While the Theranos train wreck was caused by Elizabeth Holmes and Sunny Balwani’s (both facing federal charges) outright fraud, it is worth considering how policy enabled this startup-turned-scam to take place. Writing in Ars Technica, Daniel Nazer of the Electronic Frontier Foundation lays the blame on the poor implementation of our current patent system:
Holmes’ 2003 [patent] application was not a “real” invention in any meaningful sense. We know that Theranos spent years and hundreds of millions of dollars trying to develop working diagnostic devices. The tabletop machines Theranos focused on were much less ambitious than Holmes’ original vision of a patch. Indeed, it’s fair to say that Holmes’ first patent application was little more than aspirational science fiction written by an eager undergraduate.
So how did Holmes’ unrealistic application lead to real patents, like US Patent No. 7,291,497? If you look through that patent’s application history, you can see that the examiner did review it closely. The examiner made two non-final rejections and two final rejections before eventually allowing the claims. (At the USPTO, a “final” rejection is not really final). The rejections were based on prior art and other technical grounds. What the examiner did not do, however, was ask whether Holmes’ “invention” actually worked.
One of the standards for granting a patent is “utility,” where an invention must be shown to work. While one might think that an easy way to prove such utility is a functioning prototype, the USPTO does not require any proof that a device exists.
It was Holmes’s patents that gave her the legitimacy to attract so many unwitting investors.
But let’s take things one step further: Imagine if some other inventor had the know-how to design the blood tests Holmes claimed to be producing, but couldn’t do so because Theranos had (but wasn’t using) the patent.
This would have opened the opportunity for Theranos to con not only its shareholders, but inventors who were trying to produce something real (what Nazer called “a portfolio of landmines”). This is, of course, hypothetical, but entirely possible and preventable if we held patent applicants to a higher burden of proof.
Be sure to read Alex Tabarrok’s excellent blog post on the topic at Marginal Revolution here.