Patent Baristas

The Innovation Economy:  Unleashing Intellectual Property to Fuel Growth and Create Jobs

Under Secretary Kappos

June 2, 2010

Thank you, Sarah, for that kind introduction.  I would like to thank the Center for American Progress for having me in today to speak with you about intellectual property’s critical role in today’s innovation economy.

America stands at a critical juncture in our economic evolution, and intellectual property will certainly play a key role in driving our economic growth and renewal.

As technological advances bring great change to the speed and complexity of American innovation, strong intellectual property protection and its effective enforcement will fuel innovation and jump-start our economy.

Today, I’ll speak about the critical role of IP in spurring innovation – and in increasing America’s competitiveness in the global economy.  The fact is that a dynamic and efficient patent system is essential to our economic well-being.

I’ll address the ways in which the USPTO can better ensure a well-functioning patent system; a patent system that enables small and medium sized businesses to secure the investment capital they need to bring their goods and services to market; and a patent system that helps create value and ensure cutting edge research gets funded at our universities.  Finally, I’ll discuss the imperative for government leaders – the Executive branch, the Congress and the courts – to nurture an IP eco-system that will promote innovation, and ensure America’s economic well-being.

The economic success of the United States is deeply rooted in the history of American innovation.  This country was founded by pioneers who developed new ways to cope with an unfamiliar environment, who cured disease and connected a country, and who led the world into the age of flight.  American innovators discovered the power of information technology and digital communication that brought unprecedented commerce, economic growth, and prosperity.

So, our history has been driven by innovation. And our economic security continues to depend upon our ability to innovate – and to compete in an innovation economy.   The key to economic success lies increasingly in innovative product and service development, and in intellectual property protection, which creates value for innovation.

IP is – in effect — the global currency of innovation.

Today, as a share of gross economic value, the United States invests more in intangible assets than any of our major trading partners, and our intangible investments now exceed those in tangible assets by more than 20%.

And it is patent-reliant industries, specifically, that make up the most dynamic parts of the economy—from nanotechnology to pharmaceuticals, from computers to bio-tech, and from fiber optics to green technology.

Timely and high-quality patents are critical to small businesses, which create two out of every three American jobs.   They are needed to foster research and development, which requires capital and investment.

And they are essential to attracting the capital needed to bring innovation to market.

Let’s take the example of a company called Xencor—outside Los Angeles—which creates cutting-edge biotherapeutics to treat cancer, inflammation, and autoimmune disease.  Xencor uses patents to protect its proprietary design automation technology.

Xencor CEO Dr. Bassil Dahiyat put it simply: “without patents, you cannot get funding, and without funding, you cannot grow and create jobs.”

In Southeast Michigan, one of the areas hardest hit by the recession, the company Axletech International is a global manufacturer of machine hardware, with a significant patent portfolio upon which it depends heavily.  Since it began as a spin-off in 2002, Axletech has more than doubled its workforce and now employs more than 1,000 people.

And while IP protection fuels investment and growth, astute innovators and entrepreneurs see IP as even more fundamental to value creation.  They recognize that patents also serve as vehicles for the transfer and diffusion of innovation.

We are beginning to talk about “markets for technology” and “markets for knowledge,” and patents serve a critical function in these markets.  They act as markers.  They guide technologists on both sides of the IP transfer equation to the know-how and trade secrets required to ensure a successful transaction and subsequent introduction of products and services into the marketplace.

Patents will continue to foster the movement of ideas to manufacture in the coming years and decades, and we at the USPTO are keenly aware of our responsibility in this regard.

Last month, the United States Patent and Trademark Office was described in Harvard Business Review as the “biggest job creator you never heard of.”

As our country seeks to regain the 8 million jobs lost during the recent recession, the USPTO is a great place to start.  Countless inventions that can spark new businesses are right there—sitting in the backlog.  And reducing that backlog is one of Secretary Locke’s and my highest priorities.

Why?  Because, the backlog of over 700,000 patent applications stands as a barrier to innovation and economic growth.  Recent reports conclude that the backlog could ultimately cost the US economy billions of dollars annually in “foregone innovation.”

The next laser, the next energy breakthrough, or the next cure for a disease, is buried in the files of the USPTO—and that is simply unacceptable.

So what are we doing about it?   First, we’re working to improve how we measure and track the quality of patent application review at the USPTO.  Quality patent issuances create certainty in the market.  Market certainty, in turn, facilitates growth.

Second, we are reforming the USPTO to reflect its criticality to our economy—and transforming the agency to match the fast pace of technology and innovation, and ensure the highest possible quality of review for all applications.

And we’re off to a credible start.  We’ve re-engineered the way we motivate and monitor our corps of examiners; redefined performance plans to reflect the importance of high quality patent examination and backlog reduction; fostered more communication between applicants and examiners to improve quality and efficiency; and we’re working to build a new IT infrastructure that will speed patent application processing and improve search quality.

But—most critically—to decrease pendency while improving the quality of our work product, we have begun to recognize what companies in the shipping business figured out some time ago—that all packages don’t have to get to their destination at the same rate.  Some require next day service while others can take a week.

It is clearly time for the USPTO—our nation’s Innovation Agency—to adopt private sector business practices and offer market-driven services.

We all know that patent applications, like the inventions they protect, vary significantly, and that some patents need to be issued more quickly than others.  Different firms and even individual applications have varying needs for different products and services when it comes to processing speeds.

So, the USPTO has been experimenting with various ways of enabling applicants to receive accelerated review of technologies in areas that are priorities for the Obama Administration – like green technology that is essential to battling climate change.

And we will be considering accelerated review in other categories of innovation that are vital to our national interest.

We’ve also implemented a program that allows applicants to decide what work needs to be prioritized at the USPTO.  Our recently announced expansion of Project Exchange gives all applicants with multiple filings greater control over the priority in which their applications are examined, enabling priority applications to be examined on an expedited basis.

By providing incentives for applicants to withdraw unexamined applications that are no longer important to them, Project Exchange will also help the USPTO reduce the application backlog.

Tomorrow, we’ll be announcing a request for public comment on our next initiative—a comprehensive, flexible, patent application processing model offering different processing options more responsive to the real-world needs of our applicants.  Please look for that announcement tomorrow.

Clearly, we do plan to continue empowering our applicants to prioritize their applications—and our workload—to meet the demands of the marketplace.

So, through programs like these, and through the tireless work of our examining corps, we will focus our efforts more effectively, reduce pendency, bring the backlog down, and foster innovation critical to the economic and social well-being of the United States.

But, America’s innovation success will require more than an effective USPTO.  It will be a function of many complex and overlapping innovation variables, including the promotion of best practices in disciplines where American innovation occurs.

Perhaps the most critical of these disciplines is university research.

Research conducted at American universities is vital to fostering innovation, ensuring economic opportunity, and creating American jobs.

For instance, the original patents on Recombinant DNA, the fountainhead for the biotechnology industry, came from university research.  Finding ways to ensure that important new technologies like this are taken from university lab to marketplace is a critical factor in our economic success.

And, universities are becoming more nuanced and strategic in their role as pillars of technology diffusion.

As a threshold matter, universities have begun, and must continue working cooperatively with their funding partners, to adopt best practices for capturing IP.  Because if universities and their funding partners don’t capture IP, the innovation it protects and jobs it creates become royalty free donations to our nation’s biggest economic competitors.  So while protecting IP is key, the purpose for protection has shifted—it is not to control the activities of funding partners.  It is to prevent appropriation into the low-cost labor market.

Once IP is protected, the second issue of paramount priority is the transfer of technology from university laboratory to marketplace.  The methodologies universities use to facilitate IP transfer are currently in flux, as traditional models evolve and new best practices emerge.

Universities on the cutting edge of this field realize that the long accepted choice between maximum diffusion of innovation and maximum revenue capture is a false choice.  Put simply, universities need not sacrifice their societal obligation to disseminate knowledge in exchange for research funding.

In fact, when executed well, diffusion-focused technology transfer generates more net aggregate funding, not less.

Now, royalty generation from university innovation will continue to play a role in the commercialization life cycle.  But it will synergize with diffusion-focused tech transfer.  And we will see less conflict between the models, because astute university innovators realize that when royalty generation comes into conflict with diffusion, it inhibits the fundamental mission of educating researchers and conducting research to produce breakthroughs that create American jobs and economic opportunity.  Astute university innovators are already working to a better end.

The net result of a focus on diffusion-based tech transfer is not only better technology diffusion, but increased revenue and funding through sponsored research that will help create new products and services and secure an innovation-driven future for the US economy.

In the proud history of the United States—innovation led development—IP led development—has created economic vitality and good jobs.

In fact, technological innovation is linked to three quarters of the Nation’s post WWII growth rate.  And between 1990 and 2007, compensation for jobs in innovation-intensive sectors increased by two and a half times the national average.

The US government has always played a critical role in ensuring innovation-driven growth.

During the deep recession of the 1970’s—innovation slowed dramatically and the manufacturing sector declined significantly.   In response, the US government launched a Domestic Policy Review aimed at reviving American industrial innovation.  This study, and others like it, led to the creation of the Court of Appeals for the Federal Circuit, which brought clarity to the law and improved certainty around IP rights—increasing their value.

At the same time, Congress realized the critical role of patents in innovation through university research and development.  So the Bayh-Dole Act, which encourages university patenting, was passed.

The increase in patent value and R & D that resulted from the patent system improvements of the late 1970’s and early 1980’s paved the way for a new era of economic growth and opportunity that lasted for the better part of two decades.

Now, as in the 1970’s and 1980’s, the United States stands at a crossroads of innovation.  Today we are presented with another innovation opportunity – and we again need sound IP policy and enforcement to increase the value of innovation.

We surely have not realized the full potential of IP.  In fact, the IP system has been characterized as the “sleeping beauty” of highly developed economies.  And it really is a “sleeping beauty” because our IP system has layed relatively dormant while the complexity and volume of technological innovation have grown exponentially.

If we don’t wake up, fast-developing competitors will continue to appropriate American ideas, products, and services.  American technology – and with it American jobs – will devolve to countries with cheap labor and inadequate IP protection.

To put it plainly, both appropriation and misappropriation of American IP mean the loss of American jobs in our most innovative fields—high-paying, high-skilled, high-value jobs.  And the flight of these kinds of jobs—and the flight of technology and production to our overseas competitors—poses a grave threat to our economic security.

We simply must do better to protect America’s competitive advantage in innovation before it is too late.  And that means faster and higher quality patents.  And it also means sound IP policy and the effective enforcement of IP rights.

President Obama released his Strategy for American Innovation last Fall, and identified innovation as the foundation of sustainable growth and quality jobs.  In it he identified three roles for the public sector.

First, the Government must invest in the building blocks of innovation such as human capital, infrastructure and fundamental research.  Second, it must nurture the right environment for private-sector investment and competitive markets by protecting IP rights. Third, the government must serve as a catalyst for breakthroughs related to our national priorities like clean energy and health care.

Ladies and gentlemen, it is incumbent upon us to develop a comprehensive and robust national IP policy.   America’s economic security depends on it.  The Commerce Department and the USPTO stand ready to provide leadership in formulating and executing that policy.   American business and enterprise must also play an active role in formulating this policy, based on sound business practices.

As I’ve outlined today, we must provide an environment that allows small businesses to protect their IP and attract capital based on their ideas. For these businesses to flourish, we must provide timely and high quality access to IP rights.  And we must ensure that universities press forward the frontiers of science, while working with the private sector to ensure that the value they create is both protected and diffused quickly for the benefit of the communities they serve.

All parts of the US innovation value chain must remain vibrant.  And if amplified by good government policy, the current re-aligning trends can support one another to preserve American leadership in the decades to come.

A sound national IP policy will lead to the creation and success of more innovative companies like Xencor and Axletech.  And it will ensure that we can leverage IP to safeguard our economic well-being.

If we act to meet these challenges, we can fuel decades of American economic growth.  The simple prerequisite:  a national focus on intellectual property as the currency of innovation.

Thank you.

Speech given by U.S. Patent and Trademark Office (PTO) Director David Kappos yesterday at the Center for American Progress on the importance of strong IP protection.