The Theranos scandal made headlines last year. It gained a spot in nearly every respected publication, from podcasts to its own documentary. If you’ve somehow missed all the hoopla, here are the basics.
Elizabeth Holmes, a Stanford dropout, founded healthcare company Theranos in an effort to revolutionize blood testing. Theranos, based in tech-forward Silicon Valley, received high-profile investors and huge valuations from the beginning. In 2014, Holmes was named “the next Steve Jobs” and the youngest self-made female billionaire in the world. Theranos was valued at $9 billion.
Just the next year, though, Theranos began to come under fire from the medical community. In October, The Wall Street Journal published a report quoting ex-employees showing the company’s deception and overall ineptness. Retail deals folded. The FDA found the company used some uncleared medical devices. The CMS said Theranos labs were a threat to patient health and safety. More articles were published accusing Theranos of rigged tests.
Then, in 2018, the U.S. Securities and Exchange Commission charged Holmes with fraud and conspiracy. They said she and others made inaccurate claims about their technology in order to raise funds. This eventually spelled the end for the company.
From an IP standpoint, where did Holmes and Theranos go wrong?
Faulty IP is Approved By the Patent Office Far Too Frequently
One of the questions lawyers are asking when looking at the Theranos story is, was the IP valid? Or was there fraud on the IP and the patent office?
It’s a difficult question to answer and a bit of an inherent problem in the U.S. patent system. There is a legal requirement to both have a useful patent that has utility, and a patent that is enabled such that those of skill in the art can practice the invention if they read the patent. However, these legal requirements are rarely enforced.
This is partially due to examiners simply being too busy to properly examine each patent. Examiners have, on average, 10–20 hours to address an office action. This is not enough time to both address prior art and dig into the science of the technology detailed in a patent, to figure out if the technology will or will not work.
Even if the examiner did have time to do this, it would be very difficult to do so with the paperwork they’re given. In many instances, invention test results are necessary and then the examiner would need to examine those test results — a practice that’s far beyond the current capabilities of the patent office.
This is, at least in part, where Theranos fell short. They had a great, new idea, but it had not been verified to discover whether or not the technology would actually work.
Due Diligence Falls to the Investor
Since the Patent Office does not have the resources or ability to vet utility, investors have to be careful not to assume that patents provide a quick way to assess engineering viability.
Many companies suffer from the same problem Theranos had — inventors often file for and receive patents on prototypes before practical feasibility and manufacturability have been sussed out. Yet, many of these innovators have funding.
Since all founders are also required to be adept promoters of their technologies, investors have to do more than just assume that the existence of patents means they are buying into a viable product. Thoroughly reviewing patents is necessary to know what you’re dealing with and what kind of company you’re investing in.
Unfortunately, most investors do not invest in this part of due diligence, instead allocating their resources to the corporate side of an investment or M&A transaction.
And until this glossing over of IP during due diligence ends, Theranos-like companies will continue to pop up.
The Wizard of Oz Effect: Don’t Show Investors the Wizard Behind the Curtain
Theranos has been awarded more than 200 patents — a vast number that caused many to assume that the company was an innovation powerhouse. Anyone coming up with this many new innovations, investors assumed, had to be legitimate. Investors took the existence of these patents as proof of the technology’s credibility, rather than digging into the company’s actual technological success.
Of course, some of Theranos’ patents probably are legitimate, especially the ones Elizabeth Holmes wrote in the company’s early days. If Holmes had had more time to implement these early ideas, and wasn’t beholden to the five-to-ten year-exit timeline of most Silicon Valley funding sources, perhaps Theranos could have been a success and changed the world.
But in Silicon Valley, investors are expecting to see progress and exits in a short period of time. If your technology doesn’t advance as quickly as you hope, you can fail, or possibly, concoct false results to appease your investors.
Holmes chose the latter. And in this case, Holmes as a founder was a very good salesperson and cover-up artist.
Investors, who often look at a founder’s skills and demeanor over their actual technology, were looking at what they believed to be a uniquely gifted founder, allowing her to keep the ruse going for longer than less-talented visionaries could have.
Don’t Go Down the Theranos Path: Staying Legal While Attracting Investors
Attorneys have a responsibility to ensure that clients are engaging in ethical activities when submitting items to the patent office, and also when investors are looking at a potential technology to invest in. In the case of Theranos, it’s possible that the attorneys didn’t step up and perform this duty.
It’s extremely easy for inventors and clients to cross a thin line into illegality and fraud, and many don’t get caught. However, attorneys should have enough pride in their profession to step back and be willing to take a smaller paycheck in order to guide their clients along the straight and narrow.