Patent laws dimming the light of American innovation

Once the mightiest economic super power in the world, the United States has dropped to eighth place on the 2010 “Index of Economic Freedom,” published by The Heritage Foundation and The Wall Street Journal.

The index shows freedom is a result of “the link between economic opportunity and prosperity.”

But, the sinking number of U.S. patents could be contributing to the frailty of that link.

Patents have been declining during the past decade.

Nationally, the number of patents issued dropped from 83,905 during 1999 to 77, 501 during 2008.

In Colorado, the number of patents issued peaked during 2006 at 2,100 and has flattened to 1,600 since 2008.

In Colorado Springs, issued patents peaked during 2003 at 350, and 220 were issued last year.

Patent attorneys say increasingly rigid accounting and patent laws are to blame for the decline.

Brenda L. Speer, a trademark and intellectual property attorney in Colorado Springs, attributes the decline partially to the economy but says innovation is held up by a pending U.S. Supreme Court case, In re Bilski, formerly known as Bilski v. Doll.

The case deals with the question about whether processes and procedures are patentable.

The case is a challenge to an October ruling by the U.S. Court of Appeals for the Federal Circuit in Washington, which said processes and procedures were not tied to a machine and did not result in a physical transformation, and so did not deserve a patent.

The federal circuit’s decision narrowed the processes eligible for patent protection, limiting eligible innovations to those “tied to a particular machine or apparatus.”

“A lot of people are holding back,” Speer said, “waiting to see how the Bilski case turns out. People are (still) going forward with patent applications, but are holding off for a few months.”

Dale B. Halling, a patent attorney at the Colorado Springs Technology Incubator, also says a combination of patent and accounting laws are to blame.

Halling’s resume includes preparing and prosecuting patent applications nationally and internationally for Motorola Inc. He has a bachelor’s in electrical engineering, a master’s in physics, a juris doctorate, and is registered to practice law before the U.S. Patent and Trademark Office.

He’s also an entrepreneur, with products in Cabela’s, Sportsman’s Warehouse and other retail outlets.

Technology start-ups are built on three foundations: intellectual capital, human capital and financial capital.

He said intellectual capital has been discounted as patent laws have been “weakened” in several ways since 2000.

One of the most damaging decisions, he said, was to mandate that patents be published 18 months after their first filing date — whether or not the patent has been issued.

“So (in some cases) you can wait 10 years and your patent is still not issued,” Halling said, “but it was published after 18 months, so the world has the benefits of your intellectual capital — but you don’t. If it took you 10 years to get title to your land, you’d think you lived in a Third World country.”

The “allowance rate” for patents was 60 percent to 70 percent during 2003, but has dropped to 42 percent now.

Some of the attrition is attributable to economic conditions, but many are abandoning their patents because it

takes so long for them to be issued.

And financial capital was undermined by the Sarbanes-Oxley Act of 2002.

The prohibitive costs of compliance and going public — several million per year, instead of the $91,000 that the Securities and Exchange Commission originally estimated — caused many companies to go private.

“In 1996, we had 60 percent of the world’s initial public offerings,” Halling said. “By 2005, we had 20 percent IPOs. We’re the only major country to have fewer public companies today than a decade ago.”

During the 1990s, the nation had about 500 IPOs per year, compared to only 13 last year. And during the second quarter of 2008, no venture-backed companies went public, which had not happened in any quarter since 1978.

“That’s not a cyclical downturn or ‘too much money chasing too many deals.’ This is a structural problem,” Halling said.

Excessive securities regulations impede tech start-ups because, “They’re looking for an exit strategy — they want to get bought out or go public,” he said. “A liquidity event is absolutely critical for a tech start-up. The ability to go public is what gives your company good valuations.”

And if that ability is undermined by rules and regulations that don’t exactly encourage innovation, then patent applications, technology start-ups and creativity will decline.

Thirdly, the ability to attract human capital has declined during the last decade. In order to lure engineering, management or marketing talent away from their high-paying jobs, technology entrepreneurs used to give them stock options, which had little or no value on financial statements.

But the Financial Accounting Standards Board issued a rule during 2005, FASB 123(R), requiring companies to declare stock options with the fair value of the stock on the date it was issued to employees. This is “expensive and complicated,” and as such, stock options are no longer “a good lure for pulling in human capital,” he said. “If you can’t go public, the market doesn’t go up, so stock options aren’t really worth anything — but they don’t increase revenue, so why should it be expensed?”

All this, supporters of innovation say, has lead to economic trouble.

During the 1990s, the U.S. had a budget surplus, unemployment was 4 percent, there was a small tax increase at the beginning of the decade, and the nation was the technological and economic envy of the world.

But despite a small tax cut at the beginning of the decade, by the end of the first decade of the century, the national debt was an unprecedented $12 to 14 trillion and unemployment was above 10 percent.

Halling said the shocking differences between the decades cannot be attributed to tax policy, nor to the financial crisis. Industrial production has steadily increased since 1940, with recessions causing only a temporary decrease. And other recessions did not decimate industrial production as the latest one did.

It is changes in patent laws and securities regulations, Halling said, that have stifled innovation, creativity and patent applications.

“For most of our existence, when income increased it was because you survived a famine or the plague,” Halling said, and thus more land was available per capita. “But starting in 1800 — which was the Industrial Revolution and also the beginning of the first modern patent laws — there was a steep inflection point in per capita income.

As a patent attorney, Halling worked with many technology start-ups during the ‘90s. Their ideas were “disruptive or revolutionary, with the potential to completely redefine a market,” he said. But since then, “no one’s coming in with stuff that’s revolutionary,” Halling said. “They’re (only) looking for a niche market, so they can eventually be bought out.”

Since the 1800s, technology has grown faster than the population, which has allowed people to increase their wealth.

But in the last decade, household income actually declined, showing a correlation between innovation and household income.

The United States can regain its forward momentum and reclaim its title as technological leader of the world, but a few changes are necessary.

“We have all the human talent we need. What makes an economy is the talent of the people and the system they’re working in,” Halling said. “We can get the economy growing fast if we make changes to FASB 123 (R) and Sarbanes-Oxley.”

For more information, visit Halling’s blog.