A modest proposal to save the Intellectual Property system from patent securitization
A recent discussion sponsored by the Commonwealth Club of Silicon Valley highlighted a number of issues with the US Patent system. The US Patent Office is clearly underfunded and, in the views of some informed observers, wrongly managed. Beyond that, agreement starts to break down. Some see a basically sound concept merely misadministered. But some inventors see a system that favors giant corporations, strips inventors of just remuneration, and suppresses competition. Corporate interests tend to see just the opposite: a system that dilutes their return on R/D investment, forces them to divert a ridiculous portion of their revenue to legal defense, and actually makes it risky for them to field a successful product. Further, some investors see huge pools of underperforming assets that should be exploited and securitized—a move corporate interests seem determined to block.
No one seems any longer interested in the original idea: that the patent system should protect the inventor—not his or her employer—and by protecting the inventor encourage publication of the work, thereby accelerating the pace of innovation.
So at this point permit me to offer a suggestion that should infuriate just about everyone in this wonderful, multifaceted debate. I believe that everyone in this discussion would be better served by a single, simple change in the law. We should prohibit assignment, sale, or any other transfer of patent ownership, save on the inventor’s decease, to a named heir.
This change would not fix everything. The Patent Office would still have to be correctly funded and managed. There would still be disagreement and litigation. But it would resolve a number of problems that corrode the system, and one problem that threatens to blow up the whole show.
First, consider the now-distorted relationship between inventors and their employers. Today, granting patents to the people who actually did the inventing is a rude fiction. Unless the inventor happens to be self-employed, and can show that none of the work on the patent was done under the employ of or contract to a company, ownership of the patent will automatically be assigned, by prior agreement, to the employer. Only the most powerful figures in the industry can refuse such assignment agreements when they are hired. This appropriation is poisonous in a number of ways, and to everyone involved.
For one, since it is impossible for the inventor to benefit by more than bragging rights, savvy engineers find ploys to work around the system. They avoid documenting key parts of their work if they think they might be onto something. If an idea starts to pan out, the engineers resign, find funding, and launch a new company from which they file the patents—in effect converting a potential license-revenue stream into high-risk venture equity. That’s an unwise bet most of the time, but it is a better deal than simply being stripped of the patents in exchange for a listing on a nice bronze plaque in the lobby. In the end, it is often a lose-lose for everyone. The company in which the employee began the work gets nothing but a minor competitor, the inventor gets nothing but two years of 16-hour days at reduced salary, and the industry gets no benefit from the invention. And that’s if everyone is lucky and avoids litigation.
For employers, the deal is just as bad. The system vacuums the best R/D employees out of organizations just as they are about to do their most valuable work. Any way you look at it, that is destroying equity. Further, owning patents tends to focus companies on generating revenue from their patents—and away from serving their customers. They can become locked into blinders by their own portfolios.
But suppose patents were not transferable. Inventors, instead of assigning patents to their employers, would license them, under terms negotiated on a case-by-case basis. Something useful only to the company the employee might just hand over. An innovation that is the basis for a valuable product might get licensed for a royalty based on apportionment—what share of the product’s success is due to the invention–one of the criteria used today to settle infringement cases.
With licensing instead of assignment, the goals of the inventor and employer are aligned: both want to maximize the profits from the patent, and usually the best way to do that would be for the two to cooperate. If the company isn’t interested in using the patent, the inventor can find other licensees in the free market.
This reform would also have a major benefit for venture investors. Today, when a venture company comes to the end of its runway, the company’s patents are often the best surviving assets. But separated from the engineers who did the work, the patents will have value only to competitors—to augment their own portfolios—or to patent trolls. Either one would offer only a fraction of the patents’ real worth.
If the patents remained with the engineers who created the inventions the work-out team would hold a much stronger hand. Now the asset would be not just the theoretical cash flow from asserting the patent, or the even more theoretical protection it might offer another company. It would comprise the patents, all the other intellectual property associated with applying them, including collected data, prototypes, and so forth, and the actual people who did the work. This is a far more valuable—and tangible—asset than simply a pile of patents. It would allow another company to pick up where the new venture left off and complete the work, and it would allow the engineering team to finish doing what they set out to do. Achieving this would require some forethought in designing the license the engineers would grant to their start-up, but it is achievable.
Finally, there is an even more serious problem that we must address. Patents today, as transferable rights to demand payment in the future under certain conditions, are a kind of financial contract not unlike some options contracts and swaps. As such, they can be purchased by investors and dumped into pools, so that investment banks can create financial derivatives based on them.
In fact, since the future cash flows from patents are uncertain and can be modeled as stochastic processes, patents should look very familiar to the financial geniuses who created collateralization of sub-prime mortgages. There is every reason to believe that if investment banks become involved in creating securities based on patent pools, the process will distort the creation and use of IP in the US at least as much as mortgage-backed securities distorted the process of buying a home. The result, in the extreme, could be the total collapse of IP law in the US and flight of technological innovation to the EU and Asia. Making patents non-transferable is not too extreme a step to prevent such an extreme outcome.
So I will suggest it again. Let inventors own their patents, and allow them to transfer limited rights under the well-developed body of licensing law. It’s fair to engineers. It’s best for corporations and investors. And it could prevent a catastrophe that today threatens the entire system.
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