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Posts Tagged ‘Innovation’


Sarbanes Oxley: Relief May Be on the Way

I wrote about the damaging effects of Sarbanes Oxley in my book, The Decline and Fall of the American Entrepreneur.  It appears that the Republican presidential candidates have read my book.  See this video, J. W. Verret Discusses Sarbanes-Oxley on Fox News, which shows the candidates explaining that we need to repeal SOX.  Let’s hope that they don’t just tinker around the edges with SOX and while they are at it they need to repeal Dodd Frank.  This would be a big step toward restoring innovation and getting the economy growing again.

 

 
Obama: Make Regulation Efficient

President Obama in a Wall Street Journal op-ed piece said that he has directed federal agencies to eliminate job killing regulations.  According to Obama the Executive order requires “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.”  As an example he points out:

For instance, the FDA has long considered saccharin, the artificial sweetener, safe for people to consume. Yet for years, the EPA made companies treat saccharin like other dangerous chemicals. Well, if it goes in your coffee, it is not hazardous waste. The EPA wisely eliminated this rule last month.

The fact that it has taken a severe economic recession and the lagging poll numbers of a president to make this changes shows how heavy handed our government has become and how Bzyantine our regulatory environment is.  I have suggested that the US needs a Regulatory Bill of Rights to provide citizens protections from excessive and contradictory regulations.  The Bill of Rights (first ten amendments) do not protect citizens from regulatory rules.  With just a few exceptions, if the governmental designates something a regulatory law or civil penalty then it can completely ignore the Bill of Rights.  I doubt that this is what the Founding Fathers intended when they passed the Bill of Rights.

 

If President Obama really wants to get rid of job killing regulations here is a list in order of importance:

1) Repeal Sarbanes Oxley

Sarbanes Oxley has effectively killed the IPO market and the better part of the equity market in the US.  See Sarbane Oxley Obstructing Innovation

2) Fully Fund the US Patent Office

Congress has stolen about $2B in user fees from the US Patent Office over the last two decades.  This has hurt innovation, job growth, and the economy.  See Restore Patent Funding to Create Jobs.

3) Repeal all Securities Laws

Every econometric study of our securities laws shows that they provide no benefit for investors.  See Liu, Tung, Santoni, Gary J., Stone, Courtenay C.,   Federal Securities Regulations and Stock Market Returns. This paper surveys several papers that have studied the effects of securities laws all of which show no meaningful change in investor outcomes.

4) Pass a Regulatory Bill of Rights

This would provide ordinary citizens the tools necessary to require the federal government to only implement regulations that achieve their purpose in a cost efficient manner.  See Regulatory Bill of Rights.

 

5) Eliminate the Income Tax

The income tax is not designed to generate revenue for the federal government.  It is designed to punish certain people who have committed no crime (violation of the due process clause of the 5th Amendment) and to allow Senators, Congressmen and the President to sell tax favors to the wealthy.  The income tax system should be replaced with a system with the sole goal of providing the federal government the revenue it needs.  A flat tax or a national sale tax would both work.

 

6) Repeal ObamaCare

This is a job killing piece of legislation that we cannot afford.

 

7) Reform Social Security and Medicare

The best reform is to make them defined contribution programs instead of defined benefit programs.

 

If President Obama were to implement these five simple changes, the U.S. would see above 7% growth for the next two decades.

 

 
Are Patents Relevant?

The more fundamental question in economics is whether inventions have any economic impact.  There is no role for inventions in classical economics[1], which focuses mainly on disruptions in supply and demand.  Marxist believe that all economic value is a measure of physical labor, so there is no room in the Marxist tent for inventions either.  Despite this modern economics has grudgingly admitted that inventions are key factor in economic growth.  However, they are torn on whether inventions (advances in technology) are endogenous or exogenous.  The exogenous camp believes that inventions occur separate from any incentives or spending on inventions.  Economists that fall into the exogenous camp clearly do not see any reason for a patent system, since they believe that inventions occur separate from any market forces.

The first widely acknowledged chink in the Marxist and Classical economics armor against inventions was Joseph Schumpeter who argued that creative destruction, caused by innovation, is the key to economic growth.  The hero in Schumpeter’s world was the entrepreneur not the inventor.  Despite this Schumpeter also was a determinist who believed in “natural” cycles and believed in the exogenous theory of inventions.

The next step in the economic analysis of invention was by Robert Solow.  Dr Solow published a paper in 1956 on economic growth that stated that four fifths of US worker output was due to technological progress (inventions).[2] Robert Solow would go on to win the Nobel Prize in Economics for this point.  However, Solow believed that technological progress was exogenous and therefore occurred separate from economic incentives to invent.  As a result, he argued that all countries would converge in their economic growth rates and their level of technology.  There has been no evidence for Solow exogenous theory of growth.[3] The growth and level of technology, inventions, and economic growth of countries has not converged as Solow predicted.  It is not surprising that Solow, in the exogenous camp, is a fan of the anti-patent book Against Intellectual Monopoly, by Michele Boldrin & David K. Levine.[4]

The next big advance in the analysis of inventions and economic progress was the book Invention and Economic Growth by Jacob Schmookler in 1966.  Schmookler undertook the most systematic analysis of invention of any economist.  He analyzes the issue of whether invention is exogenous, as argued by Solow, or endogenous.  He clearly shows that invention is mainly endogenous.  Schmookler does not directly address the question of the utility of a patent system in encouraging inventions.  However, he hints that attacks on the patent system in the 1930s and 40s was the cause for the decline in the number of patents issued to US inventors during this time.

In general, most economists in this area now acknowledge that invention is endogenous – subject to market forces.  If you accept that the invention process is endogenous, then the next question is whether patents encourage invention – are patents relevant?

One of the leading economists in the area endogenous growth is Paul Romer.  Romer thinks that the creation of inventions (he would call them recipes) are clearly subject to resource limitation.  He points out that researchers and laboratory equipment are not free and therefore we need a system to encourage people to invest in new inventions.  However, he believes that once an invention is created it cost virtually nothing to disseminate.  The example he uses is oral rehydration therapy.  While there are a small number of examples of inventions that are so simple and so easy to understand they can be disseminated at virtually no cost, most new inventions and technology do not fit into this category.  For instance, calculus is a very useful branch of mathematics and it has been known for centuries and yet most of us who learned calculus paid someone to teach us.  There were no intellectual property laws requiring us to pay a teacher to learn calculus, so if inventions (recipes) can be spread at no cost why did we undertake the irrational step of paying someone to learn calculus.  If technological can be disseminated at no cost then there is no reason for professors, doctors, lawyers, engineers, and especially marketers and sale people.  Romer is ambivalent about patents.  However, his ambivalence is based on the false assumption that technology dissemination is free.

Gregory Clark, an economist at UC Davis,  has written an interesting book in this area, entitled A Farewell to Alms.  In this book he states that the most important question in economics is explaining why

after millennia of per capita income being stagnant it takes off around 1800 in the West.  He provides an interesting answer.  The first part of his answer is that rate of technological progress increased at the beginning of the industrial revolution.  The second part of the answer is why the rate of technological progress suddenly increased.  He suggests that the industrial revolution takes of in Britain because of environmentally induced evolution.  Specifically, he suggests that the downwardly mobile society of Britain resulted in thrift and hard work being genetically selected in Britain.  These traits resulted in the industrial revolution taking off in Britain.  Clark appears to be part of the exogenous camp.  As a result, he does not think that patents are important in encouraging advances in technology or economic progress.

B Zorina Khan is another economist who has studied this issue.  She is author of the book, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920.  She provides extensive evidence that the US patent system and economic forces affect both the level and direction of invention.  She shows that the US created the first modern patent system and the patent system provides the major incentive that causes the US to grow from an agrarian economy to a world economic and technology power in 70 years.

The economic literature on patents is littered with misunderstandings of the basic rules of the US patent system.  For instance, many economists do not understand that the patent system is designed to spread information.  In the US we did this by setting up patent depository libraries, so that all people could take advantage of the knowledge associated with an invention.  You will read many economists that believe patents inhibit the spread of information.  This is clearly incorrect.  They do inhibit practicing of the invention without the payment of a royalty, but the underlying information is free for all people to learn from.

Economists are also generally ignorant of the history of patents.  They do not realize that patents are designed to encourage people to disclose the information associated with their invention.  The alternative to patents is trade secrets and no government can force people to disclose their trade secrets.  Before patents people protected their economically important inventions by keeping them a secret.  This limits the area’s where people will invest in new technologies to those that can be kept a trade secret.  It also means that the public does not benefit from the knowledge of the invention.  Most economists do not understand the unintended consequences of their anti-patent position.

Economists generally want to model patents as a government granted monopoly instead of a property right.  This is logically incorrect.  In economics, a government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service.  Since a patent does not even provide the holder the right to sell or practice their invention, it clearly does not grant an exclusive privilege to a firm to be the sole provider of a good or service.  Most economists do not understand this basic principle of patent law – a patent does not give the holder the right to produce or sell their invention.

It is straightforward economic analysis that investing in new technologies is an economic disadvantage for a company if there is no intellectual property protection.  The company’s research and marketing costs in creating a new product and new market clearly increase its cost of doing business over its competitors who do not spend money on new product development.  Their competitors just copy the new product and sell it into the markets the inventor created.  The inability of economists to grasp this simple point is mind boggling.  The only explanation I can come up with is that most of the economists who write about patents have not worked in the technology start-up market.  If they had, they would know that incredible additional expenses incurred not only in creating a new product, but in marketing and selling a new product.  This is particularly true the more unique the product.  It is always easier to sell a me-too product, since you do not have to explain how it works and why someone would want it.  This is why invention in most large companies is limited to line extensions.

Economists cannot provide meaningful input or commentary on the patent system unless they actually understand the patent process, the rights obtained with a patent, and the basic history of patent systems.  Ms. Khan and Pat Choate are some of the few economists who have a strong understanding of the patent system.  Unfortunately, Khan does not differentiate that patents are property rights, not a monopoly.


[1] However Adam Smith did mention inventions as one of three ways to increase the wealth of a nation.  “some addition and improvement to those machines and instruments which facilitate and abridge labor”, Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, Edited by Edwin Cannan, New York, Modern Library, pp. 373-374.

[2] http://en.wikipedia.org/wiki/Robert_Solow 8/3/10.

[3] http://www.ecomod.net/conferences/ecomod2003/ecomod2003_papers/Ulku.pdf 8/3/10.

[4] http://reason.com/archives/2003/03/01/creation-myths 8/3/10.

 
American Inventors for Patent Reform

AIPR has provided an excellent analysis of the numerous problems with the present “Patent Reform” bill.  There analysis is reproduced below:

S.515 and HR.1260, the Patent Reform Act: the weak grace period harms startups, small businesses  and university spin-offs, and will strangle millions of jobs

The Patent Reform Act weakens the one-year grace period, in  way that sharply tips the patent system in favor of large companies and companies with substantial offshore business, and against small companies, startups, university and other research spin-offs, and companies requiring FDA approval, and U.S. employees of international companies.  Small companies’ patents will be invalidated.   The costs of the patent system for small entities will increase, and venture capital investments in startups will decrease, by about $1 billion per year.  Because of multiplier effects, within a few years, the reduction in business formation that starts immediately will, within a few years, destroy about $100 billion per year of economic activity.

Current law gives an inventor one year to communicate outside a single firm, to openly raise capital, to assemble strategic partners, and to field test.  Under current law, the grace period allows a year to sort good inventions from bad, before significant resources must be committed to the patent process.  The current grace period lets companies gather information for a year so they can make good business, patenting, and investment decisions during the most difficult part of an invention’s lifetime, the early stage transition from the lab to commercialization.

The proposed amendment to the grace period is unworkable and unusable in practice.  The bill proposes that all disclosures of the invention within a year before the filing date bar will bar a patent, unless the true inventor can show “the subject matter was obtained directly or indirectly from the inventor.”  While this sounds facially reasonable, given the methods of proof available, this grace period is useless as a practical matter, because the bill provides no access to discovery of the facts that inventors will need to prove their cases.  Inventors will be forced into premature “use it or lose it” decisions, to file a patent application today or run a high risk of losing the option forever.

Further, the bill is ambiguous.  One key term, “disclosure,” is undefined.  Because the PTO must interpret statutes as adversely as possible in order to force issues to the Federal Circuit, the PTO will be required to interpret the new law to excuse only printed publications prepared with the care and expense of a full patent application.  ALL testing, offers for sale, public demonstrations, etc. will be patentability bars, with NO grace period, until the courts straighten this out.  That will take at least seven years.  It might be never, if the courts read the new law the way some big companies have advocated.

  • The situations that destroy patent rights arise suddenly, with no opportunity for a small company to recover.  The bill reflects the way large companies do business, but penalizes small companies:
  • The bill sharply favors companies that can do all of their financing, R&D, pre-launch marketing, etc. in house—but creates unacceptable risks for companies that must disclose their inventions or business plans in order to get investors or partners
  • Other countries that converted to a patent system like S.515 have lost their startup and small companies – the Patent Office admits it has never considered Canada, which made almost the same change, and had experienced no net benefit, only a shift from small companies to large
  • Because patent rights become so fragile, small company inventors must operate as if there were no grace period at all.  That raises huge costs:
  • Businesses have to conduct their affairs based on the information available today.  The bill assumes that businesses have perfect foresight knowledge, and can make good decisions without the information that accumulates over the grace period year of current law.
  • Under existing law, patent rights are largely determined by ordinary business activities.  A business doesn’t have to spend extra money just to speculatively protect patent rights.  Under the new weak grace period law, a business has “use it or lose it,” at great expense and risk of error.
  • The statute forces companies to spend money on patent attorneys far earlier, when most startups have the least money available, even on inventions that turn out to be worthless over the year.
  • Best estimates from other countries, whose laws are similar to S.515, are that inventors will have to file 100,000 to 200,000 more patent applications per year, a cost of about $ 500 million to $1 billion per year.
  • Venture capital investments will fall significantly if small companies are forced to spend money on patent applications for inventions that turn out to be worthless, and that are not filed under current law, but must be filed under S.515’s “forced to file”
  • This surge of patent applications will overwhelm the Patent Office, worsening backlog.   Many of these applications will go abandoned after the Patent Office bears its highest cost, the cost of examining an application for the first time.   The Patent Office’s fee structure is backloaded toward issued patents, so that the Office will receive only 20% or so of its fee income for doing 70% of the work.
  • “Harmonization” and international patent protection (the main rationales given by the proponents) are relevant to only a tiny minority of small entities
  • Why would we want to “harmonize” toward economies that have less than half the U.S. rates of startup formation and R&D investment?
  • Startups succeed or fail depending on their U.S. markets.  International patents are irrelevant to most startups.
  • The House bill provides that this provision only goes into effect when other major countries change their laws to harmonize toward a middle ground.  S.515 removes this quid pro quo. S.515 can’t achieve any benefit if it doesn’t require other countries to move our direction.

OTHER RESOURCES

Letter of the Small Business Coalition on Patent Legislation to SBA Administrator Karen Mills, (December 15, 2009) at http://www.connect.org/news/pdf/Coalition-Letter-to-SBA-Dec-15-09.pdf, on behalf of National Small Business Ass’n, CONNECT (San Diego small businesses), American Innovators for Patent Reform (coalition of inventors, researchers, engineers, entrepreneurs, etc.), Professional Inventors Alliance (independent inventors), National Ass’n of Patent Practitioners (patent attorneys, a majority of whom represent small businesses), IP Advocate (university faculty inventors)

David Boundy and Matthew Marquardt, Patent Reform’s Weakend Grace Period: Its Effects on Startups, Small Companies, University Spin-Offs, and Medical Innovators, Medical Innovation & Business, Summer 2010, 2:2 pp 27-37, http://journals.lww.com/medinnovbusiness/Fulltext/2010/06010/ Patent_Reform_s_Weakened_Grace_Period__Its_Effects.6.aspx

 
Non-Obviousness: A Case Study in Judicial Activism

The genesis of the non-obviousness standard (Inventive Step in Europe) was the Supreme Court’s decision in Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248 (1851).  This case first articulated the idea that the 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.[1]The invention according to the patent holder was:

This improvement consists in making said knobs of potter’s clay, such as is used in any species of pottery; also of porcelain; the operation is the same as in pottery, by moulding, turning, and burning and glazing; they may be plain in surface and color, or ornamented to any degree in both; the modes of fitting them for their application to doors, locks, furniture, and other uses, will be as various as the uses to which they may be applied, but chiefly predicated on one principle, that of having the cavity in which the screw or shank is inserted, by which they are fastened, largest at the bottom of its depth, in form of a dovetail, and a screw formed therein by pouring in metal in a fused state.[2]

The Supreme Court upon reviewing the case made the common error of pointing out that each of the elements in the invention were 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.[3]

All inventions are combinations of known elements since conservation of matter and energy means that you cannot create something from nothing, for more information see KSR: Supreme Ignorance by Supreme Court.  As a result, this analysis by the Supreme Court is meaningless and sheds no light on whether the invention should have obtained a patent.

Based on this analysis the Supreme Court then reasons:

for unless more ingenuity and skill in applying the old method of fastening the shank and the knob were required in the application of it to the clay or porcelain knob than were possessed by an ordinary mechanic acquainted with the business, there was an absence of that degree of skill and ingenuity which constitute essential elements of every invention. In other words, the improvement is the work of the skillful mechanic, not that of the inventor.[4] (underlining added)

This 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.”

There are a number of problems in the Supreme Court’s ruling in Hotchkiss v. Greenwood. First, where did the Supreme Court get the authority to add an additional requirement above novelty in order for an invention to obtain a patent?  The statute at the time did not contain any such additional requirement.  It was judicial activism to add a requirement not found in the statute.  Another error in the Supreme Court’s reasoning is the use of hindsight.  All inventions are obvious in hindsight and must be described in enough detail that they can be practiced by one skilled in the art (ordinary mechanic) to meet the requirement of the social contract of patents.[5] Another error in the case was the failure to recognize that copying by competitors of the invention or success of the invention tend to show that it was non-obvious.  Finally, the Supreme Court failed to understand the implications of the laws of physics as they apply to inventions, specifically that conservation of matter means all inventions are combinations of known elements.

Despite these errors, it is reasonable to ask did the Supreme Court’s judicial activism result in any lasting problems?  According to Gale R. Peterson, Cox Smith Matthews in their paper, “Obviousness / Non-Obviousness Of The Novel Invention: Hotchkiss v. Greenwood to KSR v. Teleflex 35 U.S.C. § 103 – 1851 to 2006.”[6]

The cases decided after Hotchkiss in 1851, both by the Supreme Court and the lower courts, were chaotic. There was no statute governing the additional hurdle an otherwise novel invention must cross before being deemed a patentable invention.[7]

The Supreme Court’s decision in Hotchkiss v. Greenwood resulted in an unworkable standard of patentability, because it was inherently subjective.  This increased the uncertainty whether an inventor would obtain a patent for their invention and increased the risk that their patent might be held invalid.  It also caused the standard of patentability to vary in different Circuits and the Patent Office.  Today this is widely understood to increase the cost of obtaining a patent and decrease the amount of resources invested in inventions.  The Supreme Court’s judicial activism in Hotchkiss v. Greenwood resulted in numerous problems that haunt us today.  Including the complete nonsense opined by the Supreme Court in the KSR v. Teleflex[8] decision, see KSR: Supreme Ignorance by Supreme Court.

Is there any logical reason for the additional requirement of non-obviousness for patents?  The definition of invention according to Free Dictionary online is “to produce or contrive (something previously unknown) by the use of ingenuity or imagination.”[9] While Merriam Webster (online) defines invention as “a device, contrivance, or process originated after study and experiment.”[10] I will ignore how and invention is created as a criteria and suggest the following definition, “to create something new” as a common sense definition.  This definition differentiates production or manufacturing from invention.  Production is creating something, but it is not creating something new it is creating something old.  If you argue that it is creating something new, then the word new has no meaning in the definition.  This definition does not do a good job of differentiating an invention from a new book or painting.  It might be argued that a new book is not creating something new, but it is not the same as other books.  So I believe this simple common sense definition has to be supplemented.  Specifically, I suggest that invention is “to create something new that has an objective result.”  By an objective result I mean that goal of an invention is an objective result that can be tested as opposed to a subjective result that is the result of a song being played or a book being read or a painting be viewed.  An objective result distinguishes an invention from a new artistic creation.

So how does this common sense definition of invention, “to create something new that has an objective result,” match up with the requirements of patent law (101, 102, 103, 112)?  This definition is generally consistent with section 35 USC 101, statutory subject matter.  It excludes scientific and mathematical discoveries since these are not creations.  Notably it clearly does not exclude software patents.  A software enabled invention is clearly a new creation and it has an objective result.  The same is true of business methods patents (for more on the nonsense associated with business method patent see – Bilski, Software Patents and Business Method Patents.  This definition is clearly consistent with section 102 – new equals novel.  Is this definition consistent with section 35 USC 103?  No this definition is not consistent with section 103.  There is nothing in the definition that suggests a standard above novelty or new.  The general reason given for section 103 is that we do not want trivial inventions that just change the size or the weight or some other trivial feature of an existing invention to obtain a patent.  If a change in size or weight or color does not make a difference in the objective result, it is not new and it is not an invention.  So I believe the definition of invention I have offered covers this issue and therefore there is no reason for an addition standard above novelty.  My suggested definition is neither consistent nor inconsistent with section 35 USC 112, since this section does not define what is an invention.  Section 112 defines the requirements an inventor must meet to obtain a patent for their invention.  Section 112 deals with the social contract between the inventor and society.  Overall the common sense definition I suggested for invention fits nicely with patent law, but there is absolutely no logic for a nonobviousness criteria for patents based on this definition.  The creation of the nonobviousness standard was judicial activism on the part of the Supreme Court without any statutory justification.  The standard has proven to be completely unworkable and completely subjective.  Only the CAFC’s jurisprudence before KSR provided any measure of a stability and logic to the section 103.  The nonobviousness standard has resulted in increase costs to inventors without any benefit.  It has increase the cost of ligation, helped technologies thieves to steal inventions, and decreased the amount invested in new technology.

I suggest the radical notion that logically the nonobviousness standard, 35 USC 103, should be repealed.  If it is not repealed then we should demand a statutory definition that is as objective as possible.  One objective solution would be to codify the CAFC’s teaching, suggestion, motivation (TSM) test.  I have proposed an alternative standard for 35 USC 103 that I believe is even more objective, clearer, and more consistent with reality than the TSM test – see Obviousness Flow Chart .  By adopting any of these solutions we will reduce the cost and uncertainty of obtaining a patent and litigating patents.  This will increase the value of issued patents and increase the investment in new technologies, which are the only way to increase real per capita income – see The Source of Economic Growth.

PS

As an interesting intellectual exercise I attempted to use ordinary definitions of novelty and obviousness to determine if the Supreme Court’s seminal decision in Graham v. Deere[11] had any basis in logic and was in anyway consistent with the statutory language.  The non-obviousness standard was added to U.S. patent law in the 1952 Patent Act.  The Courts’ job is to interpret the 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)

While many lawyers will want to immediately jump to the legislative history to interpret the statute, this is only appropriate if the statute is not clear on it face.  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 nonobviousness requirement logically requires something more than an invention be novel.  In order to understand what nonobvious means, lets find out what obvious means.  Then anything that does not meet the definition of obvious is nonobvious.  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 nonobvious has to be determined at the time the invention was made, in other words before the invention was known.  How can an invention that has not been made be easily seen, recognized, or understood; open to view or knowledge; 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 exist.  Evident means, according to Dictionary.com, plain or clear to the sight or understanding, which cannot be true of something that does not exist.  Unfortunately, this line of examination does not lead to any useful results.  No wonder the 1952 Statute has not lead to meaningful clarification of what is patentable!


[1] Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248, 249 (1851)

[2] Ibid 250-251

[3] Ibid 266

[4] Ibid 268

[5] 35 USC 112, first paragraph (Modern)

[6] Gale R. Peterson, Cox Smith Matthews, “Obviousness / Non-Obviousness Of The Novel Invention: Hotchkiss v. Greenwood to KSR v. Teleflex 35 U.S.C. § 103 – 1851 to 2006.” 11th Annual Advanced Patent Law Institute, October 26-27 2006.

[7] Ibid 3.

[8] KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007).

[9] http://www.thefreedictionary.com/inventor (6/16/10).

[10] http://www.merriam-webster.com/netdict/invention (6/16/10).

[11] Graham v. John Deere Co. of Kansas City, 86 S.Ct. 684 (1966)

 
Confusing the Property Right with the Implementation of the Property Right

Many  entrepreneurs, inventors, and economists complain about the Patent System and intellectual property rights.  However, when you examine their complaints they are often concerned about how the patent system is implemented as opposed to the concept of property rights for inventions – patents.  For instance, an extremely successful entrepreneur and angel investor I know complained that patents increase the uncertainty when investing in a start-up company.  Because of the long time that it takes patents to issue, he protested that it is difficult to know when a patent might suddenly issue, affecting the business plan of a start-up in which he has invested.   Other common complaints include that the patent system is expensive, time consuming, and difficulties in determining the boundaries of a patent. Some people go so far as to suggest that this shows that patents are not a true property right.  After all, they reason, it is easy to determine the boundaries of real property and obtaining title to real property (land) is a straight forward process.

Here, the complainers show that their ignorance of history.  Before title insurance buyers of real property paid an attorney a lot of money to determine if they would receive “good title” to land if they bought it from the seller.  This title opinion did not come with a guarantee and it was not cheap.  In addition, you would have to pay a surveyor to determine the boundaries of your real property.  The survey process was expensive and fraught with problems until the advent of modern technology, such as GPS.  Our ancestors fought each other tooth and nail over the boundaries to their land.  In fact, court battles over land are a great way to trace your ancestry, because these battles were so common.

While the critics are wrong in their comparison between real property and patents, they are correct that we need systems that reduce the cost and uncertainty of determining the boundaries of patents (inventions) and whether the owner has good title (102, 103 issues).  In short, we need the equivalent of title insurance for patents.  I believe that standards committees (e.g., IEEE 802.11 WiFi) are acting like title insurance companies.  They determine which patents are essential to practice the invention.  In effect, they determine the boundaries of patents with respect to the standard and to some extent determine if these patents have good title to an invention.  I also believe that NPEs (Non-Practicing Entities) also act like title insurance companies.  Of course, many of the critics of the patent system do not like NPEs either.

I, too,  agree that the patent system takes too long to issue patents.  However, the problem is not with the concept of a patent system but with a government that has failed to fully fund the Patent Office.  In the last two decades, about billion dollars in user fees have been diverted from the Patent Office to Congressional pet projects.  In the US, the Patent Office has always been funded by user fees, which are the fees that inventors pay to the Patent Office when they file for a patent.  However, when an inventor writes a check to the Patent Office the money is deposited directly to the general treasury account of the federal government.  Congress then appropriates these fees back to the Patent Office.  When Congress diverts (steals) a billion dollars of user fees from the Patent Office, it is not surprising that the Patent Office will take longer to determine issues of patentability,  increasing uncertainty for start-ups.  If Congress was subject to Sarbanes Oxley, they would all be thrown in jail for this diversion of fees.  In my opinion, the patent process has also become too formalistic and complicated.

These complaints that I have cataloged here are not about patents per se, but with the implementation of the patent system.  I agree that the present patent system is overly cumbersome, too formalistic, too expensive, and takes too long.  As an aside, I will point out that the critics of patents (IP) complain about their complexity but raise just a peep about a tax system that is over 10,000 pages and a new securities law that is over 1400 pages.  There appears to be a disconnect in their thinking.

Some of the solutions to the problems with our patent system will occur if the free market is allowed to create solutions like title insurance for patents.  Fully funding the Patent Office will solve many of the other problems, such as the lengthy pendency times.  Patents are completely consistent with Locke’s formulation of property.  Patents like real property rights are  fundamental to economic progress and human rights.

 
Patents and Jobs

According to business and patent expert David Kline and Henry R. Nothhaft, CEO of technology miniaturization firm Tessera, Inc. in the Harvard Business Review:

The U.S. Patent and Trademark Office (USPTO) may be the single greatest facilitator of private sector job creation and economic growth in America. It is this agency, after all, that issues the patents that small businesses — especially technology startups — need to attract venture capital investment, develop new products and services, and serve their historic role as the primary source of almost all new net job growth in America. According to one recent study, 76 percent of startup executives say that patents are essential to their funding efforts.

 David Kline is an expert in this area.  He is author of ground breaking book, Rembrandts in the Attic , on patents in business.  He is also author of Burning the Ships  that explores how Microsoft used patents to transform their business.  According to the authors, “The costs of the forgone innovation resulting from patent delays in the many billions of dollars annually.”  I think they are underestimating the cost of patent delays. 

Please read the full article at  http://blogs.hbr.org/cs/2010/05/the_biggest_job_creator_you_ne.html

 
Voices on the Net a Session with JJ

I had an excellent interview with JJ on a Session w/JJ on Voice on the net.  For the full interview click here.

 
State Intellectual Property Bank

The federal government is pursuing a suicidal policy of giving away our inventions to our foreign competitors.  Our state can mitigate the damage of this insane policy by creating a state intellectual property bank.

The United States is giving away our most valuable assets – our technology.  In 2000, the government required the publication of most US patent applications in 18 months after they are filed.  Since patents only provide title to your invention in the country (or countries) in which you apply for patent protection, foreigners are able to steal our technology by just reading our published patent applications.  In fact, Pat Choate in his book, Saving Capitalism, (http://www.amazon.com/Saving-Capitalism-Keeping-America-Vintage/dp/0307474836) documents a company in China that admits to just searching the published patent applications as their only research and development project.  How can our state avoid this suicidal policy?

Besides publishing our patent applications, the federal government requires that owners of patents pay a maintenance fee every four years in order to keep their patent from going abandoned.  Our state can use a process called escheat in order to ensure that no valuable patents go abandoned because of failure to a pay maintenance fee.  Escheat is a common law doctrine that operates to ensure that property is not left ownerless, according to Wikipedia.  Using this process the state can create a large portfolio of patents and ensure that our intellectual property is not lost.

How could the process of escheat be used to increase the wealth of our state?  State sanctioned entities would be allowed to pay the maintenance fee on any patent owned by a person or corporation residing in the state on the last day for paying the maintenance fee and take ownership of the patent using the state power of escheat.  This would allow these state sanctioned entities to build large portfolio’s of patents quickly.  Since the value of patents increases when they are part of a portfolio, this would allow these entities to build valuable patent portfolios that would generate licensing revenue.  My alma mater Kansas State University used a similar process to create a large patent portfolio very quickly.

So who are these state entities?  I do not suggest that the state literally run an invention company, I suggest that they license out this power of escheat to any group that has a reasonable plan to develop these patent portfolios.  For instance, university technology transfer offices are in a good position to evaluate the value of the patents that are about to expire for failure to pay their maintenance fees.  The licensing revenue from these patents could be used to support further university research.  Another potential group would be an intellectual property venture capital group.  Other groups could include NPE (Non-Practice Entities) invention firms, similar to Intellectual Ventures, Acadia, etc. that located in the state.

In order to ensure that the state’s interest is served, these entities could be required to license non-exclusively all in-state companies any patents in their portfolio desired by the in-state company for 30% less than a reasonably royalty.  This would encourage out of state companies to move to our state and be a great Economic Development tool for the state.  If more than one entity wanted to acquire title to a patent that was going abandon for failure to pay the maintenance fees, they would bid for the patent and the proceeds would be paid to the original owner.

The original owner of the patent would be provided certain safeguards.  For instance, they could reacquire title to there patent by paying the maintenance fee, the fees to revive the patent and reasonable attorney’s fees to the acquiring party within the time frames allowed by the patent statute.  In addition, the original owner would receive a small part of any proceed from the patent, such as 5% of any royalties or other return on the patent.

You might ask why anyone would want to pay the maintenance fee for a patent in which the owner was unwilling to do so?   A number of valuable patents go abandoned for failure to pay the maintenance fee because the underlying business has gone under or in the case of individual inventors they no longer have the resources to pursue the patent.  In fact, many of the independent non-practicing entities, such as Intellectual Ventures and Acadia started by acquiring the patents of companies that failed.  Other examples of failed business ventures where the underlying patents were very valuable include NTP and Mostek.  NTP is an invention company created out of the ashes of the failed operating company, Telefind Corporation.  RIM the maker of the Blackberry infringed NTP’s patents and eventually settled with NTP for over $600 Million.  Mostek was a failed semiconductor company that was sold to Thomson SA for $71M in 1985.  In the next seven years, Mostek licensed its patent portfolio for over $450 million.  So as you can see there are numerous patents that are valuable that go abandoned for failure to pay their maintenance fees.

A state Intellectual Property Bank program would ensure that the state did not lose its most valuable assets and be a strong economic development tool.

 
Robert’s Rules of Innovation: Book Review

This book is a well laid out, logical book on how to ensure that your company continues to innovate.  This is not a touchy feely book or a feel good cheerleader book like so many business books.  If you want practical advice from a person who has been there then this is the book for you.  As the book subtitle states this book is “A 10-Step Program for Corporate Survival.”

Robert F. Brands, the author, headed the highly successful company Airspray.  Airspray makes consumer products, particularly the highly successful instant foam dispensers.  These dispensers foam soap products without an aerosol and are found almost everywhere today.

The book has a number of metrics to determine if your company is truly innovating or only giving inventing lip service.  He suggests that companies should track new product sales.  New products are generally defined as those introduced in the last five years, however this depends on your industry.  If new product sales are less than 15% of total sales then your company is at risk of becoming extinct.  Note line extensions are not new products.  In Chapter 3 the book describes a complete innovation audit to determine if your company is truly committed being a technology leader.  He points out that most companies make the fatal mistake of cutting R&D and new product development budgets when time are tough.  If you want your company to survive, this should be the last budget item cut.

Creating successful new products is not enough to survive in the marketplace.  Your company must protect its new products with strong IP particularly patents to have sustainable advantage.  In addition, you company must understand the patent landscape of your marketplace.  “It is proven that those companies with a strong patent portfolio creates much more value to their stakeholders than companies without. Airspray, the case study focused on in the book (the company that brought instant foaming dispensers like hand soap to market) was sold at 15 times EBIT, which proves the point.”  This 15 EBIT was twice the going EBIT for similar companies and the main reason for this high valuation was Airspray’s patent portfolio protecting its innovative products.

Robert’s Rules of Innovation is a must read for anyone who wants practical, real world advice on how to ensure that their company does not go the way of the dinosaurs.

 
Study Shows Strong IP Key to VC Back Company Success

An article in IAM (Intellectual Asset Management), reports (please read the full article) on a study on the relationship between the success of venture backed companies and their intellectual property portfolio.  The study states

Success in the venture capital industry is an exit: an acquisition of, or an initial public offering (IPO) by, a portfolio company. Analysis shows that across all sectors a significantly higher percentage of venture capital backed winners (companies that have been acquired or have gone public) have patent portfolios as opposed to losers (companies that are out of business).

Winners are many times more likely to hold intellectual property than losers. Although the presence of intellectual property portfolios is not perfectly correlated to success or failure, this indication alone should support executive and investor focus on the role of intellectual property in their decisions and actions.

While having intellectual property increases the probability of success, those who manage intellectual property will have an even higher probability of success. In certain sectors, such as healthcare, data demonstrates the value of higher quality portfolios. In other sectors, such as telecommunications or information technology, the effect is less prominent – although still clearly and demonstrably present.

IAM summarizes it this way:

In fact, according to the metrics applied by IP Vision, 86% of the VC-backed winners (ie, companies that are acquired or go to an IPO) they identified had strong as opposed to typical intellectual property assessments. In other words, while a healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And ,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.

The article also explains

[A] healthy IP position may not guarantee that a start-up technology company is going to be successful, it is going to find it a whole lot harder to succeed if it does not have one. And,crucially, it is not just ownership of IP that is important, it is understanding the IP that is key.

If you want to learn how to create strong intellectual property portfolio see my post IP Strategy Document That Amazes Investors .

 

Terratec’s AggreScreed was named one the top innovations by the magazine Equipment World .  The AggreScreed allows a contractor to lay a gravel road of a set depth without the cost and time of placing survey stakes.  This invention saves contractors time and money by eliminating survey costs, reducing wasted aggregate, and eliminating rework.  This is exactly the sort of technological innovation for which the patent system was designed.  Unfortunately, it took Terratec around four years to obtain its patent.  This in not untypical and it points out that the US patent system is broken, but not for the reasons suggested by those people pushing patent reform.  The Patent Office is hopelessly backlogged but Congress will not fully fund it.  The Supreme Court’s recent decision have increased the uncertainty over whether a patent will be held valid or approved by the patent office.  We need real patent reform that provides the Patent Office the funding they need to do their vital job and provides an objective standard for which inventions are patentable.

 

There has been a lot of discussion about whether the Venture Capital Model is dying. Some suggest that there is just too much money in venture capital other suggest that it is just a cyclical downturn. However, the evidence does not support this.  Click here to see the video

 

There is a great post in IPBiz, “Mentioning Innovation with Mentioning Patents“, how CBS Sunday Morning had a whole show about the lack of innovation but never discussed patents or inventors.

One of my colleagues is always pointing out the people who use the word innovation discuss it in a disembodied way.  They never discuss inventors or patents.  Specifically, he states:

Say yes to inventors. Say no to “ignore-&-evasion”.

The full-truth word is “invention”, not inno-evasion.

He makes excellent points – at least on how the word innovation has been perverted.

 

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