Category: Legal
It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom, by Andrew P. Napolitano
Judge Napolitano has written an excellent book on Natural Law from the perspective of an attorney. He attacks legal 
Positivists, who believe the law is whatever the government says it is. He points out the moral bankruptcy of Positivists by pointing out that they have no logical basis to be against Hitler’s final solution of wiping out all Jews – since it was a validly passed law. He also rejects the non-sense of “majority rule” or Democracy.
He explains that Natural Law is like science. He states:
Only man-made theories for what those rules are and how the operate may change.
However, without an explanation or understanding, those rules remain just as “true”: Penicillin will combat certain infections, and gravity will always pull things toward the center of the Earth, regardless of whether or not we understand how.
He also states something that will not sit well with conservatives:
Truisms reject moral relativism, and American Exceptionalism. They compel and understanding of the laws of nature that animate and regulate all human beings at all times, in all places, and under all circumstances. And truisms equal freedom.
The book starts off with the Declaration of Independents. It moves onto eminent domain issues where the judge has a number of illuminating points. I particularly liked the freedom of association chapter. Napolitano I think is one of the few people to write about this issue. I also found the right to petition chapter illuminating. I believe that only someone with Judge Napolitano’s legal background could have done this chapter justice. His chapter on the growth of the Defense Industry was illuminating. While I did not agree with all his points, he makes it clear that the Defense Industry has grown completely out of control. According to the Judge the US military is in over 130 countries. The quote from Fredrick the Great comes to mind “in trying to defend everything he defended nothing.” The US military has become just another welfare/crony capitalism project. The military will complain that defense spending as a percentage of GDP is less than it was during the Korean War. However, we did not have the Department of Homeland Security, the Department of Energy, the Border Patrol, etc, which are all really part of our defense spending at the time of the Korean War.
Unfortunately, the book is marred by two problems. I am in complete agreement with the Judge’s emphasis on Natural Law, but he defines it in terms of “essential yearnings.” Someone might have an essential yearning to torture people or kill them. That does not make it a natural right. It is enough to state that people have ownership of their body. The rest of Natural Law and Natural Rights flows from this simple concept. Once I own myself, I clearly own the product of my labor which leads to all of property law, including patents. Criminal law comes from violating my rights in my body or in my property. The “essential yearnings” adds nothing to the concept of Natural Law and Natural Rights.
The second problem with the book is Judge Napolitano’s analysis of fractional reserve banking. The Judge and some Austrian economists incorrectly state that fractional reserve banking allows banks to create money out of nothing. A fractional reserve bank is a bank that lends out part of its depositors money. Fractional reserve banking is how all modern banks (since at least 1750s) operate. Wikipedia defines a Fractional-reserve banking as a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally on-loan to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.
The history of fractional reserve banking starts with the concept of an exchange bank. I explain in my book, The Decline and Fall of the America Entrepreneur: How Little Known Laws and Regulations are Killing Innovation:
Modern banking started in the early 1600s with the Bank of Amsterdam. Merchants could deposit coins with the Bank of Amsterdam and use this account to pay for transactions. Using checks, a merchant’s account was debited and another merchant’s account was credited. This meant that coins did not have to be transported from one merchant to another with the attendant risk of theft and loss or the cost of transportation. The Bank of Amsterdam was just an exchange bank that facilitated transactions between merchants. Next came the Swedish Riksbank established in 1656. The Riksbank was not only an exchange bank, it also lent money making it the first modern fractional reserve bank. Fractional reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand. Commonly, loans are made against collateral such as land or jewelry. … Some people believe fractional reserve banking creates money out of thin air, but what really happens was the money for these loans were backed by some collateral other than coins or bullion. The downside of other types of collateral is they are not as liquid as species (coins, bullion). As a result, if large numbers of customers of a fractional reserve bank wanted species (currency) at the same time, the bank would not able to fulfill all its customer’s demands. This is a classic run on a bank. A run on a bank is a cash flow issue. A sound bank may have plenty of collateral and performing loans, but if most of its customers demand species at the same time it will not be able to fulfill these requests. Fractional reserve banks free up capital from low performing assets so that they can be invested in higher performing assets. For example, if you owned a large tract of ranching land that was not highly profitable but represented a large amount of capital and you want to invest in an oil well, without fractional reserve banking you would have to sell some of the land in order to invest. With fractional reserve banking you could convert your land into a generally accepted form of money, by pledging your land as collateral to a bank for a loan. In the modern world, the loan to you is just a computer entry in your bank account.
It is clear from history that fractional reserve banks are not some sort of government institution, like the Federal Reserve. Without fractional reserve banking it is would be very difficult to securitize (Collateralize) many assets, such as houses and land. This would significantly impede the economic growth of a country. Logically if you are against fractional reserve banking you should be against a stock market. Both are just a way of securitizing assets. The stock of paper money act as a claim against various assets and/or future earnings.
Michele Bachmann has introduced a bill repeal the massive and widely criticized Dodd-Frank financial (see Newsmax story and Stillwater Gazette story). This is a good first step, but she should have also included the repeal of Sarbanes Oxley. Ms. Bachmann has correctly 
criticized SOX as ineffective and overly expensive.
When Sarbanes Oxley was passed, the SEC (Securities and Exchange Commission) estimated the cost of compliance would be $91,000.00 per year for each public company. The most recent estimates for the cost of compliance are between $4.0 million and $5.0 million per year for publicly traded companies. This clearly has an affect on the number of IPOs.
Is the cost of this law worth its incredible price? Has Sarbanes Oxley achieved its goal of protecting investors from fraud? Sarbanes Oxley has cost the U.S. economy at least $400 billion since it passage. This is just the direct costs and does not include the opportunity costs, which are most likely substantially higher. The stock market has been flat or declining since its passage. As a result, it is hard to argue that this legislation increased shareholder value. The banking scandals of 2008 & 2009 that included Bear Sterns, Lehman Brothers, American International Group (AIG), Merrill Lynch, and the Bernie Madoff fraud make it impossible to suggest that Sarbanes Oxley has protected investors from fraud.
It is a sad day for innovation and freedom. For more information on why see Does Net Neutrality Inhibit Innovation. The FCC decided to enact a set of rules called Net Neutrality, which gives the FCC broad regulatory powers over the internet. These rules are really an assault on property rights and a clear violation of the Fifth Amendment, which states “nor shall private property be taken for public use, without just compensation.” Regulating the use of private property is a taking of some part of the owner’s property rights. Property rights are a 
bundle of rights that define a relationship between something and the owner. When the government takes, limits or modifies one of these rights it is a taking.
An ironic result about these rules is that the liberal left that pushed these socialist rules is unhappy with them. They feel that the rules did not go far enough and that the regulatory process was captured by large companies. Gee, that’s surprising. Just look at how large Wall Street banks have used financial regulation to get rid of competition. The large railroads did the same thing years ago.
Another ironic angle of these rules is that no consumer has come forward to complain about the way the internet works today. A couple of very large technology companies have complained about issues of access. They are part of the socialist groups that want to take someone else’s property without paying for it. This is ultimately a fight between large companies that want to use the government to game the system in their favor.
A sad result of these rules is the useful idiots who believed that by supporting Net Neutrality they were supporting freedom and instead were supporting repression. The FCC is out of control. This is another assault by the FCC on free speech. The FCC should be abolished.
Grant Thornton has prepare a paper entitled Market Structure is Causing the IPO Crisis . Here is my understanding of
their position. The IPO market, especially for small IPOs started to decline before Sarbanes Oxley. The Manning Rule and Order Handling Rule and decimalization decreased the margin for handling illiquid securities by brokerage houses. Finally, online brokerage accounts have killed quality research and encouraged speculation.
The things that effect the IPO market are the cost of going public, the return for going public, the alternatives to going public, and the willingness of an investment bank to take you public (might be part of the cost). While not stated explicitly in the report, they seem to imply that there is little incentive for investment banks to take small companies public or to create a market in their securities after the fact. If true, I think this would contribute to the IPO downturn, but I do not think they have stated their case very strongly.
According to the NYtimes the House Financial Services Committee approved an amendment to Sarbanes Oxley (Sarbox) that would allow some companies to be exempt from this legislation. While the article implies that many companies would not be exempt under this amendment, the amendment only applies to companies worth less than $75 million and asks for a study of whether companies worth less than $250 million should be exempt.
Sarbanes Oxley has severely damaged the technology start-up market and the financial industry in the U.S. Sarbox is very expensive: including enormous direct and indirect costs to our economy and to innovation. It has not met its goals of improving the quality of auditing or preventing fraud. The effects of this law include fewer public companies, fewer companies going public, more companies choosing to go public in foreign markets, absurdly high auditing expenses and a significant decrease in risk capital.
For More information see Sarbanes Oxley – Is the Medicine Worse Than the Disease – 1 and Sarbanes Oxley – Is the Medicine Worse Than the Disease – 2 .
Any government restriction on how the internet can operate will by definition limit innovation. The FCC’s Net Neutrality proposal violates the “Rate Law of Innovation”, which states that rate of innovation is directly related to the number of elements that innovators have available to them. The Net Neutrality rule limits how many variables or elements that innovators have to innovate. See the Laws of Innovation for more information. All the major engineers who developed the internet are opposed to the FCC’s Net Neutrality rules. According to Andrew Orlowski, “Engineers fear rash legislation would inhibit the ability of systems engineers to improve latency and jitter issues needed to move data at speed.” See Mr. Orowski’s article for more information.
According to the AIPLA (American Intellectual Property Association) the allowance rate for patent applications in the U.S. fell to 42% in the first quarter of 2009.
This continues the trend of falling allowance rates that started in 2002. Why has the allowance rate changed so dramatically in the last six years? Sometime early in this decade, the USPTO started to define the “quality” of examinations by the allowance rate. The USPTO tracks the allowance rate of every examiner and grades the quality of their examinations by their allowance rate. If one examiner’s allowance rate is higher than the average allowance rate of the group they work in, their examination of applications will be considered to be of lower quality. If an examiner never allows any patent applications, they will be considered to have the highest quality examinations. This has created a perverse incentive for examiners.
For an update on the allowance rate click here.
A number of scholars[1] have suggested that the logical basis for property rights is scarcity. Property rights efficiently allocate these resources and avoid conflicts. These scholars argue that ideas and inventions are not subject to scarcity and therefore intellectual property rights should not exist. These arguments seem to be particularly prevalent among Libertarians, including the Cato Institute and Von Mises Institute, and the open source community.
None of these securities laws were able to prevent the stock market decline of 2000. Sarbanes Oxley was passed in 2002 in reaction to several corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.
Sarbanes Oxley was passed in 2002 in reaction to corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom. The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. This law has effectively killed off the possibility of going public in the U.S.
The 90’s brought us companies such as Amazon.com, eBay, Netscape, Broadcom, and AOL to name a few. We discovered web browsers, PDAs, universal email, voice over IP, DSL, broadband cable, cable telephony, Wi-Fi, and TiVo among others. The 80’s brought us companies such as Dell, Compaq, Cisco, Microsoft, Qualcomm, Adobe Systems, and Genentech. We discovered personal computers, cellular telephones, spreadsheets, and genetic engineering. This decade we have Crocs and the iPod. Where has American innovation gone?
John Kao, an expert on innovation from Harvard, claims the U.S. is experiencing a brain drain as foreign scientists and engineers return to their native countries for better opportunities. Even more alarmingly, other countries are luring away U.S. born scientists and engineers. Much of our venture capital industry is investing their resources outside the U.S. Those venture capital funds not invested overseas are often part of the walking dead, no longer actively investing.
Not to be outdone, the Patent and Trademark Office launched their own assault on inventors. The allowance rate for patents has dropped from around 70% in 2000 down to 45% in 2008. The allowance rate had hovered around 62%-72% for several decades and then started a precipitous drop around 2003.
Harmonization of US patent law with other patent laws around the world is another trend that started in the 1990s. The first effort to start harmonizing US patent law with patent laws around the world, was the change in the term of a patent from 17 years from the date of issuance to 20 years from the date of filing, 35 USC 154. The arguments for this change included harmonization with the rest of the world, the effective term of most patents is unchanged, and the change eliminates submarine patents. Wikipedia defines a submarine patent as an informal term for a patent first published and granted long after the initial application was filed. Like a submarine, its presence is unknown to the public; it stays under water, i.e., unpublished, for long periods, then emerges, i.e., granted and published, and surprises the relevant market. Jerome H. Lemelson was the poster child for submarine patents. Mr. Lemelson had patents that issued in the late 1980s and early 1990s that were based on patent applications from the 1950’s, i.e., submarine patents. This was generally regarded as unfair, because a potential infringer would not have notice that a patent covered their product or process. Mr. Lemelson’s most successful patents were related to machine vision. However, many of the claims of his key patents on machine vision were held invalid in 2004.[1]
Other commentators have suggested that “submarine” patents were caused by the inefficiencies of the US Patent and Trademark Office (USPTO).[2] One of the most cited of these is patent No. 5,283,641 to Mr. Lemelson. This patent was subject to a 20 way divisional (the Patent Office required the original patent application be divided into 20 separate patent applications), which was the major cause of the delay in this patent issuing. The term “submarine patents” first appeared in Japan and may have been an attempt to persuade the US to adopt a Japanese style patent system. The Japanese patent system is widely viewed as unfriendly to individual inventors and small companies.
The next step in harmonization was the Intellectual Property and Communication Omnibus Reform Act of 1999. This required publication of US patent applications 18 months from the filing (priority) date, expect for patent applications that explicitly requested non-publication and will never be filed in a foreign country 35 USC 122 (b). The argument for this change besides harmonization is increased patent quality and notice to potential infringers. By publishing patent applications, the invention would not remain hidden from the public and would add to the store of known prior art an Examiner at the Patent Office could cite against other patent applications. Large companies that filed internationally were in favor of this change. Large companies generally file their patent applications in foreign jurisdictions, almost all of which publish patent application at 18 months. As a result, their patent application are published at 18 months anyway. Small and independent inventors were against this change in the patent laws. Independent inventors were placated with the promise that most patent applications issue around 18 months from the date of their filing anyway, so they were not giving up any significant amount of time that their inventions were kept secret.
While this legislation was not widely seen as anti-patent at the time, its effects have clearly been to enhance the rights of adopters of technology at the expense of creators of technology. The publication rule is a clear violation of the social contract between the inventor and society. Under the publication rule, society gets the advantage of the disclosure of the invention even if the inventor never receives any property rights in his invention. Before the publication rule if an inventor felt that the scope of the claims to his invention were too narrow or not allowable, he could withdraw his application and keep his invention a trade secret. Narrow claims are easy for a competitor to design around providing little protection in exchange for the disclosure of the invention. In other words if the inventor did not like the deal he was offered from the Patent Office he could reject it and keep his invention a secret. Even for inventions that can be reverse engineered once the invention is marketed, this is a better deal than the publication rule. Under the publication rule, it is easy for competitors to find the inventor’s idea on the World Wide Web and copy the invention. Without publication, a competitor has to spend the time and money to reverse engineer the invention. This is significantly more costly than reading a patent application that describes the invention in “enough detail that one skilled in the art can practice the invention.” 35 USC 112. The publication rule is perhaps the most egregious anti-patent change in the patent laws in the history of the US. It does not promote the useful arts, since it decreases the incentive to file for a patent, which also decreases the diffusion of knowledge by the patent system. The publication rule should be declared unconstitutional, but as we will see, it is unlikely any relief will be forthcoming from the US Supreme Court.
Presently there is a proposal to further harmonize our patent laws with the rest of the world by converting our patent system from a “first to invent” to a “first to file.”[3] It is being sold as a minor change, since only about 1% of patent applications are ever involved an interference – a case to determine who is the first inventor. In addition, the first applicant to file wins most interference cases. However, this will further biases the patent system in favor of large corporations who can afford to file patents that are more speculative on incomplete inventions. Individual inventors cannot afford this expense and are likely to lose out in the race to the patent office. In addition, it is likely to result in poorly thought out patent applications and waste the US Patent Office’s resources. Other countries’ patent systems are not designed to protect the interests of small individual inventors and start-ups.
The stance of the courts has turned decidedly anti-patent since 2000. In 2006 the US Supreme Court decided eBay Inc v. MercExchange, L.L.C., 547 U.S. 388 (2006) holding that a permanent injunction should not automatically issue as part of a judgment of infringement. A patent is a legal right to exclude, 35 USC 154, others from making, using, selling (offering for sale), or importing the invention. It is a little known fact that a patent does not give the holder the right to use, make, sell (offer for sale) or import the invention.[4] The Supreme Court’s eBay decision denies a patent holder’s right to exclude others and substitutes monetary damages even if the patent holder prefers to enforce their right to exclude. The Supreme Court’s eBay decision overturned 20-25 years of jurisprudence that recognized that an injunction was the only relief a court could provide against an infringer that was consistent with a patent holder’s “right to exclude.”
In 2007 the Supreme Court in the Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), overturned a long-standing rule that a licensed patent user cannot file a declaratory judgment action when they have not breached the license terms. Article III of the U.S. Constitution prohibits going to court for an advisory opinion; there must be an actual controversy between parties with adverse legal interests. Under the Medimmune decision a patent licensee can sue the patent holder complaining the patent is invalid while claiming that they are not infringing the patent or in breach of the license. As a result, it is a no-lose situation for a licensee to file a declaratory judgment action against the patent holder claiming the patent is invalid. If the Licensee is successful in court, they no longer have to pay royalties to the patent holder and if they lose, they are in the same position as they were before the lawsuit was filed. The patent holder is forced to defend their patent with nothing to gain if they win; as a result, the patent holder has no actual controversy with the licensee. This case is clearly inconsistent with Article III of the U.S. Constitution.
In KSR International v. Teleflex, 550 U.S. 398 (2007) the Supreme Court made it easier to find a patent invalid and harder to obtain a patent by changing the standard for obviousness. In order to obtain a patent, the invention has to useful, novel, and non-obvious. The Supreme Court overturned 20 years of jurisprudence associated with an objective test of obviousness. The Supreme Court rejected any objective test of obviousness as too rigid. This more flexible approach increases the uncertainty that an inventor will receive a patent and increases the risk that their patent will be held invalid if they have to enforce their patent against an infringer. It also increased the costs associated with obtaining a patent and in enforcing a patent.
As a result of these three cases the Supreme Court has denied patent holders their “right to exclude”, allowed companies that license a patent to challenge the patent they licensed at no risk and made it more difficult for an inventor to obtain a patent and enforce the patent once it is obtained. Short of declaring the patent system unconstitutional, it is hard to see how the Supreme Court could have done more damage to the rights of inventors.
[1]United States Court of Appeals for the Federal Circuit, 04-1451, Symbol Technologies, Inc. et al v. Lemelson Medical, Education & Research Foundation, LP.
[2] Riley, Ronald J., http://inventors.about.com/library/weekly/aa072897.htm
[3] H.R. 1260 and S. 515 (2009).
[4] Because of this, it is incorrect to state that a patent is a monopoly. A legal monopoly is a right to a market and includes both the exclusive right to sell into that market and the right to exclude others from selling into that market. A patent does not confer the right to a market or the right to sell the patented invention.
The Federal Trade Commission (FTC) with their nine no-nos with respect to patents in the 1970’s[1], signaled a major shift in policy towards patents. These anti-patent policies reached absurd levels in the FTC consent decree against Xerox in 1975 that required Xerox to dedicate its patent portfolio to its competitors.[2] By the late 1970’s there was widespread concern that the US had lost its economic and technological edge. Our auto industry and our semiconductor industry were about to be overtaken and made obsolete by the Japanese and others.
In reaction to these concerns, our patent laws were strengthened in the 1980s. For instance, all patent appeals were consolidated into the Court of Appeals for the Federal Circuit (CAFC) created in 1982.[3] A number of the initial Judges on the CAFC were former patent attorneys and the court brought consistency to patent appeals. The court also took seriously the idea that issued patents are presumed to be valid. These changes signaled a more favorable atmosphere for patents in the 1980’s. Before the CAFC patents were treated differently in each of the federal court circuits. Some circuits had not upheld the validity of a patent in decades. The new court brought a sense of stability to patent law. The 1980’s saw a restoration of America’s economic and technological dominance in the world.
The Supreme Court also displayed a more favorable attitude towards patents. In, Diamond v. Chakrabarty, 447 U.S. 303 (1980), the Supreme Court decided that genetically modified microorganisms could be patented. In Diamond v. Diehr, 450 U.S. 175 (1981) the Supreme Court stated that while mathematical algorithms per se were not patentable, inventions incorporating mathematical algorithms that were otherwise directed to statutory matter were patentable. These cases set the stage for two of the most significant start-up industries in the 1980’s and 1990’s, specifically the software and biotechnology industry.
The legislative environment was also favorable to patents in the 1980’s. Extending the life of a patent to compensate for the delay in securing marketing authority from the FDA, became possible in 1984. 35 USC 156. The definition of infringement was amended to include export of kits of parts to make a product, which if made in the US would be an infringement of a US patent. 35 USC 271(f). In 1988 the definition of infringement was again expanded to include importation of products made by a process that violates a US patent, 35 USC 271 (g) and a request for marketing approval for a patented drug to be effective before the expiration of a US patent 35 USC 271 (e). In a reaction to FTC’s nine no-nos, the Patent Misuse Reform Act was passed in 1988, that made it clear that a patent was not unenforceable if the patentee refused to license their patent or used a patent tying arrangement.
The 1990’s continued the pro-patent trend. The definition of infringement was extended to acts in outer space controlled by the US in 1990, 35 USC 105, and state governments were made liable for acts of patent infringement in 1992. In 1995 the law on obviousness for a biotechnology process was changed, so that a showing the process resulted in a new and nonobvious product is sufficient to support a conclusion of nonobviousness, 35 USC 103(b). In 1995, the United State Patent Office officially started allowing claims to software stored on a computer readable medium. This allowed patent claims directed to a computer disk. As a result, a patent ower could sue a someone for owning a disk with infringing software. This seemed to be the end of the Patent Office’s sad history of denying patent protection to software enabled inventions.
The culmination of this pro-patent trend was State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). In this case, Signature Financial had obtained a patent on a “Hub and Spoke” method of running mutual funds. In this method, several mutual funds (or “spokes”) pool their investment assets into a single investment portfolio (the “hub”). Software then determines the value of each fund based upon a percentage ownership of each of the assets in the hub portfolio. This information was tracked on a daily basis, and is used to track fund share pricing and tax accountability. State Street Bank asked the court to declare this invention unpatentable as a mere mathematical algorithm or as a business method. They pointed out that the patent claim comprised steps that are the requirements specified in an Internal Revenue Service regulation for avoiding taxes on a partnership. The Federal Circuit rejected the arguments of State Street Bank, and instead upheld the patent by explicitly stating that business methods can form patentable subject matter. The court emphasized that software or other processes that yield a useful, concrete, and tangible result should be considered patentable.
A backlash against this pro-patent trend was already forming by the late 1990s. The main focus of the backlash was the “Amazon one click patent,” that allowed a user to order online using a single click. Amazon.com applied for the patent in 1997 and it issued in 1999 as patent number 5,960,411. A number of competitors had copied Amazon’s one click ordering system and shortly after the patent issued, Amazon.com sued Barnes and Noble for infringement.[4] Industry studies showed that between sixty and sixty-five percent of online shopping baskets abandon before they checked out. The primary reason for abandoned shopping carts seems to be buyer confusion and annoyance with the online purchasing process. Presumably, many of those abandoned shopping carts represent lost sales. The goal of the one click method for online shopping made the process simpler, easier and faster, thereby capturing some of that lost business. Barnes and Noble’s Express Lane (one click shopping system) was evidently successful, since a large percentage of their customers had chosen to utilize the Express Lane rather than the shopping basket.
Anti-patent activists started a boycott against Amazon.com because of the one click patent issue.[5] The one click patent was the subject of many critical articles that suggested the invention was trivial, that the one click patent was obvious, that the one click process was trivial to program and that software should not be patentable. The sad and ironic component to this controversy is that it is easy to design around the claims of the one click patent. Design around means to invent an alternative to a patented invention that does not infringe the patent’s claims. In this case, all Barnes and Noble or any other online retailer had to do to design around the claims of the one click patent was have a two click ordering system. However, few of the critics of Amazon.com and the one click patent mentioned this simple solution. Nor was there any complaint that Barnes and Noble was essentially too lazy to spend the time and effort to come up with this simple design around solution. One of the functions the patent system promotes is alternative designs to problems[6] by creating an economic incentive to create alternative designs.
Most of the critics of the Amazon one click patent, either do not understand patents and the role of claims in patents or they are just openly hostile to software patents. For example, the Free Software Foundation has a movement to end the patenting of software, believing that software patents inhibit development of software. The Free Software Foundation never criticized Barnes and Noble for being too lazy to design around the claims of Amazon.com’s patent because they are fundamentally opposed to software patents.
The arguments against software patents have a fundamental flaw. As any electrical engineer knows, solutions to problems implemented in software can also be realized in hardware, i.e., electronic circuits. The main reason for choosing a software solution is the ease in implementing changes, the main reason for choosing a hardware solution is speed of processing. Therefore, a time critical solution is more likely to be implemented in hardware. While a solution that requires the ability to add features easily will be implemented in software. As a result, to be intellectually consistent those people against software patents also have to be against patents for electronic circuits. Of course, some of them are opposed to patents more generally; however, the historical record has shown that patents have been effective in encouraging technological development. [7]
[1] Pate, R. Hewitt, “Antitrust and Intellectual Property”, American Intellectual Property Institute, 2003.
[2] Pitofsky, Robert, “Challenges of the New Economy: Issues at the Intersection of Antitrust and Intellectual Property”, American Antitrust Institute, 2000.
[3] Warshofsky, Fred, “The Patent Wars: The Battle to Own the World’s Technology”, John Wiley & Sons Inc., 1994, p. 65.
[4] Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp.2d 1228 (W.D. Wash. 1999).
[5] “Richard Stallman – Boycott Amazon!”. Linux Today. 1999-12-22. http://linuxtoday.com/news_story.php3?ltsn=1999-12-22-001-05-NW-LF. Retrieved on 2006-09-22.
[6] Westvaco Corp. v. Int’l Paper Co., 991 F.2d 735, 745 (Fed. Cir. 1993)
[7] Khan, Sorina B., The Democratization of Invention: Patents and copyrights in American Economic Development, 1790-1920, Cambrdge University Press, 2005, pp. 50.
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