent several man-years at the Menlo Park laboratory in a search for the right filament material, developing molds for its carbonization and perfecting the manufacture of their bonding connections to the lead-in wires. Thousands of experiments with filament substances and configurations were carried out, among which were carbonized fibers from turnips, pumpkins, squash, eggplants, apples, and from bamboo. Robert Conot’s book on Thomas Edison provides the details of how Edison sent out half a dozen men to search the world for the best bamboo, after narrowing down the filament “spectrum” to bamboo fibers. The results of these elaborate explorations spanning hundreds of filament configurations, were captured in hundreds of experiment entries in many lab notebooks, but only in a handful of filament patent applications.

Unlike large patenting firms that have lower-cost in-house patent prosecution resources and can afford to file more often, small business and early-stage startups will incur substantial increases in risks of losing patent protection. This is because many small firms will have no funds to flood the USPTO with patent applications, or will need to disclose their inventions to many potential investors (including large would-be competitors) before having the funding to engage in patent prosecution. Under FTF, and with a limited patenting budget, R&D teams will have to frequently face a painful dilemma as to which of these inventions should be written up and filed in a patent application. Unfortunately, many such guesses will prove wrong. Are you unwilling to acknowledge that such risks under FTF would be significantly higher than today? The great risks, costs, dilemmas and increased patent protection uncertainties that the FTF environment will create will undermine early-stage startups’ ability to attract investment capital or to even get established. Importantly, unlike other effects that would only come after the patents filed under FTF issue years after enactment, the risks associated with increased patenting uncertainties at small firms will begin having negative effects on new job creations in a matter of only months from enactment of FTF.

Indeed, the USPTO has no experience, knowledge or expertise in the potential effects of FTF because the pre-filing processes and risks discussed above have been invisible to the agency. Mr. Kappos’ citation of Interference statistics under current law in approximately 70 interferences out of some 450,000 applications per year provides virtually no relevant information on what will occur under FTF. It provides no information on applicants’ adaptive behavior when compelled to “race to the patent office.” It provides absolutely no means to assess the harm to applicants who will assume the uncertainty risks of not knowing which initial invention is worthy of a filing. Your explanation that small firms would benefit from being forced to act in their best interest have been shown as unavailing by others who commented above. If you respond to my post, please be sure to clarify whether you acknowledge that these uncertainties in patent protection risks will increase for small firms. If so, please explain how you balance these elevated costs and risks with the benefits that come (only to large firms) from FTF. To do so, use facts, show your work. If, instead, you are inclined to dismiss these risks, then we need go no further – we will have realized that we do live in different worlds.

Facts are important. To do its job, the USPTO requires very little, and indeed possesses very little, understanding of the actual invention process, the startup pre-filing activities, the entrepreneurial search and ‘mating’ with equity investors that inventors undergo and the magnitude of the risks we ask our investors to share-in. As David said, the USPTO is only the “midwife” in the birth of patents. Unfortunately, a troubling aspect of the USPTO’s advocacy for a transition to FTF overturning 200 years of American patent law is its apparent lack of data and models well within its field of expertise. For example, it failed to study somewhat relevant prosecution events at the Office, which are approximately 100-200 times more frequent than Interferences. These are Rule 131 affidavit filings including corroborating evidence to establish priority prior to a cited reference date. Analyzing the temporal statistics of pre-filing events documented in these records can be very illuminating. Do you think that estimates based on these records of the number of patent claims that issue today, but will be denied under FTF would not be far more relevant than the Interference Cool-Aid that you have been drinking?

Facts are important. It is also evident that no one at the USPTO had attempted to obtain relevant data from foreign patent offices on first-filings under FTF in order to model the increased flow and the subsequent abandonment of applications under FTF. For example, refer to an Appendix of my comments, downloadable from http://works.bepress.com/rkatznelson/59/. Figure 1 (page 3) of the Appendix shows that nearly 60% of applications filed under FTF pressures in Europe become useless to their owners before they are taken up for examination. In contrast, only 12% of applications filed without such pressure are abandoned prior to first action. This suggests that European applicants file 2.5 applications subject to FTF in order to attempt patent protection equivalent to one application, as opposed to filing only 1.14 applications for the same goal when they are not being subjected to FTF constraints. The increased flow of applications under FTF will also have dire financial collateral consequences: As seen in Figure 1, about one in three applications filed under FTF at the EPO are dropped after receiving the search report. Because the USPTO provides the search report only as part of the first office action on the merits (FAOM), the Office would be spending search and examination resources on applications that would otherwise never reach examination, let alone a patent grant that later fetches large renewal fees. (Compare these figures to the relatively low USPTO abandonment rates after FAOM in Figure 5, page 13 of my Appendix). Thus, FTF will cause a substantial upfront increase in costs to the Office without concomitant financial back-end revenues from renewal fees.

How do you think the USPTO will address the revenue shortfall when it is forced to invest much more examination resources on the “least profitable” product in its production line? As currently drafted, if S. 515 passes, the USPTO will be able (and indeed compelled) to increase all upfront application fees to make up the shortfall in patent renewal without even being accountable for such a disaster. Small business patentees will be harmed the most from these unavoidable increases in up-front patent fees. But do not despair as this will bring us in closer ”harmony” with our European friends who now have lopsided skew in their patent fee structure that is so “helpful” for their small patenting businesses.

Patent practitioners, you all have a choice now: You can advise your clients now that FTF will be good for them and that it would not matter much if they only filed early. You can tell them that they need to do so anyway, if they intend to file globally (at 20 times the cost). And upon passage of FTF, you will have to explain to them the consequences of the new law and the reasons that they must use your services more often (and pay you more money for filing more applications). You will have to explain to them that employees’ development records and engineering notebooks could not be relied on. You will have to devise new set of prudent practices that they should use immediately upon every departure of a key employee (perhaps to join a competitor). It will necessitate an immediate diversion of his colleagues’ time to write and file patent applications on patentable subject matter developed by the departing employee. You will explain that you will be there to assist them. You will explain that such precautions are advisable because derivation would be expensive, hard or nearly impossible to prove and that trade-secret enforcement is a matter remitted to vastly different state laws, in which you have no expertise. You would then have to deal with the appearance of having led them on the garden path of extracting more of their funds and making their procedures vastly more complicated.

Or, you can follow the alternative path. It involves providing your clients now with full disclosure of “I told you so before the law passed” about the consequences of FTF as described above. You can also tell your clients now where they can learn about both sides of the issue to form their own opinion and what they can do to avert the FTF provision if they so choose. This will buy you a lot of good-will and trust. It will remove any future appearance of a conflict with your clients’ interest, if and when FTF becomes law and your clients have to spend more money to use your services more often. At the very least, you can avoid losing clients due to mistrust and at the very best you and other patent practitioners following this alternative can help avert a disaster for startup companies.