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IPXI: Securitizing Patents

IPXI is an attempting to create an exchange for the transfer of patent rights.  Their website states that they intend to offer Unit Licensing Rights (ULRs) that can be bought and sold on their exchange.  A URL represents the right to use a patent in one instance of a product.  For instance, if patent A covers a new fuel injection technology, the owner of one URL in patent A has the right to produce one engine using the fuel injection technology.  IPXI’s website provides the following example:

For example, let’s say Company A owns a patent on technology that it uses in jet engines. But that technology also has applications in the production of truck engines. So, Company A decides to offer a ULR contract on IPXI permitting the purchaser to produce 5,000 units of its product with Company A’s patented technology. Company B, a truck manufacturer, realizes the usefulness of the patent and purchases the ULR contract from Company A through the exchange. Company B now owns a license to produce 5,000 truck engines using Company A’s technology.

The reported goal of IPXI is to reduce the cost of licensing technology compared to the present method of bi-lateral lawyer heavy negotiations.  This is a noble goal, but IPXI’s website is very short on specifics.  Apparently, this is because the exact methods of the exchange will be worked out by the founder members sometime in the future.  Right now IPXI is trying to find enough founding members to make the exchange viable.

I have written on ideas to create such an exchange.  For instance see Jump Starting a Secondary Market for Patents , in which I argue that Standards Committees could be converted into an exchange for transferring patent rights.  I note that IPXI founders are going to function very much like a standards committee.

Here are some of the problems in no particular order that will need to be resolved in order for IPXI to be viable.

Market Exclusion:  In IPXI’s example above, it is not clear that Company A can exclude the purchasers of its ULR from making a competing product.  The licensing fees may not make up for the lost market share, in which case companies will only offer patents that have no strategic value to themselves.

Number of ULRs:  Are the number of ULRs for a patent limited?  If they are limited, a company is going to be reluctant change their manufacturing process to incorporate this new technology.  Also the company will be reluctant to buy all the potential number of ULRs they might need up front.  If they are not limited, then the purchaser is going to worry about dilution of their ULR shares.  If they pay ten dollars per URL today, will the company holding the patent right suddenly flood the market next year and they could buy the ULRs for a dollar next year?

Validity:  What if the patent underlying the ULR turns out to invalid?  Is the money refunded?  Is the patent researched for validity before the offering?  If so are there any guarantees associated with the opinion?

Infringement Offensive:  Who is responsible for defending a patent if it is infringed.  Clearly, the value of my ULR decreases if the underlying patent is being infringed.  The best answer to this question would be that IPXI defends the patent, sort of like ASCAP.  In that case IPXI would undertake its best efforts to defend the patent if it agreed the patent was being infringed.  There would be no ramification if IPXI were unable to prove infringement.  Unfortunately, this does not meet the stock exchange model.

Infringement Defensive:  Are the seller’s of the ULR in the patent guaranteeing that practicing the patent does not infringe any other patents?  Is the issuer or IPXI going to conduct a clearance search?  If not the value of the ULR are going to suffer accordingly.  If the underlying patent is contested in court, who has the responsibility for defending the patent?  I believe the best way to solve this problem is to have IPXI defend the validity of the underlying patent.  But what if this causes a conflict between two patents that IPXI has issued ULRs for?

Accounting:  How does the issuing company know that the purchaser only built the number of licensed items they purchased ULRs for?  Does anyone have a right to an accounting?  If so who?

Process patents:  How does the ULR deal with process patents?  What if the process is not related to a number of units?  For instance, what if I have a way of processing integrated circuits?  Do the ULRs apply to the number of wafers?  What if the wafer diameter changes?  What if the pitch on the wafer shrinks?

Exclusive Licenses:  IPXI admits that its present model only works for non-exclusive licensing.  I think this is a minor problem.

 

Conclusion

I think IPXI’s goal is admirable.  However, I think there are a large number of issues to resolve before the idea is viable.  Ultimately, I believe IPXI needs to take on a much larger role than a standard stock exchange.  I think an enhanced ASCAP model is more likely to be viable.

 
The Rational Optimist: Excellent Book, Disfigured by Open Source Utopianism

The author, Matt Ridley, has written an excellent book that is epic in the scope of issues he tackles.  The book covers why homo sapiens thrived while other members of the homo genus fail.  He shows that on average the human condition has gotten consistently better and this increase in wealth has been especially true in the last 200 years.  He destroys the noble savage myth.  He shows the intellectual failings of Marxism, environmentalism, self sufficiency, and renewable energy.  His two main themes underlying these vast topics are: 1) trade leads to division of labor, which leads to invention and 2) the inexorable march of human progress.

Despite Mr. Ridley’s incredible breadth of knowledge, there is a logical gap in his first thesis when he attempts to explain the industrial revolution and why it took off in England.  This logical gap is the result of his misunderstanding of intellectual property.

This misunderstanding of intellectual property is most likely due to his open source utopianism.  This utopianism leads the book to conclude “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356.  Even with this imperfection, this is an incredible book that I highly recommend to anyone.

Population Density – Good or Bad for Wealth Creation?

The book argues that population density is necessary for trade and division of labor, which is the route to economic prosperity.  It also argues that the division of labor leads to inventions, which leads to further specialization.  Specialization requires a large enough market to support it and as a result population density is the friend of economic progress.  However, later in the book it argues that increasing population caused a decline in the living standards of Japan and Denmark.  This decline supposedly occurred because the increasing population decreased the value of labor and therefore the market for specialization and inventions.  England escapes this fate because of coal and phantom land in the colonies.  This contradiction between the need for human density for specialization and economic progress and the idea that increased population density reduced the value of labor destroying the market for inventions is not adequately resolved.

The book argues, starting on page 52, that trade is what allowed homo sapiens to succeed where other apes failed and even other humans failed such as Neanderthals.  It provides numerous examples of how various groups of humans regressed technologically because of inadequate population densities to support specialization, such as Tanzania.  The book summarizes the lessons by quoting economist Julian Simon “population leading to diminishing returns is fiction: the induced increase in productivity is scientific fact.”  P. 83.

In a chapter entitled “Escaping Malthus Trap,” Ridley discusses how Japan after a period of prosperity gives up its technology.  He states “that sometime between 1700 and 1800, the Japanese collectively gave up the plough in favour of the hoe because people were cheaper to hire than draught animals.”  P. 198.  The reason for this according to Ridley was rapid population expansion due to paddy rice technology.  This population boom made labor cheap and killed the market for technology.  Denmark follows the same path as Japan and by the 1800s becomes “trapped by its own self sufficiency.”  P. 200.  Britain escapes the Malthusian trap that Japan, Denmark, and Ireland suffer, according to Ridely, because of selective breeding (maybe p. 200), ghost acres provided by the colonies (p. 202), release valve emigration to the colonies (p. 202), and coal (sustained industrial revolution p. 216.)

There is a logical inconsistency between the conclusion early in the book that population density is necessary for prosperity, but later in the book arguing that prosperity stalled after a burst in population in various countries.  The explanation of selective breeding, does not explain why the US or Australia prospered.  These countries were heavily populated by British rejects.  Similarly, the ghost acres provided by the colonies were eventually used up.  It might be argued that there was some tipping point that could only be achieved with ghost acres.  I think this fails also, because it flies in the face of the book’s earlier argument that increased population densities allow more specialization and invention to increase everyone’s standard of living.  The release valve emigration fails for the same reasons as the ghost acres.  The emergence of coal is also unsatisfying.  Coal mining was known before the birth of Christ and trade in coal occurred in England as far back as the 1300s, according to Wikipedia.  The book also argues that many surges of economic growth were extinguished by parasitic political systems.  However, it never states this is why Japan’s and Denmark’s prosperity was reversed.

What was new in the industrial revolution was not coal, but the machines to use coal and numerous other inventions.  The book argues that these inventions were not in general due to new scientific discoveries, p. 255, and I agree.  So why at this particular point in time did we have a sudden increase in rate of technological advance, including machines that used coal?  The beginning of the industrial revolution coincides with the recognition of property right’s in inventions.  The US constitution states (Article 1, section 1, clause 8) that inventors have ‘RIGHTS” in their inventions.  Patents, which are legal title to an invention, are the only free market system for encouraging people to invent.  While Britain had a patent system at least back to the Statute of Monopolies, 1623, it did not recognize a right to property in one’s invention.  It was a royal grant, subject to the whims of the ruling monarch.  As a result, it was expensive and arbitrary.  However, when the United States recognizes that inventors have a property right to their invention, this provides a whole new incentive to inventors and their financial backers.  No doubt this attitude towards inventions also infected Britain.  For more on the correlation between real per capita increases in income and patent systems see Source of Economic Growth.

Mr. Ridley argues that patents at best have marginal effect on the rate of invention.  However, Mr. Ridley shows an appalling lack of knowledge about patents and intellectual property.  He also has a number of inconsistent statements about intellectual property.  For instance, on page 267, he states that copyrights have little effect on the creativity of musical composers.  However, on page 326 he states that Nashville was saved by music entrepreneurs using good local copyrights in the 1930s.  Not only are these two statements contradictory, there is no such thing as local copyrights in the United States.

Patents

The book has numerous other errors about intellectual property.  For instance, it states that intellectual property is not like other property, because it is useless if you keep it to yourself, p. 262.  This statement is nonsense.  The Coca Cola formula is not shared and this is the only reason it has any value.  A patent to an invention (legal title to an invention) only has value if there is some ability to exclude others from using it – as opposed to knowing about it.  If everyone can make a laser without pay royalties, then it may have value to the world but it has no differential value to the inventor.  Patents are derived from exactly the same philosophical basis as real property.  Namely,  Locke’s theory of Natural Rights.  For more information see Scarcity – Does it Prove Intellectual Property is Unjustified? Below are a list of some, but not all, of the book’s errors related to patents:

1) The book then states that people get rich by selling each other things and services not ideas, p. 263.  What are authors, professors, engineers, scientists, really selling?  Authors are not selling books, they are selling ideas that just happen to be embodied in books.  The Kindle proves this.  The Kindle does not allow the user to buy a book, but to buy the ideas in a book.  Professors are either selling the teaching of ideas or just an expensive way to bore students.  Engineers are selling a service, which encompasses ideas not the paper (digital ones and zeros) on which it is written.  Most companies do not make money manufacturing things, they make money with inventions (ideas) that are implemented in things.  When a company only sells things with no (new) ideas in these things, then their profit margins are extremely narrow.  One of the limitations on growth has been this Luddite refusal to allow inventors to specialize in inventing.  This book’s premise is built on the division of labor, but the author rejects this idea when it comes to inventing.

2) Mr. Ridley also seems to be confused between the spread of information related to inventions and the legal right to use that information to build an invention.  It is a major goal of modern patent systems to spread information about inventions so that they can be used by other people to build other inventions.  In the U.S. we built patent depository libraries to spread the wealth of information in patents (before the internet).  Patents encourage people to share the information associated with their inventions instead of keeping them a trade secret.  Countries without patent systems tend to invent mainly things that can be protected with a trade secret.  (See Switzerland before they adopt a patent system)  As a result, other inventors do not get learn from these inventions and the rate of technological progress is inhibited.

3) The book perpetuates the first mover advantage alternative to patents.  Xerox had the world’s greatest first mover advantage in plain paper copiers, when it agreed to settle an antitrust lawsuit in 1975 by giving away its patent portfolio.  Its market share went from almost 100% in plain paper copiers to 14% in just four years.  The first mover advantage is a fairy tale.

4) The book argues, p. 264, that there is no evidence that patents are what drive inventors to invent.  This statement is completely illogical.  Real property rights are not what drive farmers to farm or builders to build houses.  Nevertheless, there would be a lot less building and less efficient farming, if we did not have real property rights.  Just look at countries, where property rights in buildings and land are hard to impossible to obtain.

5) The book states that a number of inventions were never patented, p. 264, such as automatic transmission, Bakelite, ballpoint pens, cellophane, cyclotrons, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers.  While it is possible that the first version of some of these inventions were not patented, all of these inventions were subject to numerous patents.  This can be easily verified with a simple patent search.  For instance, there are at least 20 patents and probably hundreds of patents on automatic transmissions.  The same is true of ballpoint pens, gyrocompasses, jet engines, magnetic recording, power steering, safety razors and zippers.  A simple internet search shows that chemist Leo Hendrik Baekeland (1863-1944) invented and first patented the synthetic resin that we know as Bakelite in 1907.[1] Jacques E Brandenberger was granted patents to cover the machinery and the essential ideas of his manufacturing process of the new film (cellophane).[2] The assertions of no patents for the zipper is also easily shown to be incorrect.  Elias Howe, who invented the sewing machine received a patent in 1851 for an ‘Automatic, Continuous Clothing Closure’ (zipper).[3]

6) The book argues that the Wright brothers, enforcing their patent on airplane control surfaces, supposedly shut down the airplane industry in the US.  This is the typical propaganda of open source community.  First of all the Wright brothers were building airplanes, so the industry was not shut down by enforcement of the patents.  Second stealing other people’s property is not shutting down industry, it is shutting down theft.  We would not say that someone stopped the harvest of wheat, because they did not let someone else reap the wheat they planted on their land.

7) The patent thicket argument is repeated by Mr. Ridley to suggest that patents inhibit advances in technology.  A number of papers[4] have shown that there is no empirical evidence for the patent thicket argument and that the logical analogies on which it is based are flawed.  For more information see  Intellectual Property Socialism: Part IV USPTO Takes Aim at Inventors.
8) Mr. Ridley further demonstrates his ignorance of patents by repeating the concern that the US Patent Office was issuing patents for human genes in the 1990s, p. 265.  What the Patent Office did and does was issue patents on “isolated genes.”  This is similar to patents on things like isolated forms of vitamin B12, which was patented.  For more information see Gene Patenting Debate Continues.

9) The book also mistakenly calls a patent a “temporary monopoly.”  A patent is a property right, just like property rights in land, houses, cars, etc.  The logical basis for patents is exactly the same as other property rights.  Property rights are based on Natural Rights, which states that since you own yourself you own the product of your labor (physical and mental).  For more information see The Myth that Patents are Monopolies.

10) He also implies that patents are top down solution to encouraging invention.  Nothing could be further from the truth.  All a patent system does is provide property rights to inventors for their inventions.  This is similar to property rights for land, which is a bottom up way to increase the productivity of farming for instance.  Just giving pseudo property rights to peasants in the USSR and China caused enormous increases in farm production.  Property rights are a bottom up solution, not a top down solution.  In fact, the genius of the United States patent system (as opposed to Britain’s) is that it was accessible to all people, including women and slaves that had no property rights under their state laws.  This encouraged a torrent of inventive activity in the U.S. that propelled it from a backward farming country to an economic and technological powerhouse in the world in less than 60 years.  For more information see the excellent book by B. Zorina Kahn, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920.

Open Source

I am convinced that Mr. Ridley’s poor research on patents and intellectual property is due to his infatuation with the open source movement.  On page 356 he opines that genetic research will soon go open source.  He is so excited about open source that he eventually suggests a Marxist’s open source utopia – “Thanks to the internet, each is giving according to his ability to each according to his needs, to a degree that never happen in Marxism.” P. 356

The open source movement has been a dismal failure.  Its biggest success has been to extend UNIX (LINUX) to personal computers, other platforms, and add new features.  Open source has mainly extended existing technologies, much like the incremental invention that can be expected from large companies.  The open source movement deludes itself into believing they are fighting some sort of David versus Goliath battle against large corporations and the patent system.  The reality is that open source developers are giving large corporations, such as IBM, their efforts for free and weakening the bargaining power of technical personnel.  The open source movement plays right into the hands of large corporations and other large institutions, by weakening the property rights of developers in their work.  It should be no surprise that open source has been an abysmal failure, since this exactly the situation most of the world lived under until 1800.  Before modern patent systems, new inventions were rare and the return for the invention was often controlled by a trade guild.  The members of the trade guild profited equally, meaning there was little incentive for the inventor to spend time creating.  Per capita income of the world before 1800 had been stagnant for millennia.  Where modern patent laws were adopted around 1800, incredible increases in per capita income occurred.  Mr. Ridley trumpets this progress throughout his book.  In areas without patent systems, we see stagnant growth in per capita income.  For instance, Japan’s per capita income does not take off until they copy the US patent system in the 1860s.

It is unfortunate that this excellent book is disfigured by the author’s irrational infatuation with the open source movement.  This infatuation causes the author to embrace the logical contradiction that increases in population density increase economic growth and also causes the Malthusian trap (decreases in economic growth).  It also causes him to reject the solution to the Malthusian trap, which is the recognition of property rights in inventions.


[1] http://bakelitecollector.com/bakelite-history 7/21/10

[2] http://inventors.about.com/od/cstartinventions/a/Cellophane.htm 7/12/10

[3] http://inventors.about.com/library/weekly/aa082497.htm

[4] Ted Buckley, Ph.D., The Myth of the Anticommons, Bio, www.bio.org (2007); Epstien, Richard A., Kuhlik, Bruce N., Is there a Biomedical Anticommons, Regulation, (Summer 2004), pp. 54-58

 
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.

 
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.

 
Book Review By Pat Choate: Understanding How to Get the U.S. Economy Moving Again

This is a copy of Pat Choate’s review of The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.  Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma.

I do not review books on the Net unless I find them well-written and especially informative, which certainly applies to Dale B. Halling’s The Decline and Fall of the American Entrepreneur.

Nonetheless, I do have a criticism directed towards the publisher. My copy did not contain a vita of the author, which in this case is a major omission. Mr. Halling is a physicist, lawyer and an expert on patents and entrepreneurship, all of which comes through in his book. This author delivers the goods. A vita in subsequent printings would be useful.

Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by the U.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of the U.S. patent system by the U.S. Supreme Court and the Congress.

The resulting technological stagnation is a major reason the U.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.

He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that the U.S. is squandering.

He explains how the Sarbanes Oxley Act cut off the waves of venture investment that did so much to stimulate U.S. growth in the 1980s and 1990s, and he also explains how shifts in accounting rules as per stock options directed many of our most creative people into less than innovative activities.

His final chapter contains some straight forward recommendations that involve no direct-cost regulatory changes that would once again stimulate more innovation, investment and job creation in America. Amazingly, Congress is now considering a so-called “patent reform” legislation that would further diminish U.S. innovation. The author convincingly explains how this would damage U.S. innovation. He also explains the consequences of recent Supreme Court decisions on patent law. My observation is that the Roberts Court is the most anti-patent set of Justices in U.S. history. Once Congress understands what the Court has done, their decisions need to legislatively overturned.

In sum, this is well-written, jargon-free, 137-page book that is a quick read. It evidences smart and practical thinking by an author with real world experience. I highly recommend it.

 
A Modest Proposal for Academic Economists

In one of my earlier posts, Patent Quality Non-Sense , I pointed out that the R&D (Research and Development) per patent ratio, GDP per patent ratio, and number of citations per patent have all increased over the last fifty years.  These were all statistically significant changes.  Based on this evidence I concluded that the quality of patents (or threshold for obtaining a patent) has increased over the last fifty years.

I was fortunate enough to have an academic economist send me a message pointing out that there were several papers by academic economists that have been debating why the R&D per patent and GDP per patent ratio have been increasing.  One of these papers suggested the reason for this phenomena was that as technologies are explored they become mined out – the cost of obtaining a new invention keep increasing.  Of course this issue had been explored in the 1950s by the famous economist, Jacob Schmookler, in his book “Inventions and Economic Growth.”  Professor Schmookler showed that across multiple industries the amount of R&D per patent was essentially the same.  See figure 2, page 46, figure 22, page 138, figure 23, page 139. 

 

Since these industries included both new industries and mature

 

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.

 
96% of Americans Believe Innovation is Critical

According to the BBC article “Governments stifle hi-tech innovation, says trade group” , American believe innovation is critical to the US’s success as a world economic leader.  The article states:

The weakening financial markets meant that in 2009 America was overtaken as the most competitive economy by Switzerland.

As regular readers of this blog know, In my opinion 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.  The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.

 

According to the Wall Street Journal Article Big Business Creates Jobs Too, “ignoring the important role that big business plays in job creation is a short-sighted mistake.”  The author also states

It is actually within large companies that an entrepreneur can find, already in existence, much of what it takes to insure a venture’s success. This includes the capital required to fund startup costs, the marketing presence to create a near-instant reach to customers, and the standing required to gain trust of both vendors and customers.

While it is true that large companies innovate, on a per employee basis they are much less innovative see SBA report on point.  In addition, the reason for our economic woes are not that the government has failed implement policies that support large companies, but that it has implemented polices that inhibit technology start-ups.  Only technological innovation results in real per capita increase income.  The Wall Street Journal article is misleading at best.

Unfortunately, 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.  The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.

 
Do Individual Inventors and Start-ups Invent Anything Important?

According to the SBA report An Analysis of Small Business Patens by Industry and Firm Size,

Small firms have three times as many patents in emerging technologies as would be expected based on the overall percentage of patents for which they are responsible.  Specifically, small firms account for just 8 percent of all patents in the database (firms with 15+ patents), but 24 percent of the patents of U.S. firms in the emerging technology clusters.

In addition, the report states that small firms tend to patent in different areas of emerging technology than large firms.

But are small firms patents of high quality?  The report states:

Small firm patents outperform large firm patents on a number of impact metrics including growth, citation impact, patent originality, and patent generality. These metrics have been used for decades to measure the innovativeness of firms, labs, and agencies. The metrics have been validated and shown to correlate with increases in sales, profits, stock prices, inventor awards, and other positive outcomes. This suggests that the patents of small firms in general are likely to be more technologically important than those of large firms.

In addition, firms with fewer employees out patent firms per employee with more employees across all cross section firms.  Specifically,

Small firms obtain many more patents per employee than do large firms. This result is quantified to show that this is not a small-firm large-firm phenomenon, but is actually a firm size issue at all levels. In particular, even within the small firm domain, companies with fewer than 25 employees will have a higher patent-to-employee ratio on average than firms with 50 employees, which will in turn have a higher patent-to-employee ratio than firms with 100 employees, and so on.

Despite the fact that small firms and individual inventors are key drivers for technological innovation, Congress and the Supreme Court are trying to make our patent system less accessible for small inventors.  For instance, Congress is trying to change the patent laws from first-to-invent to a first-to-file system.  This would be similar to Europe’s system, which has proven to be very unfriendly to independent inventor and small firms.  The Supreme Court has made it harder for inventors to obtain an injunction (eBay decision) if their patent is violated and made it more uncertain and expensive to obtain a patent and uphold it validity (KSR decision).

 
Patent Quality Nonsense

There has been a constant drumbeat of propaganda suggesting that the U.S. is issuing low quality patents.  The academic papers supporting this propaganda compare the issue rates of patents that were filed in the U.S. and in the EPO (European Patent Office) or JPO (Japanese patent office).  While a number of papers have pointed out  the methodolical problems with  these academic papers (see Patent Quality Myth ), the bigger question is whether they selected the correct metric in the first place.  This post suggests that other metrics are more appropriate measures of patent quality and do not suffer from imposing other countries’ goals on the U.S. patent system.  These metrics show that U.S. patent quality has been steadily increasing for over a fifty years and shows that perhaps the U.S. system is becoming an elitist system – much like Europe and Japan have practiced for years.

 
Larry Kudlow is Wrong!

Larry Kudlow is predicting a strong V shaped economic recovery in 2010.  His reasons for this prediction are a steep positive yield curve and the rising stock market.  While Mr. Kudlow is a top notch economist and I appreciate his optimism, here is why I believe he is wrong.

Yield Curve

A steep positive yield curve is not necessarily a good predictor of the strength of the economy.  As seen in the chart below, the yield curve was positive and above the 80 year average throughout the 1930s and this did not portend strong economic growth.

(Source: http://seekingalpha.com/article/23870-an-80-year-yield-curve-history-and-its-implications (12/24/09), An 80-Year Yield Curve and its Implications, Shaw, Richard, “Seeking Alpha.”

In the 1970s, the yield curve was positive and above the 80 year average for much of the decade and this did not portend strong economic growth.  The 60s saw the yield curve below the 80 year average and negative twice, which did not signal weak economic growth. 

 

Some people suggest that Venture Capital is just in a normal cyclical downturn.  Not a single venture backed company went public in second quarter of 2008.  This has not happen since 1978.  This was followed up by no venture backed companies going public in second and third quarters of 2009.  This is clearly not just a cyclical downturn.

Venture Capital is built on technology start-up companies whose main assets are inventions.  The value of these inventions is determined not just by their technical merit, but the strength of title to the invention.  If legal title to the invention is weak, then a great technical invention provides a very limited opportunity for the start-up company or its investors.  This clearly reduces the value of the company and the chances of return for it investors.  Since 2000 the U.S. has significantly weakened inventors’ title to their inventions.

A thriving Venture Capital ecosystem requires a viable exit market for start-up companies.  This provides returns for the Venture Capital investors, founders, and key employees.  While mergers and acquisition are one exit market, a viable public market is critical for start-ups to obtain reasonable valuations in M&A market.  As discussed above, the public market is essentially closed to start-up companies.

The book, The Decline and Fall of the American Entrepreneur, by Dale B. Halling,  explains:

How we have weakened inventors’ and start-up companies’ rights to their inventions;

How the capital markets have been foreclosed to technology start-up companies;

How the accounting rules have changed to limit start-up companies access to human talent; and

How these changes to our laws are killing the Venture Capital market.

Get your copy of The Decline and Fall of the American Entrepreneur today.  Available on Amazon.com.

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PRlog

 

The goal of this post is to describe how to prepare an Intellectual Property (IP) strategy document that shows your company is an IP expert.  According to the book The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property, IP is the most important “sustainable competitive advantage.”  There are numerous types of intellectual property, but this post is going to focus mainly on patents and trade secrets, because these types of intellectual property protect a company’s innovation.  Innovation is the most important method of creating a sustainable competitive advantage.  Innovating without protecting the innovation with patents or trade secrets is charity according to the authors of The Invisible Edge.

 

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