VCs must have voice in patent reform debate

The effort to overhaul the patent process gained significant momentum in 2006 when legislation was introduced that called for sweeping changes to the patent system. Deep opposition to those reforms from certain industry sectors ultimately doomed the bill, but congressional interest in reform has not dimmed. Reforms that create a new post-grant opposition system, that limit the factors that can be used to calculate damages, and that create new prior-user rights are all under consideration. The National Venture Capital Association is actively engaged on the patent issue and will continue to have the opportunity to share our unique perspective, representing the interests of small venture-backed companies in the fields of high tech and life science. On March 29, NVCA member John Neis, managing director of Venture Investors, testified on behalf of the venture capital community before the House Small Business Committee on the patent reform process. Here is his testimony, which outlines the position of the NVCA.

Chairwoman Velazquez, Ranking Member Chabot and members of the committee, my name is John Neis and I am a managing director at Venture Investors, an early stage venture capital firm based in Madison, Wis. It’s my privilege to have the opportunity to share the views of the venture capital community on the patent system and the opportunity for reform.

Venture capitalists invest in small, emerging growth companies that strive to commercialize innovation. Companies that received their start with venture capital dollars include Genentech, Amgen, Intel, Cisco, Google, Medtronic, Microsoft and eBay. At one time all of these market leaders were small companies with big ideas.

Small companies need protection

The complexity of balancing the legitimate interests of numerous parties as Congress examines patent reform does not elude us. While we all agree that there are abuses of the patent system and improvements could and should be made, we believe it is absolutely critical that any reform proposals are thoroughly vetted by legislators who are fully apprised of the consequences associated with each change to the system.

At the center of our concerns is the reality that the cost of defending against infringement is disproportionately burdensome for the small venture-backed company, while the benefit of infringing relative to the cost is disproportionately attractive to a large company. Our young, emerging companies are disadvantaged relative to the larger Goliaths in so many ways that often the only competitive advantage they possess is the sustainability of their intellectual property. Yet, certain proposals, while well intentioned, erode the ability of small companies to defend their patents at a cost that doesn’t threaten their viability. I would like to provide several examples of these types of unintended consequences.

Post-grant opposition threatens to create harmful uncertainty

The post grant review clearly favors large companies with deep pockets that could use these proceedings to delay patent issuances to venture-backed companies.”

John Neis, Member, NVCA

The goal of post-grant opposition—invalidating flawed patents—is one that we share. However, adding an open-ended second process weakens the presumption of validity. A company that has a legitimate patent may not be able to get venture funding if that patent is going to be challenged again and again. The post grant review clearly favors large companies with deep pockets that could use these proceedings to delay patent issuances to venture-backed companies.

If a post grant opposition procedure is to be adopted, it should allow only a single window with a short, predictable duration of approximately six months. Petitioners for cancellation should be required to identify themselves and should be required to file all issues regarding patentability. If a party elects to challenge a patent issuance through this process, they should not be permitted to again raise these issues in any subsequent proceeding. These steps would protect the patentee from having to repeatedly defend the patent based on the same arguments.

Current calculation of damages is appropriate and working

One area that we feel does not need reforming is the calculation of damages. The current system, in which the full impact of a patented feature on a product is considered, is an appropriate one. Patentees have never been systematically overcompensated, nor are they currently.

The apportionment of damages proposal, which limits damages to only the patented feature, does not recognize that the sale of a whole product is often dependent upon the presence of a patented improvement. Additionally, arbitrarily denying courts the ability to base computations on the entire market value of a product will lead to equally arbitrary results as judges grope for the hypothetical price of an unsold feature. This is an area of reform that is best left alone.

Small company resources are best directed at innovation, not litigation

In my written testimony, I have described similar unintended consequences with many of the other proposed reforms regarding willful infringement, injunctive relief, prior use rights and venue shopping, each of which alone could add cost, delay and uncertainty that favors a deep pocket Goliath in a battle against a small company that is solely reliant on successfully commercializing its innovation. Many of the companies supported by my firm have fewer than 20 employees. Lawyers charge as much as $600 per hour for their expertise. A freshly minted Ph.D.—the one turning the innovation into a commercial reality—makes the equivalent of $60 per hour or less. While I have nothing against lawyers, only the investment in the Ph.D. is going to help advance innovation.

We share the objective of reducing unnecessary litigation. Money spent by Google or Roche in frivolous patent litigation is not only a drag on the U.S. economy, but it is also money that could be better spent acquiring young companies that are moving technology in new directions. However, reforms that add new processes, delays and uncertainty force my young companies to spend their scarce dollars on JDs rather than Ph.D.s and stifle innovation.

Improving the quality of the patent system is critical to our nation’s innovation leadership. However, so is protecting the smallest of companies that have contributed so substantially to that leadership.”

John Neis, Member, NVCA

The road ahead should be focused on quality

With that framework in mind, what are the steps that can be taken to improve the patent system as a whole?

Part of the problem in getting quality patents out of the system has been the lack of information available to patent examiners. Venture capitalists instinctually write new business plans when we encounter such systemic problems. Reported plans to use the power of the Internet to access technical experts are a radical idea that can improve information access for patent examiners. While this is only a pilot project, we feel it is the type of innovation that offers tremendous promise.

Conclusion

The United Sates must continue to be the leader among all nations in promoting and insisting on sound, strong and consistent intellectual property protections for those who need it most. Improving the quality of the patent system is critical to our nation’s innovation leadership. However, so is protecting the smallest of companies that have contributed so substantially to that leadership.

John Neis is a Managing Director at Venture Investors in Madison, Wis., and a member of the National Venture Capital Association. He may be reached at john@ventureinvestors.com.