26 February 2008

Are Patents Headed For Extinction?

Well put!

Are Patents Headed For Extinction?
Joe Kiani 02.25.08, 6:00 AM ET

Successful free enterprise requires an effective system of property ownership rights. Economists like Hernando de Soto believe that such rights are the underpinning of capitalism and explain how for decades America's strong patent system has fostered economic growth and innovation in the face of intensifying international competition. Although many factory jobs have moved overseas, knowledge workers have enjoyed improved living standards in the United States.

That picture will change for the worse if the Patent Reform Act of 2007 (S.1145), now being considered by the Senate, is enacted in its present form. This bill, together with two recent patent-unfriendly Supreme Court rulings, represents one of the worst assaults on intellectual property protection in the 218-year history of our patent system.

By undermining the value and certainty of patents, the bill could inflict a long-term blow on our economy, innovation and innovative companies--particularly small, entrepreneurial medical technology companies. That's bad news for patients, clinicians and our health care system. These companies devise revolutionary medical technologies that save lives and lower costs by shortening hospital stays, reducing medical errors, and eliminating risky procedures. But these inventions require entrepreneurial spirit and huge investments, which are only encouraged by adequate patent protection.

Investing in medical technology start-ups is a high-stakes gamble. These inventions require years of costly research and development, clinical testing and regulatory approval before they can be marketed. Many great ideas never make it. Investors need assurance that a new venture's patents are secure.

I would never have been able to raise (after mortgaging my condo) the nearly $100 million required to develop and market our breakthrough pulse oximeters if I couldn't offer the assurance that the devices would be protected from marauders. In fact, in 2004, a jury awarded Masimo (nasdaq: MASI - news - people ) $134 million in a patent case against our dominant rival, which infringed our patents shortly after we introduced our product.

The harm the new patent bill promises to inflict on innovation and property rights far outweighs any possible benefit from any worthwhile provisions.

Three provisions are especially troubling. One would restrict damages levied on infringers in patent lawsuits by basing the award on the price difference between the infringing and previous product. Every consumer knows that new products--PCs, software, cellphones, for instance--that incorporate cool new features are often sold at the same or lower price than previous versions. Under this scenario, the inventor whose innovation was taken from him would probably receive no damages under S. 1145.

Another onerous change would diminish a patent's value by permitting it to be challenged not just for a relatively short period of time after it is granted, but for its entire life.

Then there's the disturbing "Pre-Grant Publication" section of the bill. The patent grant is a bargain between an inventor and the public that was conferred by the Constitution. In return for disclosing his invention, the inventor is given a limited time (15 to 20 years) to exclude others from using it. However, the current proposal would require him to disclose his ideas well before he is told what protection, if any, he will receive in return. That is not right.

In fact, this bill may turn out to be a severe blow to a patent system that has already been significantly eroded by two recent Supreme Court rulings. In May 2006, in eBay (nasdaq: EBAY - news - people ) vs. MercExchange, the Court limited the use of permanent injunctions in infringement cases. Then in April 2007, in KSR International vs. Teleflex (nyse: TFX - news - people ), the Court lowered the standard for demonstrating that a patent is invalid because it appears obvious.

The full impact of these rulings remains unclear. Accordingly, I recommend that Congress either postpone new patent legislation or eliminate the provisions that will weaken our patent system, until we can gauge the effect of these decisions.

In making this proposal, I was inspired by a story that one of my engineering professors used to tell to highlight the importance of feedback and control theory. "If people had paused to see how many buffaloes they had already killed before they killed more, the buffaloes would not have become practically extinct." Likewise, if Congress enacts this legislation--which was conceived prior to the Supreme Court rulings--before assessing the impact of those rulings, patent protection could go the way of the buffalo.

This patent bill is being promoted by America's largest information technology companies, notably IBM (nyse: IBM - news - people ), Cisco (nasdaq: CSCO - news - people ), HP (nyse: HPQ - news - people ), Google (nasdaq: GOOG - news - people ) and Microsoft (nasdaq: MSFT - news - people ). Even though these companies have flourished under the protection of the existing patent system, they are now attacking it.

Perhaps they don't recognize the unintended consequences of the changes they're seeking. But the Chinese certainly do. In a November 2007 article in Chinese Intellectual Property News, Cheng Yongshun, a respected Chinese intellectual property judge, wrote that this bill will be "friendlier to the infringers than to the patentees in general, as it will make the patent less reliable, easier to be challenged and cheaper to be infringed." That, of course, will allow more knockoff Chinese products to flood the U.S. market.

So while the supporters of this bill may benefit in the short term from unrestrained patent infringement, I believe that they and the rest of the world will suffer in the long run.

American ingenuity and innovation are beacons of progress for the world. But they can't survive without strong intellectual property protection. At a time when our economy is slowing and health care costs continue to rise, lawmakers must encourage innovation by strengthening patent protection rather than weakening it. Regrettably, this bill, as it now stands, would do the latter.

Joe Kiani is the founder and CEO of Irvine, Calif.-based Masimo.

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