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13 December 2017Patents

Did Alice v CLS Bank affect reduced venture capital tech funding?

The number of venture capital (VC) investment rounds in technology companies has nearly halved, according to merchant bank Magister Advisors, sparking debate about the causes behind the decline.

Some commentators have discussed whether Alice v CLS Bank has played any role in this.

Citing data and research firm PitchBook, Magister Advisors noted that since 2014, the number of VC rounds in technology companies worldwide has fallen from 19,000 to 10,000.

For Manny Schecter, chief patent counsel at IBM, this decrease may correlate with the US Supreme Court’s 2014 decision in Alice. The decision led to an increase the number of patents being invalidated under section 101.

In early December this year, WIPR noticed a tweet from Schecter, who linked to a TechCrunch article written by Magister Advisors’ Victor Basta, and decided to investigate.

Dealing with uncertainty

Speaking to WIPR, Schecter added that Alice has led to many patents being invalidated and set off a “tidal wave” of uncertainty.

“Coincidence? Maybe. The sharp fall in early-stage VC funding is not clearly attributed to any cause in the post, and patents are not mentioned,” he explained.

However, patents are often leveraged to secure funding, said Schecter, so the “souring of the patent marketplace” almost certainly impacts VC funding and could be one factor contributing to the decline.

Mark Summerfield, an IP and technology consultant and author of the Patentology blog, agreed that the uncertainty created by Alice may have affected investment in ventures that rely on patents.

“Decisions such as Alice upset established expectations as to what inventions may be protected by a patent,” said Summerfield.

He went on to say that if legal rulings are clear and workable, a new consensus will be reached among innovators and decision-makers over time.

US Patent and Trademark Office data on subject matter rejections following the Supreme Court’s 2010 decision in Bilski v Kappos demonstrates this effect.

“Within about three years, overall rejection rates had returned to pre-Bilski levels. However, three years after Alice, there has been no similar reduction in the rate at which applications are rejected based on this ruling, indicative of continuing uncertainty and lack of consensus.”

Summerfield concluded that the Mayo v Prometheus decision (2012) seems to have had a similar destabilising impact in the field of medical diagnostics.

More uncertainty

But the Alice decision is not the only issue causing uncertainty in the US patent landscape, according to Paul Morinville, managing director of US Inventor, an organisation dedicated to improving the patent system.

Morinville said: “If a patent cannot be defended with certainty, it provides no value to an early stage investor. This is because if the company fails, the investor must leverage its patent assets to return the investment.”

According to the managing director, Alice has created enormous uncertainty, but the effects of the Patent Trial and Appeal Board (PTAB) have created even more uncertainty.

US Inventor protested against the PTAB in August. Its reasons included “many inventors” being denied patents and others being caught in “never-ending multi-million dollar legal battles against giant corporate infringers”.

He added: “Without question the combined uncertainty is massive and this is causing investors to avoid investing in early stage start-ups that are built on technologies protected by patents. The smarter investment is in the company that would steal the invention.”

A different view

Chris Behrenbruch, CEO of radiopharmaceutical company Telix Pharmaceuticals, who replied to Schecter’s tweet, offered a different view.

“I don’t think it’s nefarious—it’s just fund-raising cycles. A lot of VC was raised back in 2006-2008 and then the impact of the financial crisis significantly reduced capital raised during 2009-13,” he said.

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