Theranos Shows the Need For More Effective Policing of Operability

Jerrit Yang is a J.D. candidate, 2021 at NYU School of Law.

Theranos and its founder, Elizabeth Holmes, have become infamous in recent years following an expose on their fraudulent practices. Theranos was founded on the idea of creating a medical device that would enable conducting a multitude of diagnostic tests from only a few drops of blood. Revolutionary in theory, the concept proved insuperably difficult to execute in practice, and it eventually became apparent that the company had not managed to create the groundbreaking device despite its contrary representations. In fact, even though Theranos had attained significant investor backing and a Walgreens partnership that allowed it to provide testing centers, the company’s “Edison” device did not even seem able to match the efficacy of existing systems.

So if its product was a sham, how did Theranos get so big? The most readily apparent factors that contribute to an explanation include the alluring optimism that the humanitarian technological concept inspired, Holmes’s marketing prowess, and the positive reputations of its executive board and investors. But there appears to have been another cause: the company’s patent portfolio. Theranos had a portfolio of hundreds of patents that were enforceable across the U.S. and global markets. This not only enhanced Theranos’s credibility from the perspective of both institutional investors and regulatory compliance authorities, but also deterred the development of competition in the market.

How could Theranos have attained so many patents if it did not actually have a working device? Those who are unfamiliar with the patent system may be surprised that one does not actually have to have a working prototype to be granted a patent. Under 35 U.S.C. § 112(a), an applicant is required to sufficiently describe his or her invention so “as to enable any person skilled in the art . . . to make and use the same.” This provision is known as the “enablement requirement,” which is satisfied when the specification provides enough disclosure such that a “person skilled in the art can make and use the invention without undue experimentation.” Curiously, though, to comply with the enablement requirement, “[a]n applicant need not have actually reduced the invention to practice prior to filing.”^[1] In fact, an applicant is even allowed to use a “prophetic example” which “describes an embodiment of the invention based on predicted results rather than work actually conducted or results actually achieved.”^[2] Given this allowance as well as the common practice to file early and claim broadly, it is no wonder some applicants have the mindset to file first and figure it out later.

Permitting patent applicants to proceed before having a working prototype is not necessarily a bad thing. Inventors who have a sufficient conception of an idea should not necessarily be excluded from filing simply because they lack the resources to build an actual prototype. Having a “patent pending” label is often a very helpful way for startups to build credibility early and garner investment. Where this policy runs into trouble, however, is when the idea is just that: only an idea. For example, if the inventor either has not successfully operated or cannot actually operate the “invention,” others who are more capable may be deterred from innovating in the field due to potential liability or increased costs (i.e., from having to get a license). In the case of non-practicing entities (sometimes derisively referred to as “patent trolls”), the patent portfolio itself may even be used as a weapon and be the company’s main source of income. Moreover, patents and pending applications may be sought for illegitimate purposes: specifically, a patent or “patent pending” label could be brandished in order to facilitate fraudulent activity by virtue of the credibility that patents and “patent pending” labels bestow. Such hypothetical abuse of the patent system is likely what happened in the case of Theranos.

The above should not be taken to mean that the Patent Office approves of granting patents on ideas that do not work, though. Under 35 U.S.C. § 101, an invention must be “useful” to be patentable. This is known as the “utility” requirement, and to satisfy it, an invention must not be “inoperative.”^[3] In practice, however, it is rare for applications to be rejected on the basis of the utility requirement, and when such rejections do occur, they typically pertain to inventions that seem too “incredible” at first glance.^[4] The rarity of rejections based on utility deficiencies is not surprising given the short amount of time an examiner can feasibly examine an application. Likewise, patent attorneys largely do not have the time or resources to check the operability of every invention they file an application for, and they often defer to the inventor regarding operability. Patent attorneys therefore could (and sometimes do) unknowingly draft an application for an inoperative invention in terms that may not readily seem incredible.

Some will argue that sophisticated investors can accurately gauge the value of a patent  and would choose not to invest in inoperative patents. An investor may never discover that the invention is inoperative, however, if it relies on the representations of the fraudulent patentee and does not expend the resources for its own analysis of the technology. Further, a mere change in valuation or finding of invalidity may be insufficient to compensate for injuries already incurred, such as those to individuals who relied on Theranos’s blood tests for medical treatment. Increased transaction costs such as licensing fees or the costs of defending potential infringement claims can also deter competitors from performing further research or even entering the field at all, thereby chilling innovation.

Perhaps one way to preventatively deal with these patents is to augment examination procedures regarding utility and enablement analysis. Currently, an applicant’s assertion of utility creates a presumption of utility^[5] and the initial burden is on the examiner to provide a prima facie showing, supported by evidence, of a lack of utility.^[6] Examiners may also request additional evidence^[7] to corroborate an applicant’s claim of utility, though the Manual of Patent Examining Procedure (“MPEP”),^[8] which is promulgated by the U.S. Patent & Trademark Office, maintains that such requests for corroborative supplements should be rare. Maybe instead, the initial burden should fall on the applicant to establish a prima facie case of utility upon filing; or at the very least, maybe examiners should be allowed more freedom to request additional information. Similarly, maybe allocating more time to the examination of particularly “revolutionary” inventions may help, but this option raises the issue of how to properly classify whether something is “revolutionary” or not, particularly since every invention for which a patent application is filed is supposed to be novel and non-obvious.

An ideal reform may require a concerted effort between the U.S. Patent Office, attorneys, and those who are especially qualified to police for “fake” inventions and “fraud-minded inventors.” Forming a consensus around reforms is particularly important as Theranos, even though it has officially closed its doors, is still being granted new patents. Whatever the potential solution may be, it is apparent from the Theranos saga that the procedure to assess whether an invention actually works has much room for improvement.

^[1] MPEP § 2164.02 (9th ed. Rev. Jan. 2018).

^[2] Id. (emphasis added).

^[3] Id. § 2107.01(II) (“An invention that is ‘inoperative’ (i.e., it does not operate to produce the results claimed by the patent applicant) is not a ‘useful’ invention in the meaning of the patent law.”); see alsoNewman v. Quigg, 877 F.2d 1575, 1581 (Fed. Cir. 1989); In re Harwood, 390 F.2d 985, 989 (C.C.P.A. 1968) (“An inoperative invention, of course, does not satisfy the requirement of 35 U.S.C. 101 that an invention be useful.”).

^[4] See MPEP § 2107.01(II) (quoting In re Citron, 325 F.2d 248, 253 (C.C.P.A. 1963)) (“Situations where an invention is found to be ‘inoperative’ and therefore lacking in utility are rare, and rejections maintained solely on this ground by a federal court even rarer. In many of these cases, the utility asserted by the applicant was thought to be ‘incredible in the light of the knowledge of the art, or factually misleading’ when initially considered by the Office.”).

^[5] Id. § 2107.01(III)(A).

^[6] Id. § 2107.01(IV).

^[7] Id. § 2107.01(V).

^[8] MPEP is a reference manual regarding the practices and procedures related to the prosecution of patent applications in U.S. jurisdictions. It is not binding on courts and does not have the effect of law. See, e.g.,U.S. Dep’t of Commerce, Patent & Trademark Office (“USPTO”), Foreword to MPEP (9th ed. Rev. Jan. 2018), https://www.uspto.gov/web/offices/pac/mpep/mpep-0015-foreword.html.