US patent law reform to impact portfolios

A switch to a ‘first-inventor-to-file’ system, versus the existing ‘first-to-invent’ practice, means GPs need to be on the ball when it comes to portfolio companies applying for patents.

Private equity fund managers investing in companies where patent protection is important should be aware of a bill signed by into law by US President Barack Obama last week.

The America Invents Act fundamentally changes more than 100 years of US patent law by transitioning from a ‘first-to-invent system’ to a ‘first-inventor-to-file system’. This means the first inventor to be awarded the patent receives its rights, and not necessarily the first person to invent the patented product.

In that stack of [patent] applications could be the next technological breakthrough, the next miracle drug, the next idea that will launch the next Fortune 500 company

Barack Obama

Critics of the old first-to-invent system said patent holders were often blindsided by lawsuits alleging someone else was actually the first inventor. However the changes mean companies and inventors should be more quick and diligent about patenting an invention, law firm Kirkland & Ellis warned in a client memo.

Obama noted that he also hoped to reduce the patent application process to one year; it currently takes an average of three, he said. Over the last decade patent applications have nearly tripled leading to a backlog of roughly 700,000 applications yet to be reviewed by the US Patent Office. “In that stack of applications could be the next technological breakthrough, the next miracle drug, the next idea that will launch the next Fortune 500 company,” Obama said during a bill signing ceremony at Thomas Jefferson High School in Virginia.

The law also invited public participation in the patent application process. Any person or company can submit information demonstrating a patent application is not new and thus not patentable. This can open the door for portfolio companies to actively monitor patent applications submitted by competitors, said Kirkland.

Other notable changes include a process for challenging the validity of issued patents and barring the patentability of tax strategies.

For more on what GPs can do to ensure value-add at the portfolio company level, see our Portfolio Monitoring Supplement in the October's edition of Private Equity International.