[i] In addition:

• Small firms are an attractive destination for elite inventors.  Small firms are increasingly offering the working environment where the best inventors have the latitude and opportunity to innovate and invent.  A recent study indicates that the share of so-called “highly productive inventors” at large firms fell from 72% to 69% since the mid-1990s, while their presence at small firms increased from 12% to 16%.[ii]
• Large and small firms rely heavily on small firm technology.  Large firms rely significantly upon small firm patents in the high-technology sector.  For example, 41% of patents in the field of biotechnology are held by small firms.  In addition, 66% of the citations from large biotechnology company patents go to small firms, indicating that small biotech companies are referenced more than would be expected just by their numerical share of patents.

Patents are critical to the success of small innovators.

Intellectual property — especially patents — helps innovators to safely demonstrate the value of their ideas to investors who provide crucial venture capital funding.  Without the vital protections that patents provide, ideas and inventions could be stolen during the initial funding stages, before the product can even be put to market.

Firms that seek and obtain patents have a high-impact.

According to a recent study, small firms own nearly 25% of all corporate patents.[iii] Capable of specificity and focus in research and development, these small, entrepreneurial firms are intense, adept, and hungry innovators that produce high-impact, advanced technologies.  For example, only one-third of the top 1,000 most patenting U.S. firms are small firms, but in the biotech industry, small firms produce one-quarter of patents and account for 71% of the patenting firms. Patents are an invaluable tool to spur investment and innovation.  Consider that:

• Small firms produce more highly-cited patents than large firms, on average. Small firm patents are twice as likely as large firm patents to be among the 1% most-cited patents. That is, small firm patents are on average more technically important than large firm patents.
• Small patenting firms produce 13-14 times more patents per employee, as compared to large patenting firms.
• Small firm innovation is twice as likely to be closely linked to scientific research, as compared to large firm innovation.  Big businesses just can’t match the entrepreneur’s pace in leading-edge technology research.

Many small firms do not use patents as much as they should.

Too many small entrepreneurs and “garage inventors” don’t understand the patent system, its complexities and value, and therefore don’t take advantage of all of its benefits.  For example, Stan Weston, inventor of the G.I. Joe Action Figure, was offered $100,000 up front or just $50,000 with a one percent royalty once sales exceeded $7 million.  Rather than obtain a patent, Weston chose the $100,000 option — and lost out on an estimated $20 million in royalties over the next 30 years, mainly because he failed to realize the advantages of patent licensing.[iv]

Among small businesses, a lack of awareness and understanding feeds some common misconceptions about the patent process:

• “I don’t understand how the patent system can help me.”  Many small inventors are simply unaware of the patent system and the role patents should play in their business strategies. Others rely on the use of more informal types of intellectual property protection, such as trade secrets and copyrights that simply don’t suffice in the modern business environment – especially for software and high-technology products.  For example, copyrights only protect the underlying code of software, not the innovative ideas behind it.  As a result, copyrights might allow larger competitors to co-opt a smaller firm’s product, reverse-engineer its features, and then beat the smaller firm to market by leveraging their superior market muscle.
• “I’m making my business a target for a patent infringement suit by seeking a patent.”  Not true.  Well-written patents applications with carefully-worded claims actually afford more protection from infringement lawsuits, as compared to those who haven’t even applied for a patent.
• “Patents take too long to be granted, why bother?”  To be sure, the USPTO has a self-admitted pendency problem, where increasing volume and an existing backlog means patents aren’t reviewed nearly as fast as the speed of business.  Yet, even when a patent is pending, the applicant has an important asset.  A “patent pending” helps firms to demonstrate the value and feasibility of their invention and business model, thereby attracting critical venture capital funding to get the business up and running.  In addition, so called “inchoate rights” allow a company certain “bragging rights” and make assertions about competitive and first-mover advantages in press releases and marketing materials.
• “I can’t afford to get a patent.”  A rule of thumb is that legal costs to apply and secure a patent are around $30,000 – plus the inventor/applicant’s time to prepare documents and work with patent attorneys. That’s a big number for many sole proprietors and lone inventors, but this amount is surprising to many entrepreneurs who had the impression that patent filing costs much, much more.   What’s more, the patent costs are typically a small fraction of the total costs to conceive and develop a technical invention.  When the invention has true economic potential, small businesses ought to actually be saying, “I can’t afford not to get a patent.”

The patent system is good for small firms, but it could be great.

As demonstrated, patents have proven their value as a great equalizer between firms large and small and have helped small firms to bootstrap with licensing revenue generated from their innovations.  But it’s not as easy as it could be for small firms.  Three issues hinder small firms from taking full advantage of the patent system:

1. Quality.

An explosion in workload demands driven by patent-seekers created pressure on the USPTO to grant more patents, more quickly.  But increasing workload without increasing the skills or quantity of patent examiners has led to an inevitable decline in patent quality.  Specious patents were granted, including some that claimed a patent for merely putting an ordinary business function online.  For example, online travel leader Orbitz endured patent harassment stemming from their use of an “interstitial page” – a “system at work” Web page that is shown to users while the system searches for fares.

1. Pendency.

In fiscal year 1994, only 201,554 patent applications were filed with the USPTO.  A decade later in fiscal year 2004, there were 376,810 applications filed, causing the office to fall far short of its goal of an 18-month average patent turnaround time.[v] As a result, average pendency — the period from application to grant – currently stands at over 26 months.  And for the computer software industry, average patent pendency currently stands at over 40 months – far too long to satisfy an industry with such a short innovation cycle, especially for small firms that depend upon quick returns on patented products.[vi]

1. Cost.

For those who seek patents, fees and related costs of preparing a patent application are generally estimated to exceed $30,000.  And once granted, the costs of defending intellectual property rights and maintaining a patent can sometimes be “prohibitive.”[vii]

Some proposed “remedies” promise more harm than good.

The patent system is clearly ailing yet some have proposed alarmist, knee-jerk reactions that would likely cause more harm than good.  These proposals include:

• Abolishing the patent system.  Critics of intellectual property rights have seized the opportunity to cite patent system problems to justify their cries to abolish the current patent system altogether. However, even with today’s problems, the patent system provides invaluable protections for innovators who push the envelope of technology and new ideas. Without it, new and novel ideas could be usurped by others before the actual inventor could see a return on an investment – an investment that could be in the millions of dollars.   As a result, the incentive to innovate, especially for small firms where investment dollars are scarce, would be irreparably diminished.
• Legislating against business method patents.  “Business method patent” has become a dirty word in patent circles and has been cited as evidence that the system is in desperate need of reform.  Some critics have called for the elimination of patents for all business methods, citing problems with certain e-commerce method patents.  But under the current patent system, patents should never be granted for merely transporting a routine offline business process to the online realm.  The existing patent system can work for business methods if and only when the “non obvious and “new” standards are rigorously applied.  This way,,patents aren’t awarded for claims such as online implementations of calculating currency conversions or shipping rates.
• Legislating that computer software cannot be patented.  Computer software resides in the intangible realm of bits and bytes, but it’s still an invention and product that deserves patent protection.  A substantial investment of hundreds of thousands or even millions of dollars may go into a software development cycle at a high-tech firm. Patents enable small firms to simultaneously protect the innovations they’ve invested in and allows sharing code with technology partners. Patents are emerging as the most effective tool for small firms to protect and leverage their software inventions amid industry heavyweights like Microsoft, Oracle, and IBM.

Targeted reforms can help small business access the patent system.

Several patent reforms would bolster the value of patents for small firms, spur innovation, and would benefit the business community as a whole:

• End fee diversion, and hire more patent examiners with better qualifications.  Patents are a necessity to protect intellectual property and protect the value of new, useful ideas.  As a result, inventors are left no choice but to pay the fees and obtain them.  But the system is overwhelmed and the PTO doesn’t have financial or human resources to do the job.  Worse, Congress recognized the patent system as a reliable revenue source and began lifting a portion of USPTO fees to subsidize profligate spending. Essentially, the USPTO became a federal government profit center. Unfortunately, since not enough of this revenue stayed “in-house” at the USPTO, they failed to add enough patent examiners and new technology to work the backlog and speed quality patents out the door.
• Foster an environment where more efficient and comprehensive “prior art” searches are the norm.  The body of work that may precede an invention is a critical tool in evaluating patent applications.  In the case of high-technology, however, libraries of prior art are disjointed and the body of work has a shorter history.  The Software Patent Institute is compiling a reliable and comprehensive body of software-related prior art, and will make it available to patent examiners.  Projects such as this should be encouraged and welcomed by USPTO.  In addition, allowing third parties to submit prior art evidence within 6 months of an application would provide patent examiners critical information where their body of considered prior art might be scant.
• Ensure a level-playing field for all firms, large and small.  Any reform proposals should adequately consider the unique position of small, high-tech firms in the innovation and patent cycle and foster equal access to the benefits of the patent system for them.  Any favorable treatment of large patent holders and businesses would actually devalue the patent system and alienate small from this vital process.
• Educate small companies about the patent process and make it more affordable.  Small firms are most likely to innovate in cutting-edge technologies and ideas, yet many don’t realize the necessity of patenting and protecting their intellectual property.   For those small firms who do understand the value of protecting their IP, many are discouraged by fears of large patent application costs, long pendencies, and the risks of costly patent litigation.  For example, firms should consider patent insurance policies that can stop a big firm from steamrolling a smaller firm with a false patent claim.  Patent insurance has four main benefits for small firms:  1) deters infringement because it gives financial power to more aggressively protect a patent; 2) reduces pressure on the patent holder to settle because of mounting legal expenses; 3) encourages investors by reducing their risk; and 4) eases licensing because prospective licensees feel more secure and perceive lower risk.[viii] A further way small business can reduce the effective cost of patent protection is to extend a U.S. patent application into selected international markets, where expanded market potential may justify incremental costs for patent applications in, say, the Japanese and European patent systems.  In general, more facts — and less fear — will go a long way to help small firms make an informed decision about pursuing IP protection.

Conclusion

Small firms are critical to American economic growth and innovation, and the patent system is critical to their success.  As industry and government leaders look for ways to solidify American leadership in the innovation economy, educating entrepreneurs about the patent system and reforming the system to make it more small-business friendly should be at the top of any list.  A more efficient and more accessible patent system that shores up the small business backbone of our economy will undoubtedly lead to a stronger, more successful America.