The Great Patent Sellout

By John D. Trudel

Upside, November 1995

At its core, high-technology business needs legal protection. From the days of Ben Franklin and Thomas Edison, innovators have depended on the U.S. patent system to protect the unique value they created.

This protection is now absolutely essential. "Knowledge has become the key economic resource and the dominant, if not the only, source of competitive advantage," said Peter Drucker, writing in the November 1994 Atlantic Monthly. Firms like Microsoft, Intel and Motorola derive most of their market value from intellectual property. Without patent protection, Silicon Valley and the venture capital community could not exist.

But the Clinton administration has made concessions to Japan that will end life as we know it for knowledge-based business in the U.S. While visiting a client to give workshops, I met an official from the U.S. Patent Office who told me the administration promised the Japanese that the U.S. will make its patent filings public information after 18 months. If that sticks, effective January 1, all your competitors can get them.

The worst news is hidden. Embedded in the middle of the official's talk was a phrase, "re-examination rights." Did that mean that any U.S. firm with patents will be subject to endlessly defending them against re-examination by the Japanese keiretsus?

Re-examination occurs when someone challenges a patent, usually when there is litigation. Today, if one firm infringes on another firm's patent, it is running a high risk, potentially facing triple damages and legal fees if found guilty. And the cost to defend patents is more or less affordable, even for smaller firms. The Japanese have hated this system for years. Their patent system tends more to distribute technology than to restrict its use. The patent official admitted that my worst fears were valid when we spoke privately. Some Japanese officials were calling Tokyo on their cellular phones to report, "The U.S. has given us its patent system."

Why hasn't someone blown the whistle? Why didn't the press report it? It took months to find out and many details are still unclear, but here is most of the squalid tale. The proof is contained on page 26 of the 1994 Commissioner's Report to Congress, "Working for our Customers." (Free copies can be obtained by calling the patent office at 703 - 305-8600.) The sellout occurred in letters of agreement between Secretary of Commerce Ron Brown and Japanese Ambassador Takahazu Kuriyama, dated August 16, 1994.

Brown's sellout was superbly managed. The press said nothing--that I can find--about broadened re-examination. A few inventor groups voiced shock that "a treaty of this nature should be signed without any warning." Brown's Patent Commissioner Bruce Lehman hammered those groups, saying they "had an ax to grind," and were "misled, unsophisticated and don't have access to the right information" (The New York Times, August 17, 1994).

The slam dunk that closed press interest came when Harold Wegner, a professor of law at George Washington University and an authority on international patent law, defended Lehman, saying, "He got something for nothing. It's a brilliant trade." I talked to four patent attorneys: two were not worried, one was extremely concerned and the fourth said the matter needed study for its business implications.

Lehman is giving road shows to convince patent lawyers that the change is only a minor technical accommodation to harmonize U.S. law with international practice. Fortunately, there is still some time. Congress must pass laws for Brown's promises to become binding.

Opening files after 18 months, coupled with the new meaning of re-examination, is poisonous because it makes U.S. patents much more expensive, easier to break and less protective of our intellectual property.

This issue is very important and the experts are confused, so you should check the business implications carefully. We need CEOs to ask their patent counsels, "How can this harm my business?"

Damage has ALREADY been done. Some rules changed in June. U.S. patent duration has been changed from 17 years after issue to 20 years after filing. Sound harmless? Hardly. Significant patents take from six to 10 years--or more--to issue. The major revenue from a killer technology (like CD-ROM, VCR or Windows) comes a decade or more after first product introduction. Therefore, this one change cuts your patent protection by 10 to 50 percent, and it won't be easy to undo.

If blunder, I fear this is major. If perfidy, Brown's acts are monumental.

John D. Trudel is the founder and managing partner of The Trudel Group, a management consulting firm in Oregon. E-mail: jtrudel@trudelgroup.com.

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