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80–821 2013

INNOVATION AS A CATALYST FOR NEW JOBS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 18, 2013 

Small Business Committee Document Number 113–012 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missour 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Tom Rice .......................................................................................................... 1 

Hon. Judy Chu ......................................................................................................... 2 

WITNESSES 

Jack Roach, Director, Southeastern Institute of Manufacturing Technology, 

Florence, SC .......................................................................................................... 4 

Julie Lenzer Kirk, Co-Chair, Startup Maryland, Columbia, MD ........................ 6 

Steve Johnson, President and CEO, CreatiVasc, Greenville, SC ........................ 9 

Michael D. McGeary, Co-Founder, Engine Advoacy, San Francisco, CA ............ 11 

APPENDIX 

Prepared Statements: 

Jack Roach, Director, Southeastern Institute of Manufacturing Technology, Florence, SC ..................................................................................... 25 

Julie Lenzer Kirk, Co-Chair, Startup Maryland, Columbia, MD ................. 28 

Steve Johnson, President and CEO, CreatiVasc, Greenville, SC ................. 33 

Michael D. McGeary, Co-Founder, Engine Advoacy, San Francisco, CA ..... 40 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

James Bessen, Boston University School of Law and Michael J. Meurer, 

Boston University School of Law, submitted by Hon. Judy Chu .............. 44 

CONNECT - An Innovation Agenda for the 113th Congress, submitted 

by Hon. Judy Chu ......................................................................................... 80 

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(1) 

INNOVATION AS A CATALYST FOR NEW JOBS 

Thursday, April 18, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX AND CAPITAL ACCESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Tom Rice [Chairman of 

the subcommittee] presiding. 

Present: Representatives Rice, Chabot, Schweikert, Chu, and 

Barber. 

Chairman RICE. Good morning. Thanks for being 

with us today. I now call this hearing to order. 

Today’s hearing is the first in a series that will examine how to 

bolster America’s competitiveness and propel economic growth 

through innovation and entrepreneurship. America is the most innovative nation in the world. As a global hotspot of breakthroughs 

and emerging technologies, entrepreneurs have embraced our country’s creative spirit for decades and have brought innovations into 

the marketplace creating jobs and spurring economic growth. Only 

20 years ago, the transformative ‘‘IT Wave’’ struck the nation, generating new industries, and with it, new jobs and heightened economic prosperity. 

Currently, we stand at a critical juncture. The United States remains number one in innovation, but with unemployment at 7.6 

percent and a sluggish economy, communities across the nation are 

fighting to regain strength and bring back economic prosperity. The 

question remains - where do these new jobs come from and how 

can America’s competitive advantage in innovation drive economic 

growth? 

To address this question, various entities are taking a variety of 

approaches to capitalize on America’s innovative spirit. For example, in my district, we have the Southeastern Institute of Manufacturing and Technology’s Manufacturing Incubator Center, that aids 

startup manufacturers to transform innovative ideas into commercial products. This sort of focus reinvigorates local communities 

and recognizes the unique strengths of South Carolina’s 7th Congressional District, and I am happy to have Mr. Roach, the Director 

of the Southeastern Institute of Manufacturing and Technology, 

with us here today to discuss their work. 

Additionally, ADP, human capital management solutions company, which has an office in my district, works with small businesses to find innovative solutions to their business challenges. 

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While a representative of ADP was unable to be here today, I 

wanted to highlight the work that they and similar companies are 

doing around the country to help small businesses innovate to address challenges with everyday tasks such as cash flow, regulatory 

and tax compliance, and human resource management. 

It is evident that creating innovation-friendly conditions is necessary to allow entrepreneurs to thrive and generate new jobs, yet 

for each community, this may mean something different. Today’s 

witnesses truly understand the challenge and conditions necessary 

to succeed, and I thank you all for being here. And I look forward 

to your testimony. 

I now yield to Ranking Member Chu for her opening remarks. 

Ms. CHU. Thank you, Chairman Rice. And before I begin, I want 

to congratulate you on your appointment as chair to this Subcommittee on Economic Growth, Taxes, and Capital Access. Chairman Rice certainly knows about small business economics and 

taxes. He owned his own tax law practice before he came to Congress, so he is certainly well qualified and I look forward to working closely with Chairman Rice on the many critical issues facing 

this Committee. 

Today’s hearing is the first in a series that will focus on making 

America more competitive. Innovation is at the center of what 

makes America the greatest nation in the world. The ability to turn 

new ideas into reality drives the U.S. economy forward, creating 

entirely new industries and the employment opportunities that 

come with them. It comes as no surprise that small business 

startups are responsible for leading this charge, seizing on opportunities and growing rapidly. 

America has a long tradition of cultivating innovation. About 40 

percent of Nobel Prizes have been awarded to American citizens, 

and almost half of the world’s 100 most innovative companies are 

located right here in the United States. Whether it was providing 

electricity throughout the country, putting men on the moon, developing the Internet, or decoding the human genome, we can be 

proud of our legacy of discovery. Not only that, these innovative 

new businesses created new jobs, an average of 3 million a year. 

However, though America has the largest economy in the world, 

a highly-skilled workforce, top tier companies, and a second-to-none 

higher education system, there are signs that America’s innovative 

performance is beginning to slip. In the most recent world economic 

forum, rankings of the national global competitiveness, the U.S. 

dropped from fifth to seventh place. In fact, in 2008, America 

ranked number one but we have been steadily outranked ever 

since. 

We can reverse this trend if we take certain key and critical 

steps. This means investing in education, funding federal research 

and development, strengthening our patent system, and reforming 

our nation’s immigration system. Because of the timeliness of the 

last two issues, I’d like to make a few comments on them. 

Patents certainly incentivize creativity and innovation, rewarding people for their ideas. Businesses must also know that our nation’s patent system is strong and their intellectual property will 

be protected. If we want to encourage more startups to invest in 

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their businesses here in the U.S., then it is critical for us to ensure 

that their developments receive the protection they need. 

As a member of the Judiciary Subcommittee on Intellectual Property, I am happy to say that we did pass a law providing the greatest reform to patent law in 40 years. We are also, however, continuing discussions on supporting innovations through patents. 

Just yesterday we had a hearing examining the effect of abusive 

patent litigation. Unfortunately, there are bad players out there 

that abuse the system and impose obstacles for real innovative 

startups. Companies called patent assertion entities are what some 

call patent trolls, acquiring patents that they had no role in developing. Their business model is to sue companies that have related 

products and then seek as many settlements as they can for profit. 

According to a recent Boston University study, 90 percent of defendants in these suits are small- and medium-size companies. This 

poses a significant problem for startups, especially technology 

startups, and I am hopeful that we can find a solution to this issue. 

Comprehensive immigration reform is a key issue in Congress 

right now and is certainly related to the issue of innovation. Immigrants have made extraordinary contributions to America’s innovation. Twenty-five percent of the highest growth companies in America, including iconic success stories like Intel, Google, Yahoo, and 

eBay were started by immigrants. In Silicon Valley, the world’s 

hub of innovation, immigrants helped found half of all technology 

companies, many of which were small startups. But many of these 

high tech companies cannot find the workers they need because 

there are not enough applicants trained in STEM—that is science, 

technology, engineering, and math. To make matters worse, immigrants who study in the U.S. and want to make their great new 

idea a reality, cannot get visas to stay and work on their startup. 

Instead, they are taking the next Google back home instead of 

growing it right here in America. 

It is not just employment-based visas that are critical to the success of the technology industry. We will not be able to attract the 

best and brightest if they cannot live and work in the U.S. with 

their families by their sides. Immigrants are twice as likely to start 

a business as native-borns, and there are many who come to the 

U.S. through family visas. Jerry Yang, the founder of Yahoo, is a 

perfect example. His mother brought him from Taiwan to America 

when he was 10-years-old on a family visa. Despite knowing only 

one English word, shoe, upon arrival, Yang went on to master the 

language and thrive in his new home, ultimately founding one of 

the world’s largest Internet companies. He created thousands of 

American jobs and provides a service that allows millions of Americans to be more productive. 

I believe a strong immigration system needs to work for our 

small and innovative businesses. We must reform our system so 

that our small businesses have the workers they need and that the 

students educated here can keep their ideas and businesses in 

America. 

With this in mind, I am looking forward to today’s hearing which 

will provide insights into what our country can do to be one of the 

most innovative and competitive economies in the world. I would 

also like to submit two documents for the record under unanimous 

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consent—one documenting the cost to our American system of abusive patent litigation and the other, policy recommendations from 

Connect, a successful program linking inventors and entrepreneurs 

with the resources they need. 

Thank you. And I yield back. 

Chairman RICE. Thank you, ma’am. 

Without further delay, let us get to the witnesses. I appreciate 

every one of you all taking your time and making the trek here to 

Washington to be with us to help educate us and the public about 

what we can do to foster innovation. I see us as the greatest country that has ever been on earth, and we have so much potential. 

And what we need to do is do everything we can to foster that. 

So starting out with Mr. Roach, Mr. Roach and I are acquaintances. He is the Director of the Southeastern Institute of Manufacturing and Technology, which is in South Carolina in my District. 

And just so you know, my District, eight counties in South Carolina 

with the national employment rate at 7.6 percent, statewide unemployment rate 8.6 percent, not one of my eight countries is even at 

the state unemployment rate. We have got a lot of work to do, and 

it is through institutions like the one that Mr. Roach is the director 

of that we are going to start to deal with this problem. I have got 

one county in my district, Marion County, South Carolina, 19.2 

percent unemployment. So there is a lot of work to be done. 

Mr. Roach, if you want to—I thank you again for being here. If 

you want to tell a little bit about you and what the Southeastern 

Institute of Manufacturing and Technology does, I sure would appreciate that. 

STATEMENTS OF JACK ROACH, DIRECTOR, SOUTHEASTERN 

INSTITUTE OF MANUFACTURING AND TECHNOLOGY; JULIE 

LENZER KIRK, CO-CHAIR, STARTUP MARYLAND; STEVE 

JOHNSON, PRESIDENT AND CEO, CREATIVASC; MICHAEL D. 

MCGEARY, CO-FOUNDER ENGINE ADVOCACY. 

STATEMENT OF JACK ROACH 

Mr. ROACH. Thank you, Congressman Rice. 

I am the director of the Southeastern Institute of Manufacturing 

and Technology. It is a wholly owned division of Florence-Darlington Technical College, which is in Florence, South Carolina. 

Historically, innovation has created the bulk of American jobs, and 

we believe it will most certainly be the force that creates jobs tomorrow. We also believe that creativity and innovation are critical 

to the success of business, industry, and the economy. The SiMT, 

as we call it, was created to provide support services to existing 

businesses and entrepreneurs, to help them be successful. Both existing companies and entrepreneurs tend to be in need of some of 

the same things. These typically include technology, customers, 

capital, and talent. The SiMT offers services in support of all these 

areas. Since we opened the doors of our 177,000 square feet Advanced Manufacturing Center in August of 2007, we have worked 

on projects for over 200 clients, with approximately one-quarter of 

those being entrepreneurs working on innovative new product 

ideas. 

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In support of the first need, that being technology, we offer services in computer aided design, rapid prototyping/additive manufacturing, as well as reverse engineering. Additionally, our 3D-Virtual 

Reality Center can develop content that allows clients to do both 

product and process visualization and simulation, and virtual 

prototyping. We have provided these services to clients that range 

from Fortune 500 companies to entrepreneurs-inventors who come 

to us with a sketch on the back of a napkin—very common. The 

person that comes to us with a napkin sketch, and many small 

manufacturers, need a resource like SiMT to get their new product 

innovations to market. We become a part of their product development team, and in some cases we become their entire product development team. 

To help our clients with their second need, which is customers 

for their new product ideas, we create many sales and marketing 

visual presentations for our clients. These could be a product simulation shown on a laptop computer, or an Internet-based product 

demonstration. We use many tools, including virtual and augmented reality software to create compelling visualizations of new 

product concepts. Entrepreneurs, particularly, use these visual applications to sell their product idea to both potential customers and 

investors. Several of our client entrepreneurs have been able to 

generate enough interest in their product idea to secure funding for 

their business startup. In some cases, they were even able to procure purchase orders for their product from established retail companies, such as Home Depot or Lowe’s. 

The third need, capital, is always tough to come by for innovative 

entrepreneurs. We are not in the venture capital business. We cannot offer seed money to a client to get his business going. However, 

what we can do is offer them some ways to leverage the capital 

they do have. In September of 2012, we finished construction of our 

new 28,000 square foot Manufacturing and Business Incubator facility. This facility provides startup companies both office and light 

manufacturing space, which is reasonably priced. It has a potential 

to house up to 26 different startup companies. It provides amenities found in most business incubators—things like Internet access, telephone service, conference and meeting rooms, shared copiers and printers, and shared commons areas where tenants can 

network together. Additionally, in partnership with our local Small 

Business Development Center, we offer training sessions for tenants on subject areas related to running a small business. 

Additionally, this new Manufacturing and Business Incubator facility is adjacent to our existing Advanced Manufacturing Center, 

which houses our large machining center. The machining center 

has state-of-the-art equipment, such as CNC machining centers, 

water-jet cutting, and an inspection metrology lab. An incubator 

tenant that may have a limited need for this type of equipment 

may procure time on our equipment instead of buying their own. 

Access to our capital machinery can help get their business off the 

ground, while preserving their precious operating capital. 

We currently have our first client tenant in the Manufacturing 

and Business Incubator facility. The company, MatrixXcom, was recently accepted into the Mentor-Prote ́ge ́ Program that the Federal 

government has by Homeland Security. They feel that when they 

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are up to full production capacity they will employ as many as 200 

people in our local market. We have two more companies that we 

are currently working with to finish their product development. Ultimately, they will move into our incubator as well. 

The fourth need is talent, and it is almost universally in short 

supply today. Companies across the country say they cannot find 

enough skilled workers to meet their needs. Our parent organization, Florence-Darlington Technical College has its roots in training 

skilled workers for local industry. The SiMT carries on that tradition. We provide customized workforce development training solutions for client companies. When a startup company needs to train 

a new workforce or an existing company’s desires to raise the skill 

level of its current workforce, they can get that specialized training 

at the SiMT. 

In conclusion, as communities look for ways to create jobs and 

drive economic growth, many are finding innovation to be a key 

element and startup companies to be the real job creators. The 

Southeastern Institute of Manufacturing and Technology is an initiative to support the innovators and entrepreneurs in its home 

state of South Carolina, as well as the southeastern region of the 

United States. 

Thank you. 

Chairman RICE. Thank you, Mr. Roach. 

Our second witness is Julie Lenzer Kirk. Ms. Kirk is the CoChair of Startup Maryland, which brings entrepreneurs together 

throughout Maryland to stimulate innovation and drive economic 

growth across the state. Startup Maryland was launched on March 

30, 2012, and is one of the regional initiatives within the Startup 

America Partnership. A serial entrepreneur herself, Ms. Kirk 

founded her first company, Applied Creative Technologies, in 1995. 

Thank you for testifying today, Ms. Kirk. You may begin. 

STATEMENT OF JULIE LENZER KIRK 

Ms. LENZER KIRK. Thank you. Good morning, Chairman Rice, 

Ranking Member Chu. I am honored to have the opportunity to 

talk to you about innovation as a job creator. It is a topic that is 

very near and dear to my heart. 

As you mentioned, I am a serial entrepreneur. I call it a ‘‘recovering entrepreneur,’’ but I am not recovering very well because I 

surround myself by that which I am trying to recover from. But 

really, in my current role as co-chair of Startup Maryland, and as 

the executive director of the Maryland Center for Entrepreneurship 

in Columbia, Maryland, I feel fortunate to be surrounded by innovation every day. We have entrepreneurs and aspiring entrepreneurs coming in to us with incredible ideas and inventions and 

they are just looking for the resources that they need to help build 

their businesses. 

Raymond Cooper is an example of one gentleman who had a 

great idea. He had filed a patent for his invention. It is an innovative design for a wind turbine that is smaller and more efficient 

than current designs that are out there. But once he did that he 

was not really sure where to go to get the help and the resources 

that he needed. It is not until he stepped onto the Startup Maryland bus that he found the resources that he needed. It was actuSBREP-219 with DISTILLER

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ally on the advice of his mother who saw the bus on TV that the 

39-year-old gentleman came out to Bethesda, Maryland on the second to last stop of our two and a half week tour across the state 

so that he could pitch his business idea. Little did he know that 

this unplanned visit to this big yellow bus with the Maryland State 

flag draped across it, that that would be the catalyst that was 

going to help him take his invention into the marketplace and go 

from being a dreamer to a doer, which is what we focus on. 

Contrary to what many people think after seeing phenomenal 

successes like Google and Facebook, the road between an idea and 

a viable business is highly complex and full of risk. And I am sure, 

Chairman Rice, you know this firsthand as a business owner and 

working with business owners, and I have been privileged to assist 

hundreds of business owners, entrepreneurs, and help them navigate the path from concept to viable business. 

Unfortunately, we lost a few long the way because of the risks. 

But what I found is that while there are many different paths to 

building a successful business and there is a myriad of unanticipated opportunities to what we call ‘‘pivot’’ along the way, we as 

a community can and should provide assistance throughout the 

process. Communities, by way of grassroots efforts like Startup 

Maryland and strategic public/private partnerships, can increase 

the probability of success and drive greater outcomes in revenue 

growth and job creation. They can do this by encouraging connections, promoting and celebrating a culture of entrepreneurship, and 

facilitating access to needed capital. This is exactly what we at 

Startup Maryland were told when we asked entrepreneurs across 

the state what they needed and what we have been focused on 

since we launched in March 2012. 

You shared a little bit about Startup Maryland. It is a regional 

initiative of the Startup America Partnership, and it is a great example of what we can do through grassroots efforts. It is actually 

organized by entrepreneurs for entrepreneurs, and we are very 

much a startup organization ourselves. We are all working for free 

and we have no money. However, that has never stopped an entrepreneur, and that does not stop us. Our focus for 2013, as we 

shared at the White House briefing in February, is to leverage the 

unique assets of Maryland to provide entrepreneurial companies 

with the connections, coaching, and capital that they need to start 

and grow, while celebrating the entrepreneurial journey, which includes successes and failures. This, we are hoping, will provide 

them with an unfair advantage to help them drive increased scale. 

In 2012, as I mentioned before, we conceived of and executed a 

bus trip across the state of Maryland called the Pitch across Maryland, and we invited these entrepreneurs to come on the bus and 

pitch their companies to a video camera. We then posted them on 

YouTube so that we could get visibility for these companies and 

their businesses. We thought we would get about 50 people to come 

on the bus—we had 168. We had to start turning people away. The 

tour, we made 25 stops throughout all corners of Maryland, and 

Maryland is not a huge state. 

It was also created as a way to connect these entrepreneurs with 

the resources that can help them to start and grow their business, 

and also with each other. We tried to shine a spotlight on them to 

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elevate the visibility of entrepreneurs. Now, pulling off something 

of this magnitude with a scant two months of planning, required 

collaboration with a lot of people around the state. Universities, 

community colleges, incubators, and economic development agencies all stepped up to help us to customize the message for their 

regions and to introduce these entrepreneurs to their resources. It 

was amazing. You had entrepreneurs not even knowing that there 

was an economic development organization in their county, and we 

were able to make those connections. 

The most impactful outcome for many was the connections that 

they developed between each other. They were just happy to share 

their story and to meet other people that were going through that 

very lonely journey. They were excited to be connected with not 

only the Startup Maryland community, but also the Startup America. We had a lot of fruitful connections and partnerships that came 

from that. 

Bringing together the community of entrepreneurs is also exactly 

what I was hired to do by the Howard County Economic Development authority, under the leadership of county executive Ken 

Ulman, from the Maryland Center for Entrepreneurship, not unlike 

the incubator that you run. We are leveraging the resources and 

programs. We have a technology incubator, although as an entrepreneur I do not like using the word ‘‘incubator’’ because it sounds 

like a warm, fuzzy chicken, so we call it an innovation catalyst or 

the iCat. We also then connect them with other technology people 

in the community through the Howard Tech Council. We ran something called the Race for Innovation, where we brought in entrepreneurs, investors, supporters, and nobody knew who anybody 

else was, so it was just first name only, in a way to get them to 

connect with each other before they have to actually ask for an investment or ask for services. And that is really what it is about. 

It is connecting that community. And we have had mentors end up 

investing in or taking a leadership position in some of these 

startups and finding partners, getting revenues, and even getting 

customers. 

Another key need in fostering innovation is promoting a culture 

that supports it. Feeding the entrepreneurial mindset runs through 

everything we do at Startup Maryland and the MCE, but our climate does not always make it easy. So being able to celebrate failure as well as success I think is really important so that you can 

get that mindset that it is okay to try things and fail. 

Funding is also important. If you cannot have money, you cannot 

be successful. Many examples of state and local funding, but there 

is a lot we can do to help that. For example, making the SBIR process a little bit faster and easier so entrepreneurs can get that in 

time for their businesses. There is also a large and growing gap between sustainable company and concept, and we need more seed 

funding for that. 

So the work that you are doing here is really important, and having us here to help highlight these entrepreneurs, we really appreciate. We need to provide outlets so that we can spread these stories. We need to simplify the federal SBIR process, encourage and 

expand seed funding. 

Chairman RICE. I am sorry, Ms. Kirk, if you could wind up. 

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Ms. LENZER KIRK. Absolutely. Facilitating key decision-makers 

to bring innovations to companies to drive revenues. 

And then to your point, Congresswoman Chu, creating a startup 

friendly track to permanent residency for foreign nationals so that 

they can stay in the States and keep their innovations here. 

Thank you. 

Chairman RICE. Thank you, Ms. Kirk. 

Next we have our third witness, Mr. Johnson, Steve Johnson, 

who hails from my home state of South Carolina. Mr. Johnson is 

the President and CEO of CreatiVasc, located in Greenville, South 

Carolina. In 2012, his firm was competitively selected to be part of 

the FDA’s Innovation Pathway Program. CreatiVasc was also an 

early company to receive support and investment from the South 

Carolina Research Authority’s SC Launch Program, which aims to 

bring high tech companies into South Carolina and supports the 

growth of early stage firms. 

Mr. Johnson, thank you for being here today. You may begin. 

STATEMENT OF STEVE JOHNSON 

Mr. JOHNSON. Thank you, Chairman Rice, Ranking Member 

Chu, members of the Committee, ladies and gentlemen. 

My name is Steve Johnson. I am president and CEO of 

CreatiVasc Medical in Greenville, South Carolina. Our company 

began full-time operations in 2007, and we are focused on developing medical device innovations for one of the most expensive 

chronic diseases: end-stage renal disease, or kidney failure. It represents now over a $47 billion burden to the health care system. 

These patients must rely on dialysis to live, but this cost over 

$86,000 per patient per year. It has also had very little innovation 

in the past 30 years. 

CreatiVasc developed and now has in clinical trials at Johns 

Hopkins an innovative device called the Hemoaccess Valve System, 

which has the potential to significantly reduce the complications 

and cost of dialysis. 

Last year, as you mentioned, CreatiVasc was selected competitively by the FDA to be one of the three inaugural companies in 

the agency’s new Innovation Pathway program, which is designed 

to accelerate the clinical testing and approval of promising new 

technologies without compromising patient safety. Our company is 

in South Carolina, which has traditionally been viewed as a ‘‘flyover state’’ when it came to innovation: you flew over us to get to 

either Research Triangle in North Carolina or Georgia Tech in Atlanta, or Palo Alto, or Boston. Now, we are proud that South Carolina is quickly becoming a destination state when it comes to innovation. Over the last six years, over 280 technology-based companies have started up in our state. 

What has caused this dramatic change? One major stimulus, as 

Chairman Rice mentioned, has been a program created by South 

Carolina Research Authority (or SCRA) called ‘‘SCLaunch.’’ And 

while the state of South Carolina fostered the creation of this program, not a penny of state funding has supported it. This SCRA 

program provides tax incentives to support and encourage private 

donations which are used to support early-stage innovations in our 

state. This SCRA early-stage funding is provided only after extenSBREP-219 with DISTILLER

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sive and rigorous scrutiny of not only the technology but its management team, its competition, its patents, as well as its paths to 

market. 

Early-stage SCRA funds have triggered over $200 million in follow-on capital from angel and venture capital investors, and Forbes 

Magazine named it as one of the top five economic programs in the 

nation. 

The SCRA program recognizes that capital is the fuel that drives 

the economic engine. Capital transforms ‘‘technology’’ into ‘‘products.’’ This then translates into manufacturing, which then translates into jobs. But something has to prime that pump, and most 

times, traditional sources of capital, such as banks and now even 

venture capital funds, want to avoid the risk of early-stage technology startups. Programs like SCLaunch fill that vacuum. Without this program, most of these innovation startups, including our 

own company, would not exist. 

As a native South Carolinian, I fully recognize that our state has 

rarely been at the top of any ranking. We are usually 48th or 49th. 

But that is rapidly changing when it comes to encouraging, supporting, and creating new companies with breakthrough innovations. 

Innovation is the key to economic growth because it is how we 

can compete in a global marketplace. It is also how we create good, 

high-paying jobs here at home. But for innovation to succeed there 

must be adequate capital to mature these inventions from the lab 

to the market. I can tell you from personal experience that the 

greatest challenge is to find long-term funding. Even though 

CreatiVasc was fortunate enough to be selected by FDA to be one 

of the top three innovations for one of the most expensive chronic 

diseases, it is still amazingly difficult to find capital, especially for 

medical devices which take years to develop, test, and get to market. 

This is the opportunity for the future: to provide attractive incentives that secure private investment to support innovative but maturing technologies. 

Again, thank you for this opportunity. It is something that obviously you can tell I feel very passionate about. I look forward to 

your questions. 

Chairman RICE. Thank you, Mr. Johnson. I am now going to 

yield to Ranking Member Chu for introduction of the minority witness. 

Ms. CHU. I have the pleasure of introducing Michael McGeary. 

Michael McGeary is the co-founder and chief political strategist of 

Engine Advocacy, a working group of people in the entrepreneurial 

sector based in San Francisco. And it is working to connect those 

leaders with government to effect change on issues that are important to high growth, entrepreneurial tech businesses. He also 

serves as a strategist with Hattery Labs, a San Francisco-based 

seed stage venture fund and creative consultancy. And he is working on high level social and brand strategy. Previously, he worked 

with Silicon Valley startup Tune-In, and with a leading California 

law firm specializing in political compliance and disclosure. 

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STATEMENT OF MICHAEL MCGEARY 

Mr. MCGEARY. Thank you, Mr. Chairman and Ranking Member 

Chu, members of the Committee, thank you for having me here 

with you this morning. 

I want to spend my time talking about issues that will impact 

the true engine of economic growth in this country, which is our 

startup community. Starts promise the rebirth and rejuvenation of 

the American economy, and far from the idea that is held by many 

about startup life, of bespectacled views and ironic t-shirts gallivanting around Palo Alto or the Flatiron district of New York, 

spending their days writing code for the next great game about 

unicorns, we will all have our heads down in our phones, playing 

as we ride the subway to work. In fact, the startup community in 

America reflects the best of American business. It is dedicated men 

and women working in coffee shops and coworking spaces, office 

parks and garages in Kansas City and Austin and Pasadena and 

Nashville, and yes, San Francisco and New York, creating economic 

growth and multiplicative effects not seen in any other industry, 

helping power not just their own business but in many cases countless others across the country. These men and women have created 

all of the net new job growth in this country for the last quarter 

century, and according to our recent study, Technology Works, are 

projected to create 4.3 jobs in local communities for every job created in a technology concern. 

It is for those reasons and so many others that a few of us got 

together to form Engine Advocacy, and for those of you who may 

not be familiar with our group, we got started about a year and a 

half ago with the intention of connecting the startup community 

with government at the federal, state, and local level. We did so 

with an eye towards turning some of the workarounds, good ideas, 

and innovative solutions to common problems faced by the startup 

community into new legislation or government programs or smart 

regulation that can help make it just a little easier to start and run 

those businesses here in America. 

We did that in a number of ways for a community that has largely been underrepresented here in the halls of government. Our 

work is balanced between direct advocacy, convening our members 

from all over the country with leaders in government, such as yourselves, and educating all of the players by arming them with good 

stories and strong data that point to the impact that startups can 

have in driving economic growth. 

And that is really why I came here today. If you took a survey 

of startup founders and entrepreneurs, of investors, technologists, 

developers, engineers, and the myriad of others working in startups 

today, they would tell you that two issues more than any other 

threaten the promise and progress of their companies. These 

issues—immigration reform and software patent reform—are Engine’s immediate priorities and will form the basis of our advocacy 

work in the coming year. 

First let me touch on immigration. Despite our historical competitive edge, we in the United States are facing a growing gap between the jobs we can create and the skills and employees needed 

to fill them. In the long term, we need to continue to work to evolve 

our American education system to help power that growth and give 

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young people the skills they need to compete in a global marketplace. But in the short term, we must also realize that that most 

valuable resource, talent, is already on our shores. They are attending the University of Wisconsin or Kansas University or MIT 

or Stanford and others around the country. And unfortunately, we 

seem to be looking for ways in our current system to send these 

smart, talented, and entrepreneurial individuals either back to 

their countries or origin or to places like Canada or Chile or South 

Korea where they have hung out the welcome sign to these promising minds as we have done for so many years, going back to Ellis 

Island and Angel Island. It is imperative that we find a way to 

keep knowledge here, working and building business in America so 

that our economy can continue to grow and our businesses continue 

to thrive. 

Second, for those that cannot stay and others who are starting 

business, another specter is lurking, threatening to choke off innovation nearly at its source, and that is the danger of patent trolling. According to recent findings by the Electronic Frontier Foundation, patent trolls are, forgive me, patent assertion entities account for 56 percent of all lawsuits filed against innovators. This 

environment creates a legal and regulatory thicket, which many 

young companies of two and three people find incredibly hard and 

costly to navigate. We must find smart ways to protect innovative 

intellectual property, and as the constitution says, to promote 

science and the useful arts. The current system in place does no 

such thing. In fact, it even threatens to kill innovation as young 

companies find fewer and fewer avenues for capital as the prospect 

of patent troll lawsuits grow. 

In the end, what is good for startups is good for small business 

on the whole because startups power small business. Consider a 

single parent making jewelry in Boise who is able to sell to consumers all over the world thanks to Etsy or the rural doctor in 

South Carolina who is better and more readily able to diagnose cardiovascular problems in a patient because of increased computing 

power and new data from existing MRI scans paired with 3-dimensional flow visualization. That is the technology being pioneered 

right in our office in San Francisco and being made available by 

Morpheus Medical. And it is the bakery in my neighborhood in San 

Francisco’s Sunset district that accepts credit card payments via 

Square on their iPad rather than having to buy a costly point of 

sale system. 

The promise and potential of America’s entrepreneurial future is 

also so much more. Yes, we can create gaming apps that distract 

and delight, but there is also technology being created that saves 

lives, that brings people closer together, and allows us to see our 

world and ourselves from a reframed perspective. And startups can 

power the next generation of American growth if we let them. It 

will be in working with this Committee and with our other allies 

in Congress which can allow for that future, our future, to be prosperous. 

Thank you, and I look forward to your questions. 

Chairman RICE. Thank you very much for your statement. 

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So many well-intentioned and very talented people here, and I 

just appreciate so much you taking your time to be here with us 

today. 

Mr. Roach, I want to start with you. I want you to tell me about 

particularly these technology programs that you have at the SiMT 

and how it is working with attracting students and what your job 

placement prospects are. 

Mr. ROACH. Yes, sir. The SiMT is part of the Florence-Darlington Technical College, which is one of the 16 technical colleges 

in the State of South Carolina system. In our Advanced Manufacturing Center in our large machining center in that facility is 

where we have the Machine Tool Technology program run by the 

college. Those students are learning the science of machining materials. They start out with fundamental manual machining processes and by the second year of the program they are in computer 

numerical control, CNC Machining Center operations programming 

is set up. Those students have a 100 percent job placement rating 

coming out of that program. In fact, it is very difficult for us to 

keep them in the program for the full two years because once they 

get marketable job skills, the local industries out there are trying 

to hire those students as quickly as they can to get them in the 

workforce because there is a shortage of those skill sets. So that 

program in particular is one that is in high demand, it is high paying, and it is even difficult to get people into the program because 

of the science and technology level it includes, and the young people coming out of high school today typically are not fully prepared 

to go under that kind of career path. But we are doing everything 

we can to try to encourage them to go down that path because 

there are good paying jobs in that field and they are placed 100 

percent. 

Chairman RICE. You know, what would you say would be the 

average pay scale? And what would be the prerequisites for entering the program? Are you getting kids that have graduated from 

college that are entering this technical program? 

Mr. ROACH. Yes, sir. We get students in those programs from 

high school graduates to people with four-year baccalaureate degrees from other institutions who maybe they have got a degree in 

English or in History or something and they cannot find a job in 

the job market and they are looking for a high tech skill set that 

they can market. And they end up coming back to us. We jokingly 

refer to ourselves as graduate school for some of the four-year universities because we get a lot of their graduates coming back to get 

a skill that they can market. 

The perquisites essentially are the ability to do math and 

science. They need a good strong STEM background. Once they 

have got those prerequisites under their belt they make very good 

students in these programs. 

Chairman RICE. How many students do you take in this program? 

Mr. ROACH. Currently, we have approximately 40 students per 

year in the program. That includes both first-year and second-year, 

so about 20 in each group. 

Chairman RICE. Is that your capacity? 

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Mr. ROACH. No, sir. That is not our capacity. That is basically 

what we are being limited to by the local pool of candidates willing 

to go into the program. In our local area we have had a difficult 

time with the K–12 system actually steering students away from 

these kinds of career paths in their education going through high 

school, so we are trying to bring them in. 

Chairman RICE. And I just want your opinion. What is the status of manufacturing in the United States? 

Mr. ROACH. The state of manufacturing is strong. Even though 

we are down on job count, the manufactured products generated by 

this country are as great as they have ever been. The big difference 

is that it is being done with technology more than with people. So 

the people that work in industry today have to have a higher skill 

set. They have to have more training, and they get, you know, 

higher paying jobs. So it is a question of same output, fewer numbers of heads, greater skills, greater pay scale. And manufacturing 

is not dead. It is not going away. It is just different. 

Chairman RICE. And you are there and you are ready to provide 

the skills? 

Mr. ROACH. Yes, sir. 

Chairman RICE. But you cannot find the people to sign up for 

your program? 

Mr. ROACH. That is part of the difficulty, is getting the pipeline 

filled with people that are interested in going into manufacturing 

because the news is always talking about manufacturing is dying, 

no one wants to go into manufacturing. We have a hard time with 

parents steering their children away from that kind of a career 

path, even though a machine tool student graduating from our twoyear associate degree program today starts out anywhere from $17 

to $20 an hour with the possibility of going up to as high as $30 

an hour with about five years experience under their belt. Good 

paying jobs. 

Chairman RICE. These jobs, are you placing them in the local 

area or are they going nationwide? 

Mr. ROACH. This particular program is local. There is enough 

demand in our local market that it is gobbling up all of our graduates. But we have gotten calls from companies as far away as 

Kentucky and the Midwest looking for people with this skill set. 

They have heard about our program through the SiMT and they 

are asking can we come in and talk to your graduates? Can we get 

them to come to our facilities? And we say, yes, you can come and 

talk to them but typically they want to stay close to home and 

there is a job for them waiting right here in the local market. We 

are providing as many as we can get our hands on to the industry. 

Chairman RICE. And one more question. What is your tuition? 

Mr. ROACH. Our tuition at Florence-Darlington Tech, I do not 

know the exact number because I do not deal with it myself on a 

daily basis, but we are about $150 a credit hour. So a full load is, 

you know, $1,700, $1,800 a semester. And in our case, with the 

State of South Carolina’s lottery tuition assistance program, about 

80 percent of our students qualify for some sort of financial aid, either Federal Pell Grants or state lottery tuition assistance. So by 

the time they are done, most of our students either go for nothing 

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or for $200 or $300 out of pocket a semester, not counting books. 

Books, of course, are additional. 

Chairman RICE. Can you stand up and turn around and show 

me your cape? 

Mr. ROACH. No, sir. I don’t think I can do that. I cannot bounce 

bullets off my chest either. 

Chairman RICE. Ms. Kirk, could you please tell me some specific 

assistance? I want to know more about—did you say you work for 

free? 

Ms. LENZER KIRK. The Startup Maryland is all by entrepreneurs who are donating their time, so we are all volunteering 

our time to bring together the ecosystem. 

Chairman RICE. I bet you have a pretty big cape, too. 

Ms. LENZER KIRK. No, no, no. It is a great community of support. Everybody pitches in. I think any entrepreneur that has been 

successful, or even if they have failed and have really enjoyed the 

process which most of them do, they want to give back. They want 

to go and help. I am always amazed at the generosity of entrepreneurs to help other entrepreneurs. 

Chairman RICE. Now, does this entity, I assume, get some kind 

of funding? No funding at all? 

Ms. LENZER KIRK. No. In fact, it was interesting when we said 

we wanted to do a bus, everybody just kind of looked at us and 

said, ‘‘How are you going to do that?’’ And so we figured it out. We 

went out and raised money from corporations. We got some money 

from, like, the Howard County Economic Development Authority 

put the first money in for the bus. And once you start going we 

were selling the idea before we had it fully funded. I mean, that 

is kind of what entrepreneurs end up doing. We then charged all 

of the stops a stoppage fee so that they actually helped to supplement the bus tour. So it is about being creative. It is about figuring 

out a way, and that is what entrepreneurs do. It is not sitting back 

and waiting. I mean, we would love to take money and the Maryland State Government did support us but we got started before we 

had that. We went out and started raising money and talking 

about getting people excited about the idea, which is what entrepreneurs have to do. 

Chairman RICE. It sounds like you are doing a considerable 

amount of marketing and letting people know about available resources that are already there. 

Ms. LENZER KIRK. A lot of it is just grassroots, Twitter and 

Facebook, and people talking about it to their friends. It is more 

of a grassroots-type of an effort. No marketing budget. 

Chairman RICE. The bus tour sounds like it was a very innovative, brilliant marketing plan. 

So when an entrepreneur—how do they contact you? 

Ms. LENZER KIRK. How do they contact Startup Maryland? We 

have a website startupmd.org. And in fact, Startup America has 

several startup regions—38 regions across the country, s.co is the— 

s.co, that is all you have to type in, is Startup America, and you 

can get access to the region that is closest to you. 

Chairman RICE. Tell me more about the national Startup America Partnership. 

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Ms. LENZER KIRK. So the national Startup America was a partnership with the Case Foundation and Kauffman Foundation. And 

they set out to help to do what we are doing—help entrepreneurs 

across the country. And so they are pulling in—— 

Chairman RICE. How old is this entity? 

Ms. LENZER KIRK. Two and a half years, I think. It is fairly 

new. 

Chairman RICE. I did not mean to interrupt. 

Ms. LENZER KIRK. Yeah, no, that is okay. Obviously, I could 

go on, right? 

So what they realize is that each region really needs something 

a little bit different, and so they formed the regional initiatives so 

that the folks in the region could figure out what does that region 

need the most? So, for example, in Tennessee, they had no incubators, so they connected Startup America. They formed Startup Tennessee and now they have incubators across the state of Tennessee 

and are doing an amazing job of getting innovations and turning 

them into businesses. There is a Startup California. There is a 

Startup Virginia, Maryland, and D.C. We call it the Startup DMV 

where we try to work together because we are so close. And each 

region is focused on whatever that region needs. In Maryland, we 

needed to connect all these great resources we have. We have 

Johns Hopkins University of Maryland, but they operated in silos, 

and so they needed that connective tissue, and that is what we 

have been providing to them. 

Chairman RICE. Thank you very much. 

Moving on to Mr. Johnson. 

Now, I had one more question for you, Ms. Kirk. So when somebody contacts you, gets in touch with you through your website, 

what specific aid can you give them? 

Ms. LENZER KIRK. Well, first we figure out what they need, 

what stage they are at. And then we will often connect them with 

their local jurisdictions, the resources there. But within Startup 

Maryland, we have started a couple of new programs. We have a 

web portal called Co-Founders Lab that connects team members. It 

is like the EHarmony for entrepreneurs, so you can go in and find 

a team member. We have a program that we are just kicking off 

called ‘‘Raise Your Game,’’ that is for existing companies that can 

connect them into a community and help them go to their next 

growth inflection point. We have another startup that we have 

partnered with called Fosterly that is a resource map of all the resources in the state. It is crowd sourced. So we figure out really 

what it is that they need and then connect them into the network 

to find it. 

Chairman RICE. Thank you, Ms. Kirk. 

Mr. Johnson, thank you again for coming all the way here from 

Greenville. Wow, it sounds like you’ve done big things coming up 

with help for people with dialysis needs. That is wonderful. 

How specifically did SCRA help you get off the ground? 

Mr. JOHNSON. When we were forming the company in 2007, obviously we realized that with an implantable mechanical long-term 

blood exposure device, this was not going to be either a short-term 

or inexpensive process. We needed, if you will, the term we use is 

‘‘runway.’’ We needed a runway to raise money. We went to South 

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Carolina Launch and pitched them on the concept of our device, the 

kind of need that there was in the market, the fact that there had 

been no innovation in the field in 30 years, and we were able to 

get a $200,000 grant from South Carolina Launch that basically 

bought us about nine months of time. During that period of time 

we went to the private investors in the area. We brought together 

40 angel investors and we raised $3.4 million. That $3.4 million 

was based upon our achieving set milestones, and I think that is 

a key, too, to our success and to any—— 

Chairman RICE. Was SC Launch or SCRA involved in pulling together these investors? 

Mr. JOHNSON. We pulled together the investors, the mechanism that gave us the funding to allow us that time to pull those 

investors together. But in that six month period of time we were 

able to raise $3.4 million as a total commitment from those investors, and then based upon milestones of developing a finished prototype in animal trials and then beginning human clinical trials, 

various tranches were called in from those investors based upon 

our success. But truly, and we have received three installments 

from South Carolina Launch. The first enable us to get off and running. The second one enabled us to actually create our finished prototype and finished device that is being implanted in humans now, 

and the third tranche came last year when frankly we were just 

out of cash. And it frequently happens. And again, even though we 

have one of the first innovations in this field in 30 years, it is still 

in this environment extremely difficult to raise capital, even among 

the venture capital community because they want lower and lower 

risk and greater and greater assurance of success. And in medical 

devices, you are always at the exposure of what happens in the 

human body that you do not see in the lab. And so it is not always 

linear. It is not always predictable, but it is something that we live 

with. 

Chairman RICE. Thank you. 

Mr. McGeary, I want to ask you questions but I have taken far 

too much time already. Not that I do not appreciate what you do 

or the fact that you are here, and I appreciate it very much. I could 

talk to each one of you for an hour. So just thank you all very 

much for what you are doing. Thank you for what you are doing 

to help create businesses and jobs in this country. And with that 

I am going to yield to the Ranking Member, Ms. Chu. 

Ms. CHU. Thank you so much. 

Well, I have questions for Mr. McGeary. Mr. McGeary, according 

to a study from the Center on Education in the Workforce at 

Georgetown University, science, technology, engineering and math 

could have a 230,000 shortfall of advanced degrees in the U.S. by 

2018. What do you think is the best way to address this shortfall? 

Mr. MCGEARY. Thank you, Ranking Member Chu. 

I think that it is critically important to address. There are a 

number of ways in looking at the entirety of the system. Obviously, 

in the long term we need to address the educational system we 

have got in this country and really retrofit it for the jobs we are 

creating moving forward in the 21st century and train young people of promise to be part of these science, technology, engineering, 

and mathematics disciplines to take those positions. 

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The short-term answer to that is comprehensive immigration reform, and as part of that it really does have focus on technology. 

Obviously, your colleagues across the street have shown us their 

proposal. The Senate has come out with their proposal on immigration, which has some good in it for technology, including improved 

access to H1B and things like that. 

We have done a recent study that I reference in my opening 

statement called Technology Works, which has similar findings and 

we will be diving deeper into those throughout the year, alongside 

the Georgetown study. And we are seeing the same thing—that we 

are going to have a gap between the jobs we are already creating 

and the skills needed to fill that and the talent needed to fill those 

jobs. So it is critically important that we start that process now. 

We have got people here in our universities as I mentioned, who 

are ready to take on those jobs or to create their own companies, 

their own startups in communities all around the country that 

would, in fact, create even more. We have got to do better at keeping those people here. It is not about even opening up so much; it 

is keeping people that are already here, here, as opposed to sending 

that creativity and that entrepreneurship and those skills overseas. 

So in the long term, education; in the short term, we have to keep 

people here. 

Ms. CHU. And talking about the short-term, can you give us an 

example of how our broken immigration is hurting startups? 

Mr. MCGEARY. Well, I will give you one that is clear and plain 

as day from last week. On the first of April, and this is not an 

April Fool’s joke, we opened the H1B process for high skilled people 

to apply to stay here. There were 65,000 visas available. There 

were 124,000 applications. So not only are we keeping half of the 

people where, we are sending half of them home on a coin flip. We 

do not even frankly know if we are keeping the right 65,000 people 

here. That is a sin. Those are 124,000 very skilled people that 

would power immense job growth not just in technology, but as I 

mentioned, it would also engender job growth in the communities 

that surround it to a level of 4.3 jobs created for every high tech 

job. So sending these people back overseas is awful and something 

we need to fix immediately. 

On the very same day, in Canada, they opened their startup visa 

program. It was a very nicely designed website that shows you all 

the different pathways and the people in government that will help 

you as an entrepreneur come and start a business in Vancouver 

and Toronto or any city across Canada to start your business there, 

and they will help you get a visa and they will help you start. So 

instead of shipping people away, they are asking people to come in. 

They are not alone in that. There are other countries, like I said, 

with a welcome sign out. We have got to be one of those countries 

again. We have a history of that in the United States. You know, 

I am a descendant of immigrants, as so many people are in this 

country. We have got to make it once again so that the highly 

skilled people that are powering economic growth on all sectors of 

the economy can stay here in the United States and start businesses. 

Ms. CHU. I would like to turn now to the patent issue, and you 

certainly were very eloquent in talking about the effect of that on 

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startups. Could you give us an example of how these patent assertion entities, as some call patent trolls, how they work on the existing companies that do productive work? And also, any insights in 

terms of solutions that Congress could undertake. 

Mr. MCGEARY. I will answer that by telling a quick story. My 

co-founder was on a panel. I think it was Stanford Law School, and 

this was about a year ago now. It was him, it was a lawyer from 

a big law firm with an IP practice, and it was a gentleman from 

Intellectual Ventures, which is one of the most notable patent assertion entities out there. And a student asked a question. He said, 

‘‘I am starting a business and I think there might be some patent 

issues with this. How do I protect myself?’’ And this is an early 

20s, starting his first business, wanting to get started. And the 

gentleman from Intellectual Ventures says, ‘‘Well, you can come to 

us and you can license our patent portfolio.’’ Because what they do 

is go up and buy patents and they do not create products with 

them, but then they license them back to companies that will in 

some cases, or they use them as leverage against companies that 

are infringing them, knowingly or not, in court battles. And so that 

will cost you about $250,000. And then they went to the attorney 

sitting next to him and they said, ‘‘Well, actually, you can come to 

us and we will protect you from the patent trolls and we will represent you in court, and that will cost you about $250,000.’’ And 

then they got to Josh, my co-founder, and he looked down the table 

and he said, ‘‘You know you people are all crazy, right?’’ No startup, and certain no venture capital firm—and in my day job, which 

I get to do very infrequently these days, I work for venture capital 

and I see this every day—no venture capital firm is going to make 

an investment of $250,000 in a company so that they can then send 

that money into litigation. And that, by the way, is an opening 

offer. That is just to clear off the simplest of infringements unknowing, what have you. It goes so much deeper than that. 

There are a lot of things that we can do, I think, on a legislative 

level and on a regulatory level that Congress can lean on. Most notably is working with the Patent and Trademark Office to reform 

some of their policies on software patents and making sure that 

fewer bad patents get through. There has been a lot of that. There 

is a provision in the America Invents Act, which allows for financial services patents to be reexamined and thrown out if they were 

not shown to be useful. I think extending that to software would 

be good as well. But also looking at things like fee shifting and 

other areas, things like we have seen in your colleague, Congressman DeFazio’s SHIELD Act, which is co-sponsored by Congressman Chaffetz, that has been out for a while, which we have taken 

a good look at and we are broadly supportive of. I think there are 

a number of avenues for doing this, but it is—I like to say that if 

you ask for the top five issue areas concerning startups, the first 

four would be immigration, but that fifth one is definitely patent. 

It is right there and we are looking at ways to work with the community on the whole and all of you here in Congress to make that 

situation much better. 

Ms. CHU. Thank you. 

Mr. Roach, I was interested in your comments about a couple of 

important programs in Congress—the Mentor-Prote ́ge ́ Program, as 

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well as the SBDCs. You mentioned that your first client-tenant in 

the Manufacturing and Business Incubator Facility had been accepted into the Mentor-Prote ́ge ́ Program. And I was very interested 

in this because in the last Congress, Congressman Schilling and I 

introduced a bill to improve that Mentor-Prote ́ge ́ Program and it 

did pass. So could you talk about why this program was so important to your client and how it could help startups and small businesses to be more innovative? 

Mr. ROACH. Well, I will try. I am not a real expert in the program. 

My understanding of the way the program works is that if the 

small companies have some sort of technology that is of interest to 

the federal government, whether military or Homeland Security or 

whoever it is, they are paired up with a company who is already 

doing business with the government in that area. And that company sort of shepherds the small startup company through some of 

the government bureaucracy, the red tape of government procurement, things like that, as well as offering technical support in some 

areas to the small startup companies to help them really get their 

product developed, get it to market, and get it into the hands of 

the people within the government who want that technology. Sort 

of fast track it as best they can. That is kind of my understanding 

of the program. I am not an expert in the program. 

Ms. CHU. But I appreciate your insights. And Small Business 

Development Centers have provided training sessions to tenants of 

your incubator, so could you talk about these SBDC, Small Business Development Centers, and how they have helped in what you 

are doing as well as if there were cuts, which there could be cuts 

of $10 million due to the sequester, how that would affect the situation. 

Mr. ROACH. As far as our interface with the SBDC, we actually 

have one of the offices on our main college campus. It is one of the 

groups in the state of South Carolina. We work closely with that 

group all the time with our incubator facility. They actually help 

us do a good job of prescreening a lot of potential candidates into 

our center. I just had someone visit me this past week who wanted 

to come into my incubator and rent space, and when I discussed 

it with him it was obvious he had no idea what starting up a business was even about. He just had a good idea he thought and he 

wanted to come to me and rent space. I want him to go through 

the SBDC process because they will shepherd him again through 

the process, help him create a business plan, be a good sounding 

board whether his concept even is sound—all those steps that he 

really needs to do before he comes to see me at my incubator facility because I cannot give him that sort of grassroots guidance that 

the SBDC can. So we lean on them heavily to help us sort of 

prescreen or filter potential tenants in our facility. 

And they do a great job in our area. They work with a lot of people who have got an idea and they do not have a clue what they 

need to do as a first step to get started. They do not even know 

what a business plan is. Just I am going to get out there. I am 

going to make a million dollars today no matter what. I have got 

a good idea. So if I can say anything about the SBDC, we need to 

do everything we can to keep those folks in business. I do not know 

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21 

what the sequestration cuts might do to them. I have not got a 

clue. But we need to do what we can to keep those people doing 

what they do because they are a godsend to people in the startup 

phrase of contemplating a new business. 

Ms. CHU. Thank you for that insight. I really appreciate it. And 

I yield back. 

Chairman RICE. I now yield to Mr. Schweikert for five minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. And I am sorry 

I missed some of the testimony. As we all know, this is the wacky 

time of year where they have you on two different committees, but 

at least we are on the same floor of this building. 

In listening to this—and this is sort of a question—and I was 

going to start with Ms. Kirk—access to capital. I have a personal 

fixation because of my participation with the Jobs Act last year and 

how do you get smaller companies an access to money. With what 

you are doing in Maryland, issue, nonissue, where does that rank? 

Ms. LENZER KIRK. Huge issue. Yeah, huge issue. There are a 

lot of companies—as he was talking about venture capital, they are 

going farther and farther away from pre-revenue. They want a less 

risky deal. But in the beginning, there are no guarantees, especially if you have to go through FDA approval and things. So it is 

a huge deal. We have companies looking for—and loans are harder 

to get, too. You know, thankfully, the SBA does back loans and 

that is helpful, but there is a lot of—because of the economy, there 

is a lot of entrepreneurs who maybe do not have great credit. That 

does not mean they are bad people. That does not mean that they 

cannot build a phenomenal business. 

Mr. SCHWEIKERT. From some of the smallest ventures you 

have had approach you in Maryland, how small? I mean, where do 

you see the entering point of someone with a good idea? I mean, 

are they looking for a million dollars? 

Ms. LENZER KIRK. Sometimes it is can you buy me a laptop? 

I need $1,500 to get a laptop. I need $5,000 to file a patent. 

Mr. SCHWEIKERT. Mr. Roach, for you, where do you see some 

of your starting point entrepreneurs? What are they hunting for? 

Mr. ROACH. Very similar. In a lot of cases the fellow I just mentioned who was looking to rent office space, all he needed really 

was—in his case I think he had a laptop computer already so he 

did not need that but he needed some amount of money to even pay 

his rent. He was off the hip for any rent money. 

Mr. SCHWEIKERT. Why does this sound like something I would 

end up investing in. 

Mr. Johnson, the same question. 

Mr. JOHNSON. It is very, very, very challenging. Venture capital, again, they want revenue-generating companies. And again, it 

is very difficult to get that at point when you are under regulatory 

scrutiny. And again, I think there is a great opportunity to improve 

the connection between NIH and FDA. They have been siloed too 

many times in the past. 

Mr. SCHWEIKERT. Well, but that is not where, you know, the 

first level of entrepreneurial innovation is coming from. 

Mr. McGeary, and you are also—you have a relationship with the 

venture capital world; right? 

SBREP-219 with DISTILLER

22 

Mr. MCGEARY. That is correct. I do retain a desk anywhere at 

a venture capital fund in San Francisco. And we make early stage 

investments in consumer and retail and enterprise companies. 

Mr. SCHWEIKERT. Because where I was going to come back to 

you, I know you said my first four is immigration, talent—which 

having a large Intel facility in my state and these things I hear 

that all the time. But somewhere in there I was hoping I could get 

you to adjust your top five to have access to capital somewhere in 

there. 

Mr. MCGEARY. Well, the good news, Congressman, is through 

your work on the Jobs Act, that is less of a worry for us because 

especially for early stage investors—I am sorry, for early stage 

startups, there should be better access to capital. 

Mr. SCHWEIKERT. Now, there is a very interesting clause in 

that sentence, is there not? ‘‘Should be.’’ 

Mr. MCGEARY. Should be. You have done your work and we 

thank you for it. And we need the Securities and Exchange Commission to enact the law. 

Mr. SCHWEIKERT. Say that again? 

Mr. MCGEARY. You have done your work, Congressman. 

Mr. SCHWEIKERT. No, no, no. Not that part. 

Ms. LENZER KIRK. We need the SEC to do their—— 

Mr. SCHWEIKERT. No, no, no. I get enough flatter around here. 

I never knew I was so tall and good looking until I got elected as 

a member of Congress, but there is a discussion—hey, you all know 

exactly what I am talking about. 

But the discussion—and I do not want to beat up on them because they have had a lot of interesting situations over at the SEC, 

but we all came together as a body, moved a bipartisan piece of legislation, and something like crowd funding, you know, it is the 

egalitarian access to put up an idea, have it vetted through the 

Internet, have us write positive and nasty things about it in blogs, 

and be able to raise up to a million dollars, and we cannot get it 

through the bureaucracy and we are over a year late on the rule 

set. 

And I guess where I was heading on this is you all build the silos 

and these organizations to help people. You are out there doing 

venture capital. You are trying to bring talent together, and yet it 

is our own bureaucracy that is killing, starving this next generation. Because who knows what that great idea is going to be? It is 

in someone’s garage right now. It is probably not at the national 

institutes. It is probably in someone’s garage. So please, help us to 

continue to fuss at the SEC to get these rule sets out. And with 

that I yield back, Mr. Chairman. 

Chairman RICE. Thank you, sir. I recognize Mr. Barber. 

Mr. BARBER. Well, thank you, Mr. Chairman. Thank you to the 

witnesses for coming. I am sorry I missed some of your testimony 

but I was here certainly to hear about the good work you are doing. 

Particularly, Ms. Kirk, I am very impressed. When you said how 

much does it cost, you said nothing. And of course, people are investing time and energy in providing that kind of collaboration and 

knowledge through others and I really commend you for what you 

are doing. 

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I want to talk a little bit about how we move research—university research from the university to small businesses. Yesterday, I 

met with President Ann Weaver Hart, who is the new president of 

the University of Arizona, which is one of the premier state universities in research, not withstanding what is going on at ASU, Congressman Schweikert. But one of her earliest decisions as president 

was to establish what she calls ‘‘Tech Launch Arizona.’’ We know 

we have incredibly smart researchers, people who really know that 

part of our world very well, great scientists, but I think they would 

be the first to admit they do not know a whole lot about how to 

make something a commercial product. So this enterprise brings in 

expertise from the College of Business to help these professors and 

researchers get their product quickly to market. Arizona—Southern 

Arizona in particular—has a very strong foundation of bioscience, 

high tech industries, and a burgeoning solar industry, so we have 

a base on which we can build. 

I guess my question to you and to any of the other witnesses who 

would like to respond is what can Congress do to help move, first 

of all, to find and move research to the market quickly. Small businesses, we all know this, are the engine of our economy. These innovations have the opportunity to provide great paying jobs that 

will last forever that will help people in many, many ways. And I 

would just like your advice on what it is we can do specifically to 

in this arena to help research universities get those products to 

market so that we can actually build those businesses. 

Mr. Johnson. 

Mr. JOHNSON. Traditionally, the University Tech Transfer Offices are overwhelmed. I think what needs to happen is if there 

could be assistance that could go to the research universities, in 

order to help them inventory their technologies that are on the 

shelf and help match those against market needs, unfortunately, so 

much university research is done sometimes in a vacuum. It is not 

connected to a need in the marketplace that pulls that technology 

through. Any assistance that could help those universities analyze 

markets, see market needs, get them in touch with real entrepreneurial ventures, like Ms. Kirk’s, and help them understand the 

process, you do not want a researcher running a business, and all 

the data points to that. But you do need them to help transfer it 

into people’s hands that can do that. 

Ms. LENZER KIRK. And I would say, so one of the programs 

that I taught is called Activate, and it is helping mid-career women 

start tech-based businesses. And it is all based on commercialization. We started out teaching them. As an entrepreneur, I had no 

idea there was this rich resource of intellectual property sitting in 

these universities and government labs, so educating the public 

about this opportunity and this thing is imperative that we need 

to do. We are getting ready to launch a program working with the 

NSA, Johns Hopkins, and APL to accelerate the commercialization 

of technology by bringing entrepreneurial thinking people in, 

teaming them with the researchers so that they can form a team. 

The researchers can keep doing what they love to do and have the 

entrepreneurs bring those commercial products to the commercial 

world. 

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Mr. BARBER. I would really like to know more about that initiative when my staff is here, my legislative director. We would love 

to be able to learn a lot more about that. This is an adventure in 

our community that is in its infancy. We have had tech launch programs across the university, and this is the first attempt to really 

bring all of that expertise together with all of the struggle that it 

will be to take people away from their departments, but I think it 

is the future for our economy in many respects and many other 

states as well. So I would love to hear more about your initiative. 

Thank you. I yield back. 

Chairman RICE. Thank you, sir. 

Again, everybody, thank you so very, very much for being here 

today. You all came a long way. You all are doing your part to 

move our country forward, and I cannot express in words my gratitude for what you are doing. America is at a crossroads and cultivating our innovative strength to foster job creation and economic 

growth is necessary if we are going to compete on a worldwide 

stage. As our witnesses today demonstrate, America’s innovative 

spirit is alive and well. I am encouraged by local communities and 

private entities who are finding creative ways to embrace the spirit 

and aid entrepreneurs in turning their ideas into viable business 

products. 

I ask unanimous consent that the Members have five legislative 

days to submit statements and supporting materials for the record. 

Without objection, so ordered. The hearing is now adjourned. 

[Whereupon, at 11:14 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

COMMITTEE ON SMALL BUSINESS

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS

HEARING ON ‘‘INNOVATION AS A CATALYST TO NEW JOBS’’ 

TESTIMONY OF JACK ROACH

DIRECTOR OF THE SOUTHEASTERN INSTITUTE OF MANUFACTURING

AND TECHNOLOGY

VICE PRESIDENT OF WORKFORCE DEVELOPMENT FOR FLORENCEDARLINGTON

TECHNICAL COLLEGE

FLORENCE, SOUTH CAROLINA

APRIL 18, 2013 

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The Southeastern Institute of Manufacturing and Technology 

(SiMT) is located in Florence, South Carolina. It is a wholly owned 

division of Florence-Darlington Technical College. Historically, innovation has created the bulk of American jobs, and we believe it 

will most certainly be the force that creates jobs tomorrow. We also 

believe that creativity and innovation are critical to the success of 

business, industry, and the economy. The SiMT was created to provide support services to existing businesses and entrepreneurs, to 

help them be successful. Both existing companies and entrepreneurs tend to be in need of some of the same things. These typically include four things; Technology, Customers, Capital, and Talent. The SiMT offers services in support of all these areas. Since 

opening the doors of our 177,000 square feet Advanced Manufacturing Center in August of 2007, we have worked on projects for 

over 200 clients, with approximately 1⁄4 being entrepreneurs working on innovative new product ideas. 

In support of the first need, Technology, the SiMT offers services 

in Computer Aided Design, Rapid Prototyping/Additive Manufacturing, and Reverse Engineering. Additionally, our 3D-Virtual Reality Center can develop content that allows clients to do both 

Product and Process Visualization & Simulation, and Virtual Prototyping. We have provided these services to clients that range from 

Fortune 500 companies, to the entrepreneur-inventor who comes to 

us with a sketch on a napkin. The person that comes to us with 

a napkin sketch, and many small manufacturers, needs a resource 

like SiMT to get their new product innovations to market. We become a part of their product development team. 

To help our clients with the second need, Customers for the new 

product ideas they have, we create many sales and marketing visual presentations for our clients. These could be a product simulation shown on a laptop computer, or an internet based product 

demonstration. We use many tools including Virtual and Augmented Reality software to create compelling visualizations of new 

product concepts. Entrepreneurs, particularly, use these visual applications to sell their product idea to both potential customers, 

and investors. Several of our client entrepreneurs have been able 

to generate enough interest in their product idea to secure funding 

for their business startup. In some cases, they were even able to 

procure purchase orders for their product from established retail 

companies. 

The third need, Capital, is always tough to come by for the innovative entrepreneur. The SiMT is not in the Venture Capital business. We cannot offer seed money to a client to get his business 

going. However, what we can do is offer them some ways to leverage the capital they do have. In September of 2012 we finished construction of our new 28,000 square feet Manufacturing and Business Incubator facility. This facility provides startup companies 

both office and light manufacturing space, which is reasonably 

priced. It has the potential to house up to 26 different startup companies. It provides the amenities found in most Business Incubators; internet access, telephone service, conference and meeting 

rooms, shared copiers and printers, and a shared commons area 

where tenants can meet and network with each other. Additionally, 

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in partnership with our local Small Business Development Center, 

we offer training sessions for tenants on subject areas related to 

running a small business. 

Additionally, this new Manufacturing and Business Incubator facility is adjacent to our existing Advanced Manufacturing Center, 

which houses our large machining center. The machining center 

has state-of-the-art equipment such as CNC machining centers, 

water-jet cutting, and an inspection metrology lab. An Incubator 

tenant that may have a limited need for this type of equipment 

may procure time on our equipment instead of buying their own. 

Access to our capital machinery can help get their business off the 

ground, while preserving their precious operating capital. 

We currently have our first client tenant in the Manufacturing 

and Business Incubator facility. The company, MatrixXcom, was recently accepted into the Mentor-Prote ́ge ́ Program by Homeland Security. We have two more companies that we are currently working 

with to finish their product development, before they move into the 

Incubator facility. 

The fourth need, Talent, is almost universally in short supply 

today. Companies across the country are saying that they cannot 

find enough skilled workers to meet their needs. Our parent organization, Florence-Darlington Technical College, has its roots in 

training skilled workers for local industry. The SiMT carries on 

that tradition; we provide customized, workforce development, 

training solutions for client companies. When a startup company 

needs to train a new workforce, or an existing company desires to 

raise the skill level of its current workforce to compete in a broader 

market, they can get that specialized training at the SiMT. 

In conclusion, as communities look for ways to create jobs and 

drive economic growth, many are finding innovation to be a key 

element, and startup companies to be the real job creators. The 

Southeastern Institute of Manufacturing and Technology is an initiative to support the innovators and entrepreneurs in its home 

state of South Carolina, as well as the southeastern region of the 

United States. 

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Insert offset folio 28 here 80821.001

TESTIMONY Of 

JULIE lENZER KIRK 

CO-CHAIR STARTUP MARYLAND 

And 

EXECUTIVE DIRECTOR, MARYLAND CENTER fOR ENTREPRENEURSHIP 

Before the 

HOUSE COMMITTEE ON SMAll BUSINESS 

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS 

Hearing on "Innovation as a Catalyst for New Jobs" 

Contact Information: 

julie Lenzer Kirk 

Maryland Center for Entrepreneurship 

9250 Bendix Road 

Columbia, Maryland 

410313,6550 

Aprill!!, 2013 
29 

Good morning, Chairman Rice, Ranking Member Chu, and members of the Subcommittee. I am honored to have been invited to 

speak with you about Innovation as a Catalyst for New Jobs, a 

topic very near and dear to my heart. Not only am I a ‘‘recovering 

entrepreneur,’’ but in my current roles as Co-Chair of Startup 

Maryland and Executive Director of the Maryland Center for Entrepreneurship in Columbia, Maryland, I am fortunate to encounter 

innovation every day. People come to us with incredible ideas and 

inventions looking for resources to build them into a viable, sustainable business. 

Raymond Cooper had such an idea but didn’t know where to go 

for support. He had filed a patent for his invention, an innovative 

wind turbine that is smaller and more efficient than current designs. From there, however, he wasn’t sure which step to tackle 

next or where to find the resources he needed. Not until, that is, 

he stepped on the Startup Maryland bus. On the advice of his 

mother who saw coverage of the bus on TV, the 39 year old came 

to Bethesda Maryland on the second-to-last stop of our 21⁄2 week 

trip across the state so he could pitch his business idea. Little did 

he know that an unplanned visit to the big yellow bus draped in 

the Maryland State flag would be the catalyst that would launch 

his journey from a dreamer to a doer. 

Not an easy journey 

Contrary to what many people may believe after seeing phenomenal success of companies such as Google and Facebook, this 

road between an idea and a viable business is highly complex and 

full of risk. I know because not only have I been down that road 

myself more than once, but I’ve also assisted hundreds of entrepreneurs navigate the path from concept to viable business. Unfortunately, not all of them make it. 

What I have found is that while there are many different paths 

to building a successful business and a myriad of unanticipated opportunities to pivot along the way, we as a community can and 

should provide assistance throughout this process. Communities, 

by way of grassroots efforts and strategic public/private partnerships, can increase the probability of success and drive greater outcomes in revenue growth and job creation by encouraging connections, promoting and celebrating a culture of entrepreneurship, and 

facilitating access to needed capital. This is exactly what we at 

Startup Maryland were told when we asked entrepreneurs across 

the state what they needed and what we’ve been focused on since 

we launched in March 2012. 

Startup Maryland - Pitch Across Maryland 

Startup Maryland is a regional initiative of the Startup America 

Partnership, and it is a great example of incredible things being accomplished through grassroots efforts. Organized BY entrepreneurs, FOR entrepreneurs we are very-much a startup ourselves: we are all putting in a great deal of time without getting 

paid as we have no money and no resources. However, that’s never 

SBREP-219 with DISTILLER

30 

stopped an entrepreneur and isn’t stopping us. Our focus for 2013, 

as shared at a White House briefing in February, is to leverage the 

unique assets of Maryland to provide entrepreneurial companies 

with the connections, coaching and capital they need to start and 

grow while celebrating the entrepreneurial journey. This will provide them with an UNFAIR ADVANTAGE, ultimately increasing 

the rate and scale of successes. 

In 2012 we conceived of and executed a bus trip across the state 

called Pitch Across Maryland that connected entrepreneurs with 

the resources they need to be successful. The tour—which made 25 

stops through all corners of the state—was created as a way to connect entrepreneurs with each other as well as state, regional, and 

local resources while also shining a spotlight on entrepreneurship 

through celebration and awareness. 

Pulling off something of this magnitude with a scant two months 

of planning required collaboration with key sponsors at each tour 

stop. A combination of universities, community colleges, incubators, 

and economic development agencies stepped up and customized the 

message and approach for the bus’s visit to meet their community’s 

needs and pulled in their local businesses to support and celebrate. 

Working through both our network and those of our state-based 

partners, we were able to exceed expectations in number of entrepreneurs reached and still hear stories of valuable connections that 

were made as a result of the tour. 

The most impactful outcome for many has been the connections 

that developed between the entrepreneurs themselves. Grateful to 

have an opportunity to share their passion for their ideas and businesses, the entrepreneurs we met along the way used words like 

inspired, exhilarated, motivated, and we can’t leave out—relieved— 

to describe how they felt after their experience on the bus. They 

were exited to be connected to each other and to something bigger—the community of entrepreneurs assembling as Startup Maryland as well as their peers across the country through the Startup 

America Partnership. A specific example of a fruitful connection resulting from the tour was the partnership between Startup Maryland and local startup CoFounderLab. CoFounderLab created a 

platform that is the e-Harmony of startups, helping entrepreneurs 

to build teams. Startup Maryland is now providing this service to 

the community. 

Maryland Center for Entrepreneurship 

Bringing together a community of entrepreneurs was also exactly 

what I was hired to do when the Howard County Economic Development Authority, under the leadership of County Executive Ken 

Ulman, formed the Maryland Center for Entrepreneurship, or 

MCE. At the MCE, we are leveraging our resources and programs, 

such as a technology incubator called the Innovation Catalyst 

(iCat), a Speaker Series and an innovative program called the Race 

for Innovation with the goal of ensuring members of the ecosystem—entrepreneurs, innovators, investors, mentors and service 

providers—are not only getting connected but are engaging with 

each other in meaningful ways long before they need to pursue forSBREP-219 with DISTILLER

31 

1Federal Labs Consortium, http://www.federallabs.org/labs/results/?State=141 

mally working together. For example, we’ve had mentors end up investing in or taking a position with our companies, strategic partnerships being formed, and companies finding new clients via the 

relationships they’ve built through the community. 

Creating a Culture of Entrepreneurship 

Another key need in fostering innovation and entrepreneurship 

is promoting a culture that supports it. Stoking the entrepreneurial 

mindset runs through everything we do at both Startup Maryland 

and the MCE but our environment doesn’t make it easy. Maryland 

has over 15 academic institutions led by world-class innovators and 

commercialization leaders Johns Hopkins and University of Maryland. We have the highest concentration of employed doctoral scientists and engineers and opportunities for high-quality jobs at the 

approximately 20 government agencies and over 50 federal labs 1 in 

our state. Unfortunately, these assets can provide significant career 

and earning opportunities that mark a stark contrast to the realities of lean earning while starting up a business. Additionally, 

some places consist of an environment which encourages a mindset 

that can counter and even deter people from considering entrepreneurship as a career option. Continuing to promote not only entrepreneurial successes and failures alike will make entrepreneurial 

role models and realities more readily available and accessible. 

This is especially crucial among under-represented groups and by 

offering programs to specific affinity groups such the ACTiVATE® 

entrepreneurship program for mid-career women and the veteran’s 

entrepreneurship program, both supported financially in part by 

private company sponsorships, the MCE is actively working to 

spread the culture of entrepreneurship beyond traditional boundaries. 

Funding Innovation 

A business has no chance of being successful if it can’t bring in 

money from either customer-based revenues or outside capital (dilutive and/or non-dilutive). There are many examples of state and 

local funding made available to innovators and entrepreneurs, but 

more can be done. For example, many rapidly developing innovations rely on and could benefit from the federal Small Business Innovation and Research (SBIR) grants but the time and complexity 

to apply for and receive these monies is often untenable for a startup who needs to move fast to take advantage of market conditions. 

Currently, there is also a large and growing gap between idea 

conception and sustainable sales that every company must go 

through and many don’t survive without funding. Called ‘‘The Valley of Death’’ (one of many for a growing company), it is imperative 

that we help companies bridge that gap with more seed-level and 

pre-revenue funding including access to potential customers, large 

and small. One of the ways Maryland is helping companies to cross 

that chasm is through the $84M InvestMaryland fund that was 

created by offering insurance companies tax credit. This fund is 

SBREP-219 with DISTILLER

32 

being deployed across the state to be used to fill the funding gap, 

but is still too new to quantify the results. 

Call to Action - What Can You do? 

The work of this Subcommittee is important. Having me and my 

colleagues here today, shows you care about entrepreneurship and 

innovation and hopefully appreciate its importance in driving our 

economy. You are allowing us an opportunity to give voice to all of 

those entrepreneurs who need a chance, like Vasoptic Medical who 

is putting the ability to detect the onset of diabetes-induced blindness in the hands of primary care physicians; Unbound Concepts, 

who is helping level the literacy playing field by getting tools into 

the hands of educators; and Raymond Cooper, whose innovation 

could provide a huge leap forward in the adoption of wind-based 

energy solutions. 

It is crucial that we continue to support these nascent companies 

and I respectfully offer the following recommendations: 

1. Provide outlets to spread the word about entrepreneurial 

successes and failures, creating more visibility for role models 

and reinforcing the value of an entrepreneurial mindset. 

2. Simplify the federal SBIR process to get much-needed 

funding into the hands of the start-ups more quickly. This 

could be an ideal project for members of the Presidential Innovation Fellowship. 

3. Encourage and expand seed and early-stage investments 

that may be more risky than what a bank would take on, even 

with backing from the Small Business Administration (SBA). 

Example programs could consider tax credits for seed-stage investors (including the entrepreneurs themselves). 

4. Facilitate key decision makers in the public and private 

sector sharing their needs with innovative companies. This 

outreach could also create a forum whereby innovators share 

their concepts with CEO’s and Directors as they explore various types of partnerships that could help drive increased revenue. 

5. Create a start-up friendly track to permanent residency 

for foreign nationals who obtain advanced degrees in the 

United States, particularly those start-ups that have independent backing from, for example, the SBIR program, an SBA 

loan, adequate angel or VC investment. 

Thank you again for the opportunity to share my experiences and 

thoughts around innovation as a job creator and I look forward to 

answering your questions. 

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STEVE JOHNSON TESTIMONY BEFORE THE U.S. HOUSE 

COMMITTEE 

ON SMALL BUSINESS, SUBCOMMITTEE ON ECONOMIC 

GROWTH, 

TAX AND CAPITAL ACCESS: APRIL 18, 2013 

Chairman Rice, Members of the Committee, ladies and gentlemen: 

My name is Steve Johnson and I am President and CEO of 

CreatiVasc Medical in Greenville. Our company began full-time operations in 2007 and we are focused on developing medical device 

innovations for one of the most expensive chronic diseases: End 

Stage Renal Disease, or kidney failure, which now represents over 

a $47 billion burden on our healthcare system. These patients must 

rely on dialysis to live but this costs over $86,000 per patient per 

year. It is also a field that has had little innovation in over 30 

years. 

CreatiVasc developed and now has in clinical trials at Johns 

Hopkins an innovative device called the Hemoaccess Valve System® which has the potential to significantly reduce the complications and cost of dialysis. 

Last year, CreatiVasc was selected by the FDA to be one of the 

three inaugural companies in the agency’s new Innovation Pathway 

program which is designed to accelerate the clinical testing and approval of promising new technologies without compromising patient 

safety. 

Our company is in South Carolina, which has been traditionally 

viewed as a ‘‘fly-over state’’ when it came to innovation: you flew 

over us to get somewhere else like Research Triangle, Palo Alto or 

Boston. Now, we are proud that South Carolina is quickly becoming a ‘‘destination site’’ for innovation. Over the last 6 years, over 

280 technology-based companies started up in our state. 

What has caused this dramatic change? 

One major stimulus has been a program created by South Carolina Research Authority (or ‘‘SCRA’’) called ‘‘SCLaunch’’—and while 

the state of South Carolina fostered the creation of this program, 

not a penny of state funding has supported it. This SCRA program 

provides tax incentives to encourage private donations which are 

used to support early-stage innovation in our state. This SCRA 

early-stage funding is provided only after extensive and rigorous 

scrutiny of not only the technology but its management team, its 

competition and patents as well as its path to market. 

Early-stage SCRA funds have triggered over $220 million in follow-on capital from angel and venture capital investors, and Forbes 

magazine named it as one of the top five economic programs in the 

nation. 

The SCRA program recognizes that capital is the fuel that drives 

the economic engine. Capital transforms ‘‘technology’’ into ‘‘prodSBREP-219 with DISTILLER

34 

ucts.’’ This then translates into manufacturing which generates 

jobs. But something has to prime that pump—and most times, traditional soucres of capital such as banks and now even venture 

capital funds, want to avoid the risk of early-stage technology 

start-ups. Programs like SCLaunch fill that vacuum. Without this 

program, most of these innovation startups, including our own company, would not exist. 

As a native South Carolinian, I fully recognize that our state has 

rarely been at the top of any ranking. We usually come in 48th or 

49th. But that is rapidly changing when it comes to encouraging, 

supporting and creating new companies with breakthrough innovations. 

Innovation is the key to economic growth because it is how we 

can compete in a global marketplace. It is also how we create good, 

high-paying jobs here at home. But for innovation to succeed, there 

must be adequate capital to mature these inventions from the lab 

to market. I can tell you from personal experience that the greatest 

challenge is to find long-term funding. Even though CreatiVasc was 

fortunate enough to be selected by FDA to be one of the top three 

innovations for one of the most expensive chronic diseases, it is 

amazingly difficult to find capital, especially for medical devices 

which take years to develop, test and get to market. 

This is the opportunity for the future: to provide attractive incentives that secure private investment to support innovative but maturing technologies. 

Thank you for this opportunity to speak about something that I 

feel very passionate about—and I look forward to your questions. 

April 18, 2013 

Contact information: 

Steve Johnson, President & CEO 

CreatiVasc Medical Incorporated 

330 East Coffee Street 

Greenville, South Carolina 29601 

864–242–4700 

www.CreatiVasc.com 

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SBREP-219 with DISTILLER


Insert offset folio 35 here 80821.002

330 East • Suite 4063' 

I. COMPANY INFORMATION 

South Carolina 29601- 864·242·4700' Fax: 

www.CreatlVasc.com 

Founded in CreatiVasc Medical is a medical device in SC that 

developing innovations to address the growing population and rising cost of End Stage Renal 

Disease (ESRD) patients, the vast majority of whom rely on dialysis to live. ESRD costs the 

U.S. healthcare system $47.5 himon unnually, according to the Renal Data 

This figure will increase as the population ages aud the incidence of 

hypertension and ohesity continues to increase. it a field that has had little innovation 

over the 30 years to address the universal and repetitive complications that every ESRD 

patient faces. CreatiVasc innovations have been recognized hy the 

Channel and three DC\oiHe lnnoVisio[] Awards. In 2012, CrcatiVasc and 

tlagship innovation, the Hemoaccess Valve Syslem® was named by FDA to he 

of inaugural the agency's Innovation 

Pathway program, designed to inllovatiolls for End Stage Renal to 

the market as quickly as possible without compromising paticnt safety. Dr. Jeffrey Shurcn, head 

of FDA's division, cited CreatiVasc in his keynote comments to the Fehruary 

Association (SEMDA) in Atlanta. 

II. THE CLINICAL PROBLEM 

insight into the scope of End 

650,000 in the with over 450,000 of 

the graft creates of costly) problems 

(clotting) the graft. post-dialysis bleeding, pseudo aneurysms in the and arterial 

blood steal from the extremities leads to loss of circulation in the hands or feet. 

Gangrene amputation of 

According to May 2009 

require some lype of 

extremities are frequently the fate of these ESRD patients. 

months after implantation. is not only expensive hut severely compromises 

quality of life. Through a of attempts have been to improve 

A V gran functionality and reliability including blood-thinning agents. 

radiation, ultrasound and graft design. None have heen The "holy of dialysis 

been to "an on-off switch" to this tube, allowing blood to selectively flow through 

only when it needed then off afterward, restoring normal blood 
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now to the artery and except for the hours per week when is needed for dialysis. 

This has never been achieved, until the CreatiVasc inllovation. 

HI. THE CREATIVASC INNOVATION 

The CreatiVasc Hemoaccess Valve System (HVS) provides that "holy 

grail" of dialysis: an on-off switch for an A V graft. Tum the blood on 

when you need it for dialysis. Tum it off afterward. The company 

looked at the challenges of A V grafts from an 

perspective: utilize a simple mechanical valve system that closes off 

the graft to blood flow at the conclusion of dia!ysis then up 

to blood for dialysis 48-72 hours later. The components of 

the CreatiVase HVS device can be seen to the right: 

The device implanted concurrently when A V graft 

vascular or general surgeon who experience with A V 

find the HVS device very intuitive to implant with the graft. The HVS 

consists of a main body with a silicone port which allows of 

saline to be injected to inHate two balloon valves at the arterial and 

venous ends shown in the valve images to the right. 

This immediately seals offthc graft and restores the blood's normal 

pathway to the and the first time, an A V graft now has 

an "on-off switch.") Once the HVS valves urc activated at the 

conclusion of the dialysis needles and blood lines 

graft. At that point, saline bag is then connected to 

line while sterile flush hag is connected to the venous line. 

Saline flushes through the closed A V graft and removes any residual 

blood. Once this done, the dialysis needles arc removed and the 

patient can immediately leave clinic. closed graft images 

to the right: 

When the patient returns for 

aspirated the 

as shown in the image to 

only when is needed for dialysis 

These include: 

" No post·dialysis bleeding: Currently patients stay in the 15-30 minutes 

and clinic. 

dialysis is concluded before bleeding stops from where the dialysis needles were inserted. 

This is hard on the patient dialysis With the HVS 

because there is no blood flowing through post-dialysis hleeding is 

eliminated comt)lcltel·,. 
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• No internal graft thromboses: Because no blood is in the graft after the HVS valves 

tightly seal it off to hlood now. there is little chance for internal graft thromhosis or 

clotting, Only sterile saline resides in the graft between dialysis sessions, 

• No arterial blood steal: By adding the "on-off switch" to the AV graft, blood flow is 

restored to normal path in the artery and vein, The hlood is no longer diverted through 

the graft except when it is needed for dialysis. By restoring norma! hlood flow, this 

eliminates the potential for arterial blood steal which is usually caused by the diversion of 

blood from the extremities to the graft 

For the first time, the CrcatiVase Hemoaccess Valve System provides that "on-off switch" to AV 

In so doing, it provides a wide range of benefits, not only to the patient and the dialysis 

clinic but the potential to significantly reduce costs associated witb the universal complications 

of those grafts. 

IV. THE HISTORICAL ENVIRONMENT FOR INNOVATION IN SOUTH CAROLINA 

Traditionally, South Carolina has been viewed as a "fly-over" state when it came to innovation. 

Investment groups or major companies looking for innovations to acquire new over South 

Carolina on their way to Research Triangle, Boston or Palo Alto -, historically the hotbed of 

innovation, especially in thc life scicnce field (medical devices. pharmaceuticals, medical 

diagnostics, or agricultnrally-derivcd fuels or chemistry), While South Carolina had excellent 

research universities, it was not known for getting those innovations out of the lab and into sta11-

up companies that transformed "technologies" into ,. The state was frequently the 

brunt of jokes since it was almost always 49th or most "mnkings" whether those 

measurements evaluated education attainment, innovation, or the health of its citizens. Twenty 

years ago, things began to change the was successful in landing major international 

companies who huild Nort.h American high-tech manufacturing sites. Michelin, BMW and most 

recently, Boeing, now have made major manufacturing investments in the billions ,md are major 

employers in the state, 

But the state was not producing its own "internally developed" high tech companies. While 

work underway its research universities and many inventors were creating 

breakthrough innovations within the state, there was no pathway for these innovations to make it 

to the market. Over the last six this has changed dramatically, Over 280 tcchnologyhased companies started up in South Carolina over the last 6 years perhaps one the worst 

economic environments since the Great Depression, 

V. CAUSES FOR THE INNOVATION BOOM IN SOUTH CAROLINA 

This major blossoming of innovation in South Carolina has root causes, 

Perhaps the most significant stimulus came from South Carolina Research 

Authority (SCRA). a private SOl(e)3 technology developer and management 

company, SCRA took $12 million of its retained earnings and worked with the 

state legislature to create The Industry Partnership Fund to spark the South Carolina 
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Economy, No tax funds, federal or statc, were used to create this fumL 

donations were encouragcd by contrihutions to the Fund. A cap of 

$6 million was set (and stiil remains) on quickly 

funded within used 

for new start -up 

lip to loans!convertible 

often al a multiple 

""'c>ct,",,,pnt is done without extensive and scrutiny of not only of 

of solid success to which can 

state hut around the 

of 

the natioll, 

SCLaUllch I",I110.1/,'n1011 

• Numher that 280 

$ Amollllt of follow-on capital secured by portfolio companies from 

$220,000,000 

.. jobs created hy the program: 

.. SBIRISTTR 

.. ccnterslincuhators 

VI. STRATEGIC IMPORTANCE 
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significantly changes the technical landscape to solve a problem) is often trapped on the shelves 

of research universities or in the minds of inventors who have no understanding of how to: 

• Critically evaluate their idea 

• Pursue intellectual property protection for their idea 

• Write a business plan 

• Secure and manage capital 

• Interact with the applicable regulatory agencies, such as the FDA, to secure clearance to 

sell their product in the marketplace 

Discipline is needed in this process: supportive but critical eyes taking a hard look at what the 

innovation is and how it could be translated into a finished product in the market. SCRA has 

recognized that the economic impact of technology comes from where it is applied, not from 

where it is developed. The SCRA program provides this independent and critical evaluation of 

what appear to be promising technologies, then guides the inventor or inventing company 

through the maze of startup, confirmation of the value of the technology and finally into a 

finished product. 

SCLaunch capital, though not huge, has made the difference between success or failure for 

scores of companies in South Carolina. When a technology gets out of the lab and into a 

finished product, this translates into manufacturing which generates jobs. But something has to 

prime that pump - and most times, traditional sources of capital such as banks and now even 

venture capital funds, want to avoid the risk of early-stage technology start-ups. They want as 

close to 100% assurance of success and return on investment as possible. As a result, these 

organizations are avoiding higher risk (yet higher reward) technology start-up companies like 

CreatiVasc. Programs like SCLaunch fill that vacuum. Without this program, most of these 

innovation startups, including our own company, would not exist. 

South Carolina has rarely been at the top of any ranking, usually coming in at 48th or 49th 

whether the measurement has been graduation rates, rural health care, or personal income 

ratings. But that is rapidly changing when it comes to the encouragement, support and creation 

of new companies with breakthrough innovations. 

Innovation is the key to economic growth because it is how we can compete in a global 

marketplace. It is also how we create good, high-paying jobs here at home. But for innovation 

to succeed, there must be adequate capital to mature these inventions from the lab to the market. 

The greatest challenge for most of these companies is access to adequate capital, especially for 

those companies that are not in Palo Alto or the Boston or Minneapolis innovation corridors. 

Even though CreatiVasc was fortunate enough to be selected by FDA to be one of the top three 

innovations for one of the most expensive chronic diseases, it was amazingly difficult to find 

capital. This is especially true for medical devices which take years to develop, test and get to 

market. 

This is the opportunity for the future: to provide attractive incentives that secure private 

investment to support innovative but maturing technologies. 
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THE DIRECT COSTS FROM NPE DISPUTES 

Boston University School of Law Working Paper No. 12-34 

(June 25, 2012) 

Revised June 28, 2012 

James Bessen 

Boston University School of Law 

Michael J. Meurer 

Boston University School of Law 

This paper can be downloaded without charge at: 

Electronic copy available at: hltp:llssrn.comlabstract=2091210 
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The Direct Costs from NPE Disputes 

By James Bessen and Michael]. Meurer (Boston University School of Law) 

6/22/12 

Abstract: 

In the past, "non-practicing entities" (NPEs), popularly known as "patent trolls," have 

helped small inventors profit from their inventions. Is tlus true today or, given the 

unprecedented levels ofNPE litigation, do NPEs reduce innovation incentives? Using a 

survey of defendants and a datahase of litigation, this paper estimates the direct costs to 

defendants arising from NPE patent assertions. \Ve estimate that firms accrued $29 hillion 

of direct costs in 2011. Moreover, although large firms accrued over half of direct costs, 

most of the defendants were small or medium-sized finns, indicating that NPEs are not just 

a problem for large firms. 

We thank David Anderson and the staff at RPX for invaluable assistance. \Ve thank Brian 

Love, Michael Risch, and Catherine Tucker for helpful comments, and Cong '{ao, supported 

by funds from the Coalition for Patent Fairness, for able research assistance. 

Electronic copy available at: http://ssrn.comlabstract=2091210 
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Executive Summary 

This paper analyzes the direct costs of patent assertions by "non-practicing entities" 

(NPEs) against operating companies using a survey of defendants and a comprehensive 

database of NPE lawsuits. The main findings include: 

• NPE litigation is growing rapidly, affecting 5,842 defendants in 2011. 

• The direct costs ofNPE patent assertions are substantial, totaling about $29 billion 

accrued cost in 2011, including the costs of non-litigated assertions. This figure 

excludes various indirect costs to the defendants' businesses such as di,-crsion of 

resources, delays in new products, and loss of market share. 

• Much of this burden falls on small and medium-sized companies. The median 

company sued had $10.8 million in annual revenues. 82% of the defendants had less 

than $100 million in revenue and these accounted for 50% of the defenses. Small 

and medium-sized companies account for 37'Yo of the accrued direct costs. 

Moreover, compared to revenues, the direct costs of NPE patent assertions arc 

relaL1vdy larger for small companies. 

• \,\'c find little evidence that NPEs promote inyenL10n overall. Publicly-traded NPEs 

cost small and medium-sized firms more money than these Nl'Es could possibly 

transfer to inventors. This reduces the net amount that firms of any size have 

available to invest in innovation. 

• NPEs appear to be highly heterogeneous. Much of the litigation appears to consist 

of nuisance suits that settle tc)r a few hundred thousand dollars. But some NPEs are 

"big game hunters" who seek and get settlements in the tens or hundreds of million 

dollars. 

2 

Electronic copy available at: http://ssrn.comiabstract=2091210 
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Introduction 

\'(;'hat sort of costs do Non-Practicing Entities (NPEs) impose on firms targeted for 

the assertion of their patents? \\'hat do target firms spend on leg-,ll services and how much 

do they pay for licenses? And what sort of firms do NPEs target? \\?e present answers to 

these questions based on a unique survey of defendant companies and a comprehensive 

database ofNPE litigation. The survey, which covers 82 firms who mounted 1,184 defenses 

against NPE litigation, is unique in three ways. First, it includes defendant companies that 

are privately held, including small firms. Second, it reveals information about costs 

associated with cases in which NPE patents are asserted but which are resolved before a 

lawsuit is fIled. Finally, it prm-ides aggregated information about NPE patent license fees. 

These kinds of information have not been available, in part, because the terms of patent 

licenses are often secret, and in part beeause previous surveys have simply not asked about 

assertions that did not advance to the fIling of lawsuits. The costs disclosed by this survey 

are significant and should playa prominent role in policy debates about the treatment of 

NPE patent lawsuits. 

NPEs are individuals and firms who own patents but do not directly use their 

patented technology to produce goods or services, instead they assert them against 

companies that do produce goods and services. In the past, some NPEs have played a 

valuable role in bringing inno\-alions from small inventors to market. Some im"entors lack 

the resource,s and expertise needed to successfully license their technologies or, if necessary, 

to enforce their patents. NPEs provide a way for these inventors to earn rents tha~ they 

might not otherwise realize, thus providing them with greater incentives to innovate. But in 

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the past, also, some NpEs have used patents opportunistically. During the late nineteenth 

century, "patent sharks" were widely seen as extracting money from innocent individual 

farmers and railroad companies (Magliocca 20(7). 

However, while NpEs have been around for a long time, over the last few years, 

NPE litigation has reached a wholly unprecedented scale and scope (patent Freedom, 2012; 

RPX, 2(12). In 2011, 2,150 unique companies were forced to mount 5,842 defenses in 

lawsuits initiated by the actions of NpEs.' Moreover, the number of defenses has been 

growing rapidly (see Figure 1). Part of this growth has been fueled by new sources of 

funding and new business models. 

The costs born by defendants in these assertions are key to e\-a]uating the private and 

social impact of this new phenomenon. In previous research with co-author Jennifer Ford 

(Bessen et a1. 2011), we have estimated the total costs of NPE litigation for publicly listed 

firms using stock market event studies. This study complements our earlier study by 

obtaining estimates of the direct cost portion of total costs using data from a survey of 

defendants. 2 Direct costs include the cost of outside legal sen-ices, licenses fees, and other 

direct costs incurred in response to NPE litigation risk. \ 

This study also complements our earlier study by providing information on 

companies that are not publicly listed, including small companies. This information helps 

J These figures come from the RPX database described below. About 4°/0 of these defenses were mounted as 

declaratory actions rather than infringement suits; these were nevertheless init.iated by the NPEs. The figure for 

2011 feHcers, to some extent, an effort by I'\;PEs to initiate litigation before the ,\mcrica Invents .\cr rook 

effect, restricting multi-party la\vsuits. Nevertheless. the trend shown in Figure 1 illustrates rapid growth before 

2011. 

.:: The survey \vas conducted by RPX, a firm that helps companies manage risk from exposure to patent 

litigation. The Coalition for Patent Fairness reimbursed RPX for part of the expense of conducting this survey, 

, Indirect costs captured by our cyent study methodology include the opportunity costs of the effort exerted 

legal, managerial, engineering, and scientific personnel inside the firm, and other business disruption costs such 

as loss of goodwilL loss of market share, or disruption of innovati\'"c activities. 

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reveal the extent to which NPEs help small firms realize profits from their innovations and 

the extent to which small firms, to the contrary, incur costs as the targets of NPEs. 

literature Review 

Large scale NPE patent litigation is a recent deYelopment, thus the empirical 

literature is thin. Our NPE lawsuit event study is the most closely related piece of earlier 

research; in it we found that the annual wealth lost from NPE lawsuits was about $80 billion 

for publicly traded U.S. firms (Bessen et aL 2011). In theory, this cost could be composed 

mostly of transfers in the form of royalty payments to NPEs. Indeed, a number of papers 

argue that NPEs playa socially valuable role by enabling small inyentors to realize greater 

profits from their inventions (Hosie 2008, McDonough 2006, Shrestha 2010, Myh1"\'0ld 

2010, Morgan 20(8). These papers, howeyer, do not provide empirical evidence to support 

that assertion. 

Our 2011 paper rejected that possibility based on the evidence available to us; we 

concluded that much of the cost borne by technology companies as the\' defend against 

NPE lawsuits is a social loss and not a mere transfer. The sUl"\'ey results we describe below 

provide strong additional support for our view that much of cost imposed on defendants is a 

social loss. In particular, the current study finds that NPEs impose costs not only on large 

technology companies, but also on very many small and medium firms, making it eycn less 

likely that innmcative start-ups arc net beneficiaries of NPE activity. 

One other researcher has quantified the costs to defendants from NPE litigation. 

Catherine Tucker examines the effect of a lawsuit by an NPE (Acacia) against several firms 

that make medical imaging software. She compares the impact of the lawsuit on sales of 

both medical imaging and text-based medical software produced by the targeted firms. She 

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also compares the sales by the targeted firms to the. sales of medical imaging software made 

by other firms in the industry who were not targeted with a lawsuit. She finds that sales of 

medical imaging software declined by one-third for targeted firms. She attributes the sales 

decline to a "lack of incremental product innovation during the period of litigation," and she 

conjectures that incremental innm-ation was deterred bv concerns it would create additional 

risks in the on-going litigation. (Tucker 2011). 

Two other strands of previous research arc especially rde\-ant to this project. First, 

earlier work has quantified legal fees associated with patent litigation. We collected data 

about legal fees that were made public in court decisions concerning fee-shifting in patent 

cases (Bessen and Meurer 2012). L\lso, the American Intellectual Property Law Association 

conducts a biannual survey of its members and includes questions about fees in patent 

lawsuits (AIPLI\ 2011). The sources are helpful and we report some of their findings below, 

but they do not contain information about NPE litigation in particular, and they do not 

contain information about assertions that never reach the ftling of a lawsuit. 

"\ better-developed strand of literature reports \"arious characteristics of NPE 

litigation." \'i/hile not measuring costs, these studies do shed light on the question of whether 

the private losses to firms targeted by NPE patent assertions also tend to be social losses. 

The answer appears to be yes. NPE patent litigation has all the hallmarks of patent notice 

failure that distorts the patent system and makes it impede technological progress. In Patell! 

Failure (Bessen and Meurer 2(08) we show that the C.S. patent system works well for 

chemical and pharmaceutical inventions because the system provides clear notice to the 

world of the scope and existence of patent-based property rights. For most other inventions, 

'This includes .\llison et a1. (2010), Chien (2009), Love (2010), Risch (2012), Schwartz (2012), and Tucker 

(2012). (lther studies have looked at the characteristics ofNPE patents asserted in lawsuits, including Shrcstha 

(2010), ,\Bison et a!. (2009), Risch (2012), and Fischer and Henkel (2011). 

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especially software and business methods, notice failure means that innovative firms are 

targeted in patent infringement suits through no fault of their own. 

Notice failure is likely for NPE lawsuits. Sixty-two percent of the time they feature 

software patents (Bessen et al. 2011) which are notoriously difficult to interpret. Allison ct a1. 

(2010) study patents litigated multiple times and usually asserted by NPEs; they find that 

software patents account for 94'% of such lawsuits. The patents asserted in NPE lawsuits are 

often subject to lengthy prosecutions which delays public access to information about patent 

claims VUlison et aI., 2009, Love 2010, Risch 2(12). Rather than transferring technology and 

aiding R&D it appears that NPEs usually arrive on the scene after the targeted innovator has 

already commercialized some nc'.v technology (FTC 2(11). 

Data 

Survey 

Between February and April 2012, RPX invited about 250 companies to participate 

in a survey of their NPE-related costs. The pool of invitees included RPX clients and nonclient companies \vith whom RPX has relationships. Most invitees were technology 

companies, but certain non-technology companies with NPE exposure were also invited (for 

example retailers with e-commerce exposure). Participants provided information to the 

extent that doing so was consistent with their obligations to third parties. The information 

was aggregated and anonymized such that individual data was not disclosed.' 

Participants filled out a standardized Excel template that included a range of 

questions about their NPE-related costs. The instructions for the template asked that 

participants include certain statistics estimating all of their direct (external spend) NPEi "\lthough RPX provided data for this study, RPX did not exercise control ovcr the subslance of our text. 

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related costs from 2005-2011. 1\n NPE was defined to include patent assertion entities, 

individual inventors, universities, and non-competing entities (operating companies asserting 

patents well outside the area in whieh they make products and compete). This is the same 

definition of NPE used on the NPE Lawsuit Database (see below). 1\ list of each 

participant's NPE litigations from that database was provided to ensure alignment between 

the survey response and database. Templates were submitted by email or directly into a 

secure online data room. To the extent possible, an RPX study team reviewed the 

submission for quality and completeness. If needed, the company was asked certain followup questions. Finally, RPX aggregated the submitted data within a secure computing 

environment. The resulting dataset forms the basis of the data tables provided in this 

document. 

Of the 250 companies invited to participate, 82 provided data on !a,vsuits and of 

these, 46 also provided data on non-litigation patent assertions and related costs. 

NPE Lawsuit Database 

In addition to the survey, we also used a comprehensive database ofNPE litigation 

developed by RPX. These NPE litigation statistics are based on cases coded "830 Patent" in 

the PACER database which is maintained by the Administrative Office of the C.S. Courts." 

[n case counts, RPX excludes misftles, non-patent, false marking and other non-core patent 

infringement cases. \Vben a case is transferred, RPX counts it as one case and allocates it to 

the venue to which it was transferred. \,\'hen several cases are consolidated into one, RPX 

counts it as one case but with multiple defendants. When a case is severed RPX counts it as 

separate cases. In defendant counts, RPX rolls up operating company subsidiaries into a 

(, This database does not include patent disputes before the lnternational Trade Commission. 

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parcnt entity (Samsung Group and Samsung Electronics count as one defendant). 

Declaratory actions are included in case counts unless otherwise noted. 

RPX defines NPEs as discussed above and identities NPEs through a manual review 

process. In this review process, RPX reads patent complaints found in PI\CER and checks 

information in the complaint against its NPE database. RPX also checks its database of 

plaintiff counsel, searches public tilings and performs web research. Some of the factors 

they consider when determining whether a company is an NPE (or more specifically a patent 

assertion entity "PAE") include: Is the entity the same as or share a substantial financial link 

with a known PAE? Is there any e\'idenee that the company sells a product or offers a 

service? Does the entity webpage prominently mention technology, licensing, and patents; 

and not offer a product or sales? Does the complaint indicate whether the entity has a 

product in-market or in-development that is being harmed by infringement? Are the lawyers 

involved known to specialize in representing NPEs? Is this entity known as an NPE or as an 

established operating company?' 

Sample characteristics 

Table 1 compares characteristics of the survey sample with RPX's database of NPE 

lawsuit defenses. Data for the survey are on the left while data for the entire database of 

NPE defenses are on the right. The 82 surveyed companies collectively mounted 1,18~ 

defenses in NPE lawsuits beginning bet,vcen 2005 and 2011. Of these, 78~, or 66%, were 

resolved by adjudication or settlement and did not involve indemnification or other factors 

that cause costs to be atypical. 

There are a range of views among scholars and policy-makers about the appropriate definition of NPE, and 

different analysts afC likely to assembly different NPE litigation databases. Based on our experience researching 

patenr litigation, \ve believe that the RPX dafabase yields statistics that are consistent with information about 

l\PE patent litigation [rol11 other sources. 

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Notc that a possible truncation bias arises because so many lawsuits were unresolved 

at the time of the survey. Because lengthier disputes tend to be more costly, at least as far as 

legal costs are concerned (Kesan and Ball 2005), and because the number ofla\vsuit tilings 

has risen sharply in recent years, cost estimates based only on resolved lawsuits might be 

understated. 

\X'c divided the companies into sub-categories based 011 their revenue in the most 

recent year reported. \'<;'e categorize companies as small, medium or large depending on 

whether reported revenue for the most recent year is less than $100 million, between $100 

million and $1 billion, or above $1 billion. The $100 million revenue cutoff for small 

companies corresponds roughly to 500 employees, which is the cutoff used by the US Patent 

and Trademark Office and other government bodies to categorize small companies. \'{'hile 

we have revenue data on all of the companies in the survey sample, the RPX database 

reports company rc\-enue tor only 7-+% of the defenses. These data come from public 

reports and from Dun and Bradstreet, which estimates revenues for private companies. It is 

thus likely that almost all of the companies without reported revenue are small companies. In 

much of the analysis below, we explicitly assume this to be the case. This assumption is 

conservative in that it results in a lower estimate of aggregate costs of litigation. 

We also divided companies into two broad industry sectors depending on whether 

they were in the broad software industry, including c-commcrcc and finance, or instead in a 

hardware industry (everything else).' The latter distinction might be signitlcant because most 

K To preserve data confidentiality, statistical analysis was performed by RPX personnel working under our 

direction. 

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hardware industries involve greater sunk capital costs than do software industries or finance 

and for this reason hardware industries may be more at risk of hold up." 

The right panel shows that small and medium firms dominate the universe of NPE 

defendants. Small and medium-sized companies make up 90% of the defendant t1rms, 

mounting 59% of the defenses. Firms making less than $100 million in revenue aecount for 

82% of the defendants and 50% of the defenses, assuming that t1rms \\/ith unreported 

revenue are small.'" The median revenue of a defendant company reporting revenue is $10.8 

million. 

As the Table shows, our survey sample consists of companies that are larger, more 

likely to be public and which experience relatively more lawsuits than the average NPE 

defendant finn. In the rows that control for size and industry sector, survey firms appear to 

experience about twice as many lawsuits as companies in the comprehensive database. This 

is not surprising, however, it raises the possibility that our sample might be unrepresentative 

of the broader population, possibly experiencing costs that are greater or smaller than those 

of the universe of sued companies. Below we do a check on legal costs to test whether the 

survey appears to have unrepresentative costs. 

'J Readers should be mindful of 'he distinction between 'he indust,,· of the defendant and the technology 

covered br the patent asserted by the NPE. In particular, it is important to recognize that problematic software 

patents are often asserted against hardware manufacturers. 

III If, instead, we look only at firms \vith reported revenue, 66% arc small, accounting for 33~'() of the defenses. 

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Findings 

Mean and median costs 

Table 2 provides estimates of mean legal" costs, licensing costs and total costs (the 

sum of these) \vith standard errors in parentheses. The table also shows median costs. 

l\Iedian total costs per litigation defense fall roughly around half a million dollars, 

smaller for small and medium firms, larger for big ones. llowever, mean total costs are r11lfd, 

higher, nearly eight million dollars for our survey sample. This difference implies that the 

distribution of costs is highly skewed, as we explore below. Thus one must be particularly 

careful in extending judgments about the costs of litigation based on small samples. \v'hile 

"typical" costs might only be a few hundred thousand dollars, mean costs-ret1ecting the 

large costs in a small number of very costly lawsuits-are an order of magnitude higher. 

Mean total costs are, not surprisingly, significantly greater for large companies than 

small and medium companies. This difference is significant at the 1 % level. 

The first column reports the legal component of costs. Mean legal costs per defense 

range from $420,000 for small/medium companies to $1.52 million for large companies. 

Column 2 of Table 2 reports the dollar amounts paid to the plaintiff to settle the 

case.'2 Column 3 reports the (ota1 costs, the sum of legal and settlement costs. The mean 

settlement costs for small/medium companies afe $1.33 million and for large companies, 

It In the survey estimated legal costs for a particular case were specified as; «\~ alue of any legal costs related to 

this mattcr through December 31, 2011. Include outside counsel (lead and local), experts, discover\, costs, prior 

art searching, jury consultants, graphics, other expenses, and other related costs. lnclude any costs that were 

ult.imately recouped or expected to be recouped by indemnification agreements or other mechanisms. Exclude 

in-house legal costs." 

12 In the survey estimated settlement costs for a particular case were specified as: "\Talue of settlement. If a 

running royalty, estimate the present value of royalties. If there \vas an exchange of patents or other nonstandard deal structure then estimate expected present value cost of that deaL." Settlement costs include 

d;unage awards in a small nUfllber of cases. 

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$7.27 million. Mean total litigation costs are $1.75 million for small/medium companies and 

$8.79 million for large companies. 

Legal costs are about a third as large as settlement costs, or about one quarter of 

total litigation costs (slightly larger for small/medium companies). U This implies that a 

substantial part of direct costs ofNPE litigation is a deadweight loss to society.' I For the 

median case, legal costs arc roughly equal to settlement costs. 

Also note that NPE litigation is relatively more costly to smaller companies. In our 

sample, the large company litigation costs were five times as high as small/medium company 

litigation costs. But (see Table 1) the mean revenue of large companies in our sample is 

nearly seven times the mean revenue of the small and medium companies. This means that, 

roughly speaking, smaller companies pay more in direct NPE litigation costs relati,"e to their 

stze. 

Hardware firms have higher costs than software firms. This difference is significant 

at the 5% level. Since hardware firms generally have greater sunk costs than software firms, 

this difference is consistent ,vith the interpretation that hardware firms are more easily 

subject to holdup and hence they have to pay more to settle litigation. 

Comparison to other studies 

As noted above, the survey sample was not randomly selected and hence it could be 

unrepresentative. In particular, it might be that survey respondents tended to be firms \vith 

higher than average litigation costs. 

I) \"Veighting the ratios in Table 2 to represent the relatiyc weights of small and large companies in the total 

database, legal costs are 23l~/() of the total and licensing costs arc 77~/o. 

I"' The indirect costs ofNPE lawsuits, such as those measured by Tucker (201 I) and Bessen ot aL (201 I) are 

likel~· to be a more signit1cant source of deaJ\vcighr loss. 

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\Ve can check the representativeness of our sample by comparing our findings to 

other empirical evidence. In particular, legal costs can be compared to estimates derived 

from two other sources. First, AIPLA conducts a bi-annual sUITey of its members who 

estimate typical legal costs through discovery and through trial. They report these estimates 

for three categories of patent lawsuits depending on the amonnt at issue in the controversy, 

specifically, whether the amount at issue is less than $1 million, between $1 million and $25 

million, and greater than $25 million. The first and third categories provide the ranges shown 

in the addendum to Table 215 Few patent lawsuits go to trial (Kesan and Ball 2005), so the 

figure for costs through discovery is probably closer to the mean cost for patent litigation. 

On this basis, the AIPL\ cost estimates are comparable or even higher than the mean cost 

estimates from our sUITey. 

\'Cc also compared the sUITey means to means from 137 cases where one party in a 

lawsuit had been reguired to pay the others' legal fees. These were for cases between 1985 

and 2004 (Bessen and l\leurer 2012). Converted into 2011 dollars, the cost for lawsuits that 

ended in summary judgments was $840,000; the cost for those that ended in a trial verdict 

was $3.64 million. Since most lawsuits are not setrled by an initial summary judgment but are 

settled before trial, mean legal costs should fall between these tlgures. ,-\gain, the SUf\"cy 

estimates seem broadly comparable. This suggests that our survey sample is not 

unrepresentative. 

It is possible, of course, that our sUf\'ey might report representative legal costs but 

unrepresentative licensing costs. This might happen, for instance, if our sUf\"ey overrepresented hardware companies who tend to have relatively higher licensing costs. 

I Iowever, Table 1 suggests that the share of hardware firms in the SUf\'ev roughly matches 

1.'> For the middle range, the estimated costs are $1.6 minion through Jiscoycry and $2.8 through triaL 

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the share in the universe of NPE defendants found in thc database. Gcnerally speaking, 

firms with highcr licensing costs will tend to have higher legal costs, all else equal. This is 

because firms facing a large payout can typically reduce the payout or the likelihood of 

having to pay damages in trial by mounting a more aggressive (and more expensive) legal 

defense. That said, we cannot be certain that our estimates are representative, nevertheless, 

the representativeness of our legal cost estimates provides some comfort that licensing cost 

estimates are not too far off. 

The distribution of litigation costs 

Sample means do not capture the distribution of costs. In fact, litigation costs are 

highly heterogeneous. Figure 2 shows cumulative distribution plots of total litigation eosts 

for the small/medium and large companies in our sample. The smooth curvcs rcpresent 

lognormal distribution functions fitled to the data. 

As can be seen, the distribution is highly skewed. The median total litigation cost for 

small/medium companies is $318,000 and for large companies it is $646,000. A large 

fraction oflawsuits cost less than $200,000. But a small number of lawsuits cost much, much 

more. For large companies, 5% of the lawsuits cost more than $22 million. 

This heterogencity likely arises in part from variation in NPE tactics. Schwartz (2012) 

reports that some NPEs pursue nuisance suits in which they sue many companies, big and 

small. Plaintiffs using this tactic are willing to settle for small payments, of len no more than 

the amount a defendant would spend on legal fees to defend the case. 1\S one such plaintiff 

lawyer put it, "An NPE intuitively understands that we could go for triples or home runs, 

but we can also go for singles and get a good return and work on other things (Schwartz 

2(12)." Alternatively, NPEs may act like big game hunters, targeting only one or a few firms, 

but hoping to ,'lin tens of millions of dollars. The lawsuit hy NTP against BlackBerry maker 

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RIM is a good example. NTP asserted patents of doubtful validity but managed to win at 

trial and obtain a setdement of $612.5 million from RIM (Bessen and Meurer, 2006). The 

survey data does not permit us to clearly identify NPE tactics, but it does suggest that NPE 

activity is not uniform. 

\'(;'hile there are far fewer suits initiated by "big game hunters," they represent a 

disproportionate share of the cost. The distribution of costs is such that the top 5% of 

defenses for large companies account for about two thirds of the total cost of defense for 

large companies. 

Costs from cases settled without litigation 

Many NPE patent assertions are setded \vithout a lawsuit being filed. To gather 

information on non-litigated assertions, the sUf\-ey also asked a series of questions regarding 

these. Rather than count assertions, the SUf\'ey asked respondents to report cumulative costs. 

Most reported costs for the period from 2005 - 2011, but some did not have data for the 

entire period. Moreover, oruy 46 of the companies completed this section of the survey. 

The costs of assertions settled \vithout litigation consist mairuy of legal fees and 

settlement costs paid to patent holders. They also include smaller amounts spent on NPEspecific patent buying programs (including RPX services), on NPE-specitlc clearance 

searches and on re-examinations ofNPE patents. 

The means of these components are reported in Table 3 along with the cumulative 

litigation costs incurred by these same companies. For the sample as a whole, NPE costs 

from cases without litigation were about half of the comparable costs of litigated cases. For 

small/medium companies, in particular, however, costs of non-litigated cases exceeded 

litigation costs. This might be because smaller firms lack internal legal resources, making it 

relativelv more expensh-e for them to pursue litigation. Also, costs of non-litigated cases 

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were higher relative to litigation costs for hardware firms, perhaps again because hardware 

Enns, being more at risk of hold up, find it less costly to settle sooner. This difference is not, 

however, statistically significant. 

In any case, it is clear that non-litigated patent assertions are responsible for much of 

the direct costs imposed by NPEs on operating companies. In this regard, it is likely that our 

sample under-represents these cost because we have only surveyed companies that have 

been ilwolved in litigation. That is, we have not included potentially large numbers of small 

companies that have only settled NPE patent assertions and have not gone to court. 

Anecdotal evidence from small companies suggests that there might be very many such 

finns and their costs are missing from our analysis. 

Aggregate Costs of NPE Assertions 

Aggregation 

\Vhat is the aggregate cost of NPE patent assertions, including both litigated and 

non-litigated assertions? To estimate this, we began by estimating the mean cost of resolved 

litigation for small/medium firms and for large finns. We could have directly used the data 

in Table 2, however, this might overstate costs because the average small/medium firm in 

our survey sample is larger than the average small/medium finn in the entire database 

Table 1).1(, To correct for this "W1thin-category variation, we regressed log cost against log 

revenue for the survey sample and, using this, computed the predicted mean cost over the 

actual distribution in the database for each size category.17 In using these means, we assume 

1(, In Get, we calculated aggregate costs using the data in Table 2, including the so[t:\varc/harchvare categories, 

These estimates came out about 5-10~:o higher than those reported in Table 4. 

II Regressions are reported in the ,,-\ppendix. \Vc used a regression t"hat also included a dwnmy "ariable for 

firms with less than $100 million in revenue in order to capture a non-linearity in the relationship bcn.{reen log 

cost and log revenue, The predicted mean cost per Litigation \vas $1.527 million for small/medium firms and 

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that the lawsuits in each category in the database will on average accrue costs equal to these 

respective mean values. That is, for lawsuits where the defendant was indemnified by a third 

party, we assume that some party will pay an amount equal to the mean cost for defendants 

in that category, even if the defendant firm itself does not necessarily pay this amount. Also, 

we assume that lawsuits that are still underway will eventually accrue costs equal to these 

means, even if the current out-of-pocket costs arc not yet equal to this accrued cost 

To adjust these figures to account for assertions that are settled \vithout litigation, for 

each category we divided the total cost of non-litigated cases by the total number oflawsuits 

filed, including lawsuits that were still active. This gave us a pro-rated cost of non-litigated 

cases per lawsuit tiled. \'l/e added this to the mean litigation cost for each category to give a 

total cost of NPE assertions per lawsuit fIled." 

The second part of this exercise consisted of breaking the eases in the Rl'X NPE 

database into the two size categories. \'l/herc revenue was reported (about 74% of the 

datahase), we allotted the defenses to small and large cells depending on whether the revenue 

was smaller than or larger than $1 billion. 1') \'\7e conservatively assigned those companies 

without reported revenue to the "small" cells. 

Year-by-year accrued costs 

The left portion of Table 4 reports the number of defenses reported in the Nl'E 

database by year for each size category. The right portion shows the aggregate cost of NPE 

assertions per year calculated by multiplying the number of defenses reported on the left by 

the prorated total cost of defense per cell (where the cost of defense includes license cost). 

$5,641 nuUion for large firms. \X/e also ran regressions using hardware/software dummy variahles, however, the 

coefficients on these dummies \-vere not statistically significant. 

'" These are $3.17 million for small/medium tirms and $'i.59 million for large tlrms. 

1'1 RPX gathered revenue data from financial statements of publicly listed firn1s as well as estimates based on 

information such as number of employees available for private firms. Revenues were not reported when a 

private firm could not be definitely identified in their data sources. 

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The final column reports the aggregate cost, summing over both categories for each year. 

l\ggregate direct costs of NPE patent assertions grew rapidly from about $7 billion in 2005 

to $29 billion in 2011."" 

It is important to note that these totals represent a"med costs, not necessarily the 

immediate out-of-pocket cost. That is, we accrue the projected cost of a lawsuit in the year 

in which the suit was flied, even though the lawsuit might not be resolved. This is important 

because about half of the lawsuits flied in 2011 were not resolved at the time of our survey. 

The implication is that substantial sums will be flowing to NPEs over the next several years 

from lawsuits already flied. Because the number of NPE lawsuits has been growing so 

rapidly, the current revenues of NPEs likely understate the total costs of lawsuits already 

Moreovet, the effect of these assertions does not just fall on a small number of large 

companies. Some NPE advocates have argued that NPE litigation is largely a matter of 

lawsuits against a small number of large "serial infringers." These data show, to the contrary, 

that about 59% of the litigation events are directed to small and medium-sized companies 

and about 37'% of the aggregate cost falls on small and medium-sized companies. Moreover, 

this share is likely understated because, as discussed above, this analysis does not include 

those companies that have only had NPE assertions that did not go to court. 

Finally, these tabulations do not include the indirect effects of NPE assertions on the 

business of defendants. Case study evidence suggests that there are significant indirect costs 

ofNPE patent assertions (Tucker 2011). These include diversion of management or 

~n ~-\s a point of comparison, Polinksy and Shaven calculate '~the litigation costs associated 'with the U.~< tort 

are approximately $46 billion per year." 

\\:'e also caution readers not to rely on intuition based on the median cost of defending against NPE patent 

assertions. i--.ledian cases are "typical" but of course it \vould not be correct to multiply the median cost by the 

number of assertions to calculate aggregate costs numbers. 

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engineering resources, delays in new product introductions and improvements, loss or delay 

of revenue, and credit constraints. Bessen et aL (2011) estimate the total business costs of 

NPE litigation for public firms using stock market event studies. Although the samples and 

methods are not direcdy comparable, they find an aggregate loss of stock market 

capitalization of around $80 billion per year during recent years, corresponding to an 

aggregate cost in operational funds to the firms of about half that amount. This suggests 

loosely that total business costs of NPE assertions might be at least twice as large as the 

figures reported in Table 4. 

Benefits to innovators 

It is sometimes argued that NPEs facilitate innovation by providing incentives to 

small inventors who would not otherwise be able to license their patents. In this view, 

"NPEs create patent markets, and that those markets enhance investment in start-up 

companies by providing additional liquidity options. NPEs help businesses crushed by larger 

competitors who infringe valid patents with impunity. (Risch 2012)" 

Michael Risch (2012) looks at the original assignees of patents used in NPE lawsuits 

and finds that the David vs. Goliath narratiyc is not representati\·e. Few of the patents in his 

sample came from venture capital financed startup firms. Although 29"/0 of the patents in his 

sample were originally ftled by individual inventors, 43% were from large companies. The 

median revenue of a company filing an NPE patent in his sample is $6.3 miUion. Given that 

the median revenue of a company in the RPX database of firms sued by NPEs is $10.8 

million, it appears that the typical firm sued by an NPE is roughly the same size as the 

typical t1rm benetlting from NPE activity. 

Flow much of the costs accrued by defendants actually flow to inventors? \y'e can 

gain some indication of this by looking at the expenditures of publicly listed NPE firms. 

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Table 5 reports cumulative figures in 2011 dollars for 12 NPE firms that were active 

from 2005 - 2011.22 During this period, these firms cumulatiwly earned $5.8 billion in 

revenues. If we assume that these revenues consisted entirely of licensing royalties from 

resoiYed patent assertions and we assume that defendants in these cases also incurred legal 

costs in the same ratio as those reported in Table 2, then these NPEs were responsible for 

$10 billion in direct accrued costs to defendants from 2005 2011, about 10% of the totals 

reported in Table 4. 21 

Looking at the financial statements of these NPE companies, we find that the 

cumulative net increase in intangible assets-acquisitions of patents from small inventors 

would be included in this accounting category along ,vith acquisitions of other intangible 

assets-amount to $679 million, or about 7% of the direct costs to defendants. Two of the 

publicly listed NPE firms also perform their own R&D. That amounts to about 14% of the 

direct costs to defendants. These two categories might overlap somewhat if R&D generates 

intangible assets. NcYerlheless, these figures indicate that for publicly listed NPF. firms, no 

more than a quarter of the direct spending by defendants flows to innovative activity. 

Based on these figures, it seems difficult to make a convincing argument that the 

effect of NPEs is to increase innm'ation incentives. First, prcyious research has shown that 

the defendants in these lawsuits are largely tech companies that inyest heavily in R&D 

(Bessen ct al. 2011, Chien 20(9). This estimate suggests that their losses arc much larger than 

the possible flows to small inventors, especially if one adds indirect costs of NPE litigation 

to the direct costs reported in Table 5. Effectively, what defendants pay in costs as a result of 

.~? ~ot all of these firms were publicly listed all years. Notc that \ve perform a similar exercise in Bessen ct al. 

(2011). 

To calculate accrued costs from lawsuits already filed, we divide revenue by .75. That is, since 75°'0 of 

lawsuits in the total database arc unresolved (rable 1), we assume that these NPE firms have so far received 

only 75° 0 of the revenue they will receive from the laWSUIts already filed. 

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NPE litigation reduces their own R&D budgets. This is because companies become targets 

for litigation mainly when they introduce innovative products.24 Hence R&D managers must 

anticipate NPE costs as part of the cost of innovating. Small inventors would have to be an 

order of magnitude more innovative per dollar of R&D than the defendant companies, in 

order for the net effect ofNPE activity on innovation to be positive. 

Second, to the extent that small inventors are important lor innovation, NPE patent 

assertions hurt small inventors in at least two ways. As we have seen, the majority of 

defendants in NPE lawsuits are small/medium companies and these companies accme larger 

costs relative to thdr size. Small/medium tirms accme 37% of the costs, but small inventors 

receive at most 21 % of NPE costs. Also, these costs make things more difticult for small 

inventors who wish to license their technology-not just their patents·-to other tirms. If 

the prospective licensees expect NPE-related costs, they \vill be less willing to license from 

small im'entors or they will not be willing to pay as much. 

Third, the incentives provided to patent holders by the current crop of NPEs may be 

the wrong kind of incentives. NPE activity may skew the research agenda of small tlrms 

away from disruptive technologies and toward mainstream technology and associated 

patents that can be asserted against big incumbents. Even worse, small tirms are encouraged 

to divert investment from genuine invention toward simply obtaining broad and vague 

patents that might one day lead to a credible, if weak, lawsuit. 

Policy implications 

The rapid growth and high cost of NPE litigation documented here should set off an 

alarm warning policy makers that the patent system still needs signitlcant reform to make it a 

truly effective system for promoting innovation. The heterogeneous nature ofNPEs 

" Bessen and c,!curer (20!2) tind that the hazard of being sued increases with firm R&D. 

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ranging from universities, to patent brokers, to trolls"; - suggests that policy reform should 

address troll-like behavior rather than merely status as an NPE (Geradin et aI., 200S; Merges, 

2(11). 

The top priority is reform of the patent system to improve notice; this kind of 

reform will make the patent system perform more like an idealized property system (Bessen 

and Meurer, 200S; FTC, 2(11). More rigorous enforcement of the claim definiteness 

standard would be an excellent step forward. Likewise, we favor rigorous implementation of 

recent Supreme Court decisions restricting the patentability of business methods and other 

abstract processes that are difficult to propertize. r t is also crucial to provide greater 

transparency in the patent system. Feldman and E\ving (2012) document the remarkable 

opaqueness of Intellectual Ventures in connection to its patent ownership and patent 

assertion. Finally, courts should rigorously supervise patent damages awards to make sure 

that damages are proportionate to the value of the patented technology (Lemley and Shapiro, 

20(7). These reforms should not harm genuine inventors who crave publicity rather than 

secrecy, and who should still be able to obtain broad, but clear patent protection. 

It is also instructive to look for policy reforms suggested by the law and economics 

analysis of the generic problem of frivolous lawsuits. One promising policy reform is greater 

use of fee-shifting to favor defendants in cases brought by troUs. Allison ct al. (2010) find 

that troll patents fare poorly in court. The bargaining pO\ver of a troll seeking a nuisance 

settlement would be great diminished in an aggressive fee-shifting regime. Similarly, more 

""To some the use of the troll "moniker might be considered derogatory, [but] recentiv, in Highland Plastics, 

Inc. v. Sorensen Research and Development Trust, ll-cv-2246 (C.D.Ca. _-\ug. 17,2(11), the court denied a 

motion to strike the. term "paten I· troll') from the complaint, stating that patent troll '~is a term commonly used 

and understood in patent l.itig~\tion and is not so pcjoratiyc as to make its use improper:} Jd., Dn. 21 at 3." 

Ralph Dengler, l.s.1Ln!2t;L1.-,~f!l.'i~'l;-':'l.\' ... f'lL~1)!i.'~ IPLaw .-\lert, (let. 31, 2011, available at: 

http://www.iplawalert.com/2011 I 101 articles I patent-! lis-it-open. season.now-for-npcs! 

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stringent pleading requirements have been justified in other areas of the law as a method of 

reducing frivolous lawsuits; this strategy might also work for patent litigation (Blaze, 1990). 

Conclusion 

Using these survey data and the associated database ofNPE litigation our major 

findings arc these: 

• The direct costs of NPE patent assertions are substantial, totaling about $29 

billion accrued in 2011. This figure does not include indirect costs to the 

defendant's business such as dh'ersion of resources, delays in new products, 

and loss of market share. Even so, the direct costs are large relative to total 

business spending on R&D, which totaled $247 billion in 2009 (NSF 2012), 

implying that NPE patent assertions effecth'ely impose a significant tax on 

investment in innovation. 

Much of this burden falls on small and medium-sized companies who make 

up 90% of the companies sned, accounting for 59%, of the defenses, and 

who pay about 37% of the direct costs. The median revenue of companies 

sued by NPEs is $10.8 million. NPE litigation costs smaller companies more 

relative to their revenues. In addition, smaller companies pay relatively more 

to NPEs from assertions that do not go to court. The burden of all of these 

costs appears to rebut the assertions that NPEs play an important role in 

improving the profits of innovative start-ups. 

Abollt a third of the cost to defendants inyolves patent assertions that do not 

go to court. i\[oreover, we have likely underestimated these costs because we 

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have Ilot surveyed small companies that do not also have NPf-i. patem 

litigation. 

]'.iPEs appear to be highly hetewgeneous. Much of the litigMion appears to 

consist of nuisance suils Lhal settle for a few hundred thousand dolbrs. Rut 

some :\IPEs are "big game hunters" who seek ancl get settlements 10 the tens 

or hundrf'cls of million doLlars. 

}\-£1.1ch of the cost to defemJants implies a net loss of social weltilre. Ahout 

one quarter of The cost of NPE litigation consists of legal fees, Of the total 

direct cost, no more th~n a quarter could possibly represent a flow to fund 

innovative activity, 
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Allison, John R., lVlark A. Lemley and Joshua \V'alker, 2009. "Extreme Value or Trolls on 

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Allison, John R, Mark A Lemley and Joshua \X'alkcr. 2010. "Patent Quality and Settlement 

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Lemley, Mark A. and Carl Shapiro. 2007. "Patent Holdup and Royalty Stacking," Texas Law 

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Love, Brian J., 2010. "An Empirical Study of Patent Litigation Timing: Could a Patent Term 

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Patent Freedom. 2012. "Litigations Over Time," available at: 

hHn~:iL,,~\"\\'. !llil.£nJ[t(:£(JQt]LCQmLabout=!lRe~lli!ig>lIiQlb"L 

A. l\fitchell Polinsky and Steven Shavell, Costly Litigation and Optimal DamageJ, aYailable at: 

http:! j,;srn.com/ absl ract = 199()7ij(, (2012). 

Risch, Michael, 2012 forthcoming. "Patent Troll Myths," Seton Hall Law Review, 42. 

RPX. 2012. "US Litigations Involving NPEs," available at: 

hJUdb~\"'cn~)(£()W_.£()J11LiI1"ie~SJDl2v~c;i~1==3: 5. 

Schwartz, Da\'id L. 2012. "The Rise of Contingent Fee Representation in Patent Litigation," 

Alabama Law Review, forthcoming. 

Shrestha, Sannu K. 2011. "Trolls or Market-makers? An empirical analysis of nonpracticing 

entities," Columbia Law Review, 110, pp. 114-(,0. 

Tucker, Catherine, Patent Trolls and Technology Diffusion, December 24,2011, a,"ailable 

at: http://papers.ssrn.com/ so13/ papers.cfrn?abstracCid==197 6593. 

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Tables and Figures 

Table 1. Summary Statistics of Sample 

Sample AU NPE lawsuits 

Mean 

lawsuit Lawsuits / Revenue Lawsuit Lawsuits/ 

Companies defenses company ($million) Companies defenses company 

Number 82 1,184 14.4 $12,474.7 9,385 20,565 2.2 

Resolved lawsuits 784 15,486 

Percent resolved 66% 75% 

Company size Share Share Share Share 

Small/medium 44% 13% 2.7 $297.1 90% 59% 1.4 

large 56% 88% 14.9 $22,005.0 10% 41% 9.0 

Company industry 

Software 37% 26% 6.7 $7,103.1 22% 31% 3.1 

Hardware 63% 74% 11.2 $15,573.7 78% 69% 1.9 

Public company 72% 14% 

Notes: For 2005 - 2011. The left panel describes the sample used for this study. The right panel reports summary 

statistics from RPX's database of all NPE lawsuits. In the sample, all companies report revenue. In the RPX 

database, only 74% of companies have reported revenue; we assume that companies without reported revenue 

are small/medium sized. The resolved lawsuits have been terminated due to settlement or adjudication. The 

number of resolved suits excludes those that were simple transfers, had zero litigation costs (c.g., for incorrect 

defendants), where the company was substantially indemnified, or where the costs born by the company do not 

reflect the total direct costs of litigation for other reasons. Revenues are for the most recent year. Small/medium 

companies are those with revenues less than or equal to $1 billion; large company revenues exceed this amount. 

Companies identified as "software" include companies whose main product is software, e~commerce, finance, or 

undefined. "Hardware" includes everything else. 

28 

Mean 

Revenue 

($million) 

$3,243.3 

$82.6 

$16,666.4 

$3,654.8 

$3,087.2 
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Table 2. Mean Litigation Costs per defense in million dollars 

Direct costs licensing costs cost 

All 

Compan'Lsiz~ 

Small/medium 

Large 

IndlJ!ili:Y 

Software 

Hardware 

Addendum on legal costs 

A.II'.I,.~su_rye'LRQJ11 

Mean 

1.38 (0.26) 

0.42 (0.12) 

1.52 (0.30) 

1.50 (0.41) 

1.33 (0.33) 

Cost through discovery 0.49 - 3.60 

Cost through trial 0.92 6.00 

E~e_shiftQl~Bess.eJljllliiM"lJr:e.rJ..Qgl 

Summary judgments 0.84 

Median Mean Median Mean 

0.20 6.53 (1.76) 0.22 7.91 (1.86) 

0.07 1.33 (0.42) 0.18 1.75 (0.49) 

0.23 7.27 (2.01) 0.23 8.79 (2.13) 

0.17 1.82 (0.45) 0.30 3.32 (0.81) 

0.21 8.14 (2.35) 0.18 9.48 (2.48) 

Note: Standard errors in parentheses. The total number of cases is 666; sub-category shares are 

listed in Table 1. Fee shift data have been deflated to 2011 dollars. 

Median 

0.56 

0.32 

0.65 

0.55 

0.59 

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Table 3. Costs for cases settled without litigation 

(per company in million dollars) 

Total Cost per 

company, 

non-litigated 

Mean cost by type cases 

legal licensing Other Mean 

All 0.50 24.59 4.66 29.75 {13.89} 

C:gmpal1"isi.z.~ 

Small/medium 0.05 7.85 0.23 8.14 (7.68) 

large 0.77 34.40 7.25 42.43 {21.22} 

Industry 

Software 0.38 11.83 4.14 16.35 {9.14} 

Hardware 0.56 30.76 4.91 36.24 (20.03) 

Comparable 

litigation Cost per 

company 

Mean 

58.38 {19.18} 

7.06 (3.15) 

88.47 (28.95) 

38.34 (20.74) 

68.08 (26.46) 

Note: Standard errors In parentheses. Results are for a sub-sample of 46 companies that reported full 

litigation and non-litigation costs. Figures are totals over 2005-11 per company, although not all 

companies reported all years. 

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Table 4. Aggregate Accrued Direct Costs of NPEs by Year 

Number Aggregate Direct 

Year Small/medium Large Small/medium Large TOTAL 

2005 919 482 $2,916 $3,657 $6,574 

2006 899 530 $2,853 $4,021 $6,874 

2007 1,238 976 $3,929 $7,406 $11,334 

2008 1,571 1,004 $4,985 $7,618 $12,603 

2009 1,461 1,198 $4,636 $9,090 $13,726 

2010 2,588 1,857 $8,213 $14,090 $22,303 

2011 3,424 2,418 $10,866 $18,347 $29,213 

Size shares 59% 41% 37% 63% 

Note: Aggregate costs are calculated by the method described in the text. Aggregate costs include 

legal costs, settlement costs and other costs for resolved lawsuits, unresolved lawsuits and nonlitigated assertions. These report accrued costs, that is, we include the full projected cost of currently 

unresolved lawsuits. 

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Table 5. Public NPEs: innovation investments relative to costs to defendants 

Revenues 

Implied accrued direct costs 

Net increase in intangibles 

R&D spending 

MilliOJlS (2011$) 

$5,782.9 

$9,924.1 

$679.4 

$1,369.1 

100% 

7% 

14% 

Note: For 12 publicly listed NPE firms. Assumes that all revenues are royalties from licensing patent 

assertions. The implied accrued direct costs are calculated by adding legal costs to defendants to the 

assumed licensing payments, using the ratio of legal to total costs in Table 2, and then dividing by the 

portion of lawsuits that have been resolved in the database (75%) to capture costs that have been 

accrued but not yet paid. All figures are in 2011 dollars. 

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Number of Defendants in NPE Lawsuits 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

° 2005 2006 2007 2008 2009 2010 2011 

Source: RPX database 

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Figure 2. Cumulative Distribution of Total Direct Litigation Cost Size 

Smail/medium 

.. 

Note: is logarithmically scaled. Distributions are fit 

distribution functions. distributions for resolved lawsuits. 

lognormal cumulative 
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Appendix 

Table A1. Log cost regressed against log company revenue 

Intercept 

In(Rev) 

Revenue < $100m 

Note: 784 observations. 

(1) 

Coefficients Standard Error 

10.30 (0.85) 

0.13 (0.04) 

(2) 

Coefficients Standard Error 

10.90 (0.91) 

0.10 (0.04) 

-1.11 (0.63) 

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An Innovation Agenda for the 113th Congress 

Eleven innovotion Policy Ideas ta Advance American Competitiveness 

Two years ago, CONNECT introduced its first 'Innovation Agenda" for the 112'hCongress, In those 

intervening years both the President and Congressional leaders recognized the need for Washington to be 

more assertive in advancing policies that promote the innovation economy in order to sustain America '5 

competitiveness globally, Notably, matching rhetoric with action, Congress worked in a strong, bipartisan and 

bicameral way to pass the JOBS The JOBS Act is a significant accomplishment because it should 

increase the number of pathways startups and emerging companies can seek to access capital and solidify 

their commercialization efforts which will bring new technologies to market while creating jobs, 

Despite the resounding support the JOBS Act garnered in the innovation community, the President and 

Congress still have much more work to do to ensure that America's innovation economy moves forward, Many 

missed opportunities from last Congress, present themselves to this new Congress, However, as we noted 

two years ago, while Washington waits, other countries are aggressively copying America's innovation 

playbook by enacting and implementing pro-growth, pro-innovation policies, Washington must recognize that 

America's status as the global innovation leader is by no means secure or guaranteed into the future, As the 

urgency to act intensifies, CONNECT submits this multi-faceted Innovation Agenda to help the U,S. preserve 

its global innovation leadership, 

Retain top-level, foreign-born talen! from American universities while welcoming immigrant 

entrepreneurs 

Both the President and Congress are fully aware that 13 major missed opportunity in strengthening 

America's innovation ecosystem is fixing federal immigration policy. In addition to needing to increase and 

update cumbersome H·1 B visa system, America's immigration policies do not allow foreign-born science, 

technology, engineering and math (STEM) talent to work in the U.S, after graduation from an American college 

university, The 

born STEM 

has fAclAallArllvtalked about stapling a green card to college diplomas of foreignand the House passed legislation, Despite the supportive rhetoric, the 

President and the 112'" Congress missed the opportunity to keep thousands of talented STEM graduates in 

the US, who would have filled vacant, well-paying, innovation-related jobs, Such high-wage employment, 

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dispersed across the U.S., could have provided a private-sector stimulus and advanced technology 

development while increasing revenue to the Treasury. Although the importance of solving the nation's 

challenge regarding undocumented residents and their families is clear, high-skilled visa reform has made 

substantial bipartisan progress and should remain a top and urgent priority for the 113" Congress as part of 

comprehensive immigration reform. 

Additionally, Congress should streamline procedures that create too many barriers for modern-day 

immigrant entrepreneurs to successfully build companies and create jobs in the U.S. It is well known that some 

of America's biggest companies were started by immigrant entrepreneurs. The American landscape is replete 

with stories of immigrants overcoming odds to come to the U.S. to make a better life. This pool of talent, that 

would like to legally come to our shores, instead remains overseas, generating new competitors to American 

companies and undermining America's status as leading global innovation. Congress and the President 

should welcome them to our shores and transform them into American innovators. 

Provide entrepreneurs. innovators and investors economic certainty by reaching a grand deal 

to reduce federal deficits and restrain the national debt 

With great challenges, come great opportunities. Negotiating and enacting a grand deal is fraught with 

political pitfalls and technical complexities. However, uncertainty is anathema to a thriving innovation 

ecosystem. 

For too long we have heard entrepreneurs, innovators and investors worry that the economic uncertainty 

caused by Washington's inability to stabilize America's fiscal problems is leaving too much capital on the 

sidelines until some long-term certainty materializes. Entrepreneurs need to know the legal and regulatory 

rules to play by while investors need to know the startup they've invested in has a reasonable and fair chance 

to succeed. Yet, uncertainty seems to be the status quo Washington is giving to innovators and investors. 

The American people are ready for Congress and the White House to go big and reach an agreement that 

not only injects certainty into the markets and economy, but demonstrates to the world that the U.S. is serious 

about retaining its place as the world economic and innovation leader. Despite the divisions in Washington, 

the chance for a big solution is still on the table and should be anchored in fostering long-term economic 

growth and competitiveness, not near-term political expediency. 

Seize the opportunity to reform the tax code to incentivize and reward innovation 

The effort to undertake comprehensive tax reform, for the first time in nearly 30 years, will be no easy task. 

Nevertheless, the opportunity to create a pro-growth tax code that incentivizes and rewards innovation is 

indispensable as global competitors race past the U.S. in creating tax codes that draw capital, talent and 

innovation to their shores. 

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Reducing the corporate tax rate is an obvious place to start as the U.S. now leads the world with the 

highest corporate tax rate. In considering a move to a territorial tax system, with a limited window to allow the 

return of currently held foreign earnings, Congress should consider a further rate reduction if such earnings are 

returned and deployed in a way that will infuse capital into early-stage innovation and emerging technologies. 

Such pro-innovation purposes would include sponsored, purchased or collaborative R&D, funding proof of 

concept centers, early-stage venture investments, expansion of R&D facilities, or to create/expand U.S. 

manufacturing including contract manufacturing. 

Additionally, Congress should carefully consider how to specifically incentivize the tax code to promote 

startup growth and enhance the ability of young companies to scale up, expand and produce in the U.S., not 

overseas. Although the R&D credit should be simplified and made permanent, startups do not generally 

benefit from the credit. Thus, Congress should also consider renewing the R&D credit in such a way that 

startups can utilize. 

Recognize the importance and numerous benefits of federal research funding 

As Congress and the President consider where the federal budget needs to be pared back, careful 

consideration should be given to the pivotal role federal research funding plays in supporting America's 

innovation ecosystem, It has been repeatedly demonstrated that federal research funding is a wise 

investment, directly linked to technology development that changes lives and improves the public good while 

also creating new companies and high-wage jobs, These new companies and jobs return revenue back to the 

Treasury, help communities successfully grow, and enhance the American innovation ecosystem. Few federal 

efforts can highlight such an extensive, long-term, positive record. 

Congress should rightly fulfill its oversight role in uncovering waste and duplication in federal spending, 

The Government Accountability Office has done extensive work identifying federal programs that are wasteful, 

overlap and are duplicative, Inspector Generals at federal agencies regularly report on programs that don't 

work or are subject to fraud. Using the work of GAO and Inspector Generals as a guide, Congress and the 

President should seek to eliminate waste and fraud, while consolidating and right-sizing duplication in order to 

reduce the deficit. Such a targeted approach will ensure that indiscriminate cuts will not leave lab benches 

empty, life-saving experiments stalled, high-wage jobs vacant, and game-changing technology trapped in 

development stages without a pathway to commercialization, 

Continue to encourage the proliferation of more spectrum to fuel the revolutionary 

advancements in mobile technology 

One of the most dynamic areas of the American innovation ecosystem is the development of mobile 

technologies. From distance education to energy efficiency to wireless health diagnostiCS and monitoring, the 

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mobile revolution has the potential to substantially transform the every-day life of all Americans in less than a 

decade. The core fuel of the mobile revolution is spectrum. The 112" Congress took positive and important 

steps to allow more spectrum to be made available. The 113'h Congress should continue to build on that 

record by learning more about unused spectrum and federally-held spectrum while paying close attention to 

FCC actions related to incentive auctions. Wise decisions now about spectrum allocation and efficiency will 

pay handsome benefits in years to come not only for society in general but also in increased revenue to the 

Treasury. 

Encourage increased technology transfer and commercialization of federal research 

The President has already directed federal research agencies to increase their efforts to accelerate 

technology transfer of federal research and support private-sector commercialization. The President's directive 

is a win-win for both the federal government and the private sector as federally-funded technology is propelled 

into the marketplace allowing new products to improve society and expand commerce while producing a 

greater return on federal research investments. As Congress searches for new avenues to increase revenue 

to the Treasury, Congress should strongly encourage federal agencies to become more assertive in efforts to 

transfer and commercialize technology. The Administration should further direct federal agencies to 

proactively seek out regional innovation accelerators across the U.S. that already possess the expertise and 

capacity needed to move technology from the lab bench to the marketplace. 

Conduct vigorous oversight of federal agencies with innovation-related regulatory authority 

and reguire Innovalion Impact Statements for all regulations 

Currently, a host of major innovation-related regulations are weaving their way through the administrative 

process at several agencies including the Food and Drug Administration (PDUFAlMDUFA Reauthorization), 

USPTO (America Invents Act), Securities and Exchange Commission (JOBS Act and crowdfunding), the Small 

Business Administration (SBIR Reauthorization) and the Federal Communications Commission (incentive 

auctions and spectrum.) Each regulatory proceeding carries the potential to spark greater American innovation 

or dampen development. Additionally, the President's cybersecurity Executive Order will require 

implementation from several federal agencies. 

Although agencies specialize in certain areas, agencies should respect the significant need for regulatory 

humility, bearing in mind that the speed and progress of innovation will invariably outpace the ability of 

regulations to stay ahead of the innovation curve. By the time final rules are approved and implementation 

begins, market dynamics may make the rule outdated. In addition to seeking public comment, agencies should 

proactively and regularly interact with the startup community since startups often aren't aware of the 

abbreviated administrative timelines for public comment periods. Even if they are aware, startups and 

emerging companies frequently don't have the resources to hire advocates to help shape and draft public 

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comments because their main focus is making payroll, raising capital and making their venture sustainable. 

Regional innovation incubators and accelerators provide a rich supply of entrepreneurs and investors that can 

help educate and inform federal agencies on the hurdles and needs of startups and emerging companies. 

To protect startups and emerging companies, Congress should require all federal regulatory rulemakings to 

include "Innovation Impact Statements." The purpose of the Statements would be to provide more 

transparency and accountability in the regulatory process and could explain to the public such considerations 

as 1) what impact the regulation will have on innovation, 2) what data and processes were used to reach the 

agency's conclusion on how innovation will be impacted, 3) the particular impact on emerging technologies in 

the industry or related industries, 4) the cost to startup and high-growth businesses in the industry or related 

industries, and 5) the trends in the public comments related to the regulation's impact on innovation and 

startup/high-growth business. 

Protect and extend America's global edge in medical technology innovation by fully repealing 

the Medical Device Tax 

One of the few bright spots in this stuttering U.S. economy is the medical technology industry which 

combines life-saving med-tech innovation with domestic manufacturing, leading to a vibrant export sector that 

benefits the world, not just the U.S. Yet, med-tech innovation faces incredible headwinds at the hands of the 

Affordable Care Act's Medical Device Tax. 

Data reveals that the ACA rationale for taxing med-tech innovation, that the industry would enjoy the 

windfall of millions of new patients to offset the cost of the tax, was simply wrong. It is now clear that the tax is 

unwarranted and inequitable, especially since small and mid-cap companies, which tend to drive innovation 

and job growth, will bear the brunt of the tax. Even betore the tax was effective on January 1, 2013, 

companies were downgrading their upbeat forecasts and laying off high-skilled, high-wage employees. That 

trend will only continue as the calendar turns each page. 

If there was ever an industry that embodied the underlying premises of the ACA, to improve patient care 

while decreasing healthcare costs, the med-tech industry is that industry. In order to protect and extend 

America's global edge in med-tech innovation, preserve and create high-skill, high-wage jobs, and save lives, 

Congress should fully repeal the ACA's misguided medical device tax and the President should sign it. 

Foster improved STEM education including workforce development partnerships 

While STEM visa reform addresses the immediate need to expand America's innovation talent pool, the 

long-term solution resides in America's elementary and secondary education system. For too long, America's 

public schools have simply not made the grade when endeavoring to produce enough talented STEM 

graduates who are ready for either college or the workforce. 

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STEM-related companies have already recognized the underperformance of public education and are 

creating their own parallel schools or programs to educate children in order to adequately prepare them to 

successfully contribute in the marketplace. Philanthropic foundations are also getting involved with teacher 

training programs and grant programs to elevate the STEM experience for students. 

With this backdrop, Washington must have a more robust discussion on how to improve STEM education 

recognizing that one size does not fit all. Special attention should be given to how best to unleash all 50 states 

to become laboratories of STEM improvement without excessive fear of running afoul of federal regulations. 

Additionally, industry stakeholders should realize that their participation is valuable and necessary so schools 

can better understand the specific needs of that region's innovation economy. Top-performing programs 

should be heralded and their best-practices shared so other states, cities, corporations and foundations can 

multiply success across the country. Improving STEM education in elementary and secondary schools will be 

a long-term effort that should be promptly undertaken. 

Promote energy innovation to foster an environment to further propel clean tech advancements 

Part of an "all of the above" energy policy should not only include innovation in safe domestic production to 

alleviate America's reliance on foreign oil, but must also include facilitating the future of clean energy 

production. Congress should advance innovative polices that incentivize a more favorable business climate for 

the clean energy sector so startups and emerging companies can continue to spark the clean tech revolution 

while creating new jobs and securing long-term economic security. Congress should also consider the benefits 

of clean energy to national security and in meeting current and future military fueling needs. 

The selection of a new Secretary of Energy will also be significant as the selection will need to exercise 

regulatory humility so startup and emerging companies are allowed to inject disruptive technologies into the 

marketplace in order to meet differing regional energy needs. 

Strengthen intellectual property protections while fully funding the Patent and Trademark 

Office by providing full access to user fees 

Congress and the Administration should continue their aggressive focus on strong U.S. intellectual property 

and trade secret protection. As foreign competitors continue to use IP thel! as an economic weapon to impede 

the growth of American startups and established companies alike, while also eroding consumer confidence in 

American brands, Washington must not tire in its efforts to strengthen IP protections and enforcement both 

domestically and globally. 

Congress must also monitor the success of one of the most important innovation-related federal agencies, 

the U.S. Patent and Trademark Office. Unlike most federal agencies, the USPTO does not receive any 

taxpayer funding but is fully funded by user fees paid by the innovation community as they apply for and 

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maintain their patents and trademarks. Despite being funded solely by user fees, USPTO must wait on the 

budget and appropriations process before being able to access the user fees that fund the agency. Thus, the 

USPTO is hampered in its effort to produce prompt action on patent and trademark applications when USPTO 

appropriations are held up in Continuing Resolutions or when Congress restricts full access to the user fees. 

Although the 112th Congress had a golden opportunity to restrain itself and permanently end fee diversion, 

which has accounted for over $1 billion in user fees Congress has diverted away from USPTO, the America 

Invents Act left the fee diversion issue unresolved. This $1 billion diversion has caused a massive backlog of 

patent applications which impedes the speed of startup company growth and threatens patent quality. 

It is no secret that the strength of a startup's intellectual property portfolio is a key factor in whether it will be 

able to attract the capital necessary to grow into a viable company. Consequently, USPTO's prompt action on 

a patent application can hinder or accelerate a startup company's evolution. Past peliormance has shown that 

when USPTO has full access to its user fee funding, the patent application backlog decreases. 

Congress should also carefully monitor USPTO's regulatory implementation of the America Invents Act 

since so many of the new regulations will specifically impact how startups wade through the patent application 

process. Particular attention should be given to how the new First to File regulations are administered 

especially in relation to the American Grace Period which plays a vital role in intellectual property protection but 

is at serious risk of being undermined. 

Additionally, the Administration and the Senate have a tall task in replacing the previous USPTO Director. 

The mix of skill sets needed-technical proficiency managing the agency, effective Congressional relations 

and positive employee relations-will be hard to duplicate but should not be compromised. 

Conclusion 

We recognize that this Innovation Agenda is broad and touches on policy issues within the jurisdiction of 

various Congressional Committees and federal agencies. However, we believe that for far too long 

Washington has approached innovation policy in a fragmented and uncoordinated way. By bringing these 

wide-ranging ideas into one agenda, we hope to impress upon policymakers and thinkers the need to 

approach innovation policy in a more comprehensive and systemic way. We stand ready, willing and able to 

assist this Congress and Administration in advancing innovation policy to help spark an American recovery. 

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For more information contact: 

Timothy Tardibono, M.A., J.D. 

CONNECT 

Vice President, Public Policy 

timothy@connect.ora 202.412.7791 (cell) 

University of California-Washington Center 

1608 Rhode Island Avenue, NW., Washington, D.C. 20036 

Theresa Andrews 

CONNECT 

Director, Public Policy 

tandrews@connect.org 858.964.1337 (direct) 

8950 Villa La Jolla Drive, A 124, La Jolla, CA 92037 

CONNECT is a nonprofit organization that is dedicated to creating and sustaining the growth of innovative technology 

and related businesses. Since 1985, CONNECT has assisted in the formation and development of over 3, 000 companies 

and is widely regarded as one the world's most successful regional programs Hnking inventors and entrepreneurs with the 

resources they need for success. CONNECT focuses on research institution support, business creation and development, 

entrepreneurial learning, access to capital, protection of intellectual property, public policy advocacy, awards, recognition 

and networking. More than 40 countries and regions have adopted the CONNECT model, including New York City, the 

U.K, Sweden, Norway, Denmark, Australia, Colombia, and India. CONNECT is the recipient of the 2010 Innovation in 

Economic Development Award in the "Innovation in Regional Innovation Clusters" category presented by the U.S. 

Department of Commerce's Economic Development Administration. 

@connectpolicy Connect-Public-Policy ~ http://connectpolicyblog,com 

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