A Short History Lesson on Patent Policy

“Those who do not learn history are condemned to repeat it.” ~ George Santayana

To avert serious and lasting damage to our innovation ecosystem and our most promising young companies, it may be helpful to consider some history that appears to have been forgotten. For 225 years, the U.S. patent system has been one of the crown jewels of American economic policy, providing incentives for the commitment of time and money to create the next generation of technology. The Patent Act was one of first pieces of legislation adopted in 1790 by the first Congress, reflecting the Founders’ considered and thoughtful balancing of two competing objectives – allowing free and unfettered use of information and ideas in the public domain while encouraging innovation through limited protection of new and useful inventions. Those twin objectives have long provided a framework for managing the set of rules we call patent law. The current Congress, however, seems determined to abandon, or at least weaken, the latter of those objectives – the use of patents as incentives to innovate.

Despite a major overhaul of the U.S. patent system only four years ago that included the creation of special procedures for challenging weak and invalid patents in the Patent Office, Congress is now pursuing legislation designed to make it more difficult, more risky and far more expensive to enforce all U.S. patents, even the best and strongest of patents on the most important inventions. H.R. 9 and S. 1137, both of which are currently working their way through the congressional process, reflect the agenda of some of the world’s largest corporations who want to make it more difficult for startups and small innovative companies to erode their markets with next generation technologies. Although members of Congress are being told that these bills will crack down on “patent trolls,” the reality is that the legislation will have less impact on NPEs than on companies trying to interest investors in funding the development of new drugs, new medical devices and myriad other breakthrough technologies.

Lost entirely in the current debate is the importance of patents to the entrepreneurial community that depends on them to justify the risks and resources needed to bring new products and services to market in the face of entrenched competition. Venture capital backed startups have accounted most of the growth in our economy for decades. Although a few startups, such as those that create clever marketing models or applications for smartphones, may not depend on technology patents for survival, for most innovative companies patents are a critical part of their business plans without which investors will not provide funding. Consider, for example, a surgical device that may take years to develop and get approved by the FDA. Without patents, these products are easily copied, severely devaluing the development effort. For investors, enforceable patents provide the only viable way to justify the commitment of money, time and effort needed to develop such a product. Countless innovative products across nearly every technology fall into the same category. The legislative debate, however, ignores this part of our economy in a misguided effort to “get the trolls.”

Innovation does not take place in a vacuum. It requires visionary people willing to give up more secure jobs and start companies that have a high probability of failure. It requires investors with a strong appetite for risk who are willing to invest in an often distant prospect of returns sufficient to justify the risk. For technologies having a long development cycle, these prerequisites require the security provided by patents to assure that others will not be permitted merely to copy new products and services.

Patents play their most significant role in the perception of others that infringement will be punished. If an entrenched incumbent believes that a startup will be unable to enforce its patents, the patents lose this deterrent impact and become just empty pieces of paper. The unavailability of enforcement as a practical option becomes an open invitation for competitors to misappropriate the technology represented by the patent. It is already prohibitively expensive for most small companies to enforce their patents except in the most urgent of circumstances, and the result is that, even without the pending legislation, large companies often infringe the patents of smaller ones with impunity. The proposed legislation will make it still more expensive to bring patent cases and will escalate the risk level in even trying.

This is where some history might be useful. Starting before World War II and continuing throughout the 1950s, 60s and 70s, short sighted and now discredited government antitrust policies, coupled with judicial hostility toward patent enforcement and patent licensing, converged to reduce the enforceability of patents and to restrict the ability of patent owners to license their inventions. The result: foreign competitors began to capture entire industries that should have been dominated by U.S. companies that had pioneered the relevant technologies. Color television, for example, was invented in the 1950s by American companies, most prominently RCA, GE and Zenith. Despite the U.S. having an enormous technological head start, by the mid-1970s the best-selling color television set in the world was Sony’s Trinitron and a dozen American manufacturers were on their way to ceding the color television market to Japan and Korea. Similarly, another U.S. company, Ampex, pioneered the first video recorders in the 1950s, but by the end of the 70s that industry was also dominated by Japanese companies, including Panasonic and Toshiba. Similar stories abounded during the 1970s, prompting President Ronald Reagan to appoint a Presidential Commission on Industrial Competitiveness to determine the causes. That Commission was headed by John Young, then CEO of Hewlett Packard, and included numerous leaders of American businesses.

The Commission’s Report, issued in 1985, analyzed this massive migration of technology and industry from the United States to Germany, Japan, Korea and elsewhere. While the migration was not traceable solely to our failure to enforce patents and encourage licensing, the Report concluded that the lack of meaningful intellectual property protection was one of the principal drivers and something that required correction. Some of the findings resonate as much today as they did back then:

“Protection is needed for intellectual property. Since technological innovation requires large investments of both time and money, the protection of our intellectual property is another task we should place on our competitive agenda. Research and development are always risky. If the developers of a new technology cannot be assured of gaining adequate financial benefits from its commercialization, they have few incentives to make the huge investments required.

Today, the need to protect intellectual property is greater than ever. A wave of commercial counterfeiting, copyright and design infringement, technology pirating, and other erosions of intellectual property rights is seriously weakening America’s comparative advantage in innovation….”

Fortunately, the aftermath was a happier story. In the early 1980s, the newly appointed Assistant Attorney General, William F. Baxter, reversed many of the DOJ polices of prior years to encourage patent ownership and licensing. In 1982, Congress created the Federal Circuit and gave it jurisdiction over most patent infringement cases, thus providing a new vibrancy and strength to our patent system and ushering in the most productive thirty year period in history. This explosion occurred across countless industries and almost all technologies. The intervening 30 years have been hands down the most productive the world has ever known. Computing, digital audio and video, synthetic fabrics, communications, material sciences, chemistry, biotechnology, small molecule pharmaceuticals, optics, alternative forms of energy – it would be difficult to identify a technology that has not advanced by an order of magnitude or more in the last thirty years. Can we say that all of this remarkable growth was attributable solely to the renewed enforcement of patents? Of course not. But neither can anyone argue that the patent system was irrelevant in bringing it about. We know intuitively that for many technologies, patents are an essential part of the innovation process. Without protection from copying, why would anyone go to the trouble of developing a new drug or new device that is easily copied by competitors? The copyist does not share any of the development costs that may have been incurred over a period of years and with millions of investor dollars.

Before broadly weakening the enforceability of all U.S. patents, Congress needs to reflect long and seriously on the potential consequences – some that may not become fully apparent for a decade or more. There is often a long lead time between the decline in investment in technology and its impact on our nation, but history has shown us that the impact is predictable and inevitable. Frivolous and unfounded patent cases may be a nuisance to some U.S. businesses, but the prospects of losing markets and millions of U.S. based jobs to foreign competitors is a far greater threat. It is critical that Congress get this right.