Letter to the Senate–December 7, 2013

Dear Senator:

I am writing to you because you will be asked to vote on the upcoming Senate version of the already-passed Innovation Act (S. 1612, Patent Litigation Integrity Act).

Your vote has the power to adversely impact not only our country’s economy, entrepreneurial potential, and foothold in the free world, but also erode the Constitutional underpinnings of our Patent Clause.

Before making a decision to pass a rushed bill, I hold before you the Constitution, which you have sworn to uphold.

And before casting a vote that would offend our Founding Fathers, consider a more sound alternative to patent reform, one built upon open and free-market principles and rooted in the Constitutional underpinnings of our Patent Clause. (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Firstly, before making a vote to attempt patent reform, ask yourself: what is the problem with our patent system?

If “TROLLS” immediately pop up in your mind (the practice of filing frivolous lawsuits to obtain nuisance-value settlements), then like most people you’re fixated on a symptom, rather than the underlying problem.

All current legislation, including the Innovation Act, address nothing other than symptoms, to an underlying, systemic problem to our patent system.  Because of this, the Innovation Act and all other pending legislation will fail to achieve patent reform.

So, what’s the underlying problem with our patent system?  How do we achieve patent reform?  I discuss this here (http://www.investinip.com/how-do-we-achieve-patent-reform/).

To uncover the problem with our patent system, we need to first identify how we utilize our current-day patent system.  And then for each, we need to identify the mechanisms we employ to enable those uses.

So what do we use our patent system to achieve?

They are (1) enforcement and (2) monetization.

(1) Enforcement

This is the classic “right to exclude.”  (read more here — http://www.investinip.com/patent-basics-what-is-a-patent/).

To illustrate, let’s say you’re attempting to launch a product or service and another market player infringes on your patented idea and competitive advantage, you have a Constitutional right (via our Patent Clause) to enjoin that competitor from further infringing activity, or obtain royalties for their continued infringement.

This enforcement function serves to protect investments into entrepreneurial endeavors and technological advances–the foundation of scientific progress and economic development.

And what mechanism do we use for enforcement?  Litigation.

(2) Monetization

Our current-day patent system also includes a monetization component–a tool by which a patent holder can obtain royalties from patented ideas that are valid and legitimately infringed (these actually exist).

This creates an opportunity to liquidate the value of the asset.

Regarding whether liquidity of an asset is important and whether we should keep it in our patent system, these are interesting questions that I’ll be discussing in another post on www.investinip.com.

Regardless, we have a system that enables patent monetization.

Given that, what mechanisms do we use to enable monetization?  The same one as enforcement–litigation.

And this is exactly where the problem lies.

Litigation is great for enforcement, but horrible for monetization.

Why?

Because litigation is a closed, monopoly-driven model–this is perfect for the court system (read more here — http://www.investinip.com/patent-exchange/).  But for a monetization system, we need an open, free-market model–just like we use for everything else.

Why an open and free market?

A free market, because this will enable price discovery in which the market determines the proper value to attribute to a given technology asset.

And an open market, because we want the entire investment to community to participate, not just a handful of patent experts.

So how would we create an open and free-market patent monetization system?

It’s actually incredibly simple–the template for an open, free-market monetization system is already in use today, and it is used to monetize and trade on numerous other asset classes–the stock exchange.

So why not patents?  Why not an open, free-market patent exchange?

It’s all laid out here (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Now, while we are considering a patent-exchange approach to patent reform, let’s also consider the ramifications of the Innovation Act, and all other legislative measures that attempt to implement a loser-pays, bond-enforcement system.

On the surface, the Innovation Act and similar legislation seem like a great fix.

They will disincentivize the filing of frivolous lawsuits, because defendants will now have an opportunity to fight and recover costs on cases with merit to defend.

Moreover, identifying the real parties-in-interest will uncover all troll activity, and repeat offenders can be flooded with bond requirements.

The Innovation Act and other legislation like it will finally provide defendants with sufficient leverage to fight back against the trolls.

What’s wrong with that?

Well, have you considered the collateral implications?

If not, there is a serious price to pay.

The collateral implications threaten to stifle small-business innovation, angel-seed investments into entrepreneurial endeavors, and research-and-development efforts.  See, e.g., here (http://www.investinip.com/letter-congress-december-4-2013/).

How?

In a loser-pays, bond-enabled system, innovative and daring individuals with an idea, guts, and a patent won’t be able to attract investment capital, because the patent asset on its own would be too risky of an investment.

Why?  Because if I’m an investor and the patented idea is the startup venture’s competitive advantage, even if I believe in good faith that a competitor is infringing and impinging on our marketshare, how can I rely on the patent asset?  If I win, great.  But if I lose, I run this risk of paying excessive legal fees, which alone could tank the business.

How can I rely on the patent asset to back my investment?  Even when a competitor is legitimately infringing, it becomes too risky to even attempt to enforce the patent.

Instead of investing in the smaller ventures that are solely patent-based, the investor will instead invest in more well-funded operations, ones that are backed by more than just patent assets.

What will this mean?

The passage of the Innovation Act and similar legislation will be the dawn to a massive drop off of angel-seed investments into small-business ventures, particularly those that are patent-backed and where their competitive advantage relies on a patented idea.

This will serve to cripple small-business America and our entrepreneurial spirit–the foundation of our country and the very thing the Patent Clause is meant to protect.

Moreover, a loser-pays system will completely undermine the United States Patent and Trademark Office’s legitimacy (read more here — http://www.investinip.com/legitimacy-uspto-loser-pays-system/).  How can I trust the USPTO is issuing valid patents?  If they are wrong, I pay for it, not them.

Voting for the Innovation Act or similar legislation will plant seeds of doubt in the legitimacy and value of government-issued patents.

The result?  We’ll see a significant dropping in U.S. patent filings–a signal to the rest of the world of a weak patent system.

While the short-term gains of the Innovation Act and similar legislation may seem appealing, we must consider patent reform from a broader perspective, and a perspective rooted in the Constitutional underpinnings of the Patent Clause.

To achieve patent reform, we need to improve our monetization system, not weaken our patent system.

Vote to shoot down S. 1612 and support patent reform from a more holistic perspective, one that is aligned with open, free-market principles, and the Founding Fathers’ intent behind our Constitution’s Patent Clause (http://www.investinip.com/how-do-we-achieve-patent-reform/).

Our Patent Clause and America’s patent regime hang in the balance.

I hope you will read this and discuss amongst other policy makers.

Thank you for your consideration.

May God Bless our Patent Clause.

Gau