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The “America Destroys Jobs” Act

President Obama’s signing of the “America Invents Act” is supposed to spur job creation, but in reality, the act will destroy jobs. Successful entrepreneur and author, Hank Nothhaft, writes exclusively for Chief Executive on why this act will only make the U.S. unemployment problem worse.

This is the first post from successful entrepreneur and author Hank Nothhaft’s exclusive blog for Chief Executive, “The Startup View.”

The new patent bill — dubbed the “America Invents Act” — was signed on September 16th by President Obama at Thomas Jefferson High School for Science & Technology in Alexandria, Virginia. If he were being more honest, he’d rename it the “America Destroys Jobs” act.

But before I explain why the new law will destroy jobs rather than create them, as its proponents claim, let me just note that Thomas Jefferson himself would be rolling over in his grave if he knew this law was signed.

That’s because he was the one who wrote the first American patent law in 1790 that explicitly gave patent rights only to “the first and true inventor” rather than a corporate entity or wealthy patron. In doing so, he helped create the world’s first truly-democratized patent system.

Indeed, according to historians B. Zorina Khan and Kenneth Sokoloff, Thomas Jefferson and the other founders “quite self-consciously” constructed a patent system to do what none had ever done before: unleash the inventive genius and entrepreneurial energy of the common man.

The first patent law in 1790 set patent fees to a level any ordinary citizen could afford – less than 5 percent of the rate in Britain. As noted, they ensured that patent rights would be given only to inventors, not corporate entities or those with the resources to get to the patent office first. And by other means as well — including allowing anyone applying for a patent to do so postage-free — they created a patent system that encouraged innovation on a mass scale.

The result? Only 13 years after the first patent law was enacted by Congress, America had surpassed Britain — until then the leader of the industrial revolution — in the number of new inventions patented, even though Britain still had twice our population. By 1865, the per capita patenting rate in the United States was three times that in Britain, even though our populations were by then equal.

As historians Sokoloff and Naomi Lamoreaux wrote: “Observers attributed much of [America’s] rapid technological progress to its distinctive patent system. Quite revolutionary in design at inception, the U.S. patent system came to be much admired for providing broad access to property rights in new technological knowledge. These features attracted the technologically creative, even those who lacked the capital to directly exploit their inventions.”

The secret of America’s success wasn’t some “Yankee ingenuity” gene in our hereditary stock. It was a patent system geared to the needs of entrepreneurial innovators that enabled the United States to become the most powerful economy on earth. This is a key reason why almost every major technological breakthrough of the last 100 years — from autos and airplanes to semiconductors and PCs — originated in America rather than Europe or someplace else.

All that is now threatened. Here are the three key ways that the new law will destroy jobs rather than create them:

    Because the new first to file rule gives preference to big firms with the biggest legal departments and patent filing budgets rather than the most inventive entrepreneurs, the people who actually create jobs will be disadvantaged.

We know for an absolute fact that all net job growth over the last 35 years — literally 100 percent of it — comes from entrepreneurial startups. If you took startups out of the picture and looked only at large or incumbent businesses, job growth over the last 35 years would actually be negative.

In the words of Kauffman Foundation researcher Tim Kane, “When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing.”

And yet this new law forces the actual job creators and entrepreneurial innovators to the back of the line at the patent office. At a time when job creation is supposed to be Job One, this is outrageous. But it’s perhaps not any more outrageous than the president appointing as the head of his jobs and competitiveness council none other than General Electric CEO Jeffrey Immelt —quite possibly the number one outsourcer of American jobs in the last decade.

Supporters say this new law will harmonize our patent system with Europe’s. But given that less than 1 percent of European patents are filed by job-creating small businesses and independent inventors, whereas roughly 20 percent of U.S. patents are, why is that a good thing?

Indeed, if there was ever a case to be made for American exceptionalism, the patent system is surely it. We have now just thrown our best economic growth weapon overboard.

    The new law’s “post-grant review” (PGR) provisions will keep job-creating startups in limbo indefinitely, thus freezing hiring.

Judge Paul Michel, the retired chief judge of the U.S. Court of Appeals for the Federal Circuit — the main court that handles patent cases — has publicly warned that the new law will “torpedo patent rights for innovators.” Under the new PGR procedures, a big firm with ample resources can hold up a small startup’s patent with serial challenges for as long as ten years!

What’s so bad about that? Think of a patent as being akin to a deed to a home. If your deed is forever under legal challenge, just try to get a loan to build a house on it.

It’s the same with patents. Studies show that 76 percent of startup entrepreneurs find patents vital to securing venture funding. But if that those patents are forever in limbo, they won’t be able to get the venture capital they need to build their businesses and hire people. Also infringers will steal the technology, and it will be obsolete before clear title is ever obtained.

    The law’s provision allowing Congress to divert applicant fees to other purposes means that the patent office will remain chronically underfunded and unable to clear the job-killing backlog of 1.2 million applications.

What’s so bad about the backlog? Even the president’s own patent office director, David Kappos, has conceded that it is costing America, and I quote, “millions of jobs.” My own research shows that by simply clearing the backlog, we could create up to 2 ¼  million new jobs.

By allowing Congress to treat the patent office as a petty cash drawer, we have just thrown away 2 ¼  million jobs in addition to the 8 million jobs already lost in the recession.

To be fair, there are a couple of theoretically good provisions in the new law, such as a “fast track” program to speed up small business applications and allowing the patent office the right to set its own fees. But notice I said “theoretically.” The reason I did so is because we’ve all seen this movie before — and it didn’t end well the last time we saw it.

In 2010, the patent office announced a series of new revitalization measures, including new hiring initiatives, new upgrades to a patent office technology infrastructure that President Obama called “an embarrassment,” and yes — a new “fast track” program for small businesses.

But because Congress (yet again!) diverted the funds needed to actually implement any of these new programs, USPTO director Kappos announced on April 22, 2011 that the expedited Fast Track examination program was suspended, the opening of a satellite office in Detroit was postponed indefinitely, the infrastructure upgrades were being scaled back, employee training reduced, and all hiring —for both new positions and backfills — indefinitely frozen.

You’ll excuse me if I don’t wait with bated breath for the new fast track program.

To sum up, the new patent law makes several crucial mistakes.

First, it addresses the wrong problem. It’s not patent law but the patent office that needs fixing so entrepreneurs can obtain the patents they need to get funding and start hiring.

Second, it makes the problem worse by burdening the patent office with yet another new layer of bureaucratic procedure — the new “post-grant review” process — while simultaneously ensuring that thanks to fee diversion it will likely never have the funds needed to do its job adequately, let alone reduce the horrendous backlog of applications now stifling job creation.

And third, it throws away America’s unique economic advantage in the world by ending a “first to invent” system that gave preference to those who actually create jobs rather than those who outsource them — and that helped make us the most successful economy in the world.

And, it was a rare bi-partisanship that led to the law’s passage— a bi-partisan cluelessness.

The new patent law will go down in history as the biggest job killer since that other great bi-partisan reform — Sarbanes-Oxley. I don’t think that’s anything to be especially proud of.

About Hank Nothhaft

Henry R. “Hank” Nothhaft is a veteran Silicon Valley entrepreneur and former CEO of Danger, Inc., which he sold to Microsoft, and Tessera Corp, a San Jose, Cal.-based technology miniaturization firm. He is also the author of Great Again: Revitalizing America’s Entrepreneurial Leadership.