The Leahy-Smith America Invents Act: A Preliminary Examination of Its Impact on Small Businesses

Josh Lerner, Andrew Speen, and Ann Leamon, June 2015

Purpose

The Leahy-Smith America Invents Act of 2011 (AIA) may be the largest change in U.S. patent policy in over half a century. Among other things, the AIA shifts the U.S. patenting system from a first-to-invent (FTI) to a first-inventor-to-file (FITF) basis. This eliminates the use of dates of invention in determining who receives a patent. This policy change has the potential to have widespread impacts on how patents are acquired, utilized, and protected.

The intricacies of the AIA and the complex way in which patents contribute to the broader economy mean that this change could yield different economic impacts to businesses of different sizes and industries. While the FITF shift took effect in 2013, only a modicum of post-AIA patenting data is available for analysis because of the length of the patenting process and expected legal challenges. As a result, the positive and negative economic outcomes of the FITF shift are still uncertain.

The magnitude of these outcomes is particularly important to small businesses since some rely on patents to raise capital, and intellectual property is central to some business plans. Given the uncertainty and importance of the economic outcomes resulting from the shift to the FITF system, the AIA included a provision directing the Office of Advocacy to study how this policy shift could affect small businesses. In 2014, the Bella Research Group was awarded a contract to carry out this study. Their report employs a literature review and three quantitative analyses to assess the potential small business impacts of policy changes resulting from the AIA.

Background

The importance of patents to small businesses and the larger economy. Patents are a key part of innovation and, therefore, of economic growth at the regional, industry, and firm level.[1] Patents promote innovation by granting intellectual property rights and disseminating technologies.[2] Clear intellectual property rights protect innovators, and by extension they offer an incentive to conduct important research. Without an assurance that an innovator could profit from the commercialization of his or her technology, there would be little incentive to invest in substantial resource-intensive research. Moreover, patents provide a vehicle to publicly disseminate technologies without losing ownership over the intellectual property. Over time, entrepreneurs, business owners, researchers, and innovators leverage previous research to use or improve newly developed technologies, contributing to greater innovation and efficiency in the economy. Therefore, the patent system provides both an incentive to conduct innovative research and a mechanism by which to circulate its results.

Patents are of particular importance to small businesses. Small innovative firms often heavily leverage patents in their early stages of development to acquire capital. This reliance on intellectual property to acquire capital is even more important for small firms in research-intensive industries. For example, the 2008 Berkeley Patent Survey found that 97 percent of biotech companies and 94 percent of medical device companies backed by venture capital held either a patent or a patent application.[3] Patents are especially critical for innovative startups looking for funding because they can cut through some of the uncertainty and risk inherent in the decision to invest in these high-risk/high-reward entrepreneurs.[4] Given that venture capital markets can be highly volatile,[5] patents may provide value to innovative startups as a way to somewhat hedge investors’ risks when funding may not be as readily available and become more risk averse.[6]

The AIA’s policy changes and potential small business impacts. Many observers regard the AIA’s shift from FTI to FITF system as the most substantial change to the U.S. patenting system in over half a century. Beyond this significant shift in patenting policy, the AIA yielded additional policy changes with potentially ambiguous and uncertain effects on small businesses. Chart 1 summarizes the prominent post-AIA patent policy changes as interpreted in this report and their potential small business impacts. The full report contains detailed discussions of these policy changes and their associated small