Creating the “ Good Old Days ” Via Patent Reform: First-to-File Issues

1. Creating the “Good Old Days” Via Patent Reform:First-to-File Issues by Gary Lauder US Patent Reform Forum 2012 Panel: First-to-file system: Implications of a significant change in the law Washington, DC 3/27/12

2. Preamble • Spare mental cycles => multitasking • Multitasking leads to poor retention • Since this pres. has to be short • Speed talking solves all of above • In lieu of taking notes, this PPT on my web site LauderPartners.com (Patents link) (URL shown again at end of this presentation) • As Henry VIII said to his wives… • “Don’t worry. I won’t keep you long.”

3. Intro • I’m a venture capitalist (Lauder Partners LLC) • Have invested over $300M in VC over past 26 yrs. • In > 75 companies and > 50 VC funds • Not a lawyer • Co-inventor on a dozen patents • My Expertise: VC & tech entrepreneurship • The role that patents (issued & applied) play in that • Studying patent reform for the past 5 years, …in my spare time. ≠ day job. • I’m pretty horrified

4. Impact of patents • America became most innovative country • Not all due to patents, but they helped a lot • Technology entrepreneurship blossomed here • 11% of private sector workforce employed by VC-backed co’s • We invest 10X more VC & angel capital /capita than next best place: Europe • But this has been waning over last decade • AIA will be another nail in startups’ coffins • The ones that rely on patents (not all) • Let’s look at a startup from long ago…

5. Hewlett & Packard (HP) • They exhibited first product at trade show • Resulted in first order (from Disney) • Key innovations concealed inside box • Applied for patent after (w/in grace period) & were fine (old rule) • New rule: trade show demo = “on-sale” or “public use,” so no patent issuable • Worse: patent issues, but years later, invalidated in suit after discovery

6. Huh? • Trade shows = great place for entrepreneurs to get potential market and investors’feedback • AIA: triggers both on-sale and/or public use • If someone else likes the idea, that person can: • Fraudulently apply for a patent first • Write about it w/o attribution such that derivation can’t be proven • Same phenomenon at angel investor meetings • Startup inventors always going outside org for: • Financing, hiring, market research, manufacturing

7. More FTF/Grace Period SNAFUs • Contract manufacturing, even of prototypes • Can trigger “on-sale” bar to patent • Comes in many forms: foundry, laboratories, etc. • Kickstarter.com = site to fund making stuff • Takes orders for products not yet created • Publication grace irrelevant outside academia = Publish and perish • Grace period more harsh than other countries’ • FTF gives giant cash register to hackers • Try to prove derivation from Chinese hackers!

8. Investor Perspective • Much more risk (if business needs patents) • Senate colloquy notwithstanding, I am legally advised to assume no practical grace period • Can’t tell if they tripped public-use or on-sale • Will have to file earlier & more often • Greater risk of someone stealing idea & patenting or just pre-emptive publishing • Additional (often prohibitive) investments required for making non-public experimentation or in-house pilot production. • Even if patent is validly issued, PGR can tie up • Will shift investing to fewer patent-dependent companies/innovations

9. Individual inventor share in U.S. and Canadian patent grants during Canada’s transition to FTF U.S. Canada 25% decrease Upper graph is US. Lower is Canadian. Canada’s decreased by 27%.

10. State of Canadian Venture Capital Canadian Venture Capital Industry Review (2010): “long-term returns in the Canadian venture capital industry are such that capital has fled the market.“ • At least we have slightly “harmonized“ w/them!

11. The next best region for VC • Europe 1/10th as much VC & angel inv/capita • European study (2009): "Lost property: The European patent system and why it doesn't work.” • Last May, U.K.’s Small Medium-sized Entity Innovation Alliance letter to prime minister complaining that they “know only too well the failure of the patent system and have given up.” • 2/11: EU declared an “innovation emergency” • At least we are slightly more harmonized!!

12. Sage opinion from on high Chief Judge Rader & Pauline Newman, Circuit Judge in Classen Immunotherapies v. Biogen: “Europe lost innovation investment to the United States. Our country became the world leader in biotechnology innovation. Nevertheless, the tide can turn against us, too.“

13. Purpose of patents • To encourage innovation among those who lack market power & adequate resources • To do the above with the most justice & fairness • Perfectly just system probably not possible • Therefore society should choose to encourage innovators at the expense of incumbents • Other countries subsidize start-ups… • Complete failure compared to our private sector inv. • AIA seems to go in the other direction

14. Hope? • The next time you are in a hospital room w/ dying loved one, think about the cures that might have been if our patent system had continued to deliver the right incentives • Not all is lost: anything congress does, congress can undo … or the courts can • Lets hope it happens in our lifetimes… • so our lifetimes can be extended and improved

15. Thank you for your attention Gary Lauder Lauder Partners Gary@LauderPartners.com (650) 323-5700 www.LauderPartners.com/PatentReform

17. Commitments TO funds is leading indicator of funds flowing out to startups Last 4 years is down by about 2.5X due to “small changes to ecosystem”

18. Many causes of decline • Mostly self-inflicted wounds • Harder to go public or be public • Sarbanes-Oxley • Accounting changes (e.g. options expensing) • Slower FDA • Patent office delays (average time about 4 yrs) • I have seen allowances after 7 & 8 years • AIA will be another nail in startups’ coffins • The ones that rely on patents (not all) • Today’s passage of the JOBS Act helps … a bit

19. Example of startup “Best Practices” from invention to product launch Current patent law is geared around innovators’“best practices” that focus scarce resources on minimizing total development time and reducing technical risks Source: Ron D. Katznelson, SBA Presentation, (2010).

20. The loss of a grace period under the AIA forces costly deviations from “Best Practices” Under the AIA, innovators will be required to spend scarce financial resources on premature and more frequent patenting, instead of advancing toward product development Source: Ron D. Katznelson, SBA Presentation, (2010).

21. IP and all Federal civil suits filed

22. USPTO total patent pendency

23. Applications with priority dependent on filing date are less mature and are more likely to be abandoned Priority is determined by filing date Priority is NOT determined by filing date Data Sources: EPO Data from G. Lazaridis et al. World Patent Information29, pp. 317-326, (2007). “After SR, before Exam” and “First Action” here means the withdrawal components (2)+(3) and (4) respectively, as defined in the heading of Table 2. Chart Source: Ron D. Katznelson, FTC Presentation (2009). 23

24. Ask an inventor: Ben Franklin (1755) “One would not, ... of all faculties, or qualities of the mind, wish for a friend, or a child, that he should have that of invention. For his attempts to benefit mankind in that way, however well imagined, if they do not succeed, expose him, though very unjustly, to general ridicule and contempt; and, if they do succeed, to envy, robbery, and abuse.”

25. What Just Happened? • Many changes in new law • from First-to-Invent (FTI) to First-to-File (FTF) • Inside FTF: “grace period” change: • Was: 1 year from “enabling disclosure” • Will be: immediate bar if in public use or on-sale • Example 1: Science Friday Video Podcast: • “Young Inventors Soup Up A Wheelchair” • Many innovative improvements • Example:

26. Can move sideways

27. At end of video it said • That summer, they could do it, but not 2013 • They would have lost the right to patent it due to their “public use” of their technology

28. Similar Stories From Past • If this law had existed at time of Wright bros… • Public use at Kitty Hawk would have precluded patenting it • Patents must be useful, non-obvious & novel • Novelty means not anticipated by “prior art” • New rule is your own invention is deemed prior art the moment you publicly use it or offer it for sale.

29. Why I’m so bothered • The above examples are just one problem of many with this bill: • Failure to fix “fee-diversion” • FTF rewards theft of IP • “Post-grant review” (PGR) potential for abuse • Lying and intentionally misleading statements • Systemic dysfunctions: complexity vs. ADD

30. “Creating the ‘good old days’”? • The ‘good old days’ are times in the past when things were better • The AIA has so many things wrong w/it that it will make the IP future worse in some ways • Q: Why complain if it’s a fait accompli? • A: the 2 lobbying orgs need to justify existence • Will continue to try to “improve” patent laws • Similar to how trade unions serve themselves by appearing to serve their members

31. Lying & misinfo.: grace period • Provision is confusing w/triple negatives, so hard to interpret • Colloquy = staged conversation meant to clarify • Colloquy stated opposite of actual bill • When conflicting, courts go with bill, not colloquy • Senators & staffers misleading each other