State of Innovation

Patents and Innovation Economics

Gene Quinn Destroys ‘The Economist’ on Patents

The Economist has printed another of their fantasy articles on patents entitled “A question of utility.”  Gene Quinn has written a great article showing the numerous inaccuracies in The Economist’s article entitled “What ‘The Economist’ Doesn’t Get about Patents.”  The Economist article argues that patents were irrelevant to the industrial revolution.  Mr. Quinn shows the fallacy of this statement, but I want to amplify on what he said.  The industrial revolution started in England and the United States, which were the two countries with functioning patent systems.  The industrial revolution was not about industry but about a continuous invention revolution as the book “The Most Powerful Idea in the World” illustrates.  Modern ‘New Growth Economics’ has shown that the only way to increase real per capita incomes, is to increase our level of technology and that means creating new inventions.

econgrowth.smallMy new book Source of Economic Growth tackles these important questions specifically it answers these two questions: 1) What is the source of real per captia increases in wealth? And 2) What was the cause of the industrial revolution?  I provide overwhelming evidence that new inventions are the only way to increase real per capita incomes and property rights for inventions, i.e., patents, are the only way to provide a high enough level of inventing to escape the Malthusian Trap and enter the Industrial Revolution.

August 25, 2015 Posted by | -Philosophy, Patents | , | 1 Comment

The Irrational Foundations of Austrian Economics

The Austrians, such as those on the Von Mises website, like to tout that they are pro-freedom, capitalists, and arch enemies of the socialists and Keynesians.  Strangely enough this means that they have aligned themselves with socialists in opposing property rights for inventors and attacking Locke’s ideas on property.  Even more fundamentally the Austrians seem to share intellectual roots with the socialist or more broadly the post-modernist movement, which is a reactionary movement opposing the enlightenment, reason, and science.  I have written on Fredrick Hayek’s anti-reason, anti-natural rights, moral relativist positions in Hayek vs. Rand: Patents and Capitalism.

However, Hayek was not the only Austrian with post-modernists roots.  Von Mises was clear that values and prices are subjective.  By this the Austrians do not mean that they are personal or that each person puts a different value on things, they mean unconnected in anyway with reality.  Von Mises also said that economics is a value-free science.  This may sound high-minded, but science is not value free.  Science starts with an objective reality, demands logic and evidence, and morally requires that scientist report data accurately.  These positions of Von Mises place him firmly in agreement with the post-modernists (socialists, Keynesians).  Some people think I am misinterpreting the Austrian position so here is a video of a talk from the Mises University that demonstrates that the Mises people are serious about the subjective theory of value.  They are not saying it depends on your circumstances, they are saying there is no connection to reality between prices or values in economics.  The meat of the video starts at 7:35 in which the speaker states “value is just a state of mind.”  At 7:57 he is clear that value has no extensive property, which means it is not related to the real world.  8:16 the speaker states that all we have is a state of mind – that value exists only in the mind of the individual.  9:23 value is a state of mind.  9:54 there is no relation between the external world (reality) and the judgments of our minds – this is as clear as it will get that the Austrians are ignoring reality and believe economics is separate from reality.  11:14 The speaker describes profit as subjective.

Of course this position cannot logically be held to be true so you will find contradicting statements in the talk.  Just like people who deny reality, meaning they deny A is A, the position cannot be held without contradiction.  But since they deny reality matters in economics, they free themselves from the science of non-contradictory thinking – logic.  This makes the Austrians consistent with the post-modernist (socialist) movement.  I cannot say that every Austrian economist makes this mistake, but it is the accepted position of the modern Austrian school of economics and it got its start with Von Mises.

The speaker is trying to destroy the intrinsic theory of value.  Classical economists followed the labor theory of value which is an intrinsic theory of value.  According to this theory the value of an item is the sum total of the labor that went into the item.  The Austrians are correct that the classical economists’ position was incorrect, but their solution is no better.  They want to say value is determined without reference to the real world – that is it is all in the mind of the valuer, while the classical economists said value could be determined without reference to the valuer.  Both are nonsense.  Objective valuation has to take the position of the valuer and the item being valued into account.  Ayn Rand has a great explanation of this topic in Capitalism the Unknown Ideal starting on page 13 I believe.

Capitalism is based in reality, reason, and the ethics of natural rights.  Austrians are not capitalists.

February 12, 2015 Posted by | -Economics, -Philosophy, Patents | , , , | Leave a comment

Yale Law Professor’s Attack on Patents: A Comedy, Farce and Tragedy All Rolled into One

An article on Cato Unbound entitled, “What’s the Best Way to Fix the Patent System’s Problems?” by law professor Christina Mulligan, argues for two different solutions of what she perceives are problems with software patents.  One solution advocated by Eli Dourado is to eliminate all software patents (See CATO and Mercatus Center: Another Flawed Study on Patents).  The other solution, advocated by John F. Duffy, is a more rigorous application of the obviousness standard.  Ms. Mulligan comes down on the side of Eli Dourado’s solution of eliminating patents on software.

What is amazing is that Ms Mulligan never even addresses the inherent contradiction that if you are going to eliminate patents of software you have to eliminate all patents on electronics.  Of course this may be because Ms. Mulligan does not have a technological background, she is not a patent attorney nor is she legally or factually competent to be a patent attorney.  Software is a way of wiring an electronic circuit.  Any invention implemented in software executed on a computer can be implemented in hardware (i.e., an electronic circuit) as any competent electrical engineer knows.  In fact, this is exactly what happens when software is executed, it is converted into a series of voltage levels that open and close switches in a general purpose electronic circuit called a computer to create a specific electronic circuit.

Ms. Mulligan quotes the clearly incorrect statement that:

Many software patents are merely mathematical formulas or abstract ideas and should not be considered patentable subject matter because they remove too much “raw” material from the public domain.

This statement confuses two separate points.  One point is that many software patents are merely mathematical formulas or abstract ideas.  The second point is that software patents remove too much raw material from the public domain.  The idea that any software patent is a mathematical formula is complete and obvious nonsense to anyone who has worked with computers.  While it is true that software often uses mathematical formulas, so do electronic circuits, radar, rockets,  mechanical systems, chemical processes, in fact almost every area of technology.

Ms. Mulligan does not define what she means by an abstract idea.  In one sense every invention in the history of the world is an abstraction.  Inventions define a class of things.  For instance the invention of the incandescent light bulb is not a specific incandescent light bulb, but the class of these objects.  The only logical definition of an abstract idea is “a thought or conception that is separate from concrete existence or not applied to the practical”.  Every invention that meets the requirements of 35 USC 112 first paragraph is not an Abstract Idea, since this section requires that the invention be described in a manner so one skilled in the art can practice the invention.  Something that can be built and used (practiced) is concrete and applied, therefore it is not an abstract idea.  Clearly software patents are not abstract ideas because they are concrete and applied to a problem of life.  If they did not solve a problem of life, then no one would care, because no one would want to practice their invention.

The second point is that they remove too much raw material from the public domain.  This is a bald statement without any support.  In fact, patents do not remove any material from the public domain.  They secure the property rights of an inventor to their invention that did not exist before they created the invention.  To suggest that this removes anything from the public domain would make even the most strident Marxist blush.

Ms. Mulligan attempts to use Ayn Rand in support of her position.

Even Ayn Rand sidestepped suggesting a length for intellectual property terms, stating that if intellectual property “were held in perpetuity . . . it would lead, not to the earned reward of achievement, but to the unearned support of parasitism.

Of course she forgets to mention that Rand stated “Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.”[1]  You can see from this statement that it is very unlikely that Ayn Rand would have supported Ms. Mulligan’s position.

More importantly, all property rights are term limited.  A dead person cannot own property.  Property is a legal (moral) relationship between a person and something.  Once the person is dead they cannot have a legal relationship to something on this Earth that would be a contradiction.  There is only a question of what happens to property relationship when someone dies.  But no property rights go on forever.

Ms. Mulligan also ignores the obvious Constitutional problems with a law prohibiting patents on software or any other group of inventions.  Article 1, section 8, clause 8 requires that the right of inventors to their inventions be secured.  There is no basis under the Constitution to discriminate between securing the rights of inventors for chemical inventions, but not to software inventions for instance.  Ms. Mulligan may argue that the preamble to article 1, section 8, clause.8[2] is a limit on patents, but this is a clear misinterpretation of a preamble under legal construction.  Preambles are never considered limiting in law.  In addition, if the founders intended such a limitation then they would have said Congress can take whatever steps they believe will promote the sciences and useful arts.

Ms. Mulligan’s arguments do not stand up to scrutiny.  Part of the problem may be that Ms. Mulligan is not a patent attorney.  But some of the problems are so outrageous, especially for someone who is a Yale Law professor that the only conclusion is that she has a political agenda.

The United States of America created the strongest patent system in the world.  Most of the greatest inventors in the history of the world, Edison, Tesla, Bell, etc. lived and worked in the United States.  In less than 100 years, they created the most technologically sophisticated country ever.  Almost every modern product you use today was subject to a patent or a patented processes at some point.  Your cell phone is the subject of hundreds of patents.  The same is true of your computer, the Internet, the power system, the medicines your take, the car your drive, even your glass windows (Venice patent system), even cement.  For Ms. Mulligan to suggest that patents on software or anything else inhibit the progress of technological is an extraordinary claim and requires extraordinary evidence.[3]  Ms. Mulligan has failed to provide even a scintilla of evidence and logic for her position.


[1] Rand, Ayn, Capitalism: The Unknown Ideal, Signet, New York, 1967, p. 130.

[2] “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”

[3] Thomas Paine.

November 20, 2014 Posted by | -Philosophy, News, Patents | , , , , | 6 Comments

CATO on Software Patents

The CATO Institute attacks patents in an article entitled What Is a Software Patent?, by Christina Mulligan.  The article argues that the word “process” in the patent statute should be limited to those processes that have an effect on matter.  The article suggests that this would eliminate the “wrong” kind of patents.  Software is not patentable, per se, software is a set of written instructions and are just bad prose.  When people use the term “software inventions” they are talking about executing the software in hardware (electronic circuits).  What the software does is define the connections or wire the general purpose electronic circuit that we call a computer.  This special purpose electronic circuit consumes energy, generates heat, causes electrons to move – in short, it has an effect on matter.  The whole premise of the article is based on a lack of understanding of what software is.  Logically, the article has to address the issue that all “software inventions” are electronic circuits and therefor the article’s position requires that it explain why certain electronic circuits should be patentable and other electronic circuits should not be patentable. It should be noted that the author is not a patent attorney, has never written a patent or a claim, nor does she appear to have a technical background.  While this is not absolutely required, it leads to the obvious mistakes made in this article.

The Constitution requires Congress to protect the rights of inventors to their inventions.  There is no justification for the distinction made in this article.  An invention is a human creation with an objective and repeatable result.  For instance, the incandescent light bulb always puts out light when electricity of the right voltage and current is applied.  Art is a human creation with a subjective result.  Software enabled inventions are clearly a human creation and they have a repeatable, objective result.  The first patent ever issued in the US was for a Method of making potash and it was a method of doing business.  The inventor was not making potash as a hobby, he planned to make a business of it.  The label of “business method patent” is thrown around commonly, but never defined as it is not in this article.  All patents are about a method of doing business.

The article ends with praise for Mark Lemley.  Another law professor who is not a patent attorney, is not legally or factually competent to be a patent attorney, has never written a patent, has never written a patent claim, but somehow knows that we should not use “functional claiming.”  Mr. Lemley does not even know what functional claiming is.  What he appears to mean is that the claims should have to include every little step or element in the invention.  This would mean that if you were writing a patent about cell phones, you would have to claim the individual transistors.  Patent law had determined that this made no sense and as long as, for instance, heterodyne receivers were well known you could claim the heterodyne receiver without claiming the individual transistors or even explaining the invention to this level of detail.  Patent law is right on this point and Lemely and the author are clearly wrong.

As a patent attorney, with a BSEE, an MS in Physics and twenty years of practicing patent law, it would be nice if CATO, when discussing patents and patent policy would actually include those who are factually and legally competent to be patent attorneys in technical discussions about patent law, including defining what software is.

 

Disappointed

Dale B. Halling

 

What Is a Software Patent?, by Christina Mulligan.

September 30, 2014 Posted by | -Philosophy, News, Patents | , , | 4 Comments

Patent Trolls: Evidence from Targeted Firms

The paper, Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer assumes that NPEs are enforcing patents of questionable validity.  However, the paper offers no proof of this and does not even try to justify this position.  Once you start with that position, it is a foregone conclusion that any litigation is unjustified and wastes resources.  However, the initial assumption is not proven and in fact many papers have shown the opposite.  If you do not start with this assumption then the paper’s whole argument falls apart.  Litigation losses by operating companies are a justified return to the inventor and their investors.  The operating companies are not victims, but victimizers and the return to inventors and their investors encourages more inventive activity.

 

The paper’s big conclusion is: 

“Specifically, in the years following litigation, firms against whom cases are dismissed produced spent on average $211 million (t = 1.96) more on R&D expenditures than firms that lost to NPEs.  These firms also spent on average $49 million more (t = 2.95) to acquire more in process R&D from outside.30 Furthermore, in the years following litigation, firms against whom cases are dismissed produced 63.52 more new patents (t = 2.96), and these new patents received 723.98 more citations (t = 3.45), relative to the group of firms that suffered the cost of NPE litigation.31 These large differences in R&D expenditure, patent production and in the quality of produced patents do not appear until after NPE litigation.”

Inherent in this statement is that anytime an operating firm that loses a patent litigation case to a NPE is a bad result.  If the firm was stealing an invention, then the fact that they lost is a good thing.

The companies that lost in litigation spend less on R&D according to the paper.  Perhaps that is because they were not as inventive to start with, perhaps it is because they decided to focus on manufacturing and purchasing their R&D from outside inventors, and perhaps it is because they lost a substantial amount of money.  These are not dire results or unexpected results or necessarily bad results.

The paper implies that NPE lawsuits result in less spending on R&D, but just because firms that lose patent lawsuits spend less on R&D in the years immediately following, does not mean that total R&D is down.  When inventors see their rights are upheld then they are encouraged to spend more time inventing.  Unless you measure the amount spent by independent inventors or inventive firms who now see their rights upheld, you cannot draw that conclusion.  These comments also apply to the citation differences.  The authors are only looking at the microeconomic system that they care about, but you cannot draw the macroeconomic conclusions they do, because they don’t consider all the macroeconomic effects.

The paper does not define what a NPE is.  It starts with this surprising conclusion, “We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks).”  They needed a study to tell them that?  Of course NPEs focus on companies with cash on hand, why would they waste their time suing companies that could not pay them?  Especially after the eBay decision, in which they are unlikely to get an injunction.

 

The paper goes on to state:

“A new organizational form, the non-practicing entity (hereafter, NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to prosecute infringement on their patent portfolios.”

Edison, Tesla, Bell, Amstrong ‘amassed patents.’  In fact, most of the US’s greatest inventors were just inventors.  They did not create patents ‘for the sake of producing commercial products.’  They specialized in being inventors and let manufactures concentrate on manufacturing.  All of them were involved in numerous lawsuits.  The difference between them and today’s inventors is that the courts were much more likely to uphold their rights to their inventions.  As a result, manufacturers were much quicker to license inventions.  In fact, one study showed that in the late 1800’s an inventor’s chance of monetizing their invention if they received a patent was around 85%.  In other words they made money specializing as inventors.  Today that figure would be less than 2%.  Because courts allow companies like Google, Microsoft, Samsung, etc. to get away with stealing other people’s inventions, they make the calculated risk that it is better to go to court than pay an inventor a licensing fee.  As a result, inventors often have to team with someone with a deep pocket in order to get large corporations to pay them the licensing fees they deserve.  In fact, large companies such as IBM, Microsoft and others will also often team with people who are experts in licensing or litigation.

Division of labor is generally considered a positive in economics.  The fact that this paper is arguing against it means that it has to give extraordinary proof for its extraordinary claim.  The attack on NPEs is really an attack on the profession of inventing.  A uniquely American profession.

This is not an academic paper, it is a propaganda paper pretending to be science.

 

 

 

Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer

September 14, 2014 Posted by | -Law, -Philosophy, News, Patents | , , | Leave a comment

CATO and Mercatus Center: Another Flawed Study on Patents

The paper, The True Story of How the Patent Bar Captured a Court and Shrank the Intellectual Commons, has a number of errors that show its conclusions are flawed.  The author’s errors in a related article, entitled How Many Jobs Does Intellectual Property Create? were well documented by Adam Mossoff and Mark Schultz in Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong.  This paper’s title purports to show the Court of Appeal for the Federal Circuit has been captured by patent attorneys, but never actually provides any evidence to support this assertion.  Below I will detail a number, but not all the other errors in this paper.

 

1) The article states.  “Just as other property rights internalize the social benefits of improvements to land, automobile maintenance, or business investment, patents incentivize the creation of new inventions, which might otherwise be undersupplied.”

This is the utilitarian model of property rights.  The US was not founded on the Utilitarian model it was founded on natural rights, which are incorporated the Declaration of Independence and into Blackstone’s Commentaries which formed the basis of US common law for the first century of the US. In fact, Blackstone specifically states that patents and copyrights are property rights based on Locke’s formulation.  See The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.

There is no such thing as balancing test for property rights as implied by the author, this is a Utilitarian formulation of property rights.

 

2) The article states.  “A single, politically captured circuit court with exclusive jurisdiction over patent appeals has consistently expanded the scope of patentable subject matter. This expansion has resulted in an explosion of both patents and patent litigation, with destructive consequences.”

The myth of an explosion in patent litigation has been debunked many times.  As pointed out in the article The “Patent Litigation Explosion” Canard,

“First, it’s simply untrue. Award-winning economist, Zorina Khan, reports in her book, The Democratization of Invention, that patent litigation rates from 1790 to 1860 fluctuated a lot, but averaged 1.65%. Today’s patent litigation rates are around 1.5%. As Yoda would say: patent litigation explosion this is not, hmm, no. In fact, for three decades in Khan’s study patent litigation rates were higher than today’s litigation rate. From 1840-1849, for instance, patent litigation rates were 3.6% —more than twice the patent litigation rate today.”

Also see Massive Litigation Spike in Response to America Invents Act and The America Invents Act at Work – The Major Cause for the Recent Rise in Patent Litigation

Second there has not been an explosion in the number of issued patents.  The number of patents issued to US inventors in 1980 were 37,355 and in 2011 there were 108,626 that is a 3.5% increase in the number of patents per year, hardly an explosion in the number of issued patents.

The research and development cost  per patent has increased from around $1.2 Million per patent to around $4 Million per patent from 1955 to 2005 and GDP per patent over the same time period in constant dollars has increased from 60 million per patent to around 170 million per patent.  According to a paper by the Federal Research Bank of San Francisco[1], real industrial R&D has been growing at 3.7% per year between 1953 and 2000, while the number of patents per capita has been growing at 1.7% per year over the same period.  The number of citations per patent increased 3.3% per year over the 25 year period from 1975-1999.

 

3) The article states.  “As early as 1951, Simon Rifkind, a former federal judge in New York City, warned in a prescient essay that then-current proposals to create a specialized patent court would lead to “decadence and decay.”

This was the time period in which a Supreme Court Justice in 1948 would write “the only patent that is valid is one which the Court has not been able to get its hands on.”  Jungerson v. Ostby and Barton Co., 355 US 560.  This was also when the Supreme Court was applying its “flash of genus standard to patents.”  If Rifkind meant that it would result in courts that did not have this utter disdain of patents he was right.  However, this is hardly an objective measure.

 

4) The article states.  “Using a dataset of district and appellate patent decisions for the years 1953–2002, economists Matthew Henry and John Turner find that the Federal Circuit has been significantly more permissive with respect to affirming the validity of patents.”

Well given the Supreme Court’s attitude the only patent that is valid is one which the Court has not been able to get its hands on that is hardly a surprise.  One of the first things that Reagan did upon becoming president, was to create the Court of Appeals for the Federal Circuit.  This court does hear all patent appeals and actually had about half the Justice that were actually trained in patent law.  In order to be legally or factually competent as a patent attorney you have to have a technical background in science or technology, which none of the present Supreme Court justices have.  In addition, patent attorneys have to pass a separate bar exam that has one of the lowest pass rates in the US.  Patent law is a highly technical and specialized area, just like quantum mechanics is highly specialized and technical.  You would not ask an English professor how to solve a problem in quantum mechanics and expect anything sensible.  The same is true for patent law.

 

5) The chart in the article is a lie.  It shows the number of patents linearly, which would show any compound growth as an exponential.  In fact the number of issued patents has grown at a rate 3.5% from 1980 to 2011, hardly an explosion.

 

6) The article states.  “They estimate that patentees are three times more likely to win on appeal after a district court ruling of invalidity in the post-1982 era. In addition, following the precedents set by the Federal Circuit, district courts have been 50 percent less likely to find a patent invalid in the first place, and patentees have become 25 percent more likely to appeal a decision of invalidity.”

The 1970s was a period of time in which several appeals circuits had not upheld the validity of a patent in 25 years.  The FTC had a policy of nine no-nos of what you could not do with your patent without running afoul of the antitrust laws.  It is hardly surprising that Reagan and Congress wanted to strengthen the property rights of inventors.

 

7) The article states.  “The U.S. Supreme Court reversed the Court of Customs and Patent Appeals, holding that mathematical algorithms (and therefore software) were not patentable subject matter.”

Here the Supreme Court showed their complete ignorance of what a computer is and what software does.  Any electrical engineer knows that any device implemented in software can be implemented in hardware.  In fact, software just wires an electronic circuit (computer) to create an application specific device.  Engineers choose between these options based on the need for flexibility and lower cost (software) and speed (hardware) and have several choices in between.

In order to be logically against software patents, one has to be against all patents for electronic circuits.  This is the sort of nonsense you get from a court that does not understand the underlying technology.

 

8 ) The article states.  “State Street Bank v. Signature Financial Group (1998), the Federal Circuit broadened the criteria for patentability of software and business methods substantially, allowing protection as long as the innovation “produces a useful, concrete and tangible result.”

35 USC 101 states “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”  A computer implemented invention is a new and useful machine and useful process.  Seems like the Federal Circuit got it right.

 

9) The article states.  “The GAO estimates that more than half of all patents granted in recent years are software-related.”

The GAO counted any invention that includes some sort of software, firmware, or related.  Let’s see, a procedure to sequence DNA would probably use a machine that had software or firmware and therefor met the GAO’s definition.  A chemical patent that used any computer controlled machinery would count as a software patent under this definition.  Today most transmission systems are computer controlled and therefore meet this definition.  This standard is so loose as to meaningless.

 

10) The article states.  “While more patents have not resulted in faster economic growth, they have resulted in more patent lawsuits.”

This statement will take some unpacking.  First of all the 1980s and 1990s saw significantly faster growth than the 1970s, which had a significantly weaker patent system.  Second of all the patent laws were weakened starting in 2000 with the Patent Act of 2000.  This trend has continued to this day.  In 2002, we passed Sarbanes Oxley which made it almost impossible for startups to go public, which starved startups and VCs of capital.  Economic growth did not start to fall off until around 2000.  So actually the data is consistent.  Weaker patent laws are associated with weaker economic growth.  Third, the patent system cannot function in a socialist system.  The US by CATO’s estimate takes 60% of the GDP today.  What does it mean to own your patent in a world where the EPA can take your land at any time, in which the eminent domain can be used to take your property for a project that promises higher tax revenue, a world in which the government publishes your invention for the whole world to see before they provide you any patent protection, a world in which the government does not accept any limits to tax you or regulate you?  The author is right that a patent system cannot cause economic growth in the USSR, which tried to implement a patent system.  A patent system is based on a system of property rights.  Since 2000 we have created a patent system that supports crony socialism (capitalism), not surprisingly our inventors and entrepreneurs are not creating economic growth.

The macroeconomic evidence is overwhelming for patent systems creating growth.  Those countries with the strongest patent systems are the most inventive and have the greatest technological dispersion and are the wealthiest in the world.  While those with the weakest patent systems do not contribute any inventions and have very poor technological dispersion and are some of the poorest countries in the world.

 

I for one am very disappointed that the CATO Institute would publish such a poorly researched and reasoned article.

 

 

 

[1] Wilson, Daniel, “Are We Running Out of New Ideas” A Look at Patents and R&D”, FRBSF Economic Letter, Number 2003-26, September 12, 2003.

September 10, 2014 Posted by | -Law, -Philosophy, News, Patents | , | 1 Comment

Supreme Court Alice v. CLS Decision

The long awaited decision by the Supreme Court in Alice v. CLS Bank came out on June 19, 2014, while I was away giving a talk at Atlas Summit 2014, which is why this post has been delayed.  Even in the statement of the question presented in the case the Court got it wrong:

The question presented is whether these claims are patent eligible under 35 U. S. C. §101, or are instead drawn to a patent-ineligible abstract idea.

Abstract ideas are not an exception to section 101, despite a long line of nonsense by the court.  Every invention is an abstract idea in that it describes a class of things, not a specific instance.  The failure (purposeful) of the Court to define what they mean by an “abstract idea” has resulted in an incomprehensible standard.

An abstract idea is a thought or conception that is separate from concrete existence or not applied to the practical.  From this definition, it is clear that if an inventor were to describe an “abstract idea” it would be a section 112 issue, not a 101 issue.  In this case, Alice describes and claims a concrete existence that is applied to the practical problem of settlement risk that saves billions of dollars a year.  Note using any rational definition of abstract idea, means it would not be a “process, machine, manufacture, or composition of matter.”  Therefore the abstract ideas exception is just redundant.  But the Court is unable to think logically, so instead of applying the statute, they make up the law as they go along.

In any event, we need not labor to delimit the precise contours of the “abstract ideas” category in this case. It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediated settlement at issue here. Both are squarely within the realm of “abstract ideas” as we have used that term.

Biliski did not claim or describe “risk hedging” and Alice did not describe “intermediate settlement” any more than the patent for the LASER described “light making.”  The Court’s characterization of these inventions with two word tag lines is intellectually dishonest.

Note the Court admits that they refuse define what they mean by abstract idea.  Failure to define one’s terms is the hallmark of charlatans and tyrants.  The Court’s statement means that no one can know what will be considered an abstract idea until the Supreme Court rules.  This is a judicial power grab.

Below the Court tries to justify what is clearly an absurd position.

The fact that a computer “necessarily exist[s] in the physical, rather than purely conceptual, realm,” Brief for Petitioner 39, is beside the point. There is no dispute that a computer is a tangible system (in §101 terms, a “ma­chine”), or that many computer-implemented claims are formally addressed to patent-eligible subject matter. But if that were the end of the §101 inquiry, an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept.

But what petitioner characterizes as specific hardware—a “data processing system” with a “communications controller” and “data storage unit,” for example, see App. 954,958, 1257—is purely functional and generic. Nearly every computer will include a “communications controller” and “data storage unit” capable of performing the basic calculation, storage, and transmission functions required by the method claims.

A computer is a machine and those are covered by 101.  The Court is intellectual dishonest or just plain stupid when they state “an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept.”  Alice never said any such thing, but because the Justices are incompetent in reading claims and computer technology, they ignore the claims and description, and come up with their own characterization.

Here they again prove they cannot read the claims and instead paraphrase them, of course ignoring any part they find inconvenient.

The representative method claim in this case recites the following steps: (1) “creating” shadow records for each counterparty to a transaction; (2) “obtaining” start-of-day balances based on the parties’ real-world accounts at exchange institutions; (3) “adjusting” the shadow records as transactions are entered, allowing only those transactions for which the parties have sufficient 8resources; and (4) issuing irrevocable end-of-day instructions to the exchange institutions to carry out the permitted transactions. See n.2, supra.

The Court then proceeds to suggest that there is some sort of balancing test to 35 USC 101.

The former “would risk disproportionately tying up the use of the underlying” ideas, id., at ___ (slip op., at 4), and are therefore ineligible for patent protection. The latter pose no comparable risk of pre-emption, and therefore remain eligible for the monopoly granted under our patent laws.

Balancing tests are inherently unconstitutional.  A nation of laws is based on Natural Rights and clearly delineated laws.  A balancing test turns that into a nation of men.  Judges like them because they are the “men” so it is an inherent power grab.  The Constitution requires the Rights of Inventors be secured.  It does not allow for judicial balancing of inventors’ rights.

The Court then ignores the 1952 Patent Act and deconstructs the claims, which not only violates 35 USC 103, but is illogical (every invention is a combination of existing elements – conservation of matter and energy).  In addition, it brings back the discredited idea of “inventive concept”, which the 1952 Patent Act specifically was directed at eliminating.

To answer that question, we consider the elements of each claim both individually and “as an ordered combination” to determine whether the additional elements “transform the nature of the claim” into a patent-eligible application. Id., at ___ (slip op., at 10, 9). We have described step two of this analysis as a search for an “ ‘inventive concept’”—i.e., an element or combination of elements that is “sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.” Id., at ___ (slip op., at 3).

It would be nice if the Justices could actually read a statute.

The following statement shows the intellectual dishonesty of the court.

A claim that recites an abstract idea must include “additional features” to ensure “that the [claim] is more than a drafting effort designed to monopo­lize the [abstract idea].” Id., at ___ (slip op., at 8–9). Mayomade clear that transformation into a patent-eligible application requires “more than simply stat[ing] the [ab­stract idea] while adding the words ‘apply it.’Id., at ___ (slip op., at 3).

Alice’s patent application never said any such thing.  The Justices should be impeached for this sort of outrageous characterization.

Here again, the Justices prove they have no idea how to read a claim.

On their face, the claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risk. Like the risk hedging in Bilski, the concept of intermediated settlement is “ ‘a fundamental economic practice long prevalent in our system of commerce.’” Ibid.; see, e.g., Emery, Speculation on the Stock and Produce Exchanges of the United States, in 7 Studies in History, Economics and Public Law 283, 346–356 (1896) (discussing the use of a “clearing-house” asan intermediary to reduce settlement risk).

The claims are not drawn to anything.  This is just an attempt to ignore the limitations of claims to smear the invention.  The LASER is a part of the fundamental practice of creating light that has been known before for millions of years.  Does that mean it should not have been patentable?

 

Conclusion

The bottom line on this case is the Court is opposed to patents that cover financial products.  Alice and Biliski are Wall Street protection act decisions.  It is impossible to draw any conclusions broader than the Court will not allow patents on financial products.  This is not logic and it is not law.  It is time that we withdraw the Supreme Court’s jurisdiction over patent cases.  Not one of the Justices or their aides are legally or factually competent to be patent attorneys, and the consequences of their incompetence are just too high.

 

July 2, 2014 Posted by | -Law, -Philosophy, Patents | , | 5 Comments

$120 Per Smartphone in Royalties – Outrageous!

An academic paper claims that the cost for royalties ($120 per phone) is about the same as the cost of the components in a smartphone.  This was accompanied by a number of articles suggesting this was outrageous and unsustainable.  For example see:

* High smartphone patent royalties undermine industry profitability: report 

* The $120 Smartphone Patent Tax: Patent Royalties Cost More Than The Actual Hardware In Your Phone:   This one from my favorite patent Luddite site, Techdirt.

* Smartphone royalties now equal manufacturing costs

The logical flaw underlying all these articles is that the value of products is determined by the amount of physical labor and/or the cost of the underlying materials.  On this basis, the actual material costs of a cell phone are probably less than $5 and the labor (unskilled labor in the US is worth perhaps $10/hr) involved in making the phone might be worth $5, let’s throw in $10 for distribution and the hard costs of a smartphone are about $20.[i]  The rest of the costs are the result of intellectual property, much of which is in the form of patents, but some is in the skilled labor, copyrights and trademarks.  The actual cost of the intellectual property in a smartphone is closer to $380.00.  Much of these costs are hidden.  For instance, when Intel sells a microprocessor they charge you $50, for example, but the labor cost and material cost of the microprocessor is pennies.  The reason they can charge $50 is because of the intellectual property, which means patents.  From an economic point of view you are paying a dollar or so for the manufacturing and $49 in patent royalties.

Another logical flaw in these articles is that this is an unsustainable business model.  First of all the underlying paper points out that sales of smartphones and tablets is now bigger than all the rest of the consumer electronics space, with over a billion smartphones sold in 2013.  Clearly the business model is not falling apart.  Second of all, the cost of Microsoft Office Home and Business 2013 is $219.00 and none of that is manufacturing cost.  The cost of Microsoft Office is essentially all IP (Patents, Copyrights, etc.).  Solidworks, which is 3D CAD software, cost $4000.00 and also has essentially no manufacturing costs, which means you are paying the equivalent of $4000 in royalties.  The argument that the model is unsustainable is absurd.

 

Actual Paper

The paper that started this economic stupidity is The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones.  The paper is clearly designed to sway public and Judicial opinion in a manner that will be beneficial for Intel.  Namely, Intel wants a patent system that emphasizes manufacturing, not inventing.  Another goal of the paper is to get courts to reduce the amount of royalties that inventors receive.

“In particular, there has been significant recent focus on “royalty stacking,” in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product.”

This statement is absurd on its face, as the paper itself points out.

“The market for smartphones has exploded. Smartphones sales for 2013 topped one billion units globally for the first time ever.  In addition, global revenues for smartphone and tablet sales in 2013 are estimated to have surpassed for the first time revenues for the entire consumer electronics markets (e.g., televisions, audio equipment, cameras, and home appliances).”

Here is the real point that this paper is pushing:

“Further, the available data demonstrate a need for licensees to advocate and courts to rigorously apply methodologies for calculating royalties that focus on the actual value of a claimed invention put in context of the myriad other technologies in a smartphone and the components in which the technologies are implemented.”

I will admit that having courts set royalty rates is not ideal and the results can be squirrelly, which is why eBay  should be reversed.  The courts used to just prohibit the infringer from using the patented technology and then the parties had to work out a deal.  But the Supreme Court decided that enforcing the only right you get with your patent is an injunction – actually it is not an injunction it is an exclusion order requiring the infringer to not trespass on (use) the patent owner’s property.

The paper admits that its methodology is limited and the actual cash cost going to pay royalties could be higher or lower.  For instance, the paper does not track cross licensing, pass through, or patent exhaustion, all of which could significantly reduce the actual royalties paid.  They clearly made an error if they did not account for patent exhaustion.  If patent exhaustion was part of the royalty costs, then almost every high value component’s price is mainly due to patents.  Correctly accounting for patent exhaustion would show a royalty per smartphone closer to the $380.00 per phone as explained above.

The paper is just dishonest when discussing the growth in the number of patents issued and the number of patent lawsuits.  It shows in 20 years the number of patents issued in the US has increased from 100,000 per year to 250,000 per year.  The implication is that this is an absurd increase in the number of issued patents, but if you do the math this turns out to be a 4.75% annual increase, about the same as the increase in worldwide GDP over the same time period.  The paper also shows a graph depicting the number of patent lawsuits exploding around 2011.  This increase is due to the America Invents Act, which limited the joinder of defendants in patent lawsuits.  This has been well documented, as in the article  The America Invents Act at Work – The Major Cause for the Recent Rise in Patent Litigation.  The paper’s failure to point this out is just outright fraud.  The fraud is perpetrated again when the paper points to the increase in the number of NPE lawsuits.  These authors seem to have gotten their training from Al Gore and French economist Thomas Piketty.

 

 


[i] In fact you can buy cell phones for less $30.00 on the Internet.  The cost of materials in a smartphone and a $30 cell phone is essentially the same.  The material costs in a cell phone include the plastic which costs several cents, the metal for the conductors which might be worth a dollar, the silicon which in its raw form is worth almost nothing.

June 1, 2014 Posted by | -Law, -Legal, -Philosophy, News, Patents | , | 2 Comments

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