PTAB’s IPR decks innovation---mass uncertainty hurts startups and research centers---opens the door for overseas investment and science innovation in China.

Twelve years ago, there were about 700,000 new start-up firms every year in the United States, according to the Ewing Marion Kaufman Foundation, but that number has fallen 30% to 500,000 firms and continues downwards. 1In a study conducted by the Chronicle of Higher Education, more than half of the 11,000 researchers surveyed across the nation had abandoned projects central to their labs due to economic pressure. 2In the study entitled The Future Postponed, MIT delivered a shocking list revealing that none of the notable scientific highlights in recent years were U.S.-led achievements. 3The data confirms a new reality that not many care to acknowledge: innovation in the United States is dwindling. 4Several key reasons for this dire situation stem from the multiple and pervasive attacks on innovation. Most startlingly, the attacks are often in disguise as benefiting innovation. 5As a result, there has been an almost universal [*1690] silence in legal scholarship on how law and policy have discouraged innovation, which has led to the current innovation crisis. This Article breaks that silence.

First, there has been a fierce attack in patent law, where strong patents were once considered incentives for innovation. 6The attack on the patent system cloaked itself in the hysterical "patent troll" narrative that patent owners behave like trolls to extort innovative companies, 7without any consideration of the fact that these infringers are using others' patented technologies without [*1691] reciprocating compensation. 8Heeding the hysteria, the Supreme Court and the 2013 America Invents Act ("AIA") Patent Trial and Appeal Board ("PTAB") have become forerunners in creating a weak and uncertain patent system. 9Innovations are deemed ordinary, or not worthy of receiving legal protection, 10or just simply categorically ineligible for patent protection. 11This has resulted in important sectors of the economy shutting down. 12Furthermore, without [*1692] patent protection for inventions, investors are inclined to either reduce their investments in innovation and invention or shift attention to other jurisdictions where strong patent protection and certainty reign. 13

Second, for most research universities and institutions, government funding and grants for innovations have diminished and been forced into a constant uncertainty. 14The stagnation in science investment in the United States has opened the door for new breakthroughs to occur outside the United States, notably in China and Europe. 15Part of the reason for the funding decline is the new anti-science rhetoric that has ridiculed scientific projects and injected much [*1693] uncertainty into ongoing research. 16Moreover, the new patent law regime passed in 2013 removed the grace period for researchers because the first-to-invent system has been replaced by the first-to-file system. 17Researchers must watch their publication or disclosure; otherwise they face a statutory bar for lack of novelty. 18Additionally, once they obtain patents, universities and institutions face challenges to their ownership and commercialization of their patents. Consequently, the incentive to innovate in research centers across the United States is declining. 19

Lastly, in its most recent attack, the U.S. government has significantly weakened the tax system governing innovation. In the Tax Cuts and Jobs Act of 2017 ("TCJA"), Congress eliminated an important tax deduction for research and development ("R&D"), eliminated preferential capital gains rate treatment for inventors, added an excise tax on the net investment income (including royalties) of certain private colleges and universities, and enacted a host of international tax provisions that may push innovation offshore. The TCJA is also notable for what it did not do. It did not enhance the current tax credit for R&D, and it did not adopt a so-called U.S. patent box (i.e., a low effective tax rate on intellectual property income). Congress ignored repeated calls for both of these measures - measures that many countries have adopted in recent years to attract valuable innovation activity to their borders. These disruptive changes to the U.S. tax system, which is now more noticeably misaligned with the tax systems in Europe and China, will undoubtedly have a negative impact on American innovation.

[*1694] The Article proceeds as follows. Part I explains ways in which the government has traditionally supported innovation, including a strong and inclusive patent system for innovation, direct funding of basic and applied research, and various tax incentives for private investment in innovation to compensate for failures in the market. Part II exposes recent changes in these innovation policy tools - a weakening of the patent system and decline in basic and late-stage R&D funding, as well as a weakening of the tax system governing innovation - and likely consequences. Part III argues that these disruptive changes threaten the future of domestic innovation, potentially driving innovation activities offshore. The Article concludes that in this innovation crisis stronger patent rights would assist in shaping a stronger economy. 20Along with restoring stronger patents and increasing funding for basic and advanced research, enhancing tax incentives for innovation is necessary to cope with the rising tax competition from China and Europe.

I. Government Support of Innovation

Economists generally agree that innovation 21is important to economic growth and building national wealth. 22Economists also generally agree that private [*1695] investment in innovation is less than what those economic benefits warrant. 23That is because private firms cannot capture all the benefits of their private investment in innovation due to the spillover effects of research. Numerous studies have found that the social returns to private spending greatly exceed the average private returns. 24Through the lens of economic theory, this excess (the spillover effects or external benefits) takes on the appearance of market failure; specifically, too few resources are being spent on innovation. To remedy this market failure, the government has stepped in to support innovation. 25

The U.S. government supports new innovation in a variety of ways. First, it provides legal protection for innovation. Second, it provides direct support in the form of research performed by government agencies, grants, direct loans, [*1696] and loan guarantees. And third, the government provides indirect support, such as tax incentives. Each of these strategies deserves separate attention.

A. A Strong and Inclusive Patent System for Innovation

Patents are important to incentivizing innovation. 26The United States modernized the patent system to encourage innovation by adopting the 1952 Patent Code and creating a specialized appellate court in 1982 for patent cases. Both momentous events fostered a philosophy of patent inclusion for new technology to be discovered and protected, and they provided a path to a strong and robust patent system. 27Most importantly, the two events cemented the important role of patents, propelling the nation to value intangible property and paving ways for the nation to cope as manufacturing jobs were moving offshore for cheap labor. 28

The notion of modernizing patent law evolved decades ago. While the nation was facing years of economic malaise caused by monopolistic trusts, on April 29, 1938, President Franklin Delano Roosevelt identified the then-antiquated patent system as one of the culprits of the malaise in his message to Congress. 29He called for amendment of the patent law. 30The intervening World War II years prolonged the troubled patent system, in which substantive patent law [*1697] existed in judicial opinions but not in statutory provision. 31The Patent Office's decisions on patent applications were not based on statutes, and the Supreme Court was hostile towards patents. 32Notably, Justice Jackson, writing for the Court, propounded in 1949 that "the only patent that is valid is one which this Court has not been able to get its hands on." 33

Against that backdrop, the post-World War II years of American exceptionalism 34were ripe for modernizing the patent system. Congressional efforts to modernize the patent system for innovation took five years to accomplish, giving birth to the transformative 1952 Patent Code. 35One of the key drivers whose vision, leadership, and hard work contributed to the creation of the 1952 Patent Code was Judge Giles S. Rich, the titan of patent law. 36

[*1698] The 1952 Patent Code was a significant milestone in the development of patent law. 37It enshrined into patent statutes that once a patent is granted by the Patent Office, it is presumed valid independently of the validity of other claims. 38That means that each patent claim must meet all the statutory requirements for patentability. 39The 1952 Patent Code logically clarified and codified patentability requirements into separate components: patentability subject matter, utility, novelty, and non-obviousness. 40On the non-obviousness requirement, the Patent Code created an objective standard on which the courts and the Patent Office can rely to determine patentability, and the requirement soon became the "cornerstone for a new era in patent law." 41Further, the 1952 Patent Code codified contributory infringement to empower patentees for [*1699] enforcement purposes, 42a means-plus-function section, 43and other aspects of substantive patent law. The codification of judicial decisions and clarification of various statutory provisions with explicit definitions enabled the Patent Office to issue Office Actions with clear reliance on statutory reasoning. 44Overall, the new law transformed the antiquated patent system both substantively and procedurally. It marked a new beginning for a robust patent system in which more patent applications would be filed on new innovations soon to be discovered by the average inventor. It was a new era of patent incentive and inclusion. 45

The patent system for innovation, however, was incomplete if one only considered the statutory regime; to interpret the law, jurists with a strong understanding of patent law and practice were needed. 46This led to the [*1700] subsequent creation in 1982 of the Federal Circuit as the sole appellate court with jurisdiction to hear patent cases. 47The creation of the Federal Circuit marked a pivotal recognition that patents are important to the economy and that uniform law for patents is necessary. 48The Federal Circuit quickly established itself as the patent court of the nation. 49Its impact on patent jurisprudence was immediately recognized. For example, in the first five years of existence, the Federal Circuit strengthened the statutory presumption of validity. 50Its interpretation of the law dictated a heightened burden on those who wished to challenge the statutory presumption of validity, requiring the party asserting invalidity to prove it by clear and convincing evidence. 51Consequently, the [*1701] presumption of validity creates certainty for patent holders. With that certainty, the patent holders can rely on their patents for financing, commercialization, and protection. 52

It should come as no surprise that Judge Rich, the author of the 1952 Patent Code, became the bridge between the modern patent statute and judicial interpretations of patent law. He first served on the Court of Customs and Patent Appeals in 1956 and continued to serve on the newly formed Federal Circuit from the day of its inception on October 1, 1982, until his death on July 9, 1999. 53He penned 892 opinions and participated in over 3000 cases. 54His contribution as a patent jurist was monumental in shaping the modern patent system to have a "policy of inclusion" of "newly evolving technology." 55

Indeed, the Federal Circuit diligently addressed every area of patent law to encourage inclusion and innovation. 56For example, the Federal Circuit permitted evidence of commercial success to be probative of a patented invention's non-obviousness, 57elevating commercial success to a substantial consideration in patent validity. 58This would be helpful to businesses and entrepreneurs that experienced early commercial success with their inventions and could now rely on that success to withstand a challenge to obviousness. 59In [*1702] addition, the Federal Circuit warned against hindsight bias in obviousness analysis. 60

In the computer-related revolution, the Federal Circuit mapped its jurisprudence on patentability subject matter with care in order to embrace the average inventor's innovations in business methods and software fields by favoring a broad construction of 35 U.S.C. § 101 for the new technological developments. 61Specifically, in the State Street Bank & Trust Co. v. Signature Financial Group, Inc. 62decision, the Federal Circuit widened the patent inclusion door to welcome business methods and software inventions if they involve some type of practice application and produce a "useful, concrete, and tangible result." 63Consequently, innovations flourished as average inventors could reap the incentive benefits of securing patents in new fields. 64

In the biotech revolution, the Federal Circuit widened the door on patentability of inventions related to seeds and seed-grown plants, gene [*1703] sequences, 65and personalized medicine. 66Overall, inventors enjoyed patent protection for their inventions in different fields.

In addition to expanding the scope of patent law, the court modified the standard for injunctive relief to afford patentees the opportunity to receive a permanent injunction against defendants upon a finding of infringement. Relying on the predictability of the Federal Circuit's jurisprudence on permanent injunctions, patentees used that certainty as leverage when they negotiated settlements with defendants who had already been found to be infringing on the patents. 67From willful infringement, good faith reliance on advice of counsel, and fraud defense, to every other facet of patent law, the Federal Circuit fully embraced its role as created by Congress, molding patent law into a new philosophy of strengthening the incentive to innovate. 68

The Federal Circuit's strong patent philosophy developed amidst a new economic reality in the United States. Companies in every sector of manufacturing were moving from the United States to other countries for cheaper labor. 69Foreign goods from electronics to automobiles flooded the U.S. [*1704] market. 70U.S. trade deficits expanded. 71In addition, five new industries related to computers, electronics, and semiconductors have been identified as having contributed to manufacturing job losses in the United States. 72The rise of these new industries, healthcare, and other services emphasizes the important role of innovations. 73In fact, economists have identified that innovation is the key driver of economic growth. 74Innovation is risky and requires many attempts, revisions, and do-overs. It also demands originality, patience, teamwork, and [*1705] investment. In the innovation space, technological and intangible knowledge is essential and more valuable than ever for businesses to compete. 75Patented inventions stemming from innovation are protected under the strong patent system as crafted instrumentally by Judge Rich, enhanced by Congress through its creation of the Federal Circuit, and molded daily by the Federal Circuit that cherishes the certainty, predictability, patent inclusion, and incentives for business to innovate. 76

Indeed, businesses can rely on the patents obtained to enjoy the exclusive rights for twenty years. 77Their patents are statutorily presumed valid, as the Patent Office has examined all of the patentability requirements. Businesses can rely on the predictability of patent jurisprudence related to infringement, permanent injunctive relief, affirmative defenses, and privilege, among others, as interpreted by the Federal Circuit as the bedrock of certainty. 78In the end, businesses and their partners and investors can rely on patents as signals of innovation and exclusivity, as they know all too well that investment in new technology will not occur if the patents covering the technology and the patent law are uncertain. 79

[*1706] As planned by the adoption of the 1952 Patent Code and the creation of the Federal Circuit in 1982 for patent cases, inventors substantially increased patent application filings and received more patents. 80As noted elsewhere, in the three decades after the creation of the Federal Circuit, patent grants increased four times. 81The average inventors, from those in computer-related fields to those in biotechnology-related sectors, can obtain patent protection for their innovations. Startups can rely on patent filings and patent grants to seek financing. As a result, Silicon Valley and technology centers across the nation sprouted up. 82

B. Direct Funding of Basic and Applied Research

On December 12, 1980, two years before the creation of the Federal Circuit, Congress passed the Bayh-Dole Act to allow universities the right to own and exploit patents for their innovative research, funded by government grants. 83The government understood that patents are property and that property should be utilized through commercialization, and not be sitting idly. 84Congress recognized that universities have ownership of the patents even though the government has provided the funding necessary for the underlying research, instilling its belief that institutions and their researchers, rather than the [*1707] government, are in a better position to partner with others in industry and maximize the benefits the patents confer. 85Immediately, universities developed technology transfer offices to work with their researchers; to seek patent protections for new technologies coming out of labs, projects, and classrooms; and to foster the creation of thousands of new companies. 86

Consequently, universities became centers for basic scientific research and thus expanded their reliance on the government for funding in their pursuit of knowledge. Recognizing the unique role of universities in knowledge creation, Congress continued to provide grants to researchers for fundamental basic and applied research after the Bayh-Dole Act. For example, the National Science Foundation reported that the percentage of basic science research from 1980 to 2001 increased from 66.6% to 74.1%. 87The grants are crucial for researchers to cover the cost of equipment, materials, supplies, travel to conferences, and payroll for hiring scientists. 88Researchers enjoyed robust federal funding that [*1708] constituted 2% of the U.S. gross domestic product ("GDP") in the 1970s. 89In the 1960s and 1970s, the federal government shouldered 70% of the funding for basic research. The government scaled back to 61% as of 2004. 90And after the financial crisis of 2008, the federal government enhanced federal funding for research to $ 160 billion in 2010. 91

Without grant funding, there would be no research for innovation, and there would be no invention for patent filings and, consequently, no patents for licensing. 92Moreover, in the past, firms like AT&T, DuPont, IBM, Merck, and the like invested in fundamental scientific research. 93And the stock market then valued corporate fundamental and scientific research by taking the long-term view. 94

Overall, in past decades the United States has invested three times as much as any other economy in basic research in pursuit of scientific knowledge and applied research to turn discoveries into useful technologies for industry and [*1709] society. 95Still, Europe and China have proved to be formidable competitors, and thus innovation requires constant attention amidst fierce global competition.

C. Tax Incentives for Innovation

The government also supports new innovation indirectly through various tax incentives. 96In theory, tax incentives for innovation can encourage private spending that would not otherwise occur in the private market. This is a good thing because it is generally believed that research produces positive spillover effects, such as attracting high value workers including engineers and scientists, as well as luring capital essential for innovation.

Are special tax incentives for innovation justified? After all, an ideal tax system should be neutral and avoid unnecessarily shaping economic behavior. 97Over the past half century, however, this neutrality principle has lost ground to what might be termed "social engineering." Today, there are many tax rules in place that deliberately attempt to drive certain economic policies. These rules create what are known as "tax expenditures." In the common vernacular, a tax expenditure might be called a tax break or a tax loophole. Whatever we call it, a tax expenditure occurs when a rule causes the government to collect less revenue than it would collect under a "normal" income tax. 98Social engineering through tax expenditures is a prominent feature of our current income tax. The federal government maintains what is known as the tax expenditures budget, a compilation of all of the tax expenditures. 99It is estimated that federal income [*1710] tax revenues are reduced by hundreds of billions of dollars annually as result of tax expenditures. 100

Historically, some of the biggest tax expenditures have been for special tax rules designed to encourage new innovation. 101Tax incentives for innovation generally fall within one of two categories: (1) those on the development side of innovation - specifically, a tax deduction and tax credit for qualified research spending; and (2) those on the back end of the innovation cycle - specifically, a low tax rate on gain from the sale of successful innovation. In the United States, individual inventors have historically benefited from both categories of tax incentives. For example, an individual inventor could expense 100% of his or her research costs when paid. If the research was successful and the inventor later sold the invention, he or she could enjoy a low tax rate on any gain. In contrast to individual inventors, corporate inventors have historically benefitted from front-end tax incentives only (i.e., a tax deduction or credit for qualified research spending). Corporations do not receive special rate treatment on their gains. It is worthy to note that the United States, in contrast to many other nations, has never adopted a reduced tax rate on royalty income from successful innovation. As noted above, only gains from dispositions by individual inventors have been accorded preferential rate treatment.

1. Special Rate Treatment for Innovation Gains

The government began carving out special tax rules for innovation in the mid-twentieth century. The first special rule for innovation (a back-end tax incentive) was enacted in 1950. Prior to 1950, creators of both copyrighted works and patented inventions were treated similarly for tax purposes. So long as their works were not considered inventory (i.e., so long as they weren't professional creators), they would receive preferential capital gains treatment on later dispositions. Capital gains treatment is preferential to ordinary income treatment because capital gains are taxed at lower rates. 102To receive capital gains treatment, one must sell a so-called "capital asset" held for more than one year. 103

[*1711] In 1948, President Dwight D. Eisenhower published a book of wartime memoirs, Crusade in Europe, and sold it at a substantial gain. With the help of a ruling by the Treasury Department that he was not a professional writer, 104he was able to enjoy capital gains treatment, saving about $ 400,000 in taxes. 105Congress responded by modifying the definition of a "capital asset" (that is an asset eligible for preferential capital gains treatment) in the Revenue Act of 1950. The new definition excluded self-created copyrights; literary, musical, or artistic compositions; and similar property. 106Under this change, which has been called the "Eisenhower Amendment," when a person sells a book or other artistic work that is the product of his or her personal effort, his or her gain is taxed at the higher rates applicable to ordinary income. 107The stated policy behind the change was that gains from personal efforts should be taxed as ordinary income just as wages and salaries are taxed as ordinary income. 108

When Congress adopted this rule in 1950, it also considered treating as ordinary income gains from the sale of an invention or patent by the occasional inventor. Indeed, the House bill included the words "invention," "patent," and "design" in types of self-created property that were excluded from the capital asset definition and, thus, ineligible for preferential capital gains treatment. Ultimately, however, the committee believed "that the desirability of fostering [*1712] the work of such inventors outweighed the small amount of additional revenue which might be obtained under the House bill." 109Accordingly, any references to inventions, patents, and designs were eliminated. This was a strong signal that innovation was to be accorded different, and preferential, treatment under the law, at least for amateur inventors. 110

While the 1950 tax law change signaled preferential treatment for patented inventions, it only applied to amateur inventors, not to those who habitually invented and sold their inventions. It also applied only to amateur inventors who held their inventions sufficiently long enough (one year) before transferring their rights in the invention. There was also some uncertainty as to whether capital gains treatment should be available to non-professional inventors who sold their inventions but who received contingent payments resembling royalties for their inventions. Royalty payments under a license are taxed at ordinary income rates.

Four years later in 1954, Congress confirmed its desire to provide tax relief to inventors by enacting a special rule for all individual inventors - whether amateur or professional. 111Section 1235 of the Internal Revenue Code ("Code") provides statutory assurance to individual inventors that the sale of their inventions will qualify for reduced capital gains rates, as opposed to ordinary income tax rates. This is true even if the sale involves contingent payments, 112the transferor is a professional inventor and would otherwise have to report ordinary income under general tax rules, 113and the invention has been held for less than one year and would otherwise not meet the requisite one-year holding period under the general capital gains provisions. 114By assuring individual [*1713] inventors that sales of their inventions qualify for special tax treatment, section 1235 is designed to encourage R&D that potentially leads to patentable inventions. 115A stated policy goal underlying section 1235's enactment was "to provide an incentive to inventors to contribute to the welfare of the Nation." 116

2. Tax Deduction for Qualified Research Spending

At the same time Congress enacted section 1235 as a back-end incentive to stimulate economic growth and technological advancement, it enacted a very important front-end tax incentive for innovation - section 174 of the Code. Section 174 permits inventors to elect to expense immediately 100% of their qualified research and experimental expenditures. 117The legislative goal was clear - to encourage innovation activities. As noted by Daniel A. Reed, then Chairman of the House Ways and Means Committee: "This provision will greatly stimulate the search for new products and new inventions upon which the future economic and military strength of our Nation depends. It will be particularly valuable to small and growing businesses." 118Small businesses, in particular, were viewed as potential beneficiaries since section 174 does not require that an inventor has already established himself in a trade or business to [*1714] get the deduction. An inventor need only show that he has the intent and capability to enter into business with the resulting technology. 119

Without this special rule, innovation costs could not be expensed in the same year they are paid. This is because, since the inception of the modern income tax in 1913, the Code has generally precluded a current deduction for so-called "capital expenditures." The term "capital expenditure" is tax jargon for any expenditure that produces an asset lasting beyond the current tax period. 120Applying the asset capitalization rule to innovation costs can be challenging for a number of reasons. It is often difficult to determine when research activities result in an identifiable asset, the costs of which must be capitalized. Further, because research may span several years with varying degrees of success, it is often difficult to apportion costs if a particular project partly succeeds and partly fails or when different and simultaneous research activities contribute in varying degrees to the development of an asset or assets. 121By permitting immediate deduction for qualified research spending, section 174 avoided these messy accounting issues. 122More importantly, as noted above, section 174 was an important incentive for taxpayers to engage in desirable research activities. 123

[*1715] Congress left to the Treasury Department the job of defining which R&D expenditures qualify for expensing. The regulations define qualified costs as all costs incurred in the experimental or laboratory sense related to the development or improvement of a product. 124In particular, qualifying costs are those incurred for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. 125Examples of qualifying costs include salaries for those engaged in research, amounts incurred to operate and maintain research facilities (such as utilities, depreciation, and rent), and expenditures for materials and supplies used and consumed in the course of research (including amounts incurred in conducting trials). 126

Over the years, the Treasury Department expanded the scope of research costs that qualified for current deduction under section 174 - most recently in 1994 127and 2014. 128Perhaps the most significant enhancement of the section 174 deduction was its extension to computer software development costs. In administrative guidance, the IRS concluded that all costs of developing computer software may be deducted currently under section 174. 129The government adopts a broad definition of "computer software" for deduction purposes. Because of this broad definition, section 174 principles apply not just to software development costs that would otherwise constitute research or experimental expenditures for purposes of section 174, but more importantly to software development costs that do not satisfy the definition of research and experimental expenditures under section 174. 130

All of the tax incentives for innovation discussed above were enacted in the 1950s. To recap, on the front-end of the innovation cycle, Congress enacted a special deduction permitting 100% expensing of qualified innovation costs. [*1716] Later, the Treasury and the IRS expanded the types of innovation eligible for expensing, including software development. On the back end of the innovation cycle, Congress enacted rules to ensure individual inventors would receive preferential capital gains rate treatment on the sales of their inventions - first the Eisenhower Amendment to the capital asset definition (in 1950) and later section 1235 (in 1954). 131Interestingly, these tax policy tools were adopted around the same time as adoption of the Patent Code (1952), a strong signal of government support for innovation.

3. Tax Credit for Increases in Research Spending

Under the tax incentives discussed above, an inventor may deduct research costs and then enjoy a low capital gains tax on the later sale of the resulting innovation. Three decades after Congress created these powerful tax incentives for innovation, it enacted another tax incentive - a special tax credit ("STC") for incremental increases in research and spending. It should be noted that tax credits differ from tax deductions in one important way. Tax deductions reduce income before the tax rate is applied, whereas tax credits reduce tax liability dollar for dollar. Thus, a credit is worth more to a taxpayer since a deduction only reduces tax liability in proportion to the taxpayer's top marginal tax rate. For this reason, the STC was seen as a more powerful tool in incentivizing increased research activity within the United States.

The STC was enacted in 1981. 132Codified in section 41 of the Code, the STC is incremental: it is equal to a certain percentage (20%) of qualified research spending above a "base amount" - generally, a firm's normal level of investment in R&D. 133Innovators, therefore, can only benefit from it if they [*1717] increase their research spending over time. 134In theory, the STC lowers the cost of research and firms respond to the reduced price by spending more. There is some data and economic research, albeit limited, on the credit's effectiveness in increasing research spending by private businesses in the United States. One study found that for every one dollar of the credit, firms spend an additional one dollar or more on research. 135This suggests that the credit is as cost effective as a direct federal research grant.The STC's reformulation over the years has limited the types of research for which the credit is available. Today, not all costs that qualify for the section 174 deduction qualify for the STC due to special regulatory requirements and exceptions. 136In addition to meeting the requirements for deductibility under section 174, two additional requirements must be met. First, the research must be undertaken for the purpose of discovering information that is technological in nature. 137Second, substantially all of the research activities must constitute elements of a process of experimentation for functional aspects, performance, reliability, or quality of a business component. 138Both of these requirements have been the source of considerable controversy, in large part due to the regulations under section 41, which have a checkered past. 139The main controversy over the years has been [*1718] whether these requirements add to the section 174 requirements discussed earlier, or whether they merely restate them. 140However, these issues have since been largely resolved. 141

As further limitation, section 41 specifically excludes a long list of research activities from eligibility for the STC. 142One notable exclusion relates to development of internal-use software. Specifically, computer software developed for internal use by the taxpayer is excluded, 143unless the internal-use software satisfies a high threshold of innovation test outlined in the regulations. 144

A major limitation to the STC was its temporary nature. Until recently, the research credit was continually renewed as a temporary provision, which made it very difficult for firms to plan research activities. 145In 2015, Congress made [*1719] the STC permanent. 146This was probably the most significant enhancement to the STC since its adoption in 1981.

The U.S. tax incentives for innovation enacted in the early 1950s and early 1980s clearly reflect a policy decision to incentivize the development of patented inventions. 147The incentives for patents and patent-like property do not apply to other forms of intellectual property, such as copyrights and trademarks. 148With respect to copyright development, for example, creation costs must generally be capitalized. 149And, under the Eisenhower Amendment discussed earlier, when an individual copyright creator disposes of her work, she must pay tax on gain at the higher rates applicable to ordinary income. 150

Exceptions to these rules are limited. For example, under a special rule enacted in 1988, certain individual copyright creators (freelance writers, photographers, and artists, as defined in the Code) can deduct their "qualified creative expenses" if they are engaged in an active trade or business, but they cannot deduct fees paid to the Copyright Office to obtain copyright protections on the developed product. 151Another special rule enacted in 2005 permits [*1720] songwriters, but not other copyright creators, to elect to receive capital gains treatment on the sale of their songs. 152These exceptions, however, were not adopted as tax incentives to encourage copyright creation; they were relief provisions. The special deduction for freelance writers, photographers, and artists was not to promote freelance activities but rather to relieve such individuals from the burden of the capitalization rules, especially when their activities may not generate income for years. 153The special capital gains provision for songwriters was not adopted to encourage creation of musical compositions, but rather to provide relief to songwriters who, compared to other copyright creators, have quite low income that often comes in spurts. 154

In contrast to copyright creation, innovation has benefited from a long history of special tax incentives, and based on analysis of tax expenditures, numerous innovators have benefited from these incentives. In fact, the front-end incentives (deduction and credit) represent some of the largest business tax expenditures for the U.S. government. Expensing of research and experimentation expenditures (the front-end incentive affected by recent tax law change) was expected to cost the government $ 119 billion over a ten-year period from 2018 to 2027. 155The credit for increasing research activities (the front-end incentive [*1721] unaffected by recent tax law change) was expected to cost the government $ 163 billion in tax revenues over the same ten-year period. 156

II. The Attack on American Innovation

A. Weakening of the Patent System Under the Disguise of Innovation

A new narrative of innovation has overtaken the United States in the past decade. Under this narrative, innovation demands a weaker patent system where patent eligibility would not be available for inventions in business methods, software, medical diagnostics, and personalized medicine. This new narrative dominates the halls of Congress, the Supreme Court, 157the media, and academic publications and conferences. 158By weakening the patent system, this attack aims to close the door on patent inclusion.

The disagreement in patent law interpretation between the Supreme Court and Federal Circuit has escalated in this past decade. 159In the last ten years, the Supreme Court has systematically destroyed the Federal Circuit's inclusion of inventions in new innovative technologies. For example, in 2010, in Bilski v. Kappos, 160the Court overturned the Federal Circuit's "useful, concrete and tangible result" as the sole test for business methods and software inventions, narrowing the door of patentable subject matter. 161Four years later, in Alice Corp. v. CLS Bank International, 162the Court nailed the coffin shut on patentability for business method and software innovations. 163As a result, patent [*1722] filings in these fields have dropped drastically. 164Companies owning existing patents in these fields had to write down the value of their portfolios. 165And the secondary market for software and business method patents diminished for fear of invalidation under Alice. 166

Wielding its enormous power again in interpreting patentability subject matter under Section 101, the Supreme Court in 2012 turned its attention to medical diagnostics and personalized medicine in Mayo Collaborative Services v. Prometheus Laboratories, Inc., 167removing patent eligibility in this economically important sector. 168A year later, the Court focused on patent [*1723] eligibility in life sciences in Ass'n of Molecular Pathology v. Myriad Genetics, 169further eliminating patent protection in the personalized medicine fields. 170In these two cases, the Court expanded the "judicial exceptions" to patent eligibility, causing the creation of many new innovations without patent protection. 171The words "anything under the sun that is made by man," once uttered by the Court thirty years ago in reference to the field of life sciences, were turned upside down. 172The Court's decisions wreaked so much havoc on the patent system that David Kappos, USPTO Director from 2009 to 2013, urged Congress to repeal section 101 of the Patent Act. 173In fact, the Intellectual [*1724] Property Owners Association adopted a resolution to support legislation to reverse the Court's attack on innovation. 174

In attacking innovation, the Court's decisions have been criticized by many for confusing the idea of patentability, 175being judicially dishonest, 176and demonstrating a misunderstanding of patent law. 177Specifically, the Court erroneously relied on the "inventive concept" standard of section 103 in analyzing section 101, destroying the distinct three doors of patent law that Judge Rich had carefully separated in the 1952 Patent Code. 178Sadly, Judge Rich years ago predicted this misinterpretation of section 101, an interpretation in direct conflict with the intent of the drafters of the 1952 Patent Code. 179Additionally, and certainly more critically, the Court's recent line of patent [*1725] eligibility cases brings back pre-1952 instability and uncertainty to modern patent law. 180

Consistent with the new philosophy of patent exclusion, the Supreme Court has flexed its muscles in other areas of patent law, overturning law well established by the Federal Circuit. 181From injunctive remedy, 182to patent exhaustion, 183to divided infringement, 184to the obviousness test, 185the Supreme Court has significantly altered the patent landscape. 186In the obviousness requirement, the Court has made it much more difficult for innovators to pass [*1726] the obviousness muster, 187thus increasing the level of unpredictability. 188The Court announced that "ordinary innovation" has no place in receiving legal protection under the patent system. 189"Ordinary innovation" losers include independent inventors, research universities, and startups whose most important assets are patents and who often rely on these intangible assets to attract early-stage investors. 190Because these losers cannot obtain and enforce their patents, they cannot rely on them when seeking funding for further innovation. 191

As such, these decisions have alarmed members of the investment community. 192The weakening of the patent system has negatively impacted [*1727] investment in new drugs and new technologies. 193Moreover, the jobs relating to invention in the life sciences and many other areas are moving offshore, 194as investors turn their attention to different sectors 195or to different jurisdictions that are more willing to extend patent protection for similar inventions. 196

For example, China is more willing to protect software patents and includes software inventions in the scope of the patent protection and innovation [*1728] ecosystem. 197Under China's strong patent system, injunctive relief is readily available as 90% of patentees secure relief upon a finding of infringement. 198Plaintiffs, in enforcing their patents against infringers, enjoy a success rate of more than 60%. 199In other words, China provides a strong and favorable patent system. 200Consequently, investments in creating and valuing intellectual property have been diverted to or concentrated in Europe and China. 201

The Supreme Court is not alone in the attack on innovation. The PTAB, which was created amid the narrative of patent troll hysteria, has also played a significant role. 202Since its inception in 2012, the PTAB has presided over 6,000 proceedings brought to challenge many valuable patents. 203The PTAB has invalidated almost two-thirds of the patents disputed, and patent owners face seriously low percentages of success for the patents that have just gone through the examinations conducted by the Patent Office. 204Peculiarly, the guidelines that the Patent Office examiners have applied in examining the patent applications and granting the patents are the same guidelines that the PTAB judges use to immediately invalidate the just-granted patents. 205In other words, under the current patent system, the presumption of validity seems to no longer exist! The high rate of invalidating patents, one commentator has noted, makes it seem as though the examination has never occurred. 206That means patent [*1729] owners face uncertainty in trying to get patent protection and lack the incentive to innovate in the United States.