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Archive for November, 2009

In the ACLU v. Myriad case, the ACLU has alleged that the patents involved in the case cover genes found in nature.  This statement is so patently (pun intended) false, that the ACLU either purposely deceived the court or is guilty of gross negligence about the facts plead in the case.  As Gene points out in his post, Fired up: Challenging the Constitutionality of the Patent Act  none of the claims in question cover genes found in nature.  These claims are directed to screening, identifying, and isolating the BRCA1/2 genetic sequences.  This is not a claim to the gene itself, but methods of screening, indentifying and isolating the genes, which are processes not found in nature. There are claims to an isolated gene, but genes are not isolated from human cells in nature.  These claims are similar to claims on vitamin B12.  More than 80 years ago, prior to the isolation and purification of vitamin B12, the only “treatment” for megaloblastic anemia was for patients to consume a pound of raw liver a day.  Since isolated and purified vitamin B12 is not found in nature, a patent issued for isolated B12.  The ACLU purposely deceived the court when they stated, “The patents cover the human genes themselves”, paragraphs 3-4, 55-67, & 102 of the complaint, while ignoring that isolated genes do not occur in nature. 


In H&R Block Tax Services v. Jackson Hewitt Tax Services Inc., the court stated that “although tangible in some forms, money is simply a representation of a legal obligation or abstract concept.”  A similar sort of attitude seems to be involved in the Bilski case.  Both cases involve patents where money is used a unit of measure, and this seems to cause all sorts of confusion to the courts.

Is money just a legal obligation as the court states?  The court is incorrect that money is a legal obligation.  Money exists separate from a functioning legal system.  Money is a medium of exchange that measures the total amount of goods and services that can be traded for a certain amount of money.  The court seems to be confused by the legal tender rules, but money existed long before any legal tender laws ever existed. 


I suggest that the companies involved in standards organizations create a company to administer the standard.  This standards company would essentially be a licensing and development company.  The standards company would also create improvements on the standard and solicit others to contribute their inventions/patents.  Outside companies that contributed patents to the standards company would either receive equity or a royalty payment.  These standards companies would advance the concept of a secondary market for patents. 

 Standards organizations (such as IEEE 802.11 for wifi) are commonly formed by a group of companies to define a transmission or interface protocol.  The companies agree to pool their patents that are necessary to implement the standard.  They also agree to license their patents on a nondiscriminatory basis for a reasonable royalty.  Commonly, a company wishing to build a product implementing the standard takes a license to the pool of patents and pays a royalty.  The royalty payment is then divided among the companies that contributed patents based on the number and importance of the patents each company contributed. 


Based on the reports in the post “Bilski Case Provokes Skepticism from Justices” it is clear that the Supremes do not understand patent laws or innovation economics.

It is unfortunate that the Supreme Court justices are so ignorant of patent law and innovation economics.  Justice Sotomayor’s comment that patents in fact “limit the free flow of information” is complete nonsense.  First, the information in the patent would not exist if the inventor had not created it.  Second, patents trade the disclosure of information for a limited term property right.  As a result, patents foster the creation and dissemination of information.  Justice Breyer’s comment if everything that “helps a businessman succeed” is patent-eligible, it would “stop the wheels of progress” shows a complete ignorance of the history of patents and technological progress.  Before the advent of the modern patent system in the US, technological progress was so slow that per capita incomes had not changed in over 2000 years.  Since the advent of the modern patent system, we have had an unprecedented explosion in technological innovation.


Here is another article , “The Case for Market Based Patent Reform” pushing patent reform.  This article repeats many of the myths of those people who want to weaken our patent system.  For instance, it repeats the myth that there is a patent quality problem.  All the studies that purport to scientifically show that there is a patent quality problem have flawed methodologies.  For more information see Patent Quality Myth .  What we have in this country is a small number of large companies that have made a business out of infringing (stealing) other peoples’ patents.


Sarbanes Oxley (Sarbox) is starving high technology start-ups for capital.  Mathew Bandyk, in US News and World Report, suggests that not only has Sarbanes Oxley hurt venture capital, and decreased the number of IPOs, it is imposing costs on small businesses.[1] The reason that Sarbox is increasing the costs for small business, according to Bandyk, is that accountants are applying Sarbox rules to small businesses out of habit or conservatism.  In order for a company to go public nowadays, a company needs somewhere near $1 billion in annual revenue.  For more information on the damaging effects and absurdity of Sarbox see Sarbanes Oxley – The Medicine is Worse Than the Disease.  Since it does not appear likely that Washington is going to fix Sarbox anytime, how can we mitigate its damage?


According to the NYtimes the House Financial Services Committee approved an amendment to Sarbanes Oxley (Sarbox) that would allow some companies to be exempt from this legislation.  While the article implies that many companies would not be exempt under this amendment, the amendment only applies to companies worth less than $75 million and asks for a study of whether companies worth less than $250 million should be exempt.

Sarbanes Oxley has severely damaged the technology start-up market and the financial industry in the U.S.  Sarbox is very expensive: including enormous direct and indirect costs to our economy and to innovation.  It has not met its goals of improving the quality of auditing or preventing fraud.  The effects of this law include fewer public companies, fewer companies going public, more companies choosing to go public in foreign markets, absurdly high auditing expenses and a significant decrease in risk capital.

For More information see Sarbanes Oxley – Is the Medicine Worse Than the Disease – 1 and Sarbanes Oxley – Is the Medicine Worse Than the Disease – 2 .


Gene Quinn in has an excellent article (please read the whole article) on the Myraid Genetics case.  Mr. Quinn explains the absurdity of the claims by the ACLU.  But the part his article I want to focus on is the assertion by many critiques of “gene patents” that the Patent Office is issuing patents on naturally occurring genes.  As Mr. Quinn’s excellent article shows the claims are clearly not directed to naturally occurring genes – see below.

US Patent No. 5,693,473 is being challenged, and claim 1 states (in relevant part):

1. An isolated DNA comprising an altered BRCA1 DNA…

US Patent No. 5,709,999 is being challenged, and claim 1 states (in relevant part):

1. A method for detecting a germline alteration in a BRCA1 gene…

US Patent No. 5,710,001 is being challenged, and claim 1 states (in relevant part):

1. A method for screening a tumor sample from a human subject ….

US Patent No. 5,753,441 is being challenged, and claim 1 states (in relevant part):

1. A method for screening germline of a human subject…

US Patent No. 6,033,857 is being challenged, and claim 1 states (in relevant part):

1. A method for identifying a mutant BRCA2 nucleotide sequence…


There have been numerous articles and blog posts on the death of the venture capital model.[1] Only six companies that were venture capital backed went public in 2008, the lowest number since 1970.  There were also very few acquisitions of venture backed companies.[2] As a result, many venture capital firms are likely to disappear in the next couple of years.

Historically, venture capital funds have invested in a limited number of companies and taken an active part in the oversight of the companies.  Sarbanes Oxley and the likelihood of more financial regulation threaten the ability of start-up companies to go public.  Without a robust IPO market, it is unlikely that M&A activity will result in strong valuations.  Additionally, many IT start-up companies have low capital requirements and can forego traditional venture capital investments.


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