Elizabeth Holmes wrote her first patent application after her freshman year of college at Stanford University. Her invention was an arm patch that would diagnose and treat medical conditions at the same time. ((John Carreyrou, Bad Blood: Secrets and Lies in a Silicon Valley Startup 13 (2018).)) The patch was an attempt to pursue her dream of putting her mark on the world by furthering the greater good. ((Id. at 12.)) Holmes also dreamed of becoming an entrepreneur, ((Id. at 11.)) so she launched a startup in 2003 to develop her invention. ((John Carreyrou, Hot Startup Theranos Has Struggled With Its Blood-Test Technology, Wall St. J. (last updated Oct. 16, 2015, 3:20 PM), https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901.)) She named the startup Theranos.
Theranos would go on to become one of the hottest startups in the biotech industry and achieve tremendous success. In its first year alone, Theranos raised millions of dollars in funding from investors. ((John Carreyrou, At Theranos, Many Strategies and Snags, Wall St. J. (Dec. 27, 2015, 6:40 PM), https://www.wsj.com/articles/at-theranos-many-strategies-and-snags-1451259629?mod=e2fb.)) It also attracted top talent and business leadership. Although Theranos was initially focused on developing Holmes’ arm patch, it later shifted focus to blood testing machines that were to perform hundreds of tests on a miniscule drop of blood drawn from a fingertip. In 2012, Theranos arranged to begin experiments with the United States army, hoping to eventually get approval for its blood testing machines to be used by soldiers in the field. ((Carreyrou, supra note 1, at 130.)) Theranos also secured agreements to place its machines in Walgreens pharmacies and Safeway supermarkets. As a further sign of their success, Theranos moved into Facebook’s former headquarters in Palo Alto in 2012. ((Roger Parloff, This CEO Is out for Blood, Fortune (June 12, 2014), http://fortune.com/2014/06/12/theranos-blood-holmes.)) By 2014, Theranos was estimated to be worth $9 billion, ((Kevin Loria, This Woman’s Revolutionary Idea Made Her a Billionaire – And Could Change Medicine, Bus. Insider (Sep. 29, 2014, 7:23 PM), https://www.businessinsider.com/theranos-founder-elizabeth-holmes-is-a-billionaire-2014-9.)) and Forbes named Holmes the youngest and wealthiest self-made female American billionaire. ((Forbes Announces Inaugural List of America’s 50 Richest Self-Made Women, Forbes (May 27, 2015, 10:08 AM), https://www.forbes.com/sites/forbespr/2015/05/27/forbes-announces-inaugural-list-of-americas-50-richest-self-made-women/#4ca971e324c1.))
By 2015 Elizabeth Holmes had built one of the most exciting startups of the decade, and the public was eager for Theranos to bring its innovative blood testing technology to market. But Theranos was dealt a devasting blow in October 2015 when The Wall Street Journal published a report suggesting that the Theranos blood testing machines might be inaccurate. ((John Carreyrou, Hot Startup Theranos Has Struggled With Its Blood-Test Technology, Wall St. J. (last updated Oct. 16, 2015, 3:20 PM), https://www.wsj.com/articles/theranos-has-struggled-with-blood-tests-1444881901.)) It was uncovered that the machines were not capable of performing the tests as Theranos had said and that many of the blood tests were actually performed at the Theranos lab on conventional blood testing equipment. Shortly after, Walgreens suspended its plans to use Theranos equipment in its in-store wellness centers. The Food and Drug Administration investigated the Theranos lab in California and found that it violated many regulations. In response, Theranos voluntarily suspended most of its testing. ((Katherine Derla, Blood-Testing Start-Up Theranos Is in ‘Pause Period’, Says CEO Elizabeth Holmes, Tech Times (Oct. 22, 2015, 10:01 PM), https://www.techtimes.com/articles/98407/20151022/blood-testing-start-up-theranos-is-in-pause-period-says-ceo-elizabeth-holmes.htm.)) The Centers for Medicare and Medicaid Services (CMS) also inspected the Theranos lab and found that they failed to comply with its standards and requirements. CMS revoked Theranos’ lab license and suspended Holmes from owning or operating a lab for two years. ((Reed Abelson & Andrew Pollack, Theranos Under Fire as U.S. Threatens Crippling Sanctions, N.Y. Times (Apr. 13, 2016), https://www.nytimes.com/2016/04/14/business/theranos-elizabeth-holmes-proposed-ban.html?_r=0.))
Things would only get worse for Elizabeth Holmes. In 2016, the SEC and federal prosecutors began investigating Holmes and Theranos for misleading investors and the government. ((Randall Stross, Don’t Blame Silicon Valley for Theranos, N.Y. Times (Apr. 27, 2016), https://www.nytimes.com/2016/04/27/opinion/dont-blame-silicon-valley-for-theranos.html.)) As the pressure mounted, Theranos began to lay off its workforce, ultimately laying off most of its former 800 employees to avoid bankruptcy, reducing its number of employees to less than 25 people. ((Sy Mukherjee, Report: Theranos Just Laid Off the Vast Majority of Its Employees, Fortune (Apr. 10, 2018), http://fortune.com/2018/04/10/theranos-layoffs-most-of-workforce/.)) In January of 2017, Walgreens filed a lawsuit against Theranos, which was later settled. ((Christopher Weaver & Michael Siconolfi, Theranos Low on Cash After Settlement With Walgreens, Wall St. J. (Aug. 1, 2017, 5:57 PM), https://www.wsj.com/articles/theranos-low-on-cash-after-settlement-with-walgreens-1501624665.)) Holmes was charged by the SEC in March 2018 for deceiving investors that its machines could accurately conduct blood tests. She reached a settlement with the SEC which required her to pay a $500,000 fine and forfeit her stock in Theranos. She was also barred from leading a public company for ten years. ((Andrew Pollack, Elizabeth Holmes of Theranos Is Barred From Running Lab for 2 Years, N.Y. Times (July 8, 2016), https://www.nytimes.com/2016/07/09/business/theranos-elizabeth-holmes-ban.html.)) Theranos announced that it was shutting down in September. ((Reed Abelson, Theranos Is Shutting Down, N.Y. Times (Sept. 5, 2018), https://www.nytimes.com/2018/09/05/health/theranos-shutting-down.html.)) Finally, in June, Holmes was indicted for wire fraud and conspiracy to commit wire fraud and is now facing a maximum penalty of 20 years in prison. ((John Brandon, Is Elizabeth Holmes Going to Prison? Read This Before You Throw Stones, Inc. (June 17, 2018), https://www.inc.com/john-brandon/is-elizabeth-holmes-going-to-prison-read-this-before-you-throw-stones.html.))
How did we get here? How was Elizabeth Holmes able to create a business that would grow to become worth more than $4.5 billion if its technology was a sham? Theranos was brilliantly secretive and deceptive. The Theranos management deceived numerous investors, employees, members of the board, the U.S. government, Walgreens, and Safeway on its way to the top. Holmes and the management used various techniques and tools to build and maintain Theranos’ image as a technologically groundbreaking company. Key among them was the U.S. patent system.
Patents are essential to tech startups looking for funding. They are a vital component to any business plan because they demonstrate a startup’s potential value to investors. Investors want to see that a startup has technology that is desired in the market and can be sold for a profit. Investors also need to know about potential threats to the startup’s business plan. If other companies can compete against the startup using the same or similar technology, then it may not be able to survive. If the startup holds patents for its technology, then it can exclude other businesses from using its technology altogether. Additionally, the patent-holding startup can license the rights to use its technology to other businesses for profit. In this way, the patents can both generate and protect profits. Thus, startups that have already secured patents for their technology can better demonstrate to investors that their business plan will be successful. Submitting a patent application and holding a priority date (as opposed to holding an issued patent) can also have significant value. Patent rights are assigned to the first applicant to file. Although an applicant cannot exclude others from practicing their technology until the patent is issued, if they have secured a priority date, they can be sure that they will eventually receive the patent and not a later applicant (assuming there are no other barriers to the applicant receiving the patent).
Patents were essential to Theranos’ success in raising money from investors. Holmes and Theranos raised more than $6.9 million from investors by the end of 2004, their first year of business. ((John Carreyrou, At Theranos, Many Strategies and Snags, Wall St. J. (Dec. 27, 2015, 6:40 PM), https://www.wsj.com/articles/at-theranos-many-strategies-and-snags-1451259629?mod=e2fb.)) During this time, Theranos was able to use Holmes’ first patent application to demonstrate the value in its business plan. Over the course of the next few years, Theranos applied for more patents and received more and more investment dollars. By the end of 2006, Theranos had raised $45 million and had four patent applications. ((Ron Leuty, Theranos: Testing Times Lie Ahead for Secretive Blood-Testing Firm, Biz Women (June 29, 2015, 2:01 PM), https://www.bizjournals.com/bizwomen/news/profiles-strategies/2015/06/theranos-testing-times-lie-ahead-for-secretive.html?page=all.)) By the end of 2010, fundraising reached $90 million. Meanwhile, Theranos had a total of 12 submitted applications and Holmes’ first application had been issued as a U.S. patent. Theranos’ fundraising and patent filings would continue to increase until its downfall. Theranos was able to lure in many notable investors, including the Walton family, Rupert Murdoch, and Betsy DeVos, each investing more than $100 million. ((John Carreyrou, Theranos Cost Business and Government Leaders More Than $600 Million, Wall St. J. (May 3, 2018 8:01 PM), https://www.wsj.com/articles/theranos-cost-business-and-government-leaders-more-than-600-million-1525392082.))
During its formative years, Theranos was able to hire talented employees and secure savvy board members. In the same way that a startup can use its patents and patent applications to demonstrate its business plan to investors, it can attract essential personnel too. The number of Theranos employees grew to a peak of more than 800 before the layoffs that followed the incriminating Wall Street Journal reporting of 2015. ((Sy Mukherjee, Report: Theranos Just Laid Off the Vast Majority of Its Employees, Fortune (Apr. 10, 2018), http://fortune.com/2018/04/10/theranos-layoffs-most-of-workforce/.)) Over the years, Theranos’ board members included Henry Kissinger, the former Secretary of State; William Foege, the former director for the Center for Disease Control and Prevention; Richard M. Kovacevich, the former CEO of Wells Fargo & Company; Jim Mattis, the Secretary of Defense; and Fabrizio Bonanni, an executive vice president at Amgen, the world’s largest independent biotechnology company. ((Jennifer Reingold, Theranos’ Board: Plenty of Political Connections, Little Relevant Expertise, Fortune (Oct. 15, 2015), http://fortune.com/2015/10/15/theranos-board-leadership/; John Carreyrou, Theranos Executive Sunny Balwani to Depart Amid Regulatory Probes, Wall St. J. (May 12, 2016, 10:17 AM), https://www.wsj.com/articles/theranos-executive-sunny-balwani-to-depart-amid-regulatory-probes-1463015943.))
Theranos also used its patents to secure commercial deals. In 2010, Theranos approached Walgreens Pharmacies about putting its blood testing equipment in its stores. ((Carreyrou, supra note 1, at 82.)) Walgreens could generate revenue from existing customers through the machines and attract new customers interested in having an innovative Theranos blood test. At the time, Walgreens was looking for something to help it stand apart from its competition, and it hoped the Theranos machines would do the trick. ((Id. at 82.)) Key to Walgreens’ interest in a Theranos deal was a fear that its bitter rival, CVS Pharmacies, would sign a deal with Theranos first. ((Id. at 89.)) If Walgreens could sign an exclusive contract before CVS, allowing it to offer blood testing using the patented Theranos machines in its pharmacies, then it would not have to worry about CVS competing by offering similar blood tests. In the fall of 2013, Theranos began opening wellness centers in Phoenix area Walgreens stores, ((Id. at 190.)) planning to eventually place its machines in Walgreens stores nationwide. ((Id. at 84.)) However, the partnership began to fall apart after the October 2015 Wall Street Journal article was published, revealing the truth about Theranos’ machines. Walgreens eventually terminated its partnership with Theranos, shut down the wellness centers, ((Id. at 289.)) and sued Theranos for $140 million of investment money it had lost. They eventually settled for an undisclosed amount thought to be close to $30 million. ((Christopher Weaver & Michael Siconolfi, Theranos Low on Cash After Settlement With Walgreens, Wall St. J. (Aug. 1, 2017, 5:57 PM), https://www.wsj.com/articles/theranos-low-on-cash-after-settlement-with-walgreens-1501624665.))
At the same time Theranos began courting Walgreens, it was building a relationship with Safeway Supermarkets. ((Carreyrou, supra note 1, at 90.)) Safeway was interested in the Theranos machines for the same reasons as Walgreens. It wanted to be the only place in town that offered its customers the Theranos blood testing technology. Safeway knew that Theranos was negotiating with Walgreens but was nonetheless willing to settle for exclusivity in supermarkets if Walgreens would be the only drugstore with the machines. If Theranos’ technology was not patented, then it would not have been able to offer Safeway an exclusive opportunity; it would have been possible for other stores to offer similar blood testing using machines from other manufacturers. Safeway loaned Theranos $30 million and agreed to put Theranos machines in its stores. ((Id. at 91.)) Safeway spent $350 million renovating more than 800 of its stores to create upscale wellness centers, planning to offer its customers the use of Theranos’ blood testing machines. ((Id. at 110.)) However, the partnership slowly lost steam as the Safeway CEO neared retirement in May 2013, and the relationship was essentially over following the Wall Street Journal article in October that dashed Theranos’ credibility with the remaining Safeway executives. ((John Carreyrou, Safeway, Theranos Split After $350 Million Deal Fizzles, Wall St. J. (Nov. 10, 2015, 8:36 PM), https://www.wsj.com/articles/safeway-theranos-split-after-350-million-deal-fizzles-1447205796.)) Although all the wellness centers had been built as planned, they were never able to offer customers Theranos blood tests.
If Theranos was a scam and its blood testing machines did not actually work, how was it able to patent its technology in the first place? Doesn’t an invention have to work to be patented? Technically, yes, but practically speaking, no. An invention must meet many substantive conditions in order to be patent-eligible. One of the conditions is that the invention must be useful (the others are that the invention must be of patent-eligible subject matter, new, and non-obvious). ((35 U.S.C. § 101 (2012).)) The usefulness requirement is met if the invention provides a benefit to the public. ((See In re Fischer, 421 F.3d 1365, 1371 (Fed. Cir. 2005).)) An invention does not need to be the best way to provide the stated benefit, but an invention that does not work is certainly not useful. When an inventor files an application for a patent, the Patent Office must presume that the invention works to provide the stated benefit. ((See Fregeau v. Mossinghoff, 776 F.2d 1034, 1038 (Fed. Cir. 1985).)) To reject an application because the invention is inoperable, the Patent Office must provide evidence showing that a person with knowledge in the technical field would reasonably doubt that it works. ((In re Swartz, 232 F.3d 862, 864 (Fed. Cir. 2000).)) It would be a tremendous undertaking for the Patent Office to challenge all the inventions sought to be patented that they suspect are not yet operable. Thus, if an inventor files an application for an invention that does not yet work, it is quite possible that the Patent Office will not challenge it as inoperable.
If an invention meets all the substantive requirements of patentability, an inventor must still adequately describe the invention in the patent application. In describing the invention, the inventor must state exactly what was invented, reveal the best mode for carrying out the invention, and provide enough information to allow a person with knowledge in the technical field to make, use, and understand the invention. ((35 U.S.C. § 112 (2012).)) Of course, even a knowledgeable person cannot make and use an invention that does not work. Thus, an invention that does not work cannot be adequately described in a patent application. As with the usefulness requirement, the burden is on the Patent Office. It must prove that the description in the application does not enable a person to make and use the invention if it wants to reject the application for that reason. ((See In re Brana, 51 F.3d 1560, 1566 (Fed. Cir. 1995).)) This heavy burden results in the issuance of patents for inventions that do not work.
Placing the burden on the Patent Office to prove that an invention is not useful or adequately described highlights the tension in our patent system between the desire to encourage innovation and the costs of granting patent rights. The aim of the patent system is to encourage both innovation and disclosure to the public (this is why the patent specification must include the adequate description discussed above). An individual or business is more likely to invest in innovation and disclose their invention in a patent application if they believe that their efforts will ultimately result in patent rights. Potential innovators know that they are more likely to be granted a patent in a system like ours, where the Patent Office has the burden of proving that an invention does not work and that an inventor has not adequately described the invention and how to make and use it. But the additional patents that are granted in under our system can also hamper innovation. If a patent is awarded before an invention has become operable, the public may be less likely to see the full benefit of the patented invention. The patentholder may never develop the invention to its full potential, and during the patent’s term, other inventors are excluded from working on the invention. The patentholder can license its patent rights to other inventors, but the increased costs will be discouraging.
It is important for those conducting business in innovative fields to do their own due diligence. It may seem obvious, but you cannot rely on the fact that an inventor has a patent to know that their product works or is marketable. The Patent Office may have granted them a patent on an invention that does not yet work. Even if the patented invention does work, it may only be a small or ancillary part of the product and the integrated product might not work as promised.
The Theranos story serves as a reminder of what a patent does and does not necessarily mean. If an inventor has a patent, it means others can be excluded from making, using, and selling the invention. A patent does not always mean that the invention works. Certainly, not everyone that was deceived by Theranos thought that its technology worked solely because it was patented, but some might have benefitted from a better understanding of our patent system. An inventor with a patent becomes a little less impressive when you realize that their invention might not work.
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