Category: Patents
The generally agreed beginning of section 103 is the Supreme Court case of Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248 (1851). This case first articulated the idea that an improvement that was the subject of a patent had to be more than “the work of the skilful mechanic.” The case involved making door and other knobs of all kinds of clay used in pottery, and of porcelain. The Supreme Court decision made the common error of pointing out that each of the elements in the invention were individually known.
But in the case before us, the knob is not new, nor the metallic shank and spindle, nor the dovetail form of the cavity in the knob, nor the means by which the metallic shank is securely fastened therein. All these were well known, and in common use, and the only thing new is the substitution of a knob of a different material from that heretofore used in connection with this arrangement.
Every invention in the history of the world is a combination of known elements/steps. The reason for this is Conservation of Matter and Energy – you cannot create something from nothing. This idea is implicit in 35 USC 112, which requires the inventor explain their invention so that one skilled in the art can practice the invention.
Back to Hotchkiss, the ruling states the well known idea that for an invention to be patentable, it must be more than just the work of a skillful mechanic. Today this is stated as the invention must have taken more than just the work of “one skilled in the art.” For a very interesting discussion of the history of the nonobviousness requirement see Novelty and the Hotchkiss Standard.
Note that Justice Woodberry ‘s dissent in the Hotchkiss case argued that the statute only required the invention be new and did not say anything about the work of a skillful mechanic. Was there any justification in the statute for the Supreme Court’s ruling in Hotchkiss? The 1790 Patent Act stated that the Patent Board was only to grant a patent if the invention was “sufficiently useful and important.” The patent statute of 1836 also contained a clause that said the Patent Office could deny a patent to an invention the Commissioner deemed to be “insufficiently useful and important.” However, it appears that this part of the statute was almost never invoked. Either way, the statute did not give this power to the Supreme Court or any other Court. As a result, Hotchkiss was a clear case of judicial activism. The Court just made up a requirement that was not in the statute and could not be considered just an interpretation of the law.
Why the Non-obviousness Standard is Unworkable
Words have meaning. Let’s examine the meaning of the words NOVEL and OBVIOUS in the context of statute. The key portion of the non-obviousness statute states:
A patent may not be obtained though the invention is not identically disclosed or described as set forth in section 102 of this title, if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. (underlining added)
Based on the wording and the fact that section 103 was added later than the novelty requirement, logically 103 is intended to be an additional requirement above the novelty requirement. According to Dictionary.com, novelty means “of a new kind; different from anything seen or known before: a novel idea.” The non-obviousness requirement logically requires something more than an invention be novel. According to Dictionary.com, obvious means, “easily seen, recognized, or understood; open to view or knowledge; evident.” It is axiomatic to patent law that whether an invention is non-obvious, has to be determined at the time the invention was made or in other words before the invention was known. How can an invention that has not been created, be easily seen, recognized, or understood; open to view or knowledge or evident (obvious)? Clearly, an invention that has not been made cannot be open to view and how can you have knowledge of something that does not yet exist? Evident means, according to Dictionary.com, “plain or clear to the sight or understanding.” Is it any wonder that non-patent attorney judges cannot make sense of Patent Law? The law is contradictory on its face.
Is Section 103 Constitutional?
The Constitution states at Article I, Section 8, Clause 8:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.
The drafters of the Constitution only defined ONE RIGHT in the Constitution and that was the Right of inventors and authors. When the founders talked about ‘the right’ they meant a Natural Right. A natural right is a right that exists, whether government exists or not – of course enforcing that right is another story, which is why governments are instituted among men, see Declaration of Independence.
If the Constitution says that inventors have a right in their discoveries, the first question should be: what is an invention? Some people have suggested that an ‘invention’ can be anything that Congress decides it is. But this is clearly nonsense. If that were the case, then the Constitution would be meaningless. This is not ‘Alice in Wonderland,’ words have meaning. So what is an invention? Inventions belong to the genus or class of human creations. However, not all human creations are inventions. For instance, a painting or a musical score is a human creation, but it is not an invention. Reproduction or making another copy of something is not invention and not a creation in the sense used herein.
We need to differentiate inventions from other human creations. Inventions belong to the species of human creations that have an objective result. What do I mean by an objective result? Examples will probably be the best way to examine this. A painting is a human creation, but it is not an invention. A painting has a subjective result – namely the viewer’s reaction. Logically, all human creations either have an objective or a subjective result or goal, there is no other choice. This point can appear confusing with respect to mathematics. Does a Fourier Transform have an objective result? For patent attorneys, the requirement is commonly referred to as the invention must be ‘useful’ under 101. The synthesis of a new chemical is not patentable if the inventor cannot describe a practical use (industrial applicability) for the chemical. The same is true of mathematical formulas. The definition of an invention requires that it be useful or have, what I call, an objective result, which explains the basis of 101. A mathematical formula by itself is not useful or does not have an objective result.
An invention is a human creation, which means that a human was the creator of the invention. That person is called the inventor. Because we are discussing creation, not reproduction, to be the inventor you have to be first. That is where the Novelty (102) requirement comes from. There is nothing in the definition of Invention that implies any sort of non-obviousness requirement or ‘more than a skilled mechanic.’ Neither the Supreme Court nor Congress have the power to ignore the Constitution, which requires that The Exclusive Rights of inventors be secured. Therefore, 35 USC 103 is unconstitutional.
Conclusion
The origin of Section 103 was a Supreme Court case that failed to follow the law. The more than a skilled mechanic grew into the nonsense of requiring a flash of genius. The codification of this bit of judicial activism results in the non-obviousness requirement for patents. This terminology was double speak: requiring something that was unknown to be apparent. The definition of invention does not include any sort of non-obviousness requirement and the Constitution requires Congress and the Courts to uphold the exclusive rights of inventors. As a result, section 103 is unconstitutional.
Words have meanings and judicial activism has consequences. The non-obviousness standard has inhibited the creation and introduction of new technologies and therefore made us all poorer. As just one example of this see Robert Kerns, inventor of the intermittent windshield wiper. Because of the non-obviousness standard, automobile manufacturers were able to steal his invention and drag out court cases for years. Robert Kerns had a PhD. in electrical engineering and was an intelligence officer in the armed forces as a teenager. Instead of inventing or teaching, Dr. Kearns spent his life litigating against an auto industry that felt no shame in stealing his invention. Another tragic example is that of Edwin Armstrong, inventor of the superheterodyne receiver and FM. RCA’s theft of FM radio destroyed this genius to the determent of all mankind.
There has been a lot of talk about an explosion in the number of patents that were issued in the last decade. But the number of patents issued to US inventors has grown at about 1.6% per year as shown in the chart below. The chart shows the three year moving average of the number of patents issued to US inventors and 1.6% trendline.
This next chart shows that while the number of applications has grown, the number of issued patents has not kept up. (US inventors only)
This last chart shows the ratio of issued to filed patent applications (US inventors only)
Below in no particular order are some of the foundational rules of patent law. No attempt is made to prove these rules, but most should be familiar to patent attorneys. If you disagree or are looking for an explanation feel free to comment below and I will respond. In many cases I have already written a post related to the foundational rules. For my analysis of the Foundation of 35 USC 103 see 5th Anniversary of KSR: Is Section 103 is Unconstitutional?
*Patents are a Constitutional Right
*Patents and Copyrights are the only right mention in the Constitution
*Patents are a Natural Right
*Patents are a Property Right – the basis of all property rights is creation/production and the same is true of patents.
*Trade Secrets are a Natural Right
*Patents can be viewed as a Social Contract where the inventor gives up their right to a trade secret in order to obtain a patent.
*All Inventions are a combination of known/existing elements/steps and known connections
*Patents are not monopolies (A property right cannot be a monopoly)
*All Inventions use natural phenomena – we are not dealing in magic.
*Every element in every claim of a patent behaves in a predictable way – they do not violate the laws of physics – again we are not patenting magic.
*Claims define what the invention is.
*Every element (word) in a claim has to be given meaning – reading a claim is like reading an equation – not like reading prose.
*The definition of an Invention implies that it is Useful or has an Objective Result
*The definition of an inventor requires that they be the first person to create the invention, which results in the novelty requirement.
The SmartGene v. Advanced Biological Laboratories case is the first fallout from the Supreme Court’s Prometheus decision. Advanced Biological Laboratories (ABL) owns two patents (6,081,786 6,188,988) directed to computerized methods of guiding the selection of therapeutic treatment regimens, particularly for HIV. The patents explain that the new treatment options coming on line, the complex nature of the disease and how patients react to the disease and the use of multiple different treatments that can cause complex drug interactions results in the need for computerized system to help doctors treat their patients. The background section points to academic papers and patents directed to expert systems on this problem. So clearly other people felt there was a need for such a system.
The claims are directed to three expert systems on a computer and inputting data about the patient. The computer then 
ranks the treatment options and provides advisory information to the doctor about the treatment options.
The courts holding was
The patents-in-dispute do no more than describe just such an abstract mental process engaged in routinely, either entirely within a physician’s mind, or potentially aided by other resources in the treatment of patients.
The Court also finds that the patents-in-dispute are invalid under the “machine-or-transformation” or “MOT” test utilized in some of the Supreme Court and Federal Circuit precedent.
Abstract Mental Process
The claims are clearly directed to a computer. The computer is running three separate expert systems and provides a rank list of therapeutic options and advisory information. Computers are not abstract mental processes. They use electricity, they cause the state of transistors to change, they cause electrons to change position. This is not an abstract mental process. Judge Beryl A. Howell, the judge in this case needs to have her head examined if she believes a computer is an abstract mental process. But what can you expect from someone who got their undergraduate degree in philosophy and probably never took a science or math course in college. For Judge. Howell’s edification, I will point out that a computer is a general purpose electronic circuit. Software is a way of wiring this general purpose electronic circuit. So when a software program is executed it changes the wiring of the electronic circuit and makes it a specific electronic circuit. Wiring an electronic circuit is not an abstract mental process. This is just another depressing example of why we need courts and judges who understand technology and patent law in resolving patent disputes.
Because so many people, including patent attorneys appear to be confused about what an abstract mental process is, I will write a claim below that would fit the definition.
A method of solving an integral in closed form, comprising the steps of :
mentally reviewing an integral to be solved;
selecting mentally one of a plurality of techniques for solving the integral; and
applying mentally a selected technique from one of the plurality of techniques to the integral, wherein the plurality of techniques include integration by substitution and integration by parts.
MOT
The invention clearly involves a computer. A computer is a machine. When an instance of code is executed by a computer it is a specific purpose electronic circuit. A specific purpose electronic circuit converts electricity into states of transistors – thus the transformation prong is also satisfied. But an attorney who has never taken a class in physics, let alone electrical engineering would not have this basic knowledge.
Twitter posted their Innovators Patent Agreement (IPA) https://github.com/twitter/innovators-patent-agreement/blob/master/innovators-patent-agreement.md with much ballyhoo yesterday. Despite the claim that Twitter will only assert patents defensively, part 2(b) of the IPA allows Twitter to assert patents against anyone who has asserted their patents. This will only exclude a very few companies, mainly startups. Twitter’s stated goal is to promote innovation, but the real result if Twitter is successful will be that companies will rely on Trade Secrets. Trade secrets decrease innovation, because the information is not shared. Inventors cannot build on the work of previous inventors and they are more likely to waste resources rediscovering other people’s work (reinventing the wheel). History clearly shows that when a country relies on trade secrets instead of patents, innovation is impeded. Those countries with weak or nonexistent patent systems are not innovators and their people live on the edge of starvation.
Mark Cuban has been famous for criticizing intellectual property and particularly patents. According to IPBiz he stated on his blog that,
Pick any country that is currently doing well, China is a perfect example. In China the Intellectual Property Laws are so weak that someone thought it was a good idea to completely replicate Apple retail stores. Compare their economy to ours. As much as I hate to compare other economies to ours, it’s worth taking a look .
He has also criticized companies that enforce their patent rights. But now Cuban has bought into a company, Vringo, that acquired Lycos’ patent portfolio and is now enforcing those patents, according to an excellent post on GametimeIP. Vringo could be described as a Mythical Patent Creature (I stole this line from Patrick at Gametime IP).
This is not the full extent of Mr. Cuban’s hypocrisy. I am sure that he has made a fortune on the IP rights he has in the Mavericks (Just think of the money we could make by rebroadcasting Mavericks games, if we didn’t have to pay for Cuban’s IP). In addition, his argument that the countries that are doing well have weak IP rights is clearly nonsense. Is North Korea doing well? The start of China’s economic growth corresponds to their recognition of property rights including IP rights. They didn’t have any IP rights during “The Great Leap Forward” when millions of people starved to death. The current economic downturn in the US is not because our patent rights are too strong, but because they are too weak. Patents are property rights and when patents are under attack you can bet that all property rights are under attack. Clearly, the communist we have in the White House is not interested in strong property rights, but in fairness the Bush Administration was only ambivalent about property rights.
Just because you can obtain a patent for your invention does not mean that you should file for a patent. So how do you determine whether it makes business sense to file a patent application on your invention? The goal of filing a patent application is to create a barrier to entry. There are many ways to create a barrier to entry in business. For instance, a company’s customer list can give you an advantage over potential competitors since they will not know who the key people are in the industry. Another barrier to entry might be your location if you are a retail store. A gas station on at a busy intersection with easy access has an advantage over competitors that cannot be at the same busy location. Trademarks may also provide a barrier to entry.
In order to understand the value of a patent to your business it is helpful to make an analogy to physical barriers to entry. You probably lock the door to your house, but you know that someone can break the window and still get into your house. So why do you lock the doors to your house? Probably because you know that it will slow down any burglars and make it more difficult to enter your house. As a result, you increase the chance that any burglars will either give up or move on to someone else’s house. Note that you can always spend more money on the locks to your house, but at some point it doesn’t make economic sense. If you spend $1 million on a safe for a $10K diamond, it doesn’t make sense. The same thing is true for patents. You are not trying to create a perfect barrier to entry, you are trying to increase your competitors cost and slow them down if they decide to compete with you. For many of my clients the main goal is to make it painful enough for someone to compete with them that the potential competitor would rather buy out my client.
Thus the question is not whether you can afford to enforce a patent, or whether having a patent will eliminate all you competitors, but whether filing for a patent application or obtaining a patent will increase your competitor’s cost and slow down their entry into your market. If you spend $10K to obtain a patent and it increases your competitor’s cost $100K and slows them down, then it probably makes sense to file a patent application.
The size of your market must also be taken into account. The bigger your market the smaller the barrier needs to be. For instance, a company with $5 billion a year in sales in a well defined market should file patents on almost any invention in their market space. Vice versa the smaller the market the bigger the barrier to entry needs to be. I have had clients walk into my office where I am pretty sure we can create an almost perfect barrier to entry, but the market is only $80k a year. This is essentially buying a job and it makes no sense to file a patent for that size of market no matter how strong the barrier to entry.
Remember the goal of patent is to create a barrier to entry. Just like physical barriers to entry, you should not expect a perfect barrier to entry. For most startups, you want a strong enough barrier to entry that your competitor will buy you out rather than compete with you.
In an article entitled “Could Morse Have Patented the Web? Under today’s loose standards, the telegraph inventor might own the Internet” , dated March 26, 2012, the Wall Street Journal demonstrates their incredible ignorance of patent law. The article states, “The standards for patents are so low that simply having an idea often justifies a patent.” Obtaining a patent takes at least several years to obtain and tens of thousands of dollars. It is the most expensive, time consuming, and most examined property right before you obtain title of all property rights. In addition, when Morse obtained his patent the requirement that a patent cover a non-obvious invention did not exist. This by itself makes it more difficult to obtain a patent today than in Morse’s day. The author’s ignorance of patent law embodied in the above statement is monumental.
But the ignorance does not stop with this statement, the article goes on to state that:
“The patent explosion began in the mid-1990s, when the U.S. Court of Appeals for the Federal Circuit ended the requirement that patents specifically define inventions.”
First of all the U.S. Court of Appeals for the Federal Circuit never did any such thing. The requirement for specifically defining one’s invention in a patent has not changed since at least the 1952 patent act. Second there has been no explosion in the number of issued patents in the US to US based inventors. The numbers of patent issue to US based inventors has been flat for at least a decade, see chart below
and by every objective measure (GDP/patent, R&D/Patent, Population/patent) the quality of patents is increasing – see Patent Quality Nonsense.
The article then quotes a forthcoming article from the CATO Institute that it is impossible for a software company to determine if they are infringing an existing patent.
They estimate that there are 600,000 firms producing patent-eligible software and 40,000 software patents granted each year. They say this comes to “24 billion new patent-firm pairs each year that could produce accidental infringement.
Since the total number of issued patents since 1836 is just over eight million this is complete nonsense and academic fraud. The exaggeration of the authors from the CATO Institute and Yale Law School is criminal. Both of the authors of this study should be fired and never given another academic job. But so low is the state of our academic research no one will question their outrageous assertions.
Companies do market research on competitors in the software space and clearly do not feel overwhelmed by the “24 billion” new pairs of potential products. Most software companies I know are very good at narrowing down their market research and the same applies to patents. Companies spend huge sums on market research, but complain about spending a little money to determine if they are violating someone’s property rights. In fact, most companies never do check to see if their products are likely to infringe a patent. This is like starting construction on a building without checking that you have clear title to the land. We would not tolerate or glorify the stupidity in the case of real property, so why should we do so in the case of patents?
Finally, to the point that Morse could have patented the Internet this again shows the author’s ignorance of patent law. Patents cover an invention. Anything that incorporates that invention infringes the patent. For instance, if I have a patent on a microprocessor and you incorporate a microprocessor into your cell phone you infringe my patent. I am not asserting that I invented the cell phone, I am asserting that I invented the microprocessor and you are infringing my patent by incorporating it into your cell phone. According the Supreme Court’s decision Morse did invent a system for repeating electromagnetic signals so they could be sent over long distances. Repeaters are still used to amplify electronic signals, including signals sent over the Internet. So if Morse’s patent were still valid (they expired around 150 years ago), then yes the Internet would likely have infringed his patent – according to the Supreme Court’s characterization. This would not mean that Morse was asserting he invented the Internet. Note that the inventor of the transistor, the inventors of error correction codes, the inventor of microprocessors, the inventor of electronic amplifier circuits, and many, many more would be in the same hypothetical situation – but of course this is meaningless since their patents expired years ago. All this proves is that all inventions build on earlier inventions and the author of this article’s ignorance of how patents work, knows no bounds.
Could Morse Have Patented the Web? Under today’s loose standards, the telegraph inventor might own the Internet” , dated March 26, 2012, the Wall Street Journal
The Supreme Court ruling in Mayo Collaborative Services v. Prometheus Labs., Inc. (Supreme Court 2012) was released on March 20, 2012 and they held unanimously against Prometheus and invalidated two patents under 35 USC 101. My title may be a bit salacious, since the holding in the case does not limit patents to just black magic, it limits them to magic. The holding on p. 4 states:
The steps in the claimed processes (apart from the natural laws themselves) involve well-understood, routine, conventional activity previously engaged in by researchers in the field. P. 4
And adds:
The three steps (of the claim) as an ordered combination adds nothing to the laws of nature that is not already present when the steps are considered separately. P. 10
Logically, the Supreme Court is saying that known steps or elements in combination with a law of nature is not patent eligible. First every invention ever made involves steps (elements) that were known individually before the invention, and laws of nature. You cannot create something out of nothing. Section 112 means that you have to be able to describe 
your invention in terms known to those skilled in the art. Thus the Supreme Court’s holding means that any invention that satisfies 112 is unpatentable under 101. The only inventions that will satisfy 101 are those that violate laws of nature or involve creating something out of nothing – or magic.
Get out your cauldrons-
For the lawyers in the audience this case reintroduces the point of novelty test nonsense.
I have written extensively about this case in the following posts and will not reiterate my earlier points.
Justice Breyer: Patent Ignorance
Mayo v. Prometheus – Supreme Court Grants Cert (Again)
But for those not familiar with the case here is a little background
The patents (6,355,623 and 6,680,302) claim methods for determining the optimal dosage of thiopurine drugs used to treat gastrointestinal and non-gastrointestinal autoimmune diseases. Thus, the questions in this case are whether determining optimal dosages of thiopurine drugs to treat autoimmune diseases exists in nature separate from man and whether this solves an objective problem? Clearly, determining optimal dosages does not exist in nature for any drug and the patent solves the objective problem of determining the optimal dosages of thiopurine drugs for autoimmune diseases.
Ayn Rand discussed this exact issue in Atlas Shrugged. James Taggart is discussing Rearden Metal with his wife:
”…’he didn’t invent smelting and chemistry and air compression. He couldn’t have invented HIS metal but for thousands and thousands of other people. HIS Metal! Why does he think it’s his? Why does he think it’s his invention? Everybody uses the work of everybody else. Nobody ever invents anything.’ (Jim Taggart) She(Jim Taggart’s Wife) said, puzzled, ‘But the iron ore and all those other things were there all the time. Why didn’t anybody else make that Metal, but Mr. Rearden did?’” Kindle Location 5796-5802
These exact questions could be asked of the Supreme Court. All these other steps were available to other people, but no one else discovered how to use thiopurine to safely treat Crohn’s disease. In fact, the Supreme Court admits as much.
. . . and it has been difficult for doctors to determine whether for a particular patient a given dose is too high, risking harmful side effects, or too low, and so likely ineffective. p. 4
The reality is that this Supreme Court is anti-patent and anti-property rights. The opinion states patents are monopolies in three spots and mentions rent seeking in one spot, but it does not mention that the Constitution clearly states that inventors have a RIGHT to their invention and it does not state that patents are property rights. This case is just another example that the anti-property rights and anti-Natural Rights crowd is in control of our government. This case will have long term negative ramifications for the US economy. The US is losing its technological advantage because it believes that inventors should work for free. Note that Singapore is taking another path and trying to figure out how to strengthen their patent laws (see Singapore and the US Divergent Patent Policies)
While the US continues to weaken its patent laws, Singapore is taking a different path. Singapore has just announced that it is developing a plan to be an Intellectual Property Hub, according to Channelnewsasia.com. They believe that intellectual property is a key part of the global economy and they want their country to be primed to take advantage of this trend. According to the article:
With well-developed legal and financial systems and a workforce comfortable with science and technology, Singapore is poised to ride on this trend. Still, the country has a small domestic market, but Singapore can get around this by becoming Asia’s IP Hub.
A spokesman for this initiative stated:
Mr Shanmugam said: “The committee will recommend strategies to develop Singapore as a marketplace of choice to transact IP, and attract international firms and professionals who provide IP transactional services. For example, licensing and brokerage. The committee will also incentivise the creation, management and exploitation of IP in Singapore.”
While Singapore is trying to encourage IP transactions our government and intellectuals are trying to kill them by disparaging inventors as trolls. The article also explains that Singapore will grow its court system in tandem with the growth of it intellectual property. They are focusing on training judges who are experts in patents. In the US we cannot even fully fund the Patent Office and now there is an effort to sideline the ITC, which is one of the few courts with real patent expertise.
Singapore’s emphasis on technology and intellectual property has faulted it past the United States in per capita income. Singapore ranks third in the world with a per capita income of $59,936, while the US lags with a per capita income of $48,147. Singapore’s per capita income keeps growing, because they are focused on the only thing that makes people wealthier – increases in our level of technology. In the United States we have a President and his economic advisors telling us that we will get wealthier by consuming more, or by transferring more wealth from productive people to people on welfare, or by giving free money to the largest Wall Street Banks and large corporations. If the US does not wake up it is likely that Singapore will have double the per capita income of the US by 2020 (see chart).
I often hear something like ‘only 2% of patents every pay off’ or are commercialized. This comment is quoted as if it is gospel and often is said in a snide or cynical way. This comment came to my mind as I was preparing a list of patents and associated products for one of my clients. This client has seven or eight patents and every single patent covers a product my client is producing and selling. While I certainly have clients that have filed for patents that are not licensed or being practiced, these are the exception not the rule. The economist Jacob Schmookler in his 1966 book Invention and Economic Growth, investigates this issue and his survey showed that over 50% of patents are commercialized. 
Economists Lamoreaux and Sokoloff investigated the rate at which independent inventors were able to sell their patents around 1900 and at that time it was around 30%. Clearly, the myth that only 2% of patents are ever commercially successful is without basis in fact.
I believe this myth about the success rate of patents is part of an attempt to devalue patents and inventors in general. Large companies that do not want to pay for using other people’s inventions (patents) use this myth to paint inventors who sue them as crackpots. In addition, these companies use this myth to pay their employee inventors less. The anti-patent crowd has an interest in perpetuating this myth, because it demonstrates that patents are economically unimportant. However, the evidence shows that patents are successful financially at a much higher rate than the myth suggests and this shows the importance of patents and inventors to our economy.
Forbes magazine has an excellent article that provides the real facts behind the so called patent litigation explosion entitled “No, the Patent System Is Not Broken.” The article explains:
“The truth is that today’s patent litigation rate is less than half what it was in the mid-nineteenth century, a period widely recognized as the golden age of American innovation.”
The article puts today’s patent litigation rates in context.
According to Lex Machina’s authoritative “Database of U.S. Patent Litigation 2011,” the number of patent suits filed between 2001 and 2010 has held steady at less than 3,000 per year. Only about a hundred of these cases actually went to trial each year
To put it in even broader historical context, the estimated 100 patent suits currently filed in the smartphone industry is actually less than one-fifth the number of suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated a whopping 587 patent cases alone.
Perhaps even more importantly the article explains that a strong patent system creates a division of labor between inventors and manufacturers. According to Adam Smith the division of labor is key to increasing our wealth.
“The growth of market trade in patents raised the returns to invention and encouraged a division of labor whereby technologically-creative individuals increasingly specialized in their comparative advantage—invention,” observed Lamoreaux and Sokoloff. “It was the expanded opportunities to trade in patented technologies that enabled the independent inventors of this golden age to flourish—and that stimulated the growth of inventive activity more generally.”
By 1865 the per capita patenting rate in the U.S. was triple that of Britain, and the vast majority of those citizen-inventors were what we now call “non-practicing entities,” or NPEs, who licensed their patents to others to commercialize into new products. Indeed, patent and legal records from the nineteenth century indicate that more than two-thirds of the 160 so-called “great inventors” of the Industrial Revolution, including Thomas Edison, were NPEs.
Please check out the full article at:
The bill H.R. 3059, titled the “Promoting Automotive Repair, Trade, and Sales” (PARTS) Act claims to reduce the cost of automotive repairs by limiting design patents for automotive parts to 30 months. This bill pits automobile manufacturers against insurance companies and consumer groups. The argument for the bill is that it would reduce the cost of automotive repairs. As I understand it if your car is in an accident and for instance your headlight is damaged it is likely that if your car is relatively new the headlamp is covered by a design patent. As a result, when you go to replace the headlamp you either have to buy it from an OEM manufacturer or from someone who how pays royalties to make a look alike headlamp. According to the insurance companies it would be cheaper to replace the headlamp if it was not covered by a design patent.
The law on point is:
35 U.S.C. 171 Patents for designs
“Whoever invents any new, original, and ornamental design for an article of manufacture may obtain a patent therefor, subject to the conditions and requirements of this title.”
There does not appear to be any reason why the designer of the headlamp should not receive a design patent according to the law. Under the case law it appears that there might be some argument that the design patent does not apply because it falls under the repair exception to patents. However, if the patent holder got a design patent on the headlamp, then this would not appear to apply since the headlamp is not being repaired it is being replaced – manufactured.
The economics on point do not appear to be so straight forward. If the designer of an automobile determines the price of a car based on their total return, then they probably include the residual income they expect to make from repairs. If this is the case then the law will just increase the cost of new automobiles and reduce the cost of repairs, but the total cost of ownership will stay the same. In addition, if the bill becomes law it is likely to reduce the value of original designs. As a result, we will trade unique designs for me too designs. This is likely to help low cost me-too producers at the expense of innovators. The economics of the situation are ambiguous at best, but it is likely to hurt manufacturers at the expenses of the financial industry (insurance companies). Given the recent performance of financial companies and the fact that they have inordinate influence on Washington, I am inclined to say the net result will be detrimental to average Americans. Manufacturers tend to employ many average Americans at good wages. Finance companies tend to inordinately enrich a few people at the top.
The real problem with this bill is that it is not based on a discussion of property rights. It is an example of power politics at its worst, much like the SOPA and PIPA bills. It pits the lobbying power of the automotive industry against the lobbying power of the insurance industry. In other words this is just another example of how our country has deteriorated into a Civil War without guns. Each group uses the government to steal from the other group, which is why I call it a Cold Civil War.
From a property rights perspective a manufacturer should be able to obtain a design patent for each part that is manufactured – assuming it is an original design. Given the narrow nature of design patents, it should be relatively easy to modify the design to avoid the patent. For instance, a slight change in the headlamp assembly should avoid the design patent. In a free market, a consumer should have the choice to select a car that has a common design and the cost of repairs are low because few design patents apply or a highly stylish design where the cost of repairs are high because many design patents apply. The cost of insurance would also vary based on this information. As a result, the insurance industry should not be disadvantaged. The fact that they insurance industry is whining about this just shows that their goal is to obtain unjustified profits (based on a property rights point of view) at the expense of manufactures. Of course, we don’t live in anything like a free market and there is all sorts of other government interference in the market that one or the other side might make them believe they have the right to ignore the property rights of the other group – Government bailouts of insurance companies and automobile companies come to mind.
The US is no longer a nation of laws, because we no long have a meaningful Constitution and we no longer protect or understand property rights. The PARTS Act is just another sad example of how we have become a country in a COLD CIVIL WAR.
The America Invents Act (AIA) has changed the rules for marking products with patents. The law allows you to “mark” you product by providing a website that explains which patents cover which products. This is a positive step to move the patent system into the 21st century.
The reason for marking you product with a patent number is that it provides “constructive notice” to infringers of your patent. Damages for patent infringement accrue from the date of actual or constructive notice to the infringer. As a result, the damages you may recover will be larger the sooner an infringer is deemed to have notice of your patent.
From a practical point of view, having a website explaining which patents cover which products is significantly easier and less expensive than marking the actual product or the product’s packaging. If it is not too expensive to also mark your product or its packaging I would suggest that inventor’s do both.
Here is how Section 16 of the AIA reads:
(a) VIRTUAL MARKING.—
(1) IN GENERAL.—Section 287(a) of title 35, United States Code, is amended by striking ‘‘or when,’’ and inserting ‘‘or by fixing thereon the word ‘patent’ or the abbreviation ‘pat.’ together with an address of a posting on the Internet, accessible to the public without charge for accessing the address, that associates the patented article with the number of the patent, or when,’’.
(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to any case that is pending on, or commenced on or after, the date of the enactment of this Act.
The CATO Institute are reiterating the findings of the flawed paper The Private and Social Costs of Patent Trolls , Boston University School of Law Working Paper No. 11-45, by James E. Bessen, Michael J. Meurer, and Jennifer Laurissa Ford. This paper looks at lawsuits filed by NPE (Non-Practicing Entities) and the subsequent drop in the stock price of the company being sued. The paper suggests that this loss of wealth is all “deadweight” loss, since little of the money ends up with the original inventors of the technology. This last part is an intellectually dishonest slight of hand. The authors make no attempt to determine if the cases are meritorious. If the firms are infringing a valid patent, then the filing of the lawsuit represent the cost to society of deterring the theft of inventions. This cost discourages further theft by companies. If half the patent lawsuits (by cost) are meritorious then the net cost of these lawsuits is zero. Unless you assume that the cost of protecting property rights has no value, which I am afraid is the ultimate problem with anti-reason people at Reason Magazine and CATO. Neither of these organizations seems to understand property rights.
This lack of understanding of property rights causes multiple errors in both the paper and CATO’s and Reason’s analysis of this issue. For instance, once you understand that patents are property rights you understand the purchase of patents by investors is not different that the purchase of a building from the builder. The profits by the subsequent purchaser of the building are not “DEAD WEIGHT” costs and neither would a lawsuit by the purchaser to demand rent for someone squatting in their building. When the (paying) occupancy rate for buildings is high this encourages the building of new structures. The same is true for patents – when owners of patents receive good returns on their assets then inventors create more of these assets.
Unfortunately, the CATO Institute has become hopelessly lost on the issue of property rights. They have adopted the Utilitarian point of view that property rights are just an efficient way of allocating scarce resources. Professor Adam Mossoff has commented on this nonsense. Mossoff states that Jeremy Bentham’s ideas are at the root of Libertarian’s attack on IP. Bentham basic philosophy was Utilitarianism – the greatest good for the greatest number. Bentham stated that the reason for property rights was because of scarcity and conflict resolution not natural rights. Mossoff then points out that the followers of Bentham argue that there is no conflict between people using the same ideas like there is with land. Ideas can be copied and used endlessly. This argument fails for because there is a conflict when a physical embodiment of the idea (invention) is created. The copier has clearly limited the return for the inventor and patent law only prohibits the physical embodiment. I discuss the fallacies behind the scarcity theory of property at my post Scarcity: Does it Prove Intellectual Property is Unjustified and Scarcity -2 and Scarcity -3. Mossoff points out that this is the philosophical point of view used by the Cato Institute and the Von Mises Institute to attack patents (IP).
Utilitarianism’s “greatest good for the greatest number” always leads to totalitarianism. It also never leads to the purported goal. The reason for this is that utilitarianism is merely a justification for short term actions. Once something has been produced, it always looks like the greatest good is to redistribute the creation. However, this is clearly only true in the short term. In the long term it is clear that this always destroys the economy. This is the theory behind the USSR, North Korea, and all socialist states. As Ayn Rand pointed out you only need open your eyes to see that these countries do not produce the greatest good for the greatest number. This is because stealing the product of one’s mind (mental labor is labor) is no different than banning free speech. It stifles the mind, which source of all economic progress (values).
The CATO Institute’s article is under the header “Regulation.” This again demonstrates that the CATO Institute does not know the difference between property rights and regulations. Here are three easy questions for Libertarians, Socialists, and Economists to determine if a right is a monopoly (rent seeking) or a property right.
1) Does the right arise because the person created something?
2) If someone else was the creator would they have received the right in the creation?
3) Is the right freely alienable?
Patents meet all the tests of property rights. They are not a regulation. Enforcing property rights does not result in dead weight costs.
Another great article on this issue can be found at Gametimeip entitled Myopic Patent Cynicism.
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