INSIDIOUS ATTACK ON AMERICA’S GREATEST SKILL – INNOVATION

June 1, 2024, San Diego, CA - America may not have invented patent law or “letters patent” as established by the Venetian Statute of 1474, but we did inherit the notion of patent law from the English and have driven patent use globally.? America has been at the forefront of innovation globally, from leading the industrial revolution, fostering corporate intrapreneurship, to giving birth to and perfecting venture capital.? Each of these phases of innovation were founded with the premise of protecting our innovations, primarily accomplished through the use of “patents”.? It thus becomes impossible to understand why our own government would lead the effort to destroy American innovation.

Biden Administration seeks to use “march-in-rights” for any federally funded technology to grant licenses to third parties if the original patent holder does not make them available to the public on “reasonable terms”

Strong words “to destroy American innovation” even for myself, so allow me to explain. ?It is the manner in which we destroy innovation, the effect on innovation, how a decline in innovation is a job-killer, and disadvantages to America globally.? Any steps to weaken our patent system, consequently weaken American innovation.

March-In Rights / The Federal Government Seeks to Dictate and Limit Schumpeterian Rents

The Biden Administration seeks to use “march-in-rights” for any federally funded technology to grant licenses to third parties if the original patent holder does not make them available to the public on “reasonable terms,” with one key aim of forcing licensure of prescription drug technologies to lower drug prices.? Undoubtedly, making drugs accessible is a laudable goal, but over-stepping inventors and investors and dictating economic returns is legalized theft.? The government now wants to decide what economic returns are “reasonable” without regard to the market determined return for capital, put at risk for innovation.

[t]o now allow the Federal government to dictate the price at which investors are rewarded for the decades of risk taken, is nothing short of an economic assault and theft

Schumpeterian rents are earned by innovators and occur during the period of time between the introduction of an innovation and its successful diffusion.? Precisely the period of time that patents protect, during which imitation is prohibited.? This time period is critical because, especially in the case of drug development, innovation can take decades and cost billions of dollars.? American drug development is already attacked globally with weakened laws on drug pricing and generic drugs, and to now allow the Federal government to dictate the price at which investors are rewarded for the decades of risk taken, is nothing short of an economic assault and theft.

The doctrine of laches also comes to mind, while perhaps tenuous, one cannot deny the existence of the issue.? The doctrine of laches (sometimes referred to as “unclean hands”) refers to the unreasonable delay pursuing a right or claim, in a way that prejudices the [opposing] party.? Consider the following, the Federal government, through the Food and Drug Administration (FDA) dictates the speed at which new drugs are approved, and now the Federal Government would also like to determine the economic returns investors make for enduring that period.? Who wants to be in the middle of that Federal sandwich?

Consider that Federal funding, while large in the aggregate for technology development, is a fraction of the overall investment made. In 2020, the Federal government funded approximately 25.1% of the $245 billion invested in total in the U.S. (industry represented about 66%). Said another way, the Federal government believes their $0.25 allows them to dictate the value of your $0.66 investment. I will try that one with my kids!

The only thing remaining is for the government to take over innovation itself.? To be certain, government has a role in fostering the direction of research and supporting it to launch during the critical basic research & development period.? However, beyond that period, we should allow the market to drive economic returns.? Ironically, this helps the government and taxpayers as they receive license fees, royalties, and taxes from successful drug launches.

[t]he Food and Drug Administration (FDA) dictates the speed at which new drugs are approved, and now the Federal Government would also like to determine the economic returns investors make for enduring that period.? Who wants to be in the middle of that Federal sandwich?

The roadmap unveiled by the Biden Administration is unclear as to which drugs (and technologies) would be required to meet the standard of “reasonable terms” or how those terms are to be established.? I suppose that after years of deregulating the energy industry (power generation, transmission, distribution, etc.) we have decided to make drug and technology development a public utility, requiring all the trimmings – rate cases, patient populations that will serve as the rate base, and more.?

The story gets more insidious.? If the government can’t destroy the economic value created by innovative drugs and technologies through controls on price and returns, they will limit the time period innovation is valid through terminal disclaimers.

Proposed Rule to Make Patents Unenforceable If They are Issued Under a Terminal Disclaimer

A terminal disclaimer is a type of limit on an innovation for which an inventor has a patent.? The inventor might make small changes or incremental improvements to the invention and file a patent for the same invention with the changes. If the United States Patent and Trademark Office (USPTO) gives a second patent to the inventor, the second patent may have a terminal disclaimer attached, meaning the second patent expires when the first patent does. Further, it also means the inventor can only enforce the second patent if they own both patents – a sale of the first patent means they cannot enforce the second one.

Limiting the length of time inventors can protect their innovations has the effect of limiting the Schumpeterian rents they can monetize when the technologies are licensed or sold.?

This approach of continuation portfolios that are kept together by terminal disclaimers, is an industry practice that has been tried and proven for decades.? Today, “thickets” have replaced the term for portfolios, and are being given a bad reputation by the current administration.? The current administration has attacked patent portfolios with its proposed rule to make patents unenforceable if they are issued under a terminal disclaimer, which relate back to an earlier-filed patent wherein one or more claims is found invalid.? This proposed new rule would allow invalidation of an entire thicket or portfolio of patents simply by invalidating one claim in one patent from the portfolio.

Another assault on innovation!

The notion of the terminal disclaimer suggests that:

1.????? Incremental development from ongoing research and development has no further value as your patent monopoly would have a limited life; and,

2.????? There is no value in selling off earlier versions of patented technologies.

It is important to note that a patent is a public disclosure of an invention. Thus, if an inventor did not include or invent further variations or incremental improvements, when the patent was written, it suggests they were unaware of them at the time of invention.? Thus, why would we prohibit other researchers from expanding the use of the technology through further research and patent filings?? The original patent owner continues to maintain the underlying rights to the invention.

Limiting the length of time inventors can protect their innovations has the effect of limiting the Schumpeterian rents they can monetize when the technologies are licensed or sold.? A short period of time means a lower time value of money.? This serves to only benefit the largest of companies.? Moreover, it will be impossible to protect further incremental innovation because investors will not be able to protect their investments – the loss of an earlier claim thwarts and extinguishes the subsequent patent(s).

The entire venture capital industry emerged because our largest corporations stopped innovating. I know that everyone will immediately shout “Apple, Tesla, Microsoft, Intel, etc.” at me.? Nonetheless, even these companies rely on entrepreneurs and venture capitalists to test products, markets, and “cross-the-chasm”.? Why?

Entrepreneurs and venture capital are the tip-of-the-tip-of-the-innovation spear.? Today, large companies largely invest in development, while small companies commercialize research.? By relying on entrepreneurs, the largest companies can shift the difficulty of managing and expensive process of research off their income statements and balance sheets until the products are market validated.? Then, they acquire them at an accretive value – or at a point when they are immediately accretive – avoiding? the need to explain investment and losses during the innovation period.? This all favors deep-pocketed investors.

Thus, when you limit the “rents” entrepreneurs’ and venture capitalists’ ability to make good on their investment in companies who innovate, you attack small business, students, pension funds (i.e., teachers, firefighters) etc.? How?? Venture capital is an important asset class in which most pension funds have allocated a portion of their invested capital.? So, when you limit the returns earned by entrepreneurs and venture capitalists, you limit the investment capital they return to their investors – pension funds.

Returns are further limited because it requires the patent owners to own “both” or “all” patents.? Thus, it limits the ability of investors to divest of non-core technologies or patents.? One might argue that a license can always be granted, however, it has been my experience that investors place greater value on patent ownership than licensing.

Finally, we all know that technology continues to improve, none of us is patient enough for the next release of our favorite iOS or Android device.? The proposed terminal disclaimer rule has decided that if an inventor’s early version (represented by the first patent) has no further value to anyone else, it can’t be sold without selling the portfolio of patents.? So, if Apple, Google, Samsung or others advance their technologies, they are unable to sell their earlier technologies for fear of losing the new patents pursuant to the terminal disclaimer rule.? For young companies it also destroys their ability to monetize earlier versions of technology.? Whether large or small, this rule adversely affects all companies, but is worst to entrepreneurs.

In an age of declining American manufacturing and global competitiveness, the U.S. is seeing jobs head overseas, why would we cause further harm to ourselves? In 2023, China graduated approximately 1.7 million engineering graduates from university, while in the U.S. we were approximately 200,000.? Today, the U.S. continues to lead the world in innovation, but with the intensity of other nations investing in STEM and venture capital expansion, it is only a matter of time before our innovative edge is eroded.

The further irony is that the U.S. is the leading jurisdiction for patent filings.? Perhaps in the future terminal disclaimers would aid us by limiting foreign entities from long periods of patent-generated monopolies.? I think the time scale is tenuous, and there is something decidedly un-American about reducing competition.

Support The PREVAIL Act and The Patent Eligibility Reform Act

It is probably of no surprise to you that I tend towards entrepreneurship and innovation.? It is important for everyone to consider The PREVAIL Act , and The Patent Eligibility Reform Act .? Consider supporting entrepreneurs and innovation – it is American.

Luka Erceg is founder and managing director of Dynamique Financial, LLC, a disability run financial services firm that offers investment management, wholesale insurance, asset management, turnaround and restructuring, strategies, and other financial related services. His experience includes energy finance, the founding of Simbol Materials, and substantial board advisory engagements. He holds a Juris Doctorate (J.D.) from South Texas College of Law, Master of Laws (LL.M.) from the University of Houston Law Center, Master of Business Administration (M.B.A.) from Rice University, and Bachelor of Marketing (B. Com.) from the University of Guelph. He is a Certified Turnaround Professional (C.T.P.) through the Turnaround Management Association and a Certified Insolvency and Restructuring Advisor (C.I.R.A.) through the Association of Insolvency and Restructuring Advisors. On January 11, 2018, Luka suffered a left shoulder disarticulation (amputation) due to a flesh-eating bacterial infection brought on by bad oysters, Scientific American published his blog article “I lost my arm to microbes but they can save the world”, on his tragic experience but nonetheless the ongoing importance of nature and microbiology in addressing global waste problems.