Experts warn patent tax plan may undermine innovation, investment

Patent law experts needled a new patent fee scheme reportedly under consideration by the Trump administration. The proposal would assess patent holders 1% to 5% of their patents' value annually, potentially raising billions of dollars in government revenue.

"Catastrophically stupid," was the reaction of media commentator and patent attorney Gene Quinn. His IPWatchdog.com blog called the plan "fraught with peril and unintended consequences" partly because it would lead to hundreds of thousands of patents being abandoned to avoid the new fees.

"Let's be honest, patent valuation is more black magic than it is science," Quinn wrote, asking whether worthless patents would get rebates and wondering how the system would handle patents that have negative value because they cost large sums to obtain.

A fee based on the overall value of the patent "is unlikely to do anything other than annihilate research and development companies, who engage in often speculative R&D that leads to many failures as they attempt to push science and engineering forward," Quinn said.

If the proposed system overhaul were itself submitted for a patent, it would likely be denied for invalidity, the comments of many suggested.

While other IP practitioners and academic authorities offered feedback less colorful and more nuanced than Quinn's, they were also similarly negative, focusing on the difficulties involved in pricing patents and the prospect of stifling innovation.

"Most patentees don't know what their invention is worth when they file for a patent; in fact, most patents end up being altogether worthless," said Mark A. Lemley, the director of the Stanford Program in Law, Science & Technology.

"So, asking them to predict value and pay up front isn't likely to work very well, and it would deter patenting of many inventions that turn out to be important. Paying after the fact makes more sense, but it begs the question of how to calculate that value."

Lemley, who is of counsel at Lex Lumina LLP, added, "In general I am a fan of progressive taxation, including taxing corporate revenue more than we currently do. But taxing innovation in particular seems like a bad idea, and it is at odds with the efforts to give tax credits to innovation in the recent budget bill."

The Wall Street Journal, which first reported the plan on Monday, said the goal is to raise government revenue. It estimated that the U.S. could reap tens of billions of dollars but pointed out that such a "radical move" would likely face strong opposition from the business sector.

Specifics were scant. "For now, while there are few details, I am not commenting. I may when I know more," emailed Katherine Vidal, a former director of the U.S. Patent and Trademark Office who is now an IP litigator at Winston & Strawn LLP.

As reported, the plan would replace the current flat-fee maintenance system with a percentage-based fee akin to a property tax. The system currently charges patent holders three flat fees that come due at intervals of several years, peaking at $8,280 for a large patent entity 11.5 years after issuance. By statute, the U.S. Patent and Trademark Office can charge only enough to cover its budget. The Trump administration proposal would evidently require a congressional rewrite of the law.

Spokespeople for the USPTO and its parent agency, the U.S. Department of Commerce, did not return queries seeking elaboration. The patent and trademark system underwent its last major renovation in 2011, when the America Invents Act gave the office its current limited fee-setting authority.

Patently-O, a patent blog run by University of Missouri School of Law professor, Dennis Crouch, noted that news of the increased fee proposal led to market drops, especially in biotech. The plan would trade a policy of innovation for deficit reduction, Crouch argued.

Bita Rahebi, the co-chair of the global IP litigation group at Morrison & Foerster LLP, rated the prospect of the plan's passage as remote. "As taxes necessarily increase the costs of doing business, enactment of this proposal likely will discourage investment in patent rights," she emailed. "That, in turn, would decrease innovation or encourage alternative means of IP protection, like trade secret protection."

Rahebi added that there's another way the plan would discourage original thinking. "To minimize their tax liability, patent holders will have an incentive to attribute low value to their patent portfolios. That, in turn, portends lower investment."

One upside: "It also may result in fewer infringement cases, if defendants can successfully tie lower portfolio valuations to lower damages awards," she said.

Lisa Larrimore Ouellette, a law professor and senior fellow at the Stanford Institute for Economic Policy Research, said, "There could be merit to patent fee reform, but this administration doesn't have a great track record of implementing policy changes in a reasoned or evidence-based way."

She wondered whether the patent office would be tasked with assigning value to the patents it issues. "One possibility is to have firms self-value their patents and then be bound by those valuations for future licensing and damages purposes, but it's unclear if Commerce is thinking of anything along these lines."

Eric Goldman, the co-director of Santa Clara University School of Law's High Tech Law Institute, saw one possible benefit in the plan.

"There would be some value to cleaning the patent database of worthless and low-value patents," he said. "So long as those patents remain in the database, they clutter it up, which raises the diligence costs and launch risks for true innovators."

But the plan's shortcomings are daunting, Goldman added. "Patent valuation is an art, not a science. As a result, a value-based fee will almost certainly drive patentholders to 'sandbag' the PTO by understating the estimated valuation.

"This inevitable valuation sandbagging risk reminds me of President Trump's frequent and well-documented personal strategy of valuing an asset low when he reported its value to the government and valuing the same asset high when seeking third-party financing. Do we really want to encourage such unethical and duplicitous gamesmanship?"

Brian J. Love, Goldman's colleague and co-director of the high tech institute, emailed, "Patent owners could be asked to self-assess patent values, but this seems like a workable solution only to the extent that these values have some binding effect. For example, could a value submitted for tax purposes be used in some way to cap damages in an infringement action?

"I'll add that from an international perspective, the U.S, currently has relatively modest patent renewal requirements. Many countries require annual renewal payments, while the U.S. currently requires only three [over more than a decade]."