Intellectual Property

Elizabeth Holmes And The Great Patent Scam

With patents in hand, Holmes built a fraudulent company.

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Elizabeth Holmes (Photo by Kimberly White/Getty Images)

Elizabeth Holmes, founder and former CEO of Theranos, was once Silicon Valley’s biggest star. Venture capital flocked to her, glossy magazines did features on her, social media (or at least my social media) was flooded with profiles of Holmes and her company. Until one day, she had a spectacular fall from grace after a journalistic investigation revealed that her promise of revolutionizing medical diagnostic testing was built on a lie. And, as Daniel Nazer points out in a recently published piece on Ars Technica, we have the patent examination system to thank for propping her up.

First, the background: Holmes claimed to have created a blood test that used very small amounts of blood. Various profiles highlighting Holmes praised her as another example of someone who didn’t need a college degree to do amazing things, having dropped out of Stanford to start her company. In several short years, Holmes had raised millions in venture capital and in 2015, Forbes valued Theranos at $9 billion. Holmes filed for hundred of patents, many of which were granted. Then, an article in The Wall Street Journal revealed that Theranos’s testing device gave inaccurate results and used other machines for most testing. Theranos spent the next year digging herself deeper in the hole, disclaiming any wrongdoing, with (false) explanation after explanation. Everything began falling apart, from the FDA ordering the company to stop using one of its core inventions to major companies ending partnerships with Theranos. Investigations revealed that Theranos was not the golden company everyone thought it was and the SEC charged Holmes with deceiving investors through false claims about the blood-testing technology; Holmes faced other lawsuits, as well. Ultimately, Holmes was removed from her position at Theranos and the company folded.

Obviously, the full story reveals that Theranos was based on the false promise that Holmes had developed revolutionary technology that could perform diagnostic blood tests using very small amounts of blood. As I’ve noted before, patents can play a critical role in helping startups secure venture capital that allows their companies to grow and thrive. Patents lend credibility and provide an “asset” that assure investors that the company is a good bet. Unfortunately, in this case patents that should never have been granted propped up a company and helped Holmes defraud Theranos’s investors.

Holmes filed her first provisional application in 2003, describing “medical devices and methods capable of real-time detection of biological activity and the controlled and localized release of appropriate therapeutic agents.” The provisional application would become a number of issued patents. However, as Nazer notes, “Holmes’s 2003 application was not a ‘real’ invention in any meaningful sense . . . Indeed, it’s fair to say that Holmes’s first patent application was little more than aspirational science fiction written by an eager undergraduate.” Nazer goes on to note that the patent examiner for one of Holmes’s patents (U.S. Patent No. 7,291,497) did review it closely (for technical issues), but “[w]hat the examiner did not do . . . was ask whether Holmes’s ‘invention’ actually worked.”  Holmes was granted a patent for an idea, but not one that could actually be practiced.

Unfortunately, the patent examination system in the United States is overburdened and under-resourced. As I noted previously, “USPTO today is overwhelmed with patent applications and, as a result, patent examiners do not have adequate time or resources to thoroughly examine the applications. The agency receives more than 600,000 patent applications per year and patent holders are constantly pressuring for quicker deliberation in approving their applications . . . Because of the high volume of applications an examiner must process . . . it has been estimated that 70 percent of examiners have less time than necessary to thoroughly complete an examination.” Not only do patent examiners have inadequate time to determine whether prior art exists (remember: patents must reach a “novelty” threshold), but they certainly aren’t equipped to determine whether the invention actually works (meeting a “utility” requirement that the invention is useful and an “enablement” requirement that would allow a person of ordinary skill in the art to be able to build and use the invention; this is part of the patent bargain that grants a limited-time monopoly, but ultimately serves the public good). As Nazer explains, “If the applicant herself can’t build the invention with nearly unlimited time and money, it does not seem like the enablement requirement could possibly be satisfied.” Alas, a patent applicant need not submit the invention itself for review and the examiner operates under the assumption that the invention actually works. The USPTO has admitted as much:

In early 2014, around the same time that Theranos was beginning to grow its profile, the USPTO was criticized for awarding a patent to a Korean researcher for work that was already known to be fraudulent. The applicant had even been convicted for falsifying the relevant results. A USPTO spokesperson told The New York Times that the agency “operates on an honor code and that patent examiners cannot independently verify claims. In response, Professor James Grimmelmann commented: “The USPTO is an armory handing out legal howitzers on the honor system. What could possibly go wrong?”

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Theranos is the clear example of what could and did go wrong, with fake patents — well, they were granted patents, so real from that perspective, but fake in the sense that the things they protected didn’t actually exist — propping the company up, lending Holmes credibility that led to harm to who knows how many investors and hundreds of employees who were ultimately laid off in the wake of the scandal. With patents in hand, Holmes built a fraudulent company.

Krista L. Cox is a policy attorney who has spent her career working for non-profit organizations and associations. She has expertise in copyright, patent, and intellectual property enforcement law, as well as international trade. She currently works for a non-profit member association advocating for balanced copyright. You can reach her at kristay@gmail.com.

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