NEW YORK (AFX) - The recently proposed Patent Reform Act of 2006 may actually prove more good than bad for the venture-capital industry.
The general take on the proposed legislation has been this: Through its 'first to file' provision, big corporations will be able to use their teams of lawyers to quickly and firmly file patents, slamming the door on cash-strapped entrepreneurs who may have come up with the idea first -- and presumably also on the venture capitalists who could back those entrepreneurs.
But things may not be that simple. 'It's fair to say that there is a bit of propaganda' circulating, according to Harvard Business School Prof. Josh Lerner, who specializes in the study of venture capital. That propaganda is wrongly creating the impression that 'the heroic individual inventor is not going to be able to get it together to file in time' for a patent, Lerner said, adding that such a scenario is unlikely.
The bill -- making the rounds through Congress after being introduced by Sen. Orrin Hatch (R-Utah), and Sen. Patrick Leahy, (D-Vt.), on Aug. 3 -- proposes to reshape the way U.S. companies obtain ownership of ideas. The U.S. is among a minority of countries in the world where being first to file a patent on an idea does not protect one from having it successfully challenged in court by someone claiming they thought of the idea first. The proposed legislation would change that, giving whoever is first to file with the U.S. Patent and Trademark Office clearer rights to the intellectual property.
Lerner said that in a multibillion-dollar industry where groundbreaking ideas are the stock in trade, the potentially streamlined patent process proposed by the bill should be favored. That's because patents for similar and often vague ideas have proliferated on a grand scale in recent years, creating numerous potentially sticky situations inviting litigation that can kill a startup before it can really get started.
Friendster Inc. has surprised many industry observers by winning two patents this year, covering online searches for social contacts and the uploading of content like photos related to contacts -- the sort of services already underlying an entire consumer market segment, exemplified by the popular Web site MySpace.com. As the U.S. patent system stands now, many industry observers think it's only a matter of time before lawsuits start flying among the many social networking companies based on similar concepts and technology.
Hank Berry, a partner at venture-capital firm Hummer Winblad Venture Partners, said his firm's portfolio companies have had a good deal of experience in patent litigation as both plaintiffs and defendants. The most prominent example is former Hummer Winblad investment Napster Inc., the formerly free music-sharing service that was hit by a patent infringement suit from SightSound Technologies in 2004, just as it was attempting to refashion itself as a paid music-download service.
Much like Friendster, SightSound surprisingly held a number of patents covering seemingly common Internet functions. The plaintiff's claims are disputed by Napster, and the result has been a drawn-out legal battle.
By affirming the rights of the first to file for a patent, the proposed legislation 'may actually be very good for Friendster because it can have a much more direct and logical conversation with licensees, and people don't have to engage in brinksmanship,' Berry said. Friendster is backed by prominent venture capital firms like Kleiner Perkins Caufield & Byers.
Lerner said the Patent Reform Act could ease what he calls 'patent thicket.' He said that a roughly 200 percent rise in applications in the past 15 years has overwhelmed the Patent and Trademark Office, whose response has been to simply sign off on more patents. Lerner estimated that the average patent reviewer now spends no more than 14 hours on each application.
'The situation now is akin to what we have here at Harvard in terms of grade inflation,' Lerner said, adding, 'Who gets hurt when 90 percent get A's? It's the A students. And venture-backed companies are the best and the brightest, yet while they may get a patent, three other companies get patents based on the same discoveries.'
The National Venture Capital Association, the trade group that represents the industry in Washington, is taking a wait-and-see attitude toward the bill. Jennifer Dowling, vice president of federal policy and political advocacy at the NVCA, said she thinks the legislation will likely not be passed before the end of the year, and her organization is still examining it.
But Dowling said that in general, if the proposed legislation will grant 'a reasonable power to wipe out bad patents,' or patents based on similar ideas already patented, 'we see that as a positive.'
'The longer it takes to have the validity of that patent assured, you're missing out on market opportunities,' she said, adding that the current situation is akin to 'the Old West,' where anyone slinging a patent could potentially be gunned down by a lawsuit-bearing opponent.
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© 2006 AFX News
