With the March release of the new Disney/Hulu miniseries, The Dropout; the spectacular rise and fall of medical testing company Theranos is once again in the news. We thought it was an excellent opportunity to revisit and update a previous blog post from 2019 that argues that Theranos’ ability to secure patents should not have outweighed the need for due diligence from potential investors.

    Founded in 2003 by Elizabeth Holmes, Theranos designed and manufactured blood-testing machines that promised to “democratize healthcare” by automatically collecting and running hundreds of tests on a few drops of blood.

    The promise made by Theranos was to make blood testing cheaper, more convenient, and more accessible to patients.  Though Theranos managed to raise between $400 and $700M dollars from investors, had a portfolio of over 100 patent pending and granted applications and was valued at over $9B at its peak, its technology never worked. 

    In September 2018, they shut their doors and ceased operations with Holmes and other executives facing multiple charges, including wire fraud (Holmes was convicted in January 2022 of 4 counts of fraud).  The investments are now worthless.

    In the wake of the collapse of Theranos, some commentators, such as Daniel Nazer from the Electronic Frontier Foundation have argued that the company’s patent portfolio gave it unwarranted credibility that helped to prop it up, making it easier to obtain funding from unwary investors.  Opinions such as these highlight the need for investors to know just what the filing and granting of a patent can tell you, and what it cannot tell you.


    Red Flags

    There were plenty of other red flags at Theranos that were overlooked while it was riding high. Theranos’ blood testing machine had never been tested by the FDA or certified.  Theranos also never released audited financial statements.  Nevertheless, our focus today is on what a savvy investor could have determined from analyzing Theranos’ patent portfolio.

    Theranos had a large patent portfolio of 137 patents and 47 published applications as reported by the USPTO.  Elizabeth Holmes is listed as an inventor on 64 of the 137 patents.  It certainly looks impressive but what does it really mean?


    What’s in a patent application?

    A patent application consists of a written specification, text and drawings, and a set of proposed claims.  The specification gives an overview of the technological field of the patent, drawbacks with the present technology, and a description of the invention.  The claims are a written description that defines the scope of legal protection granted by the patent – the bounds of the intellectual property.  It is the claims that define whether a competing product or service infringes a patent or not.

    Whoever invents or discovers any new and useful process…”  When the patent office examines a patent application, they look for several things; whether the patent is new, inventive, useful, and whether the content of the claims are described in the specification.

    Some analysts look at the requirement that a patent be useful and assume that this means that a patent must actually work as described.  This is not the case.

    The requirement that an invention be useful is known as “utility” or “specific utility.”  However, US patent examiners only look to see that the applicant has provided a “credible assertion of specific and substantial utility” to overcome this hurdle.  In practical terms only an invention where it is clear that it is totally incapable of achieving a useful result will be rejected.

    “A small degree of utility is sufficient . . . The claimed invention must only be capable of performing some beneficial function . . . An invention does not lack utility merely because the particular embodiment disclosed in the patent lacks perfection or performs crudely . . . A commercially successful product is not required . . . Nor is it essential that the invention accomplish all its intended functions . . . or operate under all conditions . . . partial success being sufficient to demonstrate patentable utility.” Source: USPTO

    You may be asking, “Why are inventors not required to prove that their invention works?  Why don’t inventors have to provide working samples of their invention?” One reason is that in the patenting system, it is the first inventor to file a patent that receives the patent.  This means that if multiple, independent inventors are inventing the same invention, the first one to file their application with the patent office will receive the patent.

    The ideal patent application is one where the inventor has figured out the key portions of their invention, solved the technical problems, but hasn’t completed all the testing, debugging, and development required to have a complete product ready for shipment.

    Furthermore, a complex system, may incorporate several patents, trade secrets, and other IP and a demonstration of each patented portion may not be feasible at the time of filing.  Finally, at the end of the day, a patented invention that doesn’t work, or works badly, has little economic value.  It is highly unlikely that a competitor will incorporate the technology, patented or not, if it does not work.

    So, what does an issued patent tell us about the invention?

    It tells us that what is claimed is new, no one has done that exact thing before.  It tells us that there is at least some small amount of inventiveness involved.  In other words, looking at the state of the art at filing, there is at least some, small part of the invention that wasn’t obvious at the time.  It tells us that the invention could work.  Or more accurately, that it isn’t obvious that it won’t work.

    It also tells us that an average inventor in the same or similar field, after reading the patent description, could build the invention without too much trouble or experimentation.  And that’s about it.

    The patent makes no promises as to whether the invention works, how well it works, and if it will be successful in the market.


    What this means

    So, what is the moral of the story for investors looking for opportunities? While the Theranos spectacle certainly sheds some light on what could be perceived as shortcomings in patent prosecution, I think that the bigger lesson here is that investors and board members need to improve their IP literacy.

    Investors (and acquirers) who are patent savvy and know the parameters of patent prosecution are likely to make better investment decisions and would arguably have been able to better identify the red flags that were overlooked in favour of the perceived significance of being able to secure patents.

    It may be tempting to get caught up in the pomp and circumstance of something being touted as “revolutionary” or “ground-breaking” (and I think the show does a good job of showcasing the lengths Theranos was willing to go for optics) but the investors in Theranos, some of whom invested approximately $100M into the company, should have known better.

    When they did their due diligence, they should have engaged with experts to properly assess the scope, value, and viability of the patent portfolio.  They should have realized that, though patents can be a valuable corporate asset, they provide no guarantee on the viability or economic value of the company’s inventions.


    FROM THE ARCHIVES: This post was originally published on March 25, 2019 as “Could a better understanding of patents have saved investors from investing in Theranos?” and has been updated with new content.