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August 5, 2002 In News Archive

Small businesses embrace reform despite added costs

Date:  Mon, 2002-08-05

Excerpted from: The Business Review By Kent Hoover Charlotte Business Journal August 5, 2002 The auditor independence rules apply only to public companies, but privately held companies that anticipate going public in the future or merging with a public company likely will follow them as well. Most experts expect the rules will increase a company’s accounting costs, but David Martin, chairman and chief executive of Charlottesville, Va.-based M-Cam, thinks businesses may get better deals by hiring separate firms for auditing and other services. “Nothing is lost and much is to be gained by getting rid of what was effectively in many cases almost a monopoly position,” he says. Good directors will be hard to find. Two other parts of the bill, however, will have “devastating effects on small business,” Martin says. The bill will make the cost of director and officer insurance “prohibitive,” he says, forcing small public companies to choose between buying expensive liability insurance or losing qualified directors for their boards. The cost of that insurance has gone up by more than 50% in the past few months, says Mark Heesen, president of the National Venture Capital Association. “It’s only going to get worse.” Martin, whose company provides intellectual property analysis software, says the corporate reform legislation also will require companies to comply with an “esoteric rule” that requires companies to test and disclose whether their intangible assets have been impaired – e.g. whether their intellectual property or licenses have lost much of their proprietary value. That rule, issued by the Financial Accounting Standards Board, has not been enforced, but it will be now that the corporate responsibility legislation requires financial reporting to be consistent with all SEC guidelines, Martin says. Accounting firms will not want to “play by two separate rules,” he says, and will insist their privately held audit clients test their intellectual property for impairment as well. “It’s another accounting scandal waiting to happen,” he says. Full text version available here.

July 23, 2002 In News Archive

Breach of Contract — The True Failure of the Patent System

Dr. David E Martin, CEO, M·CAM, Inc. July 27, 2002

When the framers of the Constitution of the United States decided that patents would be included as the only property right granted to every citizen, they did so with the understanding that a contract is valid only when both parties receive something of value. In exchange for adding valuable insights and innovations into the growth of the American economy, inventors would be granted a limited monopoly to commercially exploit their inventions. A value to the inventor — a value to the citizens of the new republic. The inventor submits a detailed disclosure of an invention that is novel, non-obvious, and practicable. The government develops rules to ensure that, prior to any grant of monopoly rights, a formal review is conducted to evaluate the genuineness of the inventive claims. This review is a safeguard against the granting of rights to multiple parties, or to those who are manipulating the system by submitting that which they do not create, or to parties who unknowingly assert that which was already known. One important part of the patent contract is a concept called “reduction to practice” — the process by which the inventor “educates” others so that the invention, once beyond protection of the patent grant, becomes something of value to others.

 

It is useful to think of this requirement using the metaphor of a recipe. I can tell you the ingredients to make my mother’s homemade bread. However, if you simply place all the ingredients in a bowl, bread is not a likely by-product. In fact, to make the bread, the ingredients must be added in a certain order, certain timing variables must be controlled and certain baking conditions must be met. The patent standard says that an invention disclosure must enable someone “skilled in the art” to reproduce or practice the disclosed invention. As with homemade bread, I cannot patent the concept of baked cereal grains in a loaf-like form. I cannot patent the temporal interruption in yeast metabolism at the precise moment of fermentation thereby producing a thermally impaired environment in which bread results. To patent the bread, I have to tell you how to make it.

 

Back to the contract. Once a government-sanctioned body (in the United States, this entity is the United States Patent & Trademark Office or USPTO) carefully reviews what was known in the past (referred to as “prior art”) and considers the significance of the disclosed invention (non- obviousness and utility), a grant of a monopoly interest may be made. Few patents these days actually provide patent protection on all of the systems, methods, and processes required to create commercial value. Most are reliant, oddly enough, on other patented or non-patented technologies or information. Practical realities not withstanding, the system is supposed to provide the public with access to innovation in exchange for a limited time of commercial exploitation protection.

 

Sadly, the contract with society has been breached. And the very agency charged with protecting the rights of the citizenry has abandoned that responsibility. Ron Stern, President of the Patent Office Professional Association, the union representing patent examiners at the USPTO, recently declared that the most efficient examination finds no prior art. “We know we’re taking shortcuts,” said Stern. The majority of society has allowed this statement to slip past them unnoticed. We cannot. A statement such as this is tantamount to boasting that the FDA is no longer validating drug safety claims or that the Federal Reserve is printing counterfeit $20 bills. Why? Because this means that the contract stipulating that rights are to be granted for limited monopolies ONLY when the conditions of patentability are met is being violated by the very agency charged with the granting of the same. Examiners are not uniformly establishing the novelty or uniqueness of invention, and neither examiners nor the courts, where many patents ultimately are challenged, are applying any gold standard on the adequacy of the recipe. As a matter of fact, apply for the patent on the crust of bread from our little analogy above, and you’ll probably get the patent. After all, a patent was recently issued for peanut butter and jelly sandwiches without the crust!

 

When a contract has been breached, it is incumbent for the potentially damaged party to provide notice of breach to the party that is not performing. Unfortunately, given the magnitude of the problem, a vast majority of those who have noticed the breach have just accepted the fact that the system is broken. The Ministry of Trade in Denmark has recently published studies that find that small and medium-sized companies are decreasing or ceasing patent activity. Their findings indicate that these companies believe that patents granted in the U.S., Europe, and Japan have no value without a considerable litigation war chest to enforce those granted rights. Patents being granted by USPTO, EPO and JPO often fail to have any examination in context with international non-patent and, in many cases, even patent literature. In Japan, Japanese patents are generally not construed in consultation with any non-Japanese data. The examination records and reports acknowledge this amazing statistic. In the name of efficiency, these agencies, charged with the solemn trust to ensure that due process is applied to a careful review of patent applications prior to the granting of rights that can extend 20 years, have abdicated their statutory roles and have elected instead to allow efficiency to preempt their obligations to the American people.

 

But what difference does this make? After all, patents are too abstract for the average person to understand, right? Consider this. If we take the amount of money investors lost in recent cases proving the failure of the public sector to police this contract breach, we find that in one year, the losses exceeded the cumulative budgets of ALL of the world’s patent authorities. In FY2001, these losses exceeded calculated total expenditures for ALL patent authorities for the past 200 years of modern patent office performance. That’s right — retirement funds, investment funds, companies and countries lost more money on bad patents than the world has spent granting patent rights. Fiscal Year 2002 is on track to beat 2001 — a record none of us can afford. Additionally, consumers pay for patent abuses each time they turn on their windshield wipers or call their bank to check account balances. When one sees a bank’s national ad campaign lauding the bank’s commitment to innovation, one should read the fine print in press releases to see that this very commitment to innovation has come at considerable cost in the form of patent dispute resolution. The next time you hear a cell phone ring at an inappropriate time, stop and ask whether the vibration mode patent issued to another telecommunications technology company was examined appropriately. When business cannot place confidence in assets created as part of this contract between society and its innovators, business is impaired and, ultimately, the customer pays. So, if you drive a car with windshield wipers, bank on-line, play ping- pong, swing on a swing, make peanut butter & jelly sandwiches without crusts, take prescription medications, download e-mail, or read this article on-line, chances are that you are paying for a patent that should never have been granted or infringing a patent that you don’t know about, and, all the while, patent offices around the world continue to perpetuate the problem.

 

The lesson learned in the wake of Enron and WorldCom is that, when entities charged with safeguarding the public trust abandon that responsibility, the burden will fall on public shoulders. It’s time for serious reform. It’s time for the Securities & Exchange Commission to require companies to accurately inform their shareholders of the quality of the patents they own and those they license. It’s time for companies and the public to demand a patent system that restores the economic value that patents once were meant to afford. It’s time for the government to demand accountability at the patent office. It’s time to correct this breach in our contract and grant value only to those who are extending true and genuine value in return.

July 23, 2002 In News Archive

Breach of Contract — The True Failure of the Patent System

Date:  Tue, 2002-07-23

Dr. David E Martin, CEO, M·CAM, Inc. July 27, 2002 When the framers of the Constitution of the United States decided that patents would be included as the only property right granted to every citizen, they did so with the understanding that a contract is valid only when both parties receive something of value. In exchange for adding valuable insights and innovations into the growth of the American economy, inventors would be granted a limited monopoly to commercially exploit their inventions. A value to the inventor — a value to the citizens of the new republic. The inventor submits a detailed disclosure of an invention that is novel, non-obvious, and practicable. The government develops rules to ensure that, prior to any grant of monopoly rights, a formal review is conducted to evaluate the genuineness of the inventive claims. This review is a safeguard against the granting of rights to multiple parties, or to those who are manipulating the system by submitting that which they do not create, or to parties who unknowingly assert that which was already known. One important part of the patent contract is a concept called “reduction to practice” — the process by which the inventor “educates” others so that the invention, once beyond protection of the patent grant, becomes something of value to others. It is useful to think of this requirement using the metaphor of a recipe. I can tell you the ingredients to make my mother’s homemade bread. However, if you simply place all the ingredients in a bowl, bread is not a likely by-product. In fact, to make the bread, the ingredients must be added in a certain order, certain timing variables must be controlled and certain baking conditions must be met. The patent standard says that an invention disclosure must enable someone “skilled in the art” to reproduce or practice the disclosed invention. As with homemade bread, I cannot patent the concept of baked cereal grains in a loaf-like form. I cannot patent the temporal interruption in yeast metabolism at the precise moment of fermentation thereby producing a thermally impaired environment in which bread results. To patent the bread, I have to tell you how to make it. Back to the contract. Once a government-sanctioned body (in the United States, this entity is the United States Patent & Trademark Office or USPTO) carefully reviews what was known in the past (referred to as “prior art”) and considers the significance of the disclosed invention (non- obviousness and utility), a grant of a monopoly interest may be made. Few patents these days actually provide patent protection on all of the systems, methods, and processes required to create commercial value. Most are reliant, oddly enough, on other patented or non-patented technologies or information. Practical realities not withstanding, the system is supposed to provide the public with access to innovation in exchange for a limited time of commercial exploitation protection. Sadly, the contract with society has been breached. And the very agency charged with protecting the rights of the citizenry has abandoned that responsibility. Ron Stern, President of the Patent Office Professional Association, the union representing patent examiners at the USPTO, recently declared that the most efficient examination finds no prior art. “We know we’re taking shortcuts,” said Stern. The majority of society has allowed this statement to slip past them unnoticed. We cannot. A statement such as this is tantamount to boasting that the FDA is no longer validating drug safety claims or that the Federal Reserve is printing counterfeit $20 bills. Why? Because this means that the contract stipulating that rights are to be granted for limited monopolies ONLY when the conditions of patentability are met is being violated by the very agency charged with the granting of the same. Examiners are not uniformly establishing the novelty or uniqueness of invention, and neither examiners nor the courts, where many patents ultimately are challenged, are applying any gold standard on the adequacy of the recipe. As a matter of fact, apply for the patent on the crust of bread from our little analogy above, and you’ll probably get the patent. After all, a patent was recently issued for peanut butter and jelly sandwiches without the crust! When a contract has been breached, it is incumbent for the potentially damaged party to provide notice of breach to the party that is not performing. Unfortunately, given the magnitude of the problem, a vast majority of those who have noticed the breach have just accepted the fact that the system is broken. The Ministry of Trade in Denmark has recently published studies that find that small and medium-sized companies are decreasing or ceasing patent activity. Their findings indicate that these companies believe that patents granted in the U.S., Europe, and Japan have no value without a considerable litigation war chest to enforce those granted rights. Patents being granted by USPTO, EPO and JPO often fail to have any examination in context with international non-patent and, in many cases, even patent literature. In Japan, Japanese patents are generally not construed in consultation with any non-Japanese data. The examination records and reports acknowledge this amazing statistic. In the name of efficiency, these agencies, charged with the solemn trust to ensure that due process is applied to a careful review of patent applications prior to the granting of rights that can extend 20 years, have abdicated their statutory roles and have elected instead to allow efficiency to preempt their obligations to the American people. But what difference does this make? After all, patents are too abstract for the average person to understand, right? Consider this. If we take the amount of money investors lost in recent cases proving the failure of the public sector to police this contract breach, we find that in one year, the losses exceeded the cumulative budgets of ALL of the world’s patent authorities. In FY2001, these losses exceeded calculated total expenditures for ALL patent authorities for the past 200 years of modern patent office performance. That’s right — retirement funds, investment funds, companies and countries lost more money on bad patents than the world has spent granting patent rights. Fiscal Year 2002 is on track to beat 2001 — a record none of us can afford. Additionally, consumers pay for patent abuses each time they turn on their windshield wipers or call their bank to check account balances. When one sees a bank’s national ad campaign lauding the bank’s commitment to innovation, one should read the fine print in press releases to see that this very commitment to innovation has come at considerable cost in the form of patent dispute resolution. The next time you hear a cell phone ring at an inappropriate time, stop and ask whether the vibration mode patent issued to another telecommunications technology company was examined appropriately. When business cannot place confidence in assets created as part of this contract between society and its innovators, business is impaired and, ultimately, the customer pays. So, if you drive a car with windshield wipers, bank on-line, play ping- pong, swing on a swing, make peanut butter & jelly sandwiches without crusts, take prescription medications, download e-mail, or read this article on-line, chances are that you are paying for a patent that should never have been granted or infringing a patent that you don’t know about, and, all the while, patent offices around the world continue to perpetuate the problem. The lesson learned in the wake of Enron and WorldCom is that, when entities charged with safeguarding the public trust abandon that responsibility, the burden will fall on public shoulders. It’s time for serious reform. It’s time for the Securities & Exchange Commission to require companies to accurately inform their shareholders of the quality of the patents they own and those they license. It’s time for companies and the public to demand a patent system that restores the economic value that patents once were meant to afford. It’s time for the government to demand accountability at the patent office. It’s time to correct this breach in our contract and grant value only to those who are extending true and genuine value in return.

June 10, 2002 In News Archive

Patents Pending

Date:  Mon, 2002-06-10

U.S. News & World Report Megan Barnett June 10, 2002 The wording of the U.S. Court of Appeals decision on Eli Lilly’s patent on Prozac was unmistakably harsh: “invalid.” Wall Street’s translation was even harsher. Immediately following the ruling, on Aug. 9, 2000, shareholders dumped $36 billion in Lilly stock, roughly a third of the pharmaceutical giant’s market capitalization. And nine months later, when the court reaffirmed that the patent was invalid, Lilly’ s stock price plunged again. Lilly, in a challenge from a competitor, had lost the exclusive right to make and sell Prozac. That’s how much it hurts to lose a prized patent. But a patent is only as good as the judgment of one or two overworked, highly specialized bureaucrats–the examiners in the U.S. Patent and Trademark Office who award it. And a close look at the patenting process by U.S. News finds it riddled with problems, not the least of which is patents- -like Lilly’s for Prozac–that were issued in error. The fault lies partly with Congress, which refuses to give the office all the fees it collects, leaving it years behind in its computerization efforts and awash in paper. Meanwhile, with America’s economic dominance hinging more and more on technology, individuals and companies find themselves waiting two years or more for the final word on their patent applications. “I have some phenomenal concerns,” says James Rogan, the recently appointed head of the patent office, after studying its problems. If patent wait-time and quality are not addressed shortly and effectively, he says, the USPTO “is going to quickly move to a near-crisis mode.” Intangible assets like patents, trademarks, copyrights, and trade secrets are a rapidly growing piece of the U.S. economy. Since companies collect fees from those who want to use their patented products, the economic rewards from patenting are enormous. IBM, for instance, was awarded 3,411 patents and collected $1.5 billion in licensing royalties in 2001 alone. Nationwide, an estimated $120 billion is generated each year from patent licenses, up from $15 billion in 1990. With so much at stake, patent disputes increasingly are ending up in court at the expense of the patent holders. According to a University of Texas study, nearly half of those court-examined patents are ruled invalid. Struggling. To be sure, the patent office’s slippage did not occur overnight. Since George Washington signed the Patent Act of 1790, the office has struggled to keep up with the ever increasing speed of invention. Now part of the Department of Commerce, the USPTO is a $1.4 billion agency employing a staff of more than 6,000. In 1991, the office was overhauled, and a fee system was established to allow the agency to be self-supporting. But the very next year, Congress took one look at the juicy fees and withheld $8 million, putting it to other purposes. The diversion continued unabated, totaling $700 million in a decade. “People have all agreed to pay these fees,” says James Singer, a senior associate and patent specialist at Philadelphia- based law firm Pepper Hamilton. “It’s crazy to siphon off that money for snail darters.” The diversion of patent fees has made it hard for the office to recruit and retain qualified examiners, whose salary scale starts at $32,000. Indeed, during the economic boom of the late ’90s, the agency lost hundreds of examiners to the more lucrative private sector. In the year 2000 alone, 437 examiners left their jobs, while just 375 were hired. Yet between 1996 and 2000, patent applications grew over 50 percent. And the office was caught flat-footed when a federal court in 1998 upheld a patent for a computerized method of calculating share prices for mutual funds. Following the ruling, the patent office was flooded by applications for business methods, such as Amazon’s controversial “one click” checkout system for online ordering. Short on M.B.A.’s, the office was forced to hire more business-qualified examiners. In an effort to attract them, the agency hiked salaries, instituted flexible work hours, and added graduate-school benefits. But it is still desperate to catch up. “Despite the wonderful efforts of the examiners, the office has seen extreme growth in the number and complexity of patents,” says Will Wilkinson, an inventor who owns more than 200 patents. “The patent office needs all the help it can get.” On paper, it appears that the Bush administration agrees. But upon closer examination the numbers tell a different story. The 2003 budget proposal gives the USPTO a 21.2 percent budget increase of $237 million. But most of that money will come from inventors, who will be hit with a one-time 19.3 percent surcharge on all fees for the year. And from the $207 million raised by the fee increase, Congress intends to divert funds again–this time $162 million, to vaguely specified homeland security efforts. Paperless. The siphoning of revenue has put the office way behind in its efforts to modernize its research methods and data systems. Twenty years ago, officials predicted a paperless patent office by 1990. Yet today, an application that arrives electronically is promptly printed out on paper and physically attached to a file. The agency’ s Arlington, Va., offices house row after row of floor-to-ceiling shelves jammed with bright yellow “file wrappers,” applications that collect dust as they await their turn to be sent to an examiner’s in box. Approximately 350,000 cases are currently on backlog, and the agency expects to receive as many new applications this year. It’s hard to imagine that the backlog could be trimmed if examiners are to meet USPTO Director Rogan’s other imperative, which is to reduce patent-award errors. Before granting a patent, examiners are expected to assiduously search for any evidence that proves the invention is not new or is based on an existing design. That evidence, called prior art, would include everything from earlier patents to published material from anywhere in the world that describes the same invention. The enormity of the search is mind-boggling. In a perfect world, an examiner would scour everything worldwide, from graduate dissertations to marketing brochures for small businesses. While examiners have access to dozens of databases and print publications, their resources are far from adequate. To complicate matters, patent examiners work on quotas based on speed, not quality. When one of the applications on backlog finally reaches an examiner’s desk, the examiner has, on average, 20 hours to work on it. “We know we’re taking shortcuts,” says Ron Stern, president of the Patent Office Professional Association, the union for patent examiners. “The less work you do, the more credit you get. If you find nothing [in prior art], you’re considered the most efficient of all.” Efficiency, however, can easily cross into absurdity. Take Patent No. 6,368,227, awarded to 7-year-old Steven Olson of St. Paul, Minn., on April 9. The boy’s invention, which the patent office deemed new and unique, is a method for swinging sideways on a swing suspended by two chains from a horizontal tree branch. Or Patent No. 6,360,693, awarded on March 26. The patent’s claims describe an animal toy that sounds suspiciously like a stick (the apparatus “includes a main section with at least one protrusion . . . that resembles a branch in appearance” ). “It’s an embarrassment,” says one longtime patent attorney. “Sometimes examiners get so myopic on the rules of the game they don’t step back and use their common sense.” The swing patent is being re-examined by order of Rogan. Adding to the difficulties is the arcane and often creative language used in applications. Once patents have been awarded, they’re filed electronically, giving examiners the ability to search the archives by a word or phrase. But when applicants use different adjectives to describe their invention, the examiner can easily miss previous inventions that might prevent a patent from being awarded. David Martin, founder of a data management firm called M-CAM, calls them “thesaurus patents” and says he is stunned by the number of them he finds for his clients. “About one third of the time we find patents that are functionally redundant,” he says. Other experts think Martin’s estimates are overstated, but since any piece of prior art missed by the examiner can be used in court by a company to invalidate a competitor’s patent, the stakes are high. Patent lawsuits typically cost each party $1 million, and suits costing $4 million to $10 million are not unheard of. Rogan acknowledges that too many questionable patents slip through the system. Fixing the problems, he told U.S. News, is going to take real work. This week he is expected to announce proposals for reform, and he will soon hand Congress a detailed, five-year business plan for the agency. Rogan concedes that it is inexcusable to expect anyone to wait two years for patent approval but says that improving quality comes before reducing wait times. The agency plans to hire 950 new examiners in 2003. But because it takes about seven years before a new examiner is allowed to sign off on patents unsupervised, the wait time will undoubtedly lengthen even further in the near term. Rogan faces other challenges too: The examiners are members of a union, so each proposed change will get union scrutiny. In spite of this, Rogan says he is willing to push for controversial legislative reform if necessary to overhaul the patent system. “I’m not afraid to make people angry,” he says.

May 1, 2002 In News Archive

CIT offers Intellectual Property Tool to Clients

Hampton Roads Technology Incubator: May Newsletter May, 2002 Virginia’s Center for Innovative Technology (CIT) is offering an advanced Intellectual Property (IP) management tool, M·CAM DOORS™. M·CAM, a Charlottesville-based company, is providing this resource to CIT in appreciation of a 1998 CIT Innovations Award grant, which assisted M·CAM in the early development of the M·CAM DOORS™ patent analysis system. M·CAM DOORS™ is a powerful web-based IP analysis tool mining current US Patent database information. Limited patent search information is available through the InnovationAvenue.com Virginia Patent Search system (http://patents.m-cam.com/innovationavenue/). The system, powered by M·CAM, provides state economic development officials, university researchers, and private sector businesses and entrepreneurs with easy access to relevant information on patent assets in the state’s universities and laboratories. The complete M·CAM DOORS™ resource will be housed at the Virginia Tech Center for Information Retrieval, Analysis and Management (IRAM), located in Blacksburg. Virginia companies and entrepreneurs interested in using the M·CAM DOORS™ should contact a CIT regional director. Those who particularly stand to benefit from utilizing the M·CAM DOORS™ service include: patent prosecutors, patent attorneys, IP managers, and IP consultants.

December 26, 2001 In News Archive

David E. Martin to speak to the Economics Club of Hampton Roads

Date:  Wed, 2001-12-26

December 27, 2001 David E. Martin, CEO of M·CAM, Inc. — the Charlottesville, VA, based leader in the field of providing a mechanism for lenders to use intellectual property and intangible assets as collateral for lending — will speak at the May 4 meeting of the Economics Club of Hampton Roads. M·CAM is focused on: enabling companies to leverage their IP/IA portfolios to access smart capital, and creating liquid markets for Intellectual Property. The luncheon is being held from noon-1:30 p.m. at the Sheraton Waterside Hotel in Norfolk, VA.