How Darrell Issa Destroyed Our Most Important Property Right

For over a decade, Congressman Darrell Issa (CA-49) has successfully pushed legislation that has impaired funding of technology startups and thus significantly damaged new job creation. Issa was the cosponsor and a primary political driver of virtually all startup killing patent reform bills since 2005. Issa’s crusade culminated in the passage of America Invents Act (AIA) in 2011, which was also strongly supported by President Obama, and fundamentally changed the very nature of the patent system and property rights. 

The AIA’s damage is severe for small entities – leaving many startups with no tools to attract capital and build their companies. With 84% of U.S. new job creation traditionally generated by startups and inventors, Issa’s AIA is a disaster for American job creation.

To understand why the AIA is so damaging one must understand only a few basic concepts on how patent rights attract capital to early stage startups, and then see what damage AIA did to those concepts.

The first basic concept is that a patent right is defined in the U.S. Constitution as solely an “exclusive Right”. It is the only place where the word “Right” is used in the Constitution and it is intentionally capitalized. An “exclusive Right” is the very essence of a property right, so a patent right grants a personal property right to the fruits of your own labor.  

It is crucial that a patent is a personal property right if you hope to get any sort of return on the investment and hard work you expended inventing something. Patents rights do two things: One is to encourage others to license your invention because the exclusive right keeps others from doing it without your permission. Second, if you decide to startup a company to commercialize your invention, the exclusive right allows you to keep competition at bay for just long enough to establish a toehold in the market and become a competitor in your own right.

Inventors are regular folks, probably a lot like you reading this article. Most of us do not have millions of dollars in net worth or assets that can be leveraged to fund a startup. So, because patents are private property rights, we can leverage our patents to get funded. The good news is that investors, especially early stage investors often called angel investors or seed-stage funds, prefer to invest in startups with patents. A major reason that investors like patented startups is that patents, like any other property right, can be transferred to another person and that new person gets all of the same rights that the original inventor gets. This transferability gives investors confidence that their investment can be returned regardless of the fate of the startup. If the startup is successful, they get a return from the startup. If it fails due to infringement by larger and better positioned competitors, the investor can take control of the patent and return their investment through licensing. 

Patents improve the upside potential of startups and limit downside losses. This enables startups to attract the capital needed to build the company based on patent rights and create new jobs, which is how 84% of new jobs are created.

So what did the AIA do to damage this job creation ecosystem? The answer has everything to do with the way the AIA redefined a private property right as a public right. 

Pre-AIA a patent was like any other property right.  It could only be invalidated in an Article III court, commonly known as federal court, by independent lifetime appointed judges who do not have career paths. The burden of proof was on the party challenging the patent and that party had to be related to the patent, which usually meant they had to be sued by the patent holder. The level of evidence to invalidate a patent was the highest in federal court, clear and convincing. A patent had a strong presumption of validity both in black letter law and in judicial precedent. It was intentionally made very difficult to invalidate so that it could be used as collateral by startups and so it would discourage infringement. For over 200 years, potential infringers normally dealt with the inventor before infringing or if they went to court, they most often settled with the patent holder.

Issa’s AIA turned all of that on its head. Anyone can now challenge a patent to what is called a PTAB procedure. The challenger can remain anonymous and they do not have to be at all related to the patent. A PTAB is handled in the U.S. Patent and Trademark Office (PTO), the administrative branch of government – not the federal courts. PTO judges are employees who have career paths and a chain of command that extends to the president.  They can and are influenced by the those in the chain of command. 

If the challenge is accepted by the PTO (and challenges are currently being accepted at very high rates), the patent is for all practical purposes immediately invalidated for the duration of the proceeding, which could be five years. Time lost is not granted back to the term of the patent – it is just lost altogether. When one PTAB is completed, another can be launched, so the threat of a PTAB is never gone for the life of the patent.

The burden of proof is on the patent holder to reprove the validity of the patent under a completely different standard than the federal courts. The PTAB standard is intended to make it very difficult for the patent holder to reprove that the patent is valid. 

Not surprisingly, PTAB procedures are invalidating or neutering close to 95% of all patents they review. The cost to the patent holder starts at $300,000 and, depending on how litigious the challenger is, costs can run into the millions. 

The former Chief Judge of the Federal Circuit, the appeals court that hears all patent appeals, called these procedures “death squads killing property rights”, and no doubt they are.

Now put yourself in the shoes of an investor looking to invest her own money into your startup.  First, if the technology is commercially valuable it is highly likely some multinational will steal it and using their deep pockets and existing market massively commercialize it running the startup out of business. In addition, a 2006 case called eBay v. MercExchange made it impossibly difficult to exclude infringers because the public good must somehow be proven. If you can steal it and keep it, why not just steal it?  And that is what is happening today - it is called efficient infringement. This further increases the odds that investor will end up owning the patent.

However, the AIA created huge potential liability to anyone owning a patent and there are no behavioral changes that can reduce that liability. The investor is immediately subjected to the risk of potentially millions of dollars of costs to defend against a PTAB that will almost certainly be launched upon any attempt to license the patent.  Because of the cost and the likelihood that the patent will be invalidated, the investor will be forced to capitulate for pennies on the dollar, or to abandon the patent altogether. 

Issa’s AIA has made patents into liabilities to both startups and to investors. Patents are no longer property rights, they are instead public rights made strong or weak by the whims of whoever is president... or perhaps more accurately, whoever holds the political favor of the president.

For most investors, it is better to put their money in the company who would likely steal the patent than it is to invest in the company that invented it in the first place.

While this may not seem to affect you, it most certainly does. There are more companies going out of business than starting up for the first time in recorded history. It is a primary reason we are not creating jobs and a primary reason companies are moving offshore. 

This is what Issa has done in congress. He needs a new job.  If he keeps his, we will not have ours.

You can read more at https://www.dhirubhai.net/pulse/why-inventor-protest-congressman-issa-paul-morinville?published=t