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Archive for April, 2010


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.

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

Please see the full Article

 
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.

 
Pikes Peak Economic Club May 4 Meeting

Local author, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation”.

Dale B. Halling is a patent attorney located in Colorado Springs. His book, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation“, explains that innovation is the key to getting out economy growing  again. 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.

May 04, 2010
from 06:30 pm to 06:30 pm
The Vanguard School, 1605 D South Corona Ave., Colorado Springs, CO 80905

For more information click here

 
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.

 
Blaming Greenspan and the Free Market

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

As Alan Greenspan pointed out:

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

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

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

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

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

 
First-to-File vs. First-to-Invent

My good friend, Gene Quinn, of IPWatchdog, has am interesting post on the present patent reform bill.  http://www.ipwatchdog.com/2010/04/04/kappos-round-table-listening-continues-on-campus-of-uspto/id=10002/

His post brings up several interesting points.

Interferences & Independent Invention

If there were only 55 interferences last year, how come all the people calling for patent reform state that independent invention happens all the time?  If independent conception of inventions are so common you would expect a lot more interferences.  While I would grant you that the PTO is very reluctant to declare interferences, even taking this into account it shows very little independent invention.  So all the people calling for patent reform claiming that technological progress is inhibited because they are not allowed to practice their independent inventions appear to be disingenuous at best.  What is more likely is that they have not independently derived these inventions and they just do not pay a license fee to the true inventor.

First to File vs. First to Invent

The proposed solution for the first to file conversion is the scaled down one year grace period.  Your post clearly points out the limitations of this provision – namely it only protects the inventor against bar issues, but does not protect them from thieves that file a patent before the true inventor.  This does nothing to preserve our patent system for independent inventors or start-up companies.  No one with any resources and knowledge will rely on this scaled down one year grace period.  Within a decade of having passed this reform, people will argue that the one year grace period is meaningless and we should just move to a true first to file system.  Given the cost of filing a patent this will be the nail in the coffin of American Entrepreneurialism.  The patent system will just be for large entrenched companies who create incremental inventions.

Cost of Interferences

Your argument sounds logical.  Since most independent inventors cannot afford the cost of an interference, we will just get rid of them.  This correctly identifies the problem, but proposes an unjust solution.  A just solution is to reduce the cost, time, and formalism associated with interferences.  Logically, the inventor is the first one to conceive of the invention and reduce it to practice.  We need a system that is just and practical.  A practical system that is not just will lead to unintended consequences.  For instance, the publication requirement has led to our patent system giving away our technology to the rest of the world.  The practical answer was to publish our patent application and conform with the rest of the world.  The just and practical answer was to fund the PTO fully, eliminate needless formalities to patents and have patents issue in under one year.  The just and practical answer would have ensured that the US stayed the technological leader of the world and therefore economically vibrant.  Our present economy is the result of the sin of being practical but not just.

24 Month Provisional

While I am not inherently against this proposal, I can just hear the critics screaming “submarine patents.”  Extending the time to 24 months from 12 months that a provisional patent application allows the applicant to file a regular patent application sounds like a practical solution, however the better answer would be to streamline the process of applying for a patent.  We should work to reduce the time it takes to obtain a patent, reduce the cost it takes to obtain a patent, and reduce arbitrary rules required to obtain a patent that add no real value to the patent system.

Real Patent Reform

Nothing in the present patent reform proposal does anything to solve the real problems faced by inventors.  Instead of agreeing to a less bad patent reform bill, which should trash this bill and start over.  The number one issue that has to be in any patent reform bill is to stop fee diversion.  Fee diversion is fraud pure and simple.  If Congress had to live up to Sarbanes Oxley, they would all be in jail.  We need to repeal KSR.  Any objective system of patentability is better than a subjective standard for entrepreneurs and businesses.  (Only a judge or a trial lawyer thinks a subjective test is just).  For more on real patent reform see Real Patent Reform.

 

A recent article in the Huffington Post suggests that the U.S. has become a third world country in terms of innovation.  The article states:

A report by the Information Technology and Innovation Foundation looked at the progress made over the last decade in the area of innovation. Out of the 40 countries and regions it examined, the U.S. ranked dead last.

A study on innovation by the Boston Consulting Group concluded that America is “disadvantaged in several key areas, including work force quality and economic, immigration, and infrastructure policies.”

In 2009, patents issued to American applicants dropped by 2.3 percent. Those granted to foreign-based applicants increased by over 6 percent.

The article suggests loosening up our immigration policy for highly trained individuals and increasing the quality of our educational institutions as solutions to this problem.  While there is nothing wrong with these suggestions, they fail to recognize the real changes in policy that we have made in the last decade that are killing innovation.  Specifically 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.

 

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