By Todd McCracken, National Small Business Association 

The National Small Business Association, the nation’s longest-running small-business advocacy organization, opposed the patent reform bill, the America Invents Act of 2011, due to its potential to harm America’s small businesses.

The new law, signed by President Obama Sept. 16, offers nothing to benefit small businesses, startups, individual inventors or university innovators, and fails to improve the way the patent system serves the NSBA’s small-business members.

Instead, the AIA takes away the key legal provisions that small businesses and startups have used for decades, adds risk and promises to increase the cost of obtaining, maintaining and enforcing patents.

Where the 1952 patent law allowed startups, small business and disruptive innovation to flourish, the AIA repealed the most important provisions and replaces them with features that favor large businesses and multinational firms.  This new law will lead to large, lumbering, entrenched market incumbents, much as we see in Europe to the detriment of America’s entrepreneurial business community.

The patent reform law reduces the incentive for risk investments in new inventions — it tips the balance in favor of big business over early-stage innovators, and that will ultimately reduce innovation.

The AIA casts heavy clouds of legal uncertainty over patent rights for decades to come because of ambiguous drafting and dubious constitutionality.  The reform under the AIA includes the most significant changes to the U.S. patent law in over a century — and they are not good changes.  The NSBA is concerned with five major changes.

First, the AIA moves the U.S. patent system from a first-to-invent system to a first-inventor-to-file system.  Moving to a first-to-file system favors large businesses, foreign corporations and well-financed multinational market incumbents over small-business innovators.  In patent parlance, this transition is more accurately described as moving from a “first to conceive” system to the “first to reduce to practice” system.

For a patent application to be effective in protecting a new invention, it can only be written after the invention has been fully vetted, reduced to practice and tested.

Unlike the American first-to-conceive system, a first-to-file system awards patents to those who are better equipped with resources to achieve the latter reduction to practice steps after conception, or to those who can afford to file many applications at every stage of development.  Hence, favored under this first-to-file system are entities having financial and staffing resources that are generally not available to startups, individual inventors or small-business innovators.

Second, the AIA weakens the grace period that has been an important and valuable right for U.S. inventors since 1839.  That is, it shortens the deadlines for how early a patent application must be filed, and reduces the options that inventors have to develop an invention before filing an application.  The old patent law granted patent rights based on who invented an invention first — the mere fact that an inventor was first to conceive an idea was sufficient to lock down patent rights, without the expense and delay of consulting with lawyers.

The American grace period has been particularly important for small-business inventors.  This feature of the old law permitted startup companies, small companies, university inventors and the like to initiate discussions with third parties such as outside investors, outside subcontractors or potential outside strategic partners for manufacturing or marketing.  This same feature of the old law allowed an inventor to test and perfect an invention, to show that it is technically feasible and marketable, before being forced to pay $10,000 or more to a patent attorney.

Under the patent law before the AIA, all these business activities were possible, and available at low cost, because patent rights were reasonably secure (subject to small but manageable risks) simply because the inventor invented.

Under the new law, an inventor faces the same difficulties that have prevented a vibrant startup or venture-capital ecosystem from arising in Europe.  The AIA gives an inventor a Hobson’s choice:  either file a patent application before beginning outside discussions, or publish all details of an invention before beginning to discuss with outsiders.  But publishing a full roadmap to an invention just as a project begins is commercial suicide, and several prematurely filed patent applications are prohibitively expensive.

The new law creates a catch-22 for startups: An inventor can’t start discussions with an investor before filing a patent application, but usually does not have the money to file a patent application before landing an investor.  The old law permitted the discussions that allowed entrepreneurs and investors to find each other; the new law suppresses them.

The old law created an even playing field that treated small companies and large companies alike.  The new statute gives a huge preference to large companies, by strengthening the advantages to companies that can do all of their financing, research and development, testing, manufacturing and marketing in-house.  In contrast, the AIA takes away the legal provisions that allowed easy consultation with third parties and cross-company collaboration.

Similarly, the new law strengthens rights for companies that invent the same things twice, allowing them to extend patent rights far beyond the normal 20-year patent term, while providing no analogous advantage that has any meaningful value to small companies.  The law was designed by big companies for the benefit of big companies, to protect themselves from the next generation of innovators that might displace them.  It does that quite effectively.

Moreover, if the purpose of the AIA is harmonization with the rest of the world, then the disclosure grace period is effectively nonexistent.  A disclosure before filing acts as an absolute bar in jurisdictions outside the U.S. and the inventor would have to forfeit any foreign patent rights to benefit from the weakened grace period of the AIA.  This makes obtaining foreign patents more difficult for small business inventors — not easier, as proponents of the AIA contend.

Third, the AIA effectively shifts the constitutional balance between trade secrets and patents to favor those who hoard secrets.  For more than 170 years, U.S. law held that if the inventor chooses to use an invention in secret, the inventor abandons the right to obtain a patent after a year.  The AIA does away with these provisions and now provides that companies can use an invention for many years, and seek a patent years later.  This effectively extends their competitive advantage by an additional 20 years.

This provision is retroactive, enabling incumbent companies to “evergreen” or extend a soon-to-expire patent, or patent trade secrets for which they have previously forfeited the right to a patent under the old law.  It favors established older firms over startups and early-stage small businesses that have no trade-secret accumulation history.

Fourth, the AIA further shifts the constitutional balance in favor of trade secrets by expanding prior-user rights.  Prior to the AIA, the first inventor that provides a full written description of an invention receives in return a patent that allows that first inventor to exclude others, or obtain a royalty, from all others that use the invention.  Under the AIA, the motivation to disclose is sharply reduced:  One who uses an invention in secret obtains a right to circumvent the patents of others who do disclose.  In essence, the trade-secret holder receives a free ride on the rights of the patent owner.

The “exclusive right” required by the Constitution becomes a right that has to be shared.  This favors large companies, which often can rely on factors other than patents to protect their markets from competitors, but will be fatal to many small companies that live or die by the patent system.  This AIA provision shifts risks onto those who participate in the patent system, and favors those who keep trade secrets.  This disadvantages small-business innovators that must rely on the patent system for their survival in the market.

Fifth, the AIA adds more opportunities to challenge the validity of patents.  Strong patents are critical to startup companies trying to obtain investments.  The AIA, however, adds several new paths by which an infringer can tie up a patent in legal proceedings in the U.S. Patent and Trademark Office, even if the patent owner had no intent to enforce the patent.

The new law shifts much of the economic decision making to the infringer — and given the dynamics of the market, this generally means a shift of legal and market power from small companies and startups to large firms and market incumbents.  The net result is that valuable patents will be more subject to challenge, which increases costs for the patent owner, weakens the value of the patent and makes it more difficult to license or raise capital necessary to starting a company and creating jobs.  NSBA members repeatedly attempted to be heard on these matters.

However, the Senate spent six years avoiding testimony from any person from a startup, an early-stage small business, an individual inventor, or venture capital.  The infirmity of the AIA and its legislative process is manifested by its provisions that call for studies of the very issues on which Congress should have been informed prior to enacting the provisions of the AIA at which the studies are to be directed.

For example, the AIA requires a U.S. Small Business Administration study regarding alternatives to the first-to-file system and its likely effect on small-business patent applicants.  But these first-to-file and weak grace-period provisions in the AIA go into effect regardless of the results of the study.

Similarly, the AIA directs the PTO to study and report to Congress on international patent protection for U.S. small businesses — while the relevant provisions that harm small business’s ability to obtain international patent protection go into effect regardless of the results of that study.  The AIA also directs the PTO to study, report and make recommendations to Congress on the operation of prior-user rights.

This includes the effects of prior-user rights on small businesses, universities and individual inventors, as well as its effects on innovation rates in selected countries, and an analysis of legal and constitutional issues that may arise from placing trade-secret law in patent law.  Regardless of the results that obtain from this study and recommendations, the related AIA provisions went into effect on the day of its enactment.

The new patent law is the perfect example of legislating first and asking questions later.

Each of the changes described above acts to weaken our patent system to the disadvantage of small-business innovators.  Taken together, these changes strike a terrible blow to innovation in the United States and will saddle our patent system with unprecedented legal uncertainty.

This uncertainty is enhanced by legitimate questions of the constitutionality of the AIA.  In shifting the constitutional balance away from the patent system’s disclosure purposes, in promoting the hoarding and evergreening of trade secrets and the broad expansion of prior-user rights, the AIA runs counter to the constitutional purpose of our patent law — to promote the progress of the useful arts by securing for a limited time exclusive rights to the inventor in return for disclosure of the invention.

Any patent reform that runs counter to the constitutional text and underlying purpose surely will face legal challenges that will call into question the validity of any patents granted under that legislation.  These concerns decrease the value of patents, make it more difficult to license and increase the cost of enforcement, which impacts small-business innovators disproportionately more than large companies.

Enactment of the AIA has, at every turn, put small-business innovators at a disadvantage, and to describe it as anything other than a massive blow to entrepreneurial innovation is simply untrue.

(Todd McCracken is president and CEO of the National Small Business Administration in Washington.  Dr. Ron Katznelson, NSBA member and president of Bi-Level Technologies, contributed to this article.)