Is the recession suffocating American innovation?

May 4, 2009 8:25 PM ET

WASHINGTON (AP) - Got a bright business idea? Take a number.

Americans haven't stopped dreaming up newfangled gizmos or sketching engineering marvels on the back of cocktail napkins. But tight credit and business cutbacks have slowed the pace of getting the latest U.S. innovations to market.

Venture capital investments have plummeted. Lenders aren't lining up to fund business startups. New patent applications are down at the U.S. Patent and Trademark Office, creating a budget crisis at the agency, which depends on money from fees to keep operating.

If patent fee revenue continues at its current rate, the office will end the budget year collecting roughly $100 million below projections.

That puts the patent office in a Catch-22. After several years of hiring more than 1,200 patent examiners a year, the office has suspended hiring, trimmed overtime and made other reductions. This comes as the office and its 6,000 examiners are struggling to whittle down a backlog of 770,000 new, unexamined applications.

"Innovation is the way America generally gets out of downturns," said Robert Budens, president of the Patent Office Professional Association. The group represents 4,000 examiners and other patent professionals, many of whom worry the recession will mean layoffs before the end of the year.

"At the Patent Office, we're one of the key drivers of stimulating innovation and for us to get to the point where we might have to furlough or have a reduction in force would just be horrible," he said.

So far, companies that spend the most on innovation have resisted the temptation to raid their research and development budgets. They're opting to ride out the recession with an eye to future sales, according to Booz & Co., which surveys the world's 1,000 largest, publicly traded, corporate research and development spenders.

Although those budgets often are set months in advance, recent data that Booz collected on about 400 of the companies shows that research spending rose 2 percent from the first quarter of 2008 to the fourth quarter.

"The recession has caused us to be very conservative in a lot of areas, but research and development is not one of them," said James Norrod, president and chief executive officer of Segway Inc., the Bedford, N.H.-based maker of two-wheeled, standup vehicles. "We think that R&D is really the life blood of the company. We haven't cut back. We have actually added people in that area."

Matthew Sampson, an intellectual property lawyer at McDonnell Boehnen Hulbert & Berghoff in Chicago, says business hasn't slowed yet, but patent work usually lags during economic downturns.

"I'm actually a little bit nervous about next year," Sampson said.

Businesses, however, have begun cherry-picking the ideas they want to shepherd through the expensive patent process. Seed money to nurture innovation also is drying up.

Venture capitalists invested just $3 billion in the first quarter of the year — down 47 percent from the fourth quarter of 2008 and the lowest level since 1997, according to the National Venture Capital Association. Bank loans and "angel capital" — money that friends and families and wealthy individuals cough up to support innovation they personally believe in — also are contracting.

"If banks stop lending in general, lending for small innovative technologies dries up completely," said Jere Glover, a Washington business attorney who directs the National Small Business Association's technology council. "Banks are more likely to make loans to a company that has bricks and mortar, land and property."

Basement inventors are really feeling the pinch.

"A lot of independent inventors get their start by floating their expenses on charge cards and of course charge card credit lines have been greatly restricted," said Ronald Riley, the man behind numerous patents including those related to the automated industrial monorail and the treadmill.

"For independent inventors, at least until they achieve some commercial success, the money for patenting comes out of discretionary income. It doesn't mean they're not inventing, it just means they're just not going to file until things improve," said Riley, founder of the Professional Inventors Alliance.

It costs roughly $10,000 to obtain and hold a patent, although fees vary depending on the type of application and are adjusted downward for individual inventors, small business and nonprofits.

A $1,090 fee is paid when an application is filed and $1,510 more is due when a patent is granted. Maintenance fees of $980, $2,480 and $4,110, which maintain a patent holder's legal protection for the life of a patent, are due at 3 1/2 years, 7 1/2 years and 11 1/2 years, respectively.

Some penny-pinching patent holders have stopped paying their maintenance fees, choosing to let their rights to a patent expire early on innovations not critical to profits down the road. In addition, fewer patent seekers are paying fees to obtain more extra time to respond to questions from the patent office.

"Companies and law firms are saying, `We cannot afford to pay for an extension,'" said John Doll, the office's acting director. "They're given three months in which to respond and then you have the opportunity to buy an additional three months. A lot of the companies that I've talked to say, `We simply are not authorizing any extensions of time. If the law firm wants to respond later, they will pay for the extension, not the company.'"

Some companies are in such dire straits that innovation is just not an option for them, but more and more companies are recognizing how critical innovation is, said Scott Anthony, president of Innosight, a management and innovation consulting company in Watertown, Mass., and author of several books on the subject.

"Some people say, `I cannot afford to innovate.' What they are really doing is sowing the seeds of their own destruction," he said.

Anthony notes that many innovative companies were started during economic downturns.

Hewlett-Packard formed in a California garage at the end of the Great Depression. Digital Equipment was born during a recession in the 1950s. During an economic downturn in the 1970s, 23-year-old Carol Wior started a garment business with $77 and three sewing machines in her parents' garage.

Thirty-seven years later, the maker of the patented "Slimsuit" and her company's 200 employees in Bell Gardens, Calif., are working through the recession on a new undergarment and swimsuit concept. "I think you'd be a fool if you didn't tighten up a little bit," Wior said. "We're being more careful, but I'm not tightening up when it really comes to marketing and product development."

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On the Net:

U.S. Patent and Trademark Office: http://www.uspto.gov/

Patent Office Professional Association: http://www.popa.org/

National Venture Capital Association: http://www.nvca.org/

National Small Business Association: http://www.nsba.biz/

Professional Inventors Alliance: http://www.piausa.org/

Booz & Co.: http://www.booz.com/

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