The Theranos verdict is a reminder that patent-literacy matters.
Zachary Silbersher
Elizabeth Holmes, the founder of Theranos, has been convicted of securities fraud. There are many lessons and take-aways from Holmes’ story and the verdict. For one thing, fake-it-till-you-make-it may now yield concrete consequences for failure. Yet, one overlooked lesson is that the Theranos downfall illustrates a failure of patent-literacy—particularly among investors. (This is, after all, a patent blog.)
Some commentators have pointed out an unease with the resulting disparity between the counts for which Holmes was found guilty versus not guilty. In a New York Times op-ed, Bethany McLean lamented that she wanted Holmes to be convicted for lying to patients more than for lying to investors. Investors—especially accredited investors—should be doing their homework, whereas, according to McLean, patients “shouldn’t have to do any homework to make sure the provider of their blood tests isn’t lying to them.”
So much of the Theranos story has focused Elizabeth Holmes herself—first, lauded as a revolutionary in healthcare on the cover of Fortune magazine, and then as the devious mastermind behind a crumbling wall of lies and deceit on the front page of The Wall Street Journal. Yet, the investors who propped up Theranos as a highly-valued healthcare media darling also deserve their share of attention.
In 2019, I published a blog post arguing that Theranos investors dropped the ball in one particular way—they failed to read the patents. Had they done so, some red flags might have been raised. For one thing, some of the patents confirmed there was no working prototype.
The counts for which Holmes was convicted related to wire transfers made from investors in 2014. At that time, in the beginning of 2014, Theranos had approximately thirty-six patents and pending patent applications that had been filed and already published.
Among those patents, one patent in particular appeared to cover the “box” that Theranos was touting to investors. The patent is U.S. Patent No. 8,435,738, and the patent application published in March 2013. The claimed invention covers a “multi-analysis system” with a “housing” that included a “plurality of modules” including “a sample preparation station configured to effectuate at least one sample preparation procedure,” “an assay station configured to perform one or more types of assays,” “a detection system configured to detect a plurality of signals associated with the multiple types of assays.” In addition, the invention was configured to perform multiple types of different assays.
A review of the prosecution (examination) history of the patent application before the Patent Office reveals some interesting information. First, there were multiple interviews with the Examiner in which Elizabeth Holmes herself participated. (See U.S. Patent Application No. 13/244,947, interview summaries dated May 11, 2012 and January 17, 2013). In itself, this is neither unusual nor nefarious. Rather, it is common during the patent application process for the inventor to participate in “interviews” with the Patent Office, which are essentially meetings to discuss the status of the application. If anything, this shows that Elizabeth Holmes herself was knowledgeable and aware of the status of the patents being pursued by her company.
Yet, the prosecution history reveals more. The application was itself rejected several times by the Examiner. The Examiner cited considerable prior art that covered systems identical or similar to the one pursued by Theranos—namely, the same systems touted by Holmes to potential investors as a revolutionary product in itself. Again, it is not uncommon for patent applications to be rejected numerous times by the Patent Office. Yet, that often happens because most patents are admittedly minor tweaks over existing systems and prior art. By contrast, if you are claiming that you invented something as groundbreaking as the airplane, as opposed to a minor tweak over existing technology, then why is your patent application facing so many rejections and why is the prior art so crowded?
Finally, the back and forth between Theranos and the Patent Office over this one particular patent application is probably the most revealing. The patent was eventually granted by the Patent Office, but only after Theranos narrowed the scope of the invention to distinguish it from existing prior art systems that did the same thing. In particular, the patented system in U.S. Patent No. 8,435,738 was amended to expressly require a “cytometry station configured to perform cytometric assay.”
What does that mean? It means that if this patent is going to cover Theranos’ minilab—and ultimately protect Theranos investors’ multi-million dollar investment from copycats—then the Theranos minilab must have a cytometer. Cytometers are complicated instruments that can alone sell for around $30,000. A Theranos slide presentation (albeit from 2016) indicates that the cytometer would be “optional”.
Together, this raises a number of questions that could have been posed by investors in 2013. Does the minilab have a cytometer? Where is it? How is the price tag of the cytometer going to impact the price of the minilab? This is just one patent. There were more than 30 others that could have revealed more insights into exactly what was going on at Theranos at the time the investments were made.
As the ‘738 patent reveals, patents can reveal information that can otherwise be obscured during investor presentations. Inventors and startups must contend with prior art systems, and ultimately distinguish their own inventions. That often results in narrowing the scope of the patent. Sometimes—many times—the patent becomes so narrow, and covers only one commercially infeasible option of the overall product line, that its value to the company drops considerably. Because startups often have to pull up their skirt in front of the Patent Office in a manner that they don’t have to do in front of investors, patent literacy—and knowing what patents can reveal—can be critical for investors performing due diligence into technology startups.
Undoubtedly, there is much more to the story of Theranos than just the patents. As other commentators have suggested, the real story as far as investors are concerned is that FOMO and media hype will override rigorous due diligence almost every day. Theranos is an exception precisely because it garnered so much hype, and that probably explains more than anything why investors may have failed to ask the right questions or follow the red flags.
Yet, the lessons of patent literacy are likely more salient for investors in those startups that are not bathed in the glow of media hype. Patents in America have been around for hundreds of years, and yet, we are living within an era where both startups and investors often treat patents as an afterthought. There are many reasons for this, but the resulting irony is that patents have been devalued precisely at a time where we are supposed to be living through a technology revolution.