What is Really Wrong with the Patent System
I am a “recovering patent attorney.” I became a patent attorney after years as an engineer. I went to a patent attorney and I expected my patent attorney to help me, but I was sorely disappointed. I was so disappointed that I took the Patent Bar Exam, became a patent agent, and began to “reverse engineer” that patent system. I started to pull back the curtain to see what happens behind the scenes.
It was far worse than I expected.
The biggest eye opener is that patent attorneys never have “skin in the game.” They get paid up front, take no risk, and merely write up your invention and send it to the Patent Office.
What is worse: the financial incentives of patent attorneys are completely opposite of their clients. What happens if a patent attorney writes a terrible patent application? They get paid more to fix it by going back and forth with the Patent Office, typically under the ruse of getting “broad claims.”
The old joke is that you can only tell if an invention is “good” when the check clears.
On top of that, patent attorneys continually promote “strategies” for startups and inventors that are great for the attorneys – but terrible for the clients. These “strategies” include provisional patent applications, big omnibus patent applications, endless continuation applications, “broad claims,” and more.
A huge structural problem is that patent attorneys do not have a “feedback loop” to learn whether they are doing the right thing. A patent gets filed, but it does not get examined for several years. During examination, the attorney wishes they explained the invention in a better way or realizes a mistake they made. They learned something, but they have three years’ worth of patent applications in the pipeline with the same mistake.
Compounding this problem, their patents will not get licensed or litigated for years later. A simple mistake, like otherwise innocently filing a terminal disclaimer, comes back to haunt them a decade or more later. A feedback loop of a decade or more does not help the attorneys become more proficient. In fact, it makes them more set in their ways.
Most patent attorneys are trained by someone as they enter the field. From that point on, they practice using the same techniques and style as they were taught. I have seen attorneys who have been practicing for 40+ years who still file applications using double-spaced Courier font and line numbering every 5 lines. This style was required by the USPTO before word processors, and they changed to a completely different standard in the 1990’s. This attorney never read the memo.
All of these issues speak to the fact that the quality of work product is dreadful. This is one of the main reasons why 95% of all patents are worthless.
But why should patent attorneys improve their product? Truth is, they do not need to because they do not have “skin in the game.”
Having Skin in the Game
BlueIron is the culmination of everything I have learned so far. BlueIron provides financing for patents. BlueIron’s business model is for me, the patent attorney, to have “skin in the game.”
By having skin in the game, my only incentive is to create a high-quality asset that has real value.
Skin in the game does not mean that I only profit on the upside of a patent. Getting paid up front and taking warrants or equity in a startup is not “skin in the game.” That is unjust enrichment, and for lawyers it is strictly illegal and prohibited under the Rules of Professional Conduct.
Skin in the game means that I suffer if the patents are bad, and I make only a reasonable upside if the patents are good.
Exposure to downside risk makes all the difference.
That is real skin in the game.
With BlueIron’s business model, a client can elect to walk away from their patents at any time. If they run out of money, or if they merely do not like the patent anymore, BlueIron gets stuck with the patent. My incentive is to make sure we create assets that always have value, because there is a high likelihood that startups company will fail.
The BlueIron model is not a “loan-to-own” model, where we hope to profit from selling patents. The sad truth is that selling individual patents is very difficult, with many factors working against you.
A patent from a failed company is a very strong indicator that the idea was bad.
Because there is no success in the market, the patents probably have very little value today, but they might have value at some point down the road. The patents will have value only if some other company makes an investment in the narrow limits of the invention. It may take a decade for the patent to be saleable on the market, if at all.
BlueIron invests alongside investors in the operating company, typically angel or venture investors. These investors are putting skin the game, too, and they are helping the company succeed.
One big difference between BlueIron’s investment and an angel investor’s investment: BlueIron has collateral in the form of the patents.
Because BlueIron has collateral, BlueIron’s return on investment is capped, typically at a small multiple. The angel investor has no downside protection, so they should be entitled to a much higher return. When you combine the two risk profiles of BlueIron and angel investors, the angel investor winds up with a higher rate of return. BlueIron takes the lower risk tranche, leaving even more upside to the angel.
What it Takes to Make the BlueIron Model Work
The BlueIron business model is focused solely on creating valuable patents. This means reverse engineering the patent system to create the most valuable assets possible – which is exactly what the inventor, entrepreneur, and equity investor wants, too.
The BlueIron model starts with due diligence on inventions and the company. A great idea is worthless unless a company brings a product to market. A patent is worthless unless it captures that value of that product.
After due diligence, the patent must be written and prosecuted to survive litigation. Throughout the course of the life of the patent, it needs to be adjusted and modified to keep current with the lessons the market is telling the company. Lastly, the company must have enough horsepower to enforce the patent, which we provide in the form of patent enforcement insurance.
The BlueIron business model is only appropriate for those rare cases where patents make a big difference. Typically, these are competitive spaces where the innovations are the deciding factor for capturing a sale.