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How the new bid to reform patent law will kill jobs

September 2, 2011: 11:12 AM ET

The creators of a new measure claim it will spur 200,000 jobs, but the red tape it creates will hinder growth, not boost it. 

By Gary Lauder, contributor

FORTUNE -- Few things upset me more than being lied to, so I am quite distressed that the proponents of the America Invents Act are getting away with characterizing this bill as promoting job growth. The Senate is scheduled to vote on the bill when it returns after Labor Day, and if it passes, I believe the new law will have the opposite effect by hindering entrepreneurs whose inventions rely on patents.

If you are like most people, you probably have no idea what I am talking about. The esoteric nature of this bill means it hasn't been reported meaningfully in the mainstream press. This has enabled this legislation to crawl forward under the radar of the affected parties. As beneficiaries of technological innovations, we will all be affected parties. I will explain.

Today's patent law allows entrepreneurs to wait to file patent applications until they know they have inventions that are valuable. The one-year grace period lets inventors discuss their ideas with investors and strategic partners and experiment with different versions of the idea. Even if during that time the idea leaks out, the company can still win a patent as long as it applies within one year of first public disclosure. According to David Boundy, Vice President for Intellectual Property at Cantor Fitzgerald, the America Invents Act would: "require a company to file premature, hasty, and expensive patent applications on every baby-step idea to preserve rights against third parties who are dabbling in the field without intent to develop a commercial product." This red tape would slow innovation and cost America jobs. Why change the current law?

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I have been a venture capitalist for 26 years and am intimately familiar with the process through which an inventor or entrepreneur's ideas become funded and commercialized. I also appreciate how much better our entrepreneurial ecosystem seems to work in America than does Europe's or Japan's -- the countries with whom we are supposedly "harmonizing" our laws. We are not just slightly better; American startups receive ten times more venture capital and angel capital per capita than Europe does, and other regions are even further behind. While the reasons for the differences are multi-faceted, one of them is our better patent system.

A patent's primary purpose is to prevent copying. This provides financial incentives for inventors and investors to take the many risks associated with innovating new technologies. The history of innovation is riddled with theft. Some of the most famous inventors in America died penniless due to theft or other unethical legal maneuvers that deprived the inventors of just compensation. Even Ben Franklin cited the problem in 1755 when he said:

"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."

Thefts go back even further. Physicist Stephen Hawking is a patron of an organization in the UK representing small businesses (SMEIA) who would like to see their patent system become more like ours. In May he told the group:

"As a cosmologist, you may be interested to know that my illustrious predecessor Galileo Galilei had his design for a compass stolen, by his one time protégé Baldassar Capra. I know that patent theft is one of the big issues that innovative SMEs face today. Galileo described such theft as "worse than murder, the victim feels the loss of fame, honour and merited glory, obtained not by nature, fate or chance ... but from studies, hard work and long vigils."

The UK's situation is similar to the rest of Europe and the rest of the world -- other than the U.S.A. Two years ago, a European research organization published a study named "Lost property: The European patent system and why it doesn't work." This is whom we are "harmonizing" with?

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A study by The Kauffman Foundation found that all new job growth in our country comes from startups, so it's easy to see how the changes would reduce jobs, not grow them. It seems reasonable to expect the proponents of the "patent reforms" in the AIA to bear the burden of proof that these changes might help, but that is not the case. Senator Patrick Leahy, who is sponsoring the bill, has claimed that it will spur 200,000 jobs, but not a shred of evidence exists for that. In Washington if one simply restates the same fiction enough times, it is believed.

Why is this happening? The answer is that five to 10 years ago, patent litigation was growing more rapidly and scared many big firms into creating industry groups to lobby congress to "fix it." IT firms and pharmaceuticals butted heads for years and ultimately they compromised on this bill. It does not benefit either of them very much -- nor anyone else, but their lobbying groups, such as the Coalition for 21st Century Patent Reform want a victory to justify their existence. In fact, during the intervening years, many major court decisions have occurred which have incrementally solved most of the problems that existed when those groups were formed … but they developed a life of their own. Their corporate members have an average company age of about a century and have been net exporters of jobs

So congress is putting the interests of the job exporters ahead of the job creators … all due to the fact that the job creators have had no voice in this process and are still unaware of what's about to happen. Nor do they have the resources to hire lobbyists or make campaign contributions. Not a single inventor nor startup was invited to testify before the Senate on this in the past six years of hearings. This was not an accident.

If the bill is passed, it is unlikely to be undone. Sarbanes-Oxley has proved that point. Despite destroying billions of dollars of value, it's still there nine years after it passed the Senate 99-0-1. As Walter Lippmann once said: "When all think alike, few think very much." Let's hope the Senate will think again … or for the first time.

--Gary Lauder is the Managing Partner of Lauder Partners LLC, a Silicon Valley-based venture capital firm investing primarily in information technologies. He has assembled the best information he could find on patent reform and the AIA here.

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