Does the New Patent Reform Law Shut Out Small Business?

On Friday, September 16, President Obama signed the America Invents Act of 2011 after the bill overwhelmingly passed the Senate the previous week. This long-awaited legislation will result in major changes to the U.S. patent system, which has operated essentially unaltered for nearly 60 years.

Reform of what many viewed as an outmoded patent-rights system has been in the works for at least six years. With final passage, the new law begins the process of providing the U.S. Patent and Trademark Office with more resources to deal with a huge backlog and inefficient systems. More important in the long run, it establishes an entirely new way in which inventors and companies are granted patents. Under the new legislation, the U.S. system changes from a “first-to-invent” system to a “first-to-file” system, which is already used by the vast majority of the world’s industrialized countries.

But while most observers agree that change was needed, the legislation remains hotly debated. Proponents say it will help spur innovation in the U.S. by streamlining the unwieldy old patent-rights system, reducing patent litigation, and bringing U.S. policies in line with those of the rest of the world. It currently takes about three years for the USPTO to process a patent, and a backlog of 700,000 applications awaits initial action. Backers also point to the act as a key job-creation tool, claiming it will create as many as 200,000 new jobs.

But many small-scale inventors, entrepreneurs, and small business owners worry that a first-to-file patent system gives large corporations an unfair advantage.

The National Small Business Association, for instance, strongly opposes to the act due to what it calls the “severe tilting of the system against small innovators and in the favor of large, multinational corporations.” The problem is that big companies have more legal and financial resources — resources that are needed to file for patents quickly, no matter when the invention was actually made.

“This legislation will irreversibly damage the ability of small business owners and entrepreneurs to create, develop, and commercialize their innovations,” says NSBA president Todd McCracken. “To think this bill will have anything but negative implications on job creation is absurd.”

However it turns out, there’s a lot at stake here. Big corporations are spending billions of dollars to buy up patent portfolios — often just to protect themselves against possible patent-infringement lawsuits from competitors and so-called patent trolls. These patent trolls — individuals or companies that acquire patents with no intention of actually using them to create anything but lawsuits — are a growing problem in several industries, particularly the technology industry, adding costs and uncertainty to the process of bringing new products to market.

A Little Background

Under the old first-to-invent system, the USPTO awarded patents to whoever was determined the first person to have invented something. Now, with the first-to-file system, it will award patents to the first inventor or company that files a patent application with the USPTO. The problem with first-to-invent, critics contend, was the expensive and time-consuming litigation often required to determine who actually developed an invention.

When patent applications were 20 pages long and an invention had a dozen or so claims on it, this wasn’t a huge problem. But nowadays, applications can stretch to hundreds of pages, and inventions may have hundreds or even thousands of claims. “With such an inefficient process, innovations and inventions that have the potential to change our lives are not reaching the marketplace quickly enough, and sometimes not at all,” wrote Douglas K. Norman, general patent counsel for Eli Lilly and Company, on the Lillypad blog. For similar reasons, many other large corporations are also in favor of the new law.

But the America Invents Act has infuriated many of those without fat corporate wallets. Independent inventors, academics, and small business owners wonder how they can beat large corporations to patent when big companies have entire departments devoted solely to technology research and intellectual property — making it possible to file much faster than their smaller competitors.

Some experts say this concern is overblown because the law includes a one-year grace period to protect academics and inventors who disclose their inventions before filing a patent. Robert Merges, a professor of law at University of California, Berkeley, noted in a San Francisco Chronicle article that this provision gives inventors one year to hone their inventions after disclosure. Pamela Samuelson, the director of UC Berkeley’s Center for Law and Technology, agreed: “The ‘little guy’ inventor story that this rule favors big firms is really a myth.”

And one provision of the America Invents Act may actually help small businesses save money, at least on the front end: Because the legislation expands application discounts available to small-scale and independent inventors, many small entities will actually see a reduction in patent application fees.

More $$$ For Patent Administration

Funding changes are also a big part of the new law. The America Invents Act stipulates that any USPTO earnings beyond its congressional appropriation can no longer be diverted from the USPTO to the general Treasury, as used to be the case. Last year, an estimated $53 million in patent fees was siphoned away from the office. USPTO director David Kappos estimates the new law will result in $300 million in extra earnings for the office, which will help it pay for much-needed IT upgrades and process overhauls, as well as help the office process its huge backlog of applications.

Part of that money will also go toward expanding the post-grant review process that is intended to settle potential legal battles before they start. Inventors or companies can contest the validity of a patent for nine months after it is issued, during which time the USPTO will go back and review the case. The goal is to keep expensive and lengthy patent fights out of the courts in the first place.

On the other hand, unlike the original efforts at patent reform, the final version of the bill does not change the current system of determining damages in patent infringement cases. That means it is unlikely to reduce the amount of huge jury awards — or do much to stop patent trolls.

Only time will tell whether the worst fears of small inventors and entrepreneurs come to pass. In the meantime, any inventor or business owner with a hot new idea shouldn’t wait to file a patent application with the USPTO. The patent game is about to change drastically — and if history is any indication, it won’t change again for a long time.