Guest Poster David Boundy: A Detailed Examination of What the Proposed First to File Legislation Means to Business

By | November 23, 2009

(Editorial Note:  Last week, I posted my thoughts on the proposed changes to the US patent laws from a first to invent to a first to file system.  In response to my post, I received an exceedingly detailed and substantive comment from David Boundy, Vice President, Ass’t Gen’l Counsel, Intellectual Property at Cantor, Fitzgerald.  (David wanted me to say that this post his personal view, and does not reflect the views of Cantor, Fitzgerald.)  David’s viewpoint on what the proposed legislation will mean to business deserves a forum, and he has graciously allowed me to post his comment in total on the IP Asset Maximizer Blog.  Anyone who works with business to generate patent assets should be concerned about the proposed changes.)

David Boundy of Cantor, Fitzgerald

David Boundy of Cantor, Fitzgerald

About guest poster David Boundy:   David Boundy has spent over a decade on Wall Street, first in several of New York’s most prominent law firms, now as in-house counsel at one of Wall Street’s largest investment banks.   In several years of his career, David as one single lawyer moved more money around based on patents than the entire federal judiciary combined.   David believes that litigation costs and damages should be irrelevant to the current patent reform debate; what matters is the effect on investment flows.

David Boundy’s views on the proposed First to File legislation:

I concur with Jackie on the narrow points of her last paragraphs from her post of last week:  IF the proposed legislation simply changed § 102(g) from “before such person’s invention thereof” to “before such person’s effective filing date,” and IF the currently-pending legislation left in place §§ 102(a) and (b) so that an inventor can “swear behind publications” (don’t forget prior use and sale!), “but not [behind] previously filed patent applications that claim the same or similar invention,” then I think the new statute and first-to-file might work.  As Director Kappos wrote in his blog, IF that were the proposal, the number of affected applications would be small.

But that’s not the proposed legislation.  The currently-pending legislation totally rewrites § 102(a), (b), (e) and (g).  Under the proposal, the one-year grace period—while nominally extant—becomes extremely delicate, easily lost by unforeseeable acts of others.  As a practical matter, no business will be able to rely on such a tenuous grace period.  All applicants will be forced to race to the Patent Office—not just a race with a competing § 102(g) applicant, but a race against all who would disclose or use the invention, parties whose activities are currently shielded by § 102(a) and (b).  The inventor loses his patent, as a practical matter, even to those who learned the invention from the inventor.

Consider the practical reality under the new legislation.

Suppose an inventor puts an invention out for shake-out testing, analogous to the testing permitted under today’s § 102(b).  It’s a success!  Magazine articles!  Competitors!  Improvements by others!  As soon as the success is manifest (and before the year is up), the inventor files his application.  The examiner finds the magazine articles, advertisements for the competing products, etc.   Now the inventor has the burden to show that each and every one was a derivation.

Similarly, suppose the inventor needs to find investors or strategic partners for manufacturing, marketing, or sales.  If any of them leak (and remember, venture capitalists essentially never sign nondisclosure agreements), then the inventor has to show “derivation” for every public disclosure.

As a practical matter, no business can rely on such uncontrollable contingencies.  Though the proposed statute has a nominal one-year grace period, the practical reality is that no one will be able to test outside a lab closed to public view without filing first.  No one will be able to disclose the invention to potential strategic partners or investors, without filing first.  As a practical matter, the new statute is a “no grace period” statute.

So what are the results?

1.  Many, many more applications will be filed. Ron Katznelson’s FTC testimony provides much insight.  Slide 9 shows that nearly 60% of applications filed under first-to-file pressures in Europe become useless to their owners before they are taken up for examination.  In contrast, only 12% of applications are abandoned prior to first action, if they can be filed without such pressure.  This means that under a first-to-file race to the Patent Office, it takes more than two times the number of applications to obtain one surviving application worthy of patent protection.  From the available data, first-to-file will increase the total number of applications by more than 30%.  We saw this when Canada went first-to-file—why rerun the experiment here?

2.  Businesses will have to make very painful “file it or lose it” decisions far too early, with no practical ability to test, shake out bugs, or find out which inventions are valuable and which are not. (See Ron Katznelson’s Slides 4-6).

3.  Inventors currently invest very little time or money in “loser” inventions, because they have time to figure out which the losers are.  Under the new statute, they’ll be forced to spend time making filing decisions, and then spend more time communicating the necessary information to the patent attorney, to file on those losers.  The costs will make the patent system far less attractive for small companies, startups, and individual inventors.

I estimate (based on long experience representing small companies, and investors’ due diligence reviews of small companies) that the changes to § 102(a), (b) and (e) affect a number of applications roughly equal to today’s total number of small entity filings, and possibly greater.  The change affects the large majority of small entity applications filed today (the ones that are filed late in the § 102(b) year, in reliance on the § 102(b) grace period).   More importantly, the § 102(a), (b) and (e) changes will force about that same number (probably more than half of today’s small entity filings) to be filed under first-to-file that are <b><i>not filed at all</i></b> today.  The costs to small entities of all those new applications are truly staggering, and has been totally ignored by the PTO and the large company market incumbents that are driving “first inventor to file.”

One common rejoinder is “Provisional applications solve this problem, and are dirt cheap.”  If you believe this and you represent companies much smaller than IBM, you don’t understand how inventors and businesses work.  The main cost of a provisional is the inventor’s time diverted to patent work from profitable work, from running the business.  At companies $1 billion and smaller, company processes rarely require patent-worthy documentation during development.  Any such written work product exists only for patent purposes, and is a direct incremental cost of the patent system.  If the new statute forces the inventor to expend the effort to prepare an early filing, and the invention turns out within the year to be a loser, then there’s no way that the statute can restore that inventor time back to the company.  The current statute lets the inventor “wait and see” at very low risk.  Under current statute, the operative facts and related records already exist and can’t be changed, and so the inventor doesn’t have to spend time or money on prophylactic and speculative patent activity—patent-related expenses only arise after there’s been time to make a good, informed decision.  The new statute makes existing facts irrelevant, and forces the inventor to spend time on patent activities, to “file it or lose it.”

Director Kappos’ blog’s focus on interferences misses the major point because it’s based only on filing data, and ignores activities that are invisible to the PTO.  Inventorship  contests between competing applicants at the PTO are irrelevant. The dominant effect of first-to-file is not the rare contests among applications that reach the PTO.   What matters is all the applications for loser inventions that will be filed, and the important inventions that will not be patented at all, in both cases because the information necessary for good decision-making was not available at the time a decision had to be made.  As of today, the only opinions the PTO has expressed are artifacts of sample bias, not analysis of data, and a reality-deprived view of how the world outside Alexandria works.

Further, the burdens on the PTO itself will be substantial.  Because of the race to the Patent Office, many of that flood of new applications will be hastily prepared, and therefore harder to examine.  A high proportion will go abandoned after first action – once an inventor has committed $5K-$15K to file an application, the PTO cannot possibly provide a refund large enough to induce abandonment before first action, no matter how bad the facts that emerge.  The PTO will bear most of the costs for examining these applications, and will realize only 15% or so of the total lifetime revenue.   First-to-file is a huge money-loser for the Office.  The loss will be upfront, without back-end renewal compensation.  This will necessarily require increases in upfront fees, further harming small entities.

And the rushed patents will be weaker protection for the business that sought them.

The new “first to file” is a massive job killer.  Its biggest effect will be to suppress disruptive innovation and to entrench market incumbents.  So, what should you do?

If you are a university tech transfer officer, this affects you directly—the new statute will substantially crimp your pipeline.   A spin-out company can’t get going if it can’t get capital.  Much startup capital is driven by patents.  Most spin-outs need to do a lot of inventing to turn your university’s basic science into a marketable product.  If the spin-out company will have to spend more money on patents on failed inventions, and get weaker patents on good inventions, then capital flows will be substantially impacted, and that will in turn markedly slow your tech transfer operation.  Do not accept the PTO’s assurances that the statute doesn’t affect you (remember that only a handful of people at the PTO have any experience in the private sector, and fewer still with startups). The only assurances that matter must come from the National Venture Capital Association and small business organizations. Without their approval, “balanced” political compromise reflects “balance” among players with big lobbying budgets. Without private capital, your  investments in the pipeline will be stranded. New innovation will never enter the “Valley of Death,” much less get to the other side.  Write your state’s senators and representatives—you, America’s research universities, are key to getting it right on this issue.

If you are a small company or lawyer that represents small companies, you also need to get to your senators and congressmen.   And you should call the tech transfer folks at your state’s main research universities (public and private) and try to nudge them to action, as above.  You should contact the  Small Business Coalition on Patent Reform (contact ron@bileveltech.com), and get on a small business letter as a signatory company.

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