State of Innovation

Patents and Innovation Economics

Death of Angel Capital

According to the Wall Street Journal:
Senator Chris Dodd’s 1,400-page financial reform bill contains many economic land mines, and here’s one of the worst: Provisions that would make it harder for business start-ups to raise seed capital. Currently, wealthy individuals who want to invest directly in a new business can do so with minimum interference from regulators. The law requires only that the investor be “accredited” by meeting thresholds for net worth ($1 million) or income ($250,000). Entrepreneurs depend on these “angel” investors, since many new businesses lack the collateral for bank loans and are too small to interest venture capitalists.
Mr. Dodd’s bill would change all this for the worse. Most preposterously, it would require that start-ups seeking angel investments file with the Securities and Exchange Commission and endure a 120-day review. Rare is the new company that doesn’t need immediate access to the capital it raises, and a four-month delay is the kind of rule popular in banana republics that create few new businesses.
The legislation also removes a federal pre-emption that prevents start-ups and investors from being subject to 50 different state regulators. The North American Securities Administrators Association, which represents state regulators, argues that federal pre-emption contributes to fraud. But angel investors don’t use broker-dealers and other middlemen linked to recent investment scandals. Nascent companies often seek financing from multiple investors in different states, and a state-by-state regulatory regime would mean higher compliance costs and more legal risks.
The Dodd bill also raises the net worth and income thresholds to $2.3 million and $450,000, respectively. The Angel Capital Association, a trade group, estimates that these provisions would disqualify about 77% of current accredited investors. Accreditation matters in luring other potential investors, such as venture capitalists who enter the picture once a company begins to mature.

Please see the full Article

April 26, 2010 Posted by dbhalling | Innovation, Uncategorized | , , , , , , | 1 Comment

Gene Patent Case: Case Study in Judicial Activism

Judge Sweet’s opinion in ACLU v. Myriad is a mind numbing 156 pages.  The opinion seems to be an attempt win an argument by boring the opposition to death.  The opinion is inconsistent, wrong on the law, but most importantly a case study in judicial activism.  Judge Sweet’s decision in this case is ultimate based on his opinion that “the overriding importance of DNA’s nucleotide sequence” means thatMyriad should not receive patent protection for genes that are an indicator of breast cancer.

The only legitimate question before the court was whether Myraid’s patents on isolated forms of genes are patentable subject matter under 35 USC 101.  However, the opinion rambles on for pages listing so called “facts” that have nothing to do with the only legitimate issue.  For instance, the opinion discusses how a clinic in Ontario is able to provide the same tests as Myriad for less money by “ignoring” – stealing would be the correct word, Myriad’s technology.  There is a lot of typical liberal hand wringing over the cost of the tests, but of course the cost and effort of the research are ignored.  The opinion in the “facts section” questions whether patents encourage innovation.  These facts are irrelevant to the case, since they have nothing to do with whether the genes in question are patentable subject matter.  The fact that the court cites these irrelevant “facts” or actually hypothesis shows that the court has no interest in law.  It is a typical case of Judicial Activism where the judge sets themselves up as the philosopher king ready and willing to refashion the whole country according to their dictates.  But, this is not the job of the court and the court does not have this authority.

The patent and trademark clause is the only place in the Constitution where a “right” is mentioned.  The courts and even Congress have no authority to eliminate the patent system.  Under the Constitution it is job of Congress to define the patent laws.  The only job of the courts is to apply the patent laws.  If there is some ambiguity in the laws the Courts may provide insight within the bounds of the statute, but it has no authority to rewrite the patent statue.  As a result, all of Opinion’s examining of the value of patents and how they affect innovation is irrelevant at best and unconstitutional at worst.

Judge Sweet’s legal basis  for his opinion that Myriad patents are not statutory matter under 35 USC 101 relies on Diamond v. Chakrabarty, 447 U.S. 303 (1980).  This case is widely cited for the proposition that “anything under the sun that is made by man” is patentable subject matter.  Isolated versions of human genes (i.e., BRCA1 and BRCA2 genes) do not exist in nature.  While it is possible that they are naturally isolated from the rest of the chromosome at some point in time, they are never naturally isolated outside of a human cell.  It is clear that isolated versions of the BRCA1 and BRCA2 genes are a product of man.  So how did Judge Sweet reach his ruling that Myriad’s patents were directed to non-statutory matter?  First, he quotes a dissenting opinion in Diamond v. Chakrabarty.  Dissenting opinions are not the law and generally citing a dissenting opinion in a case directly on point is a sign you are wrong.  Second, he states that the Supreme Court was wrong in their ruling in Diamond v. Chakrabarty.  He points to the legislative history of 35 USC 101:

Section 101 sets forth the subject matter that can be patented, ”subject to the conditions and requirements of this title.” The conditions under which a patent may be obtained follow, and section 102 covers the conditions relating to novelty.  A person may have ”invented” a machine or a manufacture, which may include anything under the sun that is made by man, but it is not necessarily patentable under section 101 unless the conditions of the title are fulfilled.

The opinion specifically points to the underlined section for the proposition that there are some other conditions necessary to meet the requirements of 35 USC 101.  This interpretation is clearly flawed.  The underlined section above means that a person has to not only meet the requirements under 35 USC 101, but also the requirements of Novelty, Non-Obviousness, Enablement, Written Description, etc.  I would like to believe that this clear error is an honest mistake, but it was apparent from the beginning of the opinion that Judge Sweet has no respect for Constitution or the law when it comes to patents.

Using this dishonest slight of hand, Judge Sweet then proceeds to state that just purifying a naturally occurring substance is not patentable subject matter under 35 USC 101.  There are many cases on point that the Judge conveniently ignores.  For instance, Merck & Co., Inc. V.Olin Mathieson Chemical Corporation, 253 F.2d 156 (1958), found that Merck had claimed an isolated and purified form of vitamin B12.  Isolated vitamin B12 is not found in nature.  Merck’s isolated vitamin B12 was better than the form found in nature since patients were spared having to consume a pound of liver in order to derive the same benefits.  The discovery of isolated vitamin B12 by George Whipple, George Minot, and William Murphy resulted in them winning the 1934 Nobel Prize in Medicine.

The philosophical basis for Judge Sweet’s opinion is based on the flawed reasoning that an invention that includes a naturally occurring substance is not patentable.  This reasoning is similar to the flawed reasoning that an invention based on a “combination of known elements” is not patentable or at least it is highly suspicious that such an invention should receive a patent.  All inventions are combination of known elements, these elements are always made at some level of naturally occurring substances.  This is a clear result of the conservation of matter and energy.  These elements always behave in a predictable way in that they never violate the laws of physics.  If Judge Sweet’s ideas on patents were applied consistently to all patents then only black magic would be patentable.

The sad fact is that both liberal, conservative, and strict constitutionalist judges have become activist judges with respect to patent law.  (See Judge Scalia’s statements in the Bilski oral arguments)  None of these judges has even a rudimentary understanding of the how the laws of physics apply to patent law.  If these judges would stick to there job of applying the law instead of acting as philosopher kings ready and willing to refashion the whole country according to their dictates, then their errors would not be so damaging to patent law, the country, and our economy.

April 16, 2010 Posted by dbhalling | Patents, Uncategorized | , , , , , , , | 2 Comments

Blaming Greenspan and the Free Market

The Financial Crisis Inquiry Commission, being members of congress, are trying their best to pin the financial crisis on anyone but Congress.  It appears the favorite whipping boys are Alan Greenspan and unfettered capitalism.  Congress conveniently forgets that between Fannie, Freddie, FHA loans, Veterans Housing Administration, and the Community Reinvestment Act we don’t have unfettered capitalism.  Not to mention to the Federal Depository Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Association, the Board of Governors of the Federal Reserve, the Department of Housing and Urban Development, the Federal Financial Institutions Examination Council, the Financial Crimes Enforcement Network, and state banking regulatory agencies.  The only way someone can call that unfettered capitalism is to propagate The Big Lie: that the US is a bastion of unfettered capitalism, which causes all our problems.  

As Alan Greenspan pointed out:

 the surge in demand was the heavy purchases of subprime securities by Fannie Mae and Freddie Mac, the major U.S. Government Sponsored Enterprises (GSE). Pressed by the Department of Housing and Urban Development and the Congress to expand “affordable housing commitments,” they chose to meet them by investing heavily in subprime securities. The firms accounted for an estimated 40% of all subprime mortgage securities (almost all adjustable rate), newly purchased, and retained on investors’ balance sheets during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for subprime mortgage backed securities during the years 2003-2004 was effectively politically mandated, and hence driven by highly inelastic demand.

As Greenspan points out Congress had no interest in reining in the subprime mortgage party or the securitization of these mortgages (CMO).  In addition, Greenspan did warn about both the problems with Fannie and Freddie.  In 2002, he expressed concerns to the FOMC, noting that “…our extraordinary housing boom…financed by very large increases in mortgage debt – cannot continue indefinitely.” It did continue for longer than he would have forecast at the time, and it did so despite the extensive two-year -long tightening of monetary policy that began in mid-2004.  See Greenspan’s complete analysis at http://fcic.gov/hearings/pdfs/2010-0407-Greenspan.pdf.  

Greenspan then points out that there “was a pronounced fall from 2000 to 2005 in both global real long-term interest rates and nominal long-term rates, which indicated that global saving intentions, of necessity, had chronically exceeded global intentions to invest.  Yet the ex post global saving – investment rate in 2007, overall, was only modestly higher than in 1999, suggesting that the uptrend in the saving intentions of developing economies tempered declining investment intentions in the developed world.  This statement is the most interesting and important statement in all of Greenspan’s testimony.  Why had and has the developed world reduced its rate of investment?  Why has investment not grown since 1999?

Has the rate of investment in the developed world stagnated because we have run out of businesses and ideas?  No, since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. If we want to create jobs, we need to have laws that encourage entrepreneurial start-ups. 

These issues are discussed in more detail in my book The Rise and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovationhttp://www.amazon.com/Decline-Fall-American-Entrepreneur-Regulations/dp/1439261369/ref=sr_1_1?ie=UTF8&s=books&qid=1262911287&sr=8-1

April 12, 2010 Posted by dbhalling | Uncategorized | , , , , , , , | 2 Comments

Da Vinci Institute: Night with a Futurist

Dale Halling will be speaking at the Night with a Futurist event at the Da Vinci institute on April 5, 2010 at the Madcap theater.   As a patent attorney, Dale Halling deals with start-up entrepreneurs on a daily basis.  He began noticing a significant difference between the types of projects his clients were involved with in the 1990s and 2000s. Clients, in the 90s, would come into his office with plans to build businesses that were disruptive or revolutionary.  The technologies underlying these companies held the potential to completely redefine a market.  Some of the ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies.  It was very exciting talking with these entrepreneurs.  Their energy was infectious and the potential implications of their work was mesmerizing.  However, the tech downturn of 2000-2001 changed all that.

After 2002, the start-up companies he came into contact with were all looking for narrow niche markets.  Instead of trying to make dramatic changes to technology and go public, these companies were looking to develop incremental changes and be bought out by an existing company.

He started wondering if other people in the tech world were seeing similar trends.

Recent innovations like the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry are certainly innovative, but they are not capable of altering the entire economy like the Internet of the 90s.  The Internet in the 90s affected almost every business in the U.S.  It drove PC sales, retail, electronics, telecommunications, professional businesses, marketing, newspapers, and much more.  It also redefined whole areas of life, with email, online shopping, and online advertising. It was impossible to escape the effects of the Internet unless you crawled under a rock.

The personal computer revolution of the 80s had a similar effect.  The iPod has been cool, but hasn’t affected the whole economy.

So what’s behind all this? The changes have seemed subtle from the outside, but the ripple effects have been huge.

Join us as we take a hard look at how the face of innovation has changed, and what we can do to turn it around.

EVENT: Night with a Futurist
DATE: April 5, 2010 – Monday
TIME: 6:30pm-9:00pm
WEBSITE: http://www.davinciinstitute.com/events/433/night-with-a-futurist-monday-april–5-2010

LOCATION: MADCAP Theater, 10679 Westminster Blvd, Westminster, CO 80020
DIRECTIONS: Driving Directions

COST: $25, Members: Free, SuperMembers: Free
REGISTER: Register here

PHONE: 303-666-4133

TOPIC: “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation”
SPEAKERS: Dale Halling, Allison Taylor, Catharine Merigold, Gene Branch, Mike Schmidt, Thomas Frey

March 25, 2010 Posted by dbhalling | Uncategorized | , , , , , , , , | 2 Comments

Does Health Care Bill Signal End of American Empire?

Here is an interesting article.  David Murrin suggests that the passage of the health care bill is a signal that not only is the American Empire coming to and end but it is the end of the Western Empires.

The passage of the health care law shows that the US empire is declining because it illustrates the fact that people expect the state to take care of them, David Murrin, the co-founder of Emergent Asset Management hedge fund manager, told CNBC.

See the full interview.

March 24, 2010 Posted by dbhalling | Uncategorized | , | 1 Comment

Health Care: The End of Freedom

The passage of the health care bill is the end of the American experiment with freedom.  This experiment with freedom created the greatest country in the world that propelled the world out of the Malthusian trap into unprecedented wealth.  This wealth and more importantly freedom was more widely distributed and benefited more people than any other time in the history of the world.  You no longer have the right to “pursuit of happiness.”  Here are some of the consequences of the health care bill:

1) Bankruptcy:  The US will become insolvent in the next decade.  By insolvent I mean either the US will renege on the terms of some of its debt or we will have double digit inflation.

 2) Constitution: The Constitution is now a meaningless piece of paper.  Any pretence that the government is limited has died.  The government can enact any legislation requiring anyone to take actions that government deems in its interest.  The government does not work for you, you work for the government; your only purpose is to serve the government.

3) Medical Innovation is Dead: This law ensures that we will have essentially no innovation in medicine.  The US is the only major country that invests in pharmaceutical research.  Most countries have been free riding on US medical research for years.

Here is a timely speech by Ronald Reagan on point

 http://www.youtube.com/watch?v=qXBswFfh6AY.

March 23, 2010 Posted by dbhalling | Uncategorized | , , , | 10 Comments

The Ballad of the Patent Troll

This videoby Alexander Poltorak takes on a number of the myths associated with patent trolls.  The video explains the hypocrisy of large companies complaining about “Patent Trolls.”  It also makes an interesting point that patents are not a tax on innovation but a tax on copiers (non-innovators).  While I do not agree with all the points in the video, it makes a valuable contribution to the discussion about the value of patents.

March 15, 2010 Posted by dbhalling | Uncategorized | , , | 8 Comments

Worldwide Patent Backlog

According to Intellectual Property Watch, the worldwide patent backlog “could impose £7.6 billion (about USD$11.3 billion) in annual expenses on the global economy within the next five years if nothing is done to fix it, according to a new economics study from the United Kingdom released this morning before directors of several top global intellectual property offices.”  Personally, I know this significantly underestimates the damage done by dysfunctional patent systems around the world.

The article suggests that patent harmonization is necessary to reduce the backlog.  However, harmonization has done nothing to reduce the backlog of unexamined patent applications to date.  In addition, all harmonization programs have been attempts to weaken the US patent system and give away our technology.  The article suggests that hiring additional examiners has not worked to reduce the patent backlog.  Of course, if the US government took its constitutional duties seriously they would prioritize the patent system instead of trying to take over health care, or spending billions on green projects or social engineering projects.

What is needed to reduce the backlog of unexamined patents is a reciprocity system.  Under reciprocity if an inventor received a patent in Canada they would obtain some patent rights in the US and vice versa.  This does not require harmonization, so it does not hurt the rights of US inventors.  “About 50 percent of patent applications seen in the US come from overseas,” according to David Kappos, Director of the US Patent and Trademark Office.  The US Patent Office is just repeating the work done in other patent offices of other countries.  While not all of these countries can be counted on to perform a thorough examination, many can.  It makes no sense that your patent is only valid in one country but can be invalidated by prior art anywhere in the world.  It’s as if you lost the rights to your car when you drove it into Canada.  Reciprocity would also encourage more investment in technology, which is the only way to increase real per capita income.

March 11, 2010 Posted by dbhalling | Uncategorized | , , , , , , , | Leave a Comment