Could Patent Reform Hurt Cleantech?

3/16/09

(Editor’s Note: This is excerpted from written testimony to the U.S. Senate Judiciary Committee.)

Out of the many patents that will be filed in the coming years, there will be a handful of world-changing inventions that can crucially alter the course of our future. These are the jewels we need to protect:

—inventions that solve climate change
—inventions that rid us of foreign oil dependence
—inventions that prevent and treat pandemics
—inventions that address diabetes and Alzheimer’s, saving 40 percent of the future Medicare budget

It is important to emphasize that the patent reform discussion is not just between the high technology and pharmaceutical industries. It is also about the future of American innovation including high-tech, biotech and the area that is even more critical to America: energy – what we call “cleantech.” Cleantech is the fastest growing sector of business and of venture investment. The same venture capitalists who led the successful creation of the high-tech and biotech industries are now poised to lead the way in developing new clean technologies.

The issue we need to collectively explore is how to protect the truly pioneering inventions that we all want to see, such as San Diego-based Sapphire Energy’s carbon neutral crude oil. This is a true breakthrough, made by harnessing the energy from the sun and capturing carbon dioxide, to grow algae on non-agricultural land using non-potable water to make gasoline, diesel, and jet fuel.

Pioneering cleantech inventions require a huge investment upfront, and rely solely on original intellectual property protection to negotiate with corporate partners – some of the largest corporations in the world. By their very nature these inventions change entrenched industries and markets, and take orthogonal approaches to intractable societal problems. These are not inventions that large corporations are incented to make. They require the small business, entrepreneurial risk-taking component of our economy. In Sapphire Energy’s case it started with asking a set of fundamental questions, “Can we make a carbon-neutral fuel domestically, using no agricultural land and non-potable water, that is compatible with the existing distribution and refining infrastructure, at $60 a barrel, at a scale of 1 million barrels per day.”

Without significant venture capital investment of $100,000 to $150 million, these promising technologies that underpin the future of our country and our world will not be developed. Only after these seed and early stage investments have demonstrated the viability of an idea can they attract even larger corporate partner commitments, which can range from $200 million to billions of dollars.

The reality of cleantech today is that small companies must negotiate with large companies for capital to survive, especially in constrained financial markets. In order to get the corporate deals, the negotiations rest solely on the proprietary strength of the patent applications and patents. Substantial changes in the way we approach damages in these pioneering cases, are likely to inadvertently but fundamentally change the business dynamic. Essentially, it will increase the original business risk so that the first investment does not take place. In addition, large companies may take advantage of the increased power that apportionment of damages gives them, even if apportionment was meant to solve an entirely different problem. They may wait to invest, and these technologies may never get to scale and ultimately benefit the public.

The type of seed venture capital and pioneering work we do is already a tentative business, and small perturbations in the system can have large effect in investment, innovation, and U.S. competitive advantage. Successful economic development of important new ideas requires a constructive partnership relationship between the small, nimble, wildcatter venture-based start-ups and the large, capital-rich corporate partners, which move more slowly if at all. Like many effects of policy, the business reality will take effect immediately in the game theory of the negotiation, 10 years before the first litigation and damages. In the meantime, the uncertainty and tilt toward lower innovation and entrenched market leaders, will serve to quash the breakthrough innovations and solutions we need to solve the pressing problems we face.

We must ensure that cleantech innovation is enhanced, not suppressed, by patent reform and that all sides are heard so we craft the best possible legislation to solve the problems of the tech industry while not harming cleantech.

We must address the problems that the technology industry has raised. It is unacceptable that patenting the font for the letter “O” should stop an operating system. We should make sure that the patenting of immaterial inventions does not hurt our technology companies. Yet we should make sure to solve the problems they face, and not risk inflicting collateral damage on the worker bees of our economy. The creation of a “gate keeping” standard, which lets the court apportion damages when there is an apparently frivolous case, solves the very problem that has been raised without creating a huge new risk.

Apportionment of damages without some standard of materiality could be devastating to clean-tech and other innovations. The inadvertent harm to the most competitive and important industries we are creating could be real and fast, ceding strength to foreign competitors.

In United States history there has always been the inclination to support the individual, to protect the weak from the strong, to make the assumption that someone who has a new idea should be heard. I urge the Committee to consider this history and think of the real example of carbon neutral oil – a case that is playing out as we speak. Your actions on patent reform and damages will have real effects on the survival of cleantech and other innovative industries in their tentative relationships with the goliaths of the energy world this year and next, well before the first case is decided. We all have a stake in that outcome.

Robert Nelsen is a co-founder and a Managing Director of ARCH Venture Partners. He focuses on biotechnology, pharmaceuticals, and nanotechnology. Follow @

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