Privacy, Business and Law

Though the small business community has largely missed the debate, a major struggle is taking place over the future of the US patent system. Some patent authorities claim what is at stake is the ability of innovation-driven small businesses and startups to raise capital and properly develop innovations so they can best compete in the marketplace.

First-to-invent vs. first-to-file

The US is near unique in a patent system that awards temporary but exclusive intellectual property rights based on the actual first inventor. Most countries award patents under a “first-to-file” rule, a courthouse race irrelevant to whom the actual first inventor is. Foreign countries and various multinational companies are pushing for U.S. adoption of first-to-file.

The case for switching to first-to-file under what is referred to as “patent harmonization” is summarized by Rene Tegtmeyer who, after a career with the U.S. Patent and Trademark Office, now practices patent law with Fish & Richardson in Washington, DC. Tegtmeyer, a first-to-file proponent, says that many companies marketing abroad already operate on a “first-to-file” basis in the US as “filing quickly in the U.S. establishes your filing date in other countries when you file in those countries within one year. More U.S. businesses should be focusing on foreign markets,” and a first-to-file system would presumably sharpen that focus. Various harmonization tradeoffs should cultivate “broader and stronger patent protection” in countries where certain technologies are not protected by patents. “Patent applicants’ rights will be established more quickly, simply and often less expensively,” and small businesses can avoid expensive “interference” proceedings in the Patent and Trademark Office to settle disputes over whom the first inventor is.

Larger companies, with greater legal and financial resources, have an obvious edge in filing patents quickly. To “give small businesses and individuals a fair chance to beat their competitors to the Patent and Trademark Office, particularly when they are first-to-invent,” Tegtmeyer says proposals include inexpensive initial “provisional” applications to establish a filing date.

Opponents to first-to-file charge that it unavoidably stacks the cards in favor of large companies. Don Banner, a former US Patent Commissioner who heads a law firm in Washington, D.C., says proposed “provisional” applications, filed at every step of the way until a final application is filed, might be low fee, but fees are only part of the costs. Banner refers to first-to-file as “the patent attorney’s full employment act,” and asks, “Do we want a system that emphasizes filing little pieces of paper or a system that encourages people to make products that work?” As to interferences, Banner says they occur in one tenth of one percent of patent applications, and can be simplified and made less expensive.

The value of the core concept of first-to-invent, says its advocates, is apparent in the level of US innovation, historically far ahead of other countries.

The importance of secure property rights to small business

Paul Johannessen is founder and CEO of Megapulse, a growing Bedford, Mass. company that does 20 million a year as the world’s primary manufacturer of Lorran-C Radio navigation transmitters. “Unlike large companies, we can’t afford to file on any idea that comes up. We file maybe one in five because it might take a year to determine if an idea has merit. Big firms consider us pirates invading their turf and feel we should not be competitors but should be in their fold. We were only able to compete with giants like ITT and Westinghouse, and to have a sole source prototype with the Coast Guard, because of the strength of patented ideas that were fully developed.”

Other companies echo this experience. Christina Holly is Vice President of Stylus Innovation, Inc. in Cambridge, Mass., a young company that assembled technologies in a unique way that allows bar code ordering over the phone. “Our patent position allowed us to take royalties from licensing our first technologies to Direct Data Systems, in Heartland, Wisc., and develop new software products controlled by voice,” says Holly. “In ordinary circumstances, a small company doesn’t have the resources to file right away, and under first-to-file couldn’t risk approaching companies before filing patents.”

Novus Packaging Corporation, Inc. of Jamaica Plain, Mass. has entered the $1.3 billion US packaging market targeting the niche polystyrene thermal protection market of perhaps $50 million. Nicholas De Luca describes the packaging market as brutal, but has filed patents for an ingenious inflatable packaging technique that reduces waste by 90%. “The first question from businesses is ‘what is your patent position’,” notes De Luca. “For a small guy in a huge market, a patentable technology is all important. Under first-to-file, I’d be paranoid about exploring licensing, despite confidentiality agreements, before patents were locked up. But in the U.S., knowing I am first to invent and have a year to fully develop my patent, I have more confidence in revealing my invention.”

De Luca will file a PCT filing, allowing a period for the option of eventually filing in Europe after filing in the US, but for him the US market is the all-important launch pad. “I only send samples in the states, not Europe or Japan, as systems there don’t favor the small inventor,” says De Luca. “Costs of filing in Europe are at least ten times as much. Entrepreneurship in Europe is inhibited by their system. Someone my age (22) starting a company there is pretty rare. Our patent system is geared to the philosophy of encouraging entrepreneurship. It recognizes the lifespans of businesses and the need to support the embryonic stage.” De Luca says the backing he’s getting based on the prospects of his patents is now enabling him to develop a novel automobile anti-theft device.

Ivan Faigen is president of Divecomm, Inc. in South Lancaster, Mass., which uses acoustic energy in a novel way that enhances underwater communications for divers. Faigen says “‘first-to-file’ promotes filing before feasibility is demonstrated, allowing large operations to flood filings that create a monopoly of ideas in a particular field without bringing them to market. This can frustrate inventors who must demonstrate the feasibility of an idea, and discourage them from fully developing and filing on a novel idea, keeping niche businesses, which rely on a high degree of technology, from launching.” With the springboard of American patents and important American market, Divecomm is exploring foreign patents and joint ventures for marketing abroad, with “excellent prospects for developing the lion’s share of underwater communications within several years,” says Faigen.

Dr. Robert Rines, founder of the Franklin Pierce Law Center in Concord, N.H. and a major inventor of high-resolution image scanning radar and sonar, says companies like the above are “not founded on patent applications rushed in on the first conception, which is ‘first-to-file’, but on patents that have to be fully developed, with lots of careful finish work. Who will put money in on the half-baked?” Moreover, “if you don’t know all the answers and panic and file, there is the danger that the Patent Office will be confused by multiple patents and unable to determine when certain ideas actually happened in association with particular applications.”

Theft, patent invalidation and prior art

According to Jerome Lemelson, a successful Nevada inventor who, with MIT, has created a national inventors prize, “under first-to-file the unscrupulous can steal ideas far more easily to file them first, which will rocket corporate espionage and damp down the exchange of developing ideas. The open, academic atmosphere of university research would also suffer.”

First-to-file opponents like Lemelson says increasing industrial espionage would coincide with a huge expansion of “prior art”, information already known to others, that can invalidate patents. This would will open U.S. markets to a flood of foreign products ripped off from American innovation that is unlicensed and uncompensated. After the invalidation of US patents, such products could flow freely into world markets without fear of reprisals in the US market.

Banner calls “prior art” the “crazy aunt in the attic that first-to-file proponents don’t talk about.” He explains, “under our first-to-invent system, an inventor who conceives an invention and works diligently to perfect it is shielded from all third party ‘prior art’ which goes into the public domain subsequent to the date of conception. When that inventor files his U.S. patent application within one year of that conception date, (or one year after he offers the invention for sale or puts it into public use), he is protected from prior art. The grace period is a shield during which prior art cannot be used to refuse the issuance of the patent. Moreover, prior art cannot later invalidate the patent, as long as the date of conception predates the prior art.”

“That shield doesn’t exist under ‘first-to-file’, so third party prior art with a date after conception but before filing could later emerge to kill the application or to invalidate it at any later time,” says Banner. “A dishonest employee could fax the idea to to an obscure publication in Rwanda, and sink it. Moreover, many harmonization proponents seek to greatly expand prior art, say to mere allegations that something was offered for sale, or even discussed, anywhere in the world. Challenging allegations of prior art might require sending lawyers to depositions all over world, and many nations don’t even have discovery. The expense of patent litigation would increase so enormously it would virtually eliminate small businesses and individual inventors from the equation, which is exactly what many multinational corporations and foreign nationals desire.”

Prior-user rights

Tegtmeyer says harmonization proposals would “leave to the U.S. whether to provide ‘prior-user rights’ under a first-to-file system.”

Ed MacCordy, former president of University Technology Managers, says prior user rights is the closet goal of many companies pushing first-to-file. Prior user rights, which would allow a company to claim it was using an idea before a patent was filed and to continue use of it without paying the patentee. That amounts to a royalty-free, compulsory license that, says MacCordy, “would put trade secrets in a superior position to patents.”

MacCordy and Banner say this would devastate the ability of small start-up companies, inventors, and university researchers to license inventions and attract venture capital. “How many small investors,” Banner asks, “could lay everything on the line if a giant like General Electric could come forth later and say it already had the invention?”

Harmonization proposals may vary, but they’re not going away. Tegtmeyer observes that while “harmonization proposals are presently on the self because of related negotiating difficulties with other countries, they are likely to come off the shelf sometime in the not too distant future.”

by Skip Kaltenheuser