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Archive for July, 2010


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

 
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

 
Job Growth Due to Start-Ups

A study by the Kauffman Foundation shows that all net job growth is due to Start-Ups.

Between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.

According to the study,

When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing. It’s well understood that existing companies of all sizes constantly create – and destroy – jobs. Conventional wisdom, then, might suppose that annual net job gain is positive at these companies. A study released today by the Ewing Marion Kauffman Foundation, however, shows that this rarely is the case. In fact, net job growth occurs in the U.S. economy only through startup firms.

This study dovetails very nicely with my book, The Decline and Fall of The American Entrepreneur, How Little Known Laws and Regulations are Killing Innovation.  The book explains why the US growth was so strong in the 1990s and weak in this decade even before the financial crisis.  I identify three foundations on which technology start-up companies built on intellectual capital, financial capital, and human capital.  All three of the foundation 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.

 
Investing in Start-ups Less Risky Than Stock Market?

Stock trader, Howard Lindzon, believes that it is less risky to invest in start-up companies than the stock market.  He made this stunning statement in an interview on Tech Ticker (please see the full interview).  Mr. Lindzon believes that the stock market is rigged and that investors have more control when they invest in start-ups.

I don’t know whether this is good news or bad news.  It is good news that at least one investor is more interested in building businesses than just trading stocks.  On the other hand it is bad news if even a professional trader believes the stock market is rigged.

 
Innovation vs. Invention

I believe there is a lot of confusion regarding the difference between invention and innovation.  This confusion is the result of erroneous definitions and the purposeful intent of some to increase their importance by belittling the contributions of others.

I believe that most of this mischief started with the great economist Joseph Schumpter.  According to Wikipedia:

Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice

There is nothing inherently wrong with the distinction above, but the way it is applied blurs together a number of different skills.  Blurring skills together shows a  misunderstanding of the process of innovating.  Broadly speaking, innovation can be broken into two distinct sets of skills: creation and dissemination.  By creation I mean creating something new, not production – creating something old.

A subset of creation is invention.  An invention is a creation with an objective repeatable result.  A creation that is not an invention has a subjective result, such as the effect of a painting on a viewer, or the effect of a book on a reader.  Many activities combine both a subjective creation and an invention, such as architecture.  However, we can separate out the invention from the other creative elements and this helps our understanding of the process.

Dissemination may include a number of processes, such as education (marketing, sales), manufacturing, finance, and management.  This is not to say that marketing cannot be creative, it clearly often is very creative.  However, the creative part of marketing can be separated out from the dissemination or execution part of marketing.  The same is true of manufacturing, which can definitely include inventing.  But an invention related to manufacturing is part of the creation step not part of the dissemination step.

Finance can also have inventions.  For instance, the invention of a fractional reserve ratio bank is clearly an invention.  It has the objective result of securitizing assets and turning them into loans and currency.  A fractional reserve bank will securitize land and turn into a loan and currency.  Despite this, it is important to understand that the first person to develop the fractional reserve bank is inventing and the person operating the fractional reserve bank is disseminating.

All real per capita economic progress is the result of inventing.  This is not to say that it is unnecessary to disseminate inventions, but if there were no new inventions there would not be any economic progress. We would be stuck in static world once all the inventions had been completely disseminated.  Of course, if we stop all dissemination activities we will quickly starve to death.

It is my belief that business and economic professors have focused on “innovation” instead of “invention” because they have no idea how to invent or how the process of how inventing works.  They concentrate on what they know, i.e. business and economic practices.   As a result, the focus is dissemination,  under-appreciating the importance of inventing.  In addition, it results in misleading business theories, such as:

- Management teams are more important than the quality of the invention.

- Execution is everything; patents and other IP do not matter.

- Get Big Fast.

The truth-test of these theories is directly related to the strength of the patent laws at the time the company is created.  When patent laws are weak, these theories are more true and when patent laws are strong, these theories are less true.  Unfortunately, when patent laws are weak these theories do not overcome the disincentive to invest in risky new technologies.  Management teams do not build revolutionary or disruptive technologies, they just disseminate these technologies. These sorts of teams are like large companies and generally can produce a return with less risk by NOT developing high-risk technologies.  They tend to focus on incremental technologies or on stealing someone else’s technology.  While this may be good business advice in a period of weak patents, it is bad for our country’s competitiveness and our standard of living.

Technological progress (i.e., inventing), in the long run, is the only competitive business advantage.  The best management team in the world selling buggy whips at the turn of the century could not overcome the technological advance of the automobile and stay a buggy whip company.  The best management team in the world selling vacuum tubes in the 1940s, could not overcome the advance of transistors and semiconductors and stay a vacuum tube company.  This country is littered with companies that had great management teams that were overwhelmed by changes in technology.  For instance, Digital Computers had a great management team, but they could not overcome the advance of the personal computer.  Digital Computers failed to invent fast enough to overcome the onslaught of small inexpensive computers.  US steel was not able to overcome the onslaught of mini-mills, aluminum, and plastics.  This was not because they did not have a good management team, it was because the management team under- prioritized invention and over-prioritized execution or dissemination skills.  Ford & GM have not become walking zombies because they did not have strong management teams, but because they have not invented.  As a result, they have antiquated production systems and weak technology in their products.  86% of the companies in the Fortune 500 in 1959 are no longer there.  Some of these companies disappeared because of bad management, but most companies disappeared because they did not keep up with changing technology.  In other words, they did not invent.

Inventions or advances in technology are the ONLY WAY to increase real per capita incomes and the only long term business advantage.  Business school theories that do not prioritize invention, are bad business and bad for our country.

 
Avik Roy’s Excellent Analysis of Drug Patent Settlements

Mr. Roy’s article “Why Drug Patent Settlements are Good for Consumers”  is a breath of fresh air in this debate.  Mr. Roy shows why these settlements are good news for consumers.  Patented inventions are property rights with the same logical basis as property rights in land.  As Ayn Rand pointed out Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.”  “What the patent and copyright laws acknowledge is the paramount role of mental effort in the production of material values: these laws protect the mind’s contribution in its purest form: the origination of an idea.”

History has clearly shown that when governments interfere with private property rights, it always results in less economic activity.  Less economic activity is always bad for consumers, since they have fewer choices and more importantly their income is negatively impacted.  The US government’s interfering with drug companies’ patent property rights have will have the same effect.  The government is not just interfering with drug companies’ property rights, it is also interfering with contracts.  This is clearly not in the spirit of Contract Clause of the US constitution and is detrimental to economic activity.

Mr. Roy clearly shows how government interference in these contracts and patent rights is not beneficial to consumers.  He explains,

If the government banned the “devious tactic” of legal settlements, the likely outcome is that consumers will spend more on pharmaceuticals, not less. Claims to the contrary are only accurate if you believe that generic companies are dumb enough to settle even when they would win in court. The truth is the opposite: modern generic companies like Teva employ the most sophisticated patent lawyers on the planet. You can rest assured that they will only settle when they think their case is weak.

Please read his full analysis.

 
Equitable Estoppel: Another Excuse for Stealing Inventions

The Aspex Eyewear v.  Clariti case decided by the CAFC on May 24, 2010 used the excuse of equitable estoppel to allow Clariti Inc. to steal Aspex Eyewear’s invention in U.S. patent 6,109,747.  Aspex sent a letter to Clariti asserting that Clariti was selling products that were covered by three other of Aspex’s patents in 2003.  Aspex then sends a letter in 2006 that one of Clariti’s products is infringing the 6,109,747 (747 patent) and seven months later files suit against Clariti for infringement of the 747 patent.  The court found that this seven month delay justified a defense of equitable estoppel on the part of Clariti.  There is no evidence that Clariti relied on Aspex’s statements or that it relied on Aspex’s seven month silence.  This is clearly just another backhanded way to undermine patent rights.

This case makes a mockery of the Constitutional guarantee of securing inventor’s rights.  Congress has already spoken on when silence or inaction bars the awarding of damages.  35 USC § 286 limits damages for infringement that occurs more than six years before the filing of a lawsuit.

This case opens up the possibility that by marking your product with a patent and failing to file a lawsuit within seven months might result in a defense of equitable estoppel.  This makes the notice provision of the patent laws 35 USC § 287 a minefield for the patent holder.

This case is one in a long line of changes to our patent law that are designed to make it easier to steal patented technology.  These changes include the publication requirement, the underfunding (stealing of user fees) of the patent office, the appointment of an incompetent PTO director (Jon Dudas), the requirement of maintenance fees to keep your patent alive, the elimination of the duty of care, the elimination of automatic injunctions for infringement, the imposition of a subjective (unworkable) standard of obviousness, the doubling of the pendency time to obtain a patent, the increased ability to attack the validity of a patent under new procedures, the lowering of the standard of inequitable contact, prosecution history estoppel and on and on and on.  This is an all attack on the patent system, which will destroy our economic and technological leadership.

 

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