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Many observers have opined that our system of examining and issuing patents has gotten out of control and that overworked patent examiners are allowing overly broad patents to be issued. Consequently, there are those who believe our patent system is producing patents that have the potential to quell innovation in a variety of areas, most notably the Internet. While there is some cause for concern, these fears are for the most part unwarranted. To the contrary, our patent laws foster innovation by allowing companies to stake out IP rights and thereby protect their investments in research and development. There are a host of examples illustrating that the ability to obtain patent protection clearly fosters innovation by encouraging companies to invest in R&D. Maybe the best example is the pharmaceutical industry. The cost to bring a drug to market is measured in the hundreds of millions of dollars. It is also a lengthy process that can take 10 years or more. But once a drug is out, there is nothing, absent patent protection, that prevents a competitor from simply reverse engineering the drug to develop a generic version that can sell for much less, thereby eroding the market of the original drug developer. Without the ability to protect their investment via patent protection, few, if any, companies would be willing to invest the time and money required to bring a new drug to market. Additionally, venture capitalists are looking much more closely at a company’s IP before investing. Savvy VCs understand the importance of a strong IP portfolio as a measure of the strength of a company’s technology and as a measure of the company’s ability to protect its position in its target markets. More and more companies are calling us saying that they are engaged in a funding round and that potential investors are asking the same question: “How many patent applications have you filed?” Many of those companies are finding that they cannot raise that next round of funding until they have addressed this question by developing a patent plan, and at least carrying through with the initial steps the plan outlines. In other words, the emerging companies that are most successful in raising the capital needed to continue developing new technologies are those that can ensure potential investors that their investment will be protected by a strong patent portfolio. These are just a couple of examples of how our patent system fosters research and development by allowing companies to protect their investments in new technologies. Moreover, the companies we see are not pursuing patents in order to quell innovation in their target markets. They seek patent protection in order to stake out their rights, maintain their competitive advantage and to aid in cross-licensing negotiations. In fact, it is often better to have other companies innovating in the same space because it helps grow and validate the market, as well as the company’s technology. If other companies are pursuing the same market and the same types of technologies, this is further evidence to potential investors, or management, that the market is worth pursuing and that the company’s technology is worth investing in. Unfortunately, there are companies that make no product and whose only business is to acquire patents in order to enforce them against large industry segments. These companies often take what amounts to paper patents and attempt to apply them to broad industries, often stretching the conceivable scope of the patent claims in order to make their case. Because these companies do not make any product, a company engaged in a legitimate effort to bring innovative products to market is at a negotiating disadvantage. Even if such a company has a strong patent portfolio, it cannot be used as leverage in a cross-licensing negotiation. Further, because the business plan of patent-holding companies is solely based on forcing companies to take a license, they cannot be dissuaded by arguments that their patents are invalid or not infringed. Admitting that such was the case would be tantamount to abandoning their whole business. Further, where a company may normally be unwilling to bear the cost of trying to enforce a questionable patent, these companies are fully prepared to do so and have often factored the cost of litigation into their business plan. While these companies are an unfortunate side-effect of our patent legal system, it still must be recognized that the goal of these companies is not to quell innovation. On the contrary, these companies depend on the hard work of other companies at innovating and creating new markets. It is such new markets that these types of companies typically target. Accordingly, they typically price their license request at a level that, while inconvenient, does not jeopardize the sustainability of a company’s market. Further, these companies typically price their license request at a fraction of the cost it would take to litigate the issue, which allows them to largely avoid litigating their questionable patent positions. A strong patent system is clearly essential to continued innovation. Our patent system does a good job on the whole of encouraging innovation by allowing companies to protect their technology and allowing investors to protect their investments. John Benassi is a partner and Noel Gillespie is an associate in the San Diego office of Paul, Hastings, Janofsky & Walker. Benassi serves as co-chair of the firm’s worldwide IP group, and both of the authors concentrate their practice on intellectual property matters. They can be reached at [email protected]and [email protected]. • Practice Center articles inform readers on developments in substantive law, practice issues or law firm management. Contact News Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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