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Archive for September, 2010


More on the Myth that Patents are Monopolies

David Kline, author of Rembrandts in the Attic, has added the following insight from history on the idea that patents are monopolies.

“The condemnation of monopolies ought not to extend to patents, by which the originator of a new process is permitted to enjoy, for a limited period, the exclusive privilege of using his own improvement. This is not making the commodity dearer for his benefit, but merely postponing a part of the increased cheapness (or excellence) which the public owe to the inventor, in order to compensate and reward him for his service.”

John Stuart Mill, “Principles of Political Economy,” 1848

“The dawn of the right of inventors has been actually [contemporaneous] with the destruction of monopolies odious to the common justice of men; and the common sense of mankind has marked a distinction between such monopolies and the exclusive rights conceded to inventors. Their rights, under patents, are called ‘monopolies’ only from the poverty of language, which has failed to express in words a distinction which no less clearly exists.”

Louis Wolowski, Chair of Industrial Economics, Conservatoire des Arts et Métiers, 1864

“How can the exclusive right of an invention be compared with a monopoly in trade? How can the exclusive privilege to sell salt in Elizabeth’s time, which added not one bushel to the production, but which enriched the monopolist and robbed the community, and the exclusive right of Whitney to his cotton gin, which has added hundreds of millions to the products and exports of the country, be both branded, with equal justice, with the odious name of monopoly?”

George H. Knight, 1891

A patent is a property right, it is not a monopoly.   For more information see The Myth That Patents are Monopoly.

 

Here is another person pointing out that Sarbanes Oxley did not solve the problems it was suppose to fix and has driven the IPO market overseas.  See Video.

 
Patents Critical Indicator of Success

Another study shows that start-up company success is tied to patenting success.  The authors of the study are a pair of professors of  finance, Jerry Cao of Singapore Management University and Po-Hsuan Hsu of University of Connecticut.  Perhaps the key finding is:

Start-up firms that successfully file patents before receiving any VC investment and more likely to complete IPOs and less likely to fail or be acquired.

The study shows that

67.39% of patenting VC investees successfully completed the IPO process, whereas only 14.81% of VC investees without patents did do.

This is a huge difference.  Patents are also a good indicator of whether a firm will end up in bankruptcy.

On the other hand, only 3.47% or patent-filing VC investees filed bankruptcy, in sharp contrast to the 10.12% of VC investees without patents who did so.

This study clearly shows that patents are critical to the success of start-up companies.

 
SOX Causes Delay in Facebook IPO

Peter Thiel, an early investor in Facebook, said that Facebook will not go public until late in the game.  He explained that regulations such as Sarbanes Oxley are causing Facebook to delay their IPO.  He talks about this at 5:10 into the Fox Business Network Video.  The rest of the interview is well worth listening to also.

My book, The Decline and Fall of the American Entrepreneur, argues that SOX significantly undermined the financial capital on which technology start-up companies are built.  SOX was only 60 pages long, the new financial reform bill is well over 2000 pages.  Imagine the damage it will cause.

 
CASHING IN ON IP: Guest Post by Robert Brands

What’s in your IP cupboard?

Progressive companies create innovation teams. They invest countless man-hours, dollars and other resources in investigating and pursuing innovation. Yet they often leave their intellectual property untouched, thereby failing to translate patents and other IP into revenue opportunities.

American industry and academia hold some two million current patents granted by the U.S. Patent and Trademark Office. Yet, the vast majority remain idle. In a tight economy – and even in the best of times, failure to exploit existing patents for profit means more than money’s being left on the table. New opportunities – and the possibilities they spawn in kind – are lost.

At a recent Intellectual Property Owners meeting in Atlanta, the importance of corporate innovation and IP governance were tied directly to the potential for value creation. The consensus was that this untapped resource represents a significant lost potential value and income generation.

The combined roles of innovation governance and IP management cannot be over-emphasized. While the roles of corporate IP governance, supervision and even leadership are critical, companies that have respectable IP portfolios must install an IP Officer on the innovation teams or new product development board. The intention would be for the IP Officer or team to…

-          Manage the IP portfolio, keeping a keen eye on that place where consumer or market trends and the portfolio intersect.

-          Present opportunities to the innovation or NPD teams. And

-          Work with those teams to craft approaches to maximize potential monetization.

Even small businesses with no IP portfolio can maximize IP potential. For example, IP Teams can search IP auctions or licensing opportunities to see how patents available match with the company’s goals or vision. For example, some 40% of the two million patents held are “common patents” for such generic products as components or parts for automobiles and software elements for cell phones. The patent owners often work out licensing agreements to put the patent into use. It can be cumbersome, costly and time consuming to work out one on one deals. But it often can serve the buyer’s near- and long-term needs.

One such marketplace about to take off , IPX International seeks to work with corporate IP owners and market leaders to maximize intellectual asset management on an open market exchange. “Establishing a fair and reasonable price for IP, the Exchange provides companies with an economical opportunity to be both a corporate good citizen and an innovative leader.”

In the end, these seized opportunities can increase shareholder value.

At the IPO conference and around Innovation war rooms across the business landscape, smart organizations are realizing that IP exploitation is an enabler. It empowers companies to transform often idle holdings into a significant source of income generation and the mindset for continued innovative thinking.

Managing that place where innovation and the IP portfolio meet is not a one-off event. This process must be a habit, an ever-present line-item on the Innovation / NPD To-Do List. Only when it is emphasized and embraced internally will it ensure the contents of the cupboard become fuel for the bottom line.

By Robert Brands with Jeff Zbar

Robert Brands is the founder of InnovationCoach.com, and the author of “Robert’s Rules of Innovation”: A 10-Step Program for Corporate Survival, with Martin Kleinman,  published  Spring, 2010 by Wiley.

 
Were the Recessions of 2000 and 2008 Both Caused by Easy Money?

It is common for pundits to declare that the last two recessions were due to easy money on the part of the Federal Reserve.  Both free market proponents, such as Austrian economists, and Keynesians agree on this point.  David Faber even did a one hour show called the “Bubble Decade.”  First, let’s distinguish between easy credit bubbles and investment manias.  The recession of 2008 was clearly the result of excessive debt and is therefore a credit bubble.  Not only did the Federal Reserve hold interest rates low, but more importantly the federal government pursued a number of policies to encourage overinvestment (borrowing) in the housing sector.  Among these policies were the creation of Fannie and Freddie Mac and their investment in subprime mortgages and debt rating agencies, sanction by the SEC, that rated securities based on these mortgages as AAA.  Both of these contributed to a false sense of security on the part of investors.  It was believed that even if these securities (CMOs) failed the government would stand behind any mortgages backed by Fannie and Freddie.

Now compare this to the recession of 2000.  There were no policies encouraging debt (or equity) investments in technology start-up companies.  Banks do not loan money to even highly successful technology start-up companies.  Even very accommodative money policies by the Federal Reserve do not result in direct loans to these companies.  The Fed has small indirect effects.  For instance, easy money by the Fed makes it easier for founders to mortgage their house (or other property) and invest in their start-up.  Another indirect effect is that lower interest rates make it more attractive to invest in technology start-ups than debt instruments.  A third indirect effect is low interest rates encourage margin accounts for stock investors.  As a result, it is unlikely that the investment mania of the late 90s was the result of easy money policies on the part of the Fed.

Some people seem to believe that manias and bubbles can only occur because of easy money policies on the part of the Federal Reserve (Central Bank).  This cannot be right, because the tulip mania of Holland reach its peak in 1623.  This was before fractional reserve banking.  The first fractional reserve bank was the Swedish Riksbank established in 1656.  The first central bank was not established until the next century.  Clearly, investment manias can occur without central bank.

Gold is one of the most sensitive barometers of inflation due to excessive money creation.  The price of gold fell from about $400.00 an ounce in 1996 to below $300.00 per ounce in 1999 and most of 2000.  This is not the sort of response we would expect in gold prices, if the Federal Reserve was inflating the money supply.  The Discount Rate was 4 ½% in November 1998 and was increased to 6% by May 2000.  Again this is not one would call an easy money policy.  The investment mania in technology companies in the late 90s was not the result of over inflating the money supply.  Part of the deflation of the late 90s was due to a rapid increase in the amount of goods and services being produced, due to the new technologies being developed.  This may be one of the cases where the GDP measurement actually understated the actual growth.

The recession of the 90s was not caused by too easy money, but imprudent tightening of the money supply.  Alan Greenspan was determined to cool the stock market.  As a result, the Fed increased interest rates until they caused a recession.  The yield curve turned negative 1999 or early 2000.  A negative yield curve would never occur in a free market economy – that is without a central reserve bank.  No one would ever loan out money for a longer term at a lower interest rate in than a shorter term loan.  An inverted yield curve is the product of a central bank.

The economic growth of the 90s was built on companies developing new technologies, which is the only way to increase real per capita income.  As a result, the recession of 2000 was relatively mild.  Alternatively, the housing bubble was built on easy credit and did not result in new technologies.  The recession of 2008 was the deepest since the recession of 1980.

 
$30 Billion for Small Business Lending

President Obama’s latest proposal to stimulate the economy is to subsidize community banks so that they lend to small businesses.  Gary Townsend has a great article on this at Seeking Alpha.  He suggests the program is flawed because of poor execution issues.  In his more cynical mood (honest mood), he suggests that it is payback to the banks for supporting financial reform.

More important than poor execution is that Obama’s proposal is fundamentally flawed.  It is another case of the government stealing money from one group to give it to another group.  It will not create jobs.  Banks lead to established businesses that have assets and cash flow.  The Kauffman Foundation has shown that all net new jobs over any decade are created by new businesses not small businesses.  High quality jobs are created by new business that are creating new technologies.  President Obama could get 300 times the impact with 1/30th the spending by fully funding the Patent Office and repealing Sarbanes Oxley and the new financial reform bill.  New companies (start-ups) that create high quality jobs are funded by equity investments.  These equity investments are backed by intellectual capital – patents.   The best return on these equity investments occurs when these companies go public.  Sarbanes Oxley has made this almost impossible.

This proposal by President Obama is not about creating jobs, but about political payback.

 
Patent Reform – The Big Lie

Supporters of the present Patent Reform Bill often argue:

Congress has not substantively altered patent law for more than 50 years. The patent system is simply not up to the challenges of the 21st century and is handicapping the American knowledge economy.  John Conyers – Roll Call July 12, 2010.

The Coalition for Patent Fairness states:

The last comprehensive re-write of patent laws occurred more than 50 years ago, decades before the modern technology revolution had begun.

The argument that our patent laws have not been update in more than fifty years is a BIG LIE.  Here are a partial list of changes in patent law in the last thirty years.

1980

Requirement of Maintenance Fees

This was a backhanded way of instituting a working requirement.  The U.S. hads rejected a working requirement throughout our history.  Working requirements for patents undermine the inventor’s right in their invention and are common among third world countries that do not protect an inventor’s rights in their invention.

Provision made for third parties to cite prior art to USPTO.  35 USC 301

1982

Court of Appeals for the Federal Circuit created. 35 USC 141, 28 USC 1295.

Arbitration of disputes relating to patent infringement or validity authorized 35 USC 294.

1984

Possibility of extending patent term to compensate for delay in securing marketing authority from FDA to sell new drugs for humans. (Waxman Hatch Amendments)

Protection from finding of obviousness over work of co-employees etc. 35 USC 103 (c).

Clarification that to be a joint inventor the inventors did not have to work together or each be an inventor of subject matter of every claim. 35 USC 115(a).

Statutory Invention Registration scheme introduced 35 USC 157.

Definition of infringement amended to include exports of kits of parts that can be used to make a product which if made in the U.S. would be an infringement of a U.S. Patent. [45] 35 USC 271(f)

1988

Possibility of extending patent term to compensate for delay in securing marketing authority from FDA to sell new drugs for animals. 35 USC 156

Definition of infringement amended to include importation into the United States of products made abroad by a process covered by a U.S. patent and to reverse the burden of proof in certain cases of alleged infringement of a process patent. (Process Patents Amendment Act) 35 USC 271(g), 35 USC 287, 35 USC 295.

Definition of infringement amended to include application to FDA for marketing approval of a patented drug to be effective before the expiration of the patent but to remove from patent infringement acts relating to collecting data for use in submissions to the FDA for marketing approval of a drug etc. 35 USC 271(e).

Patent Misuse Reform Act made it clear that patent was not unenforceable for misuse on the basis that patentee had refused to license the patent or on the basis of tying arrangements unless the patentee had market power in the relevant market. 35 USC 271(d).

1990

Extension of definition of patent infringement to acts in outer space on a “space object or component thereof under the jurisdiction or control of the United States”. 35 USC 105

1993

Extension of right to prove prior invention to acts carried out in NAFTA countries (35 USC 104)

1994

Extension of right to prove prior invention to acts carried out in WTO countries (35 USC 104)

Introduced the possibility of filing provisional patent applications. 35 USC 111(b) and 119(e)

The term of a patent is chanted to twenty tears from its earliest filing date (instead of seventeen years from grant). 35 USC 154

This was passed in part to harmonize our laws with other countries.  A major justification for changing our patent laws over the last 15 years has been to harmonize with other countries.  The other countries have done nothing to harmonize with our laws and their patent laws have not been nearly as effective at encouraging invention.

The other reason this provision was passed was because of problems associated with the delay in issuing patents.  Instead of solving the delay in the Patent Office, we changed the term of patents.

Definition of infringing acts extended to include offers for sale and acts of importation. 35 USC 271

Change in burden of proof in cases where infringement of process patent is alleged. 35 USC 295

1995

Protection of biotechnology processes from finding of obviousness if it is for the production of new and nonobvious product. (35 USC 103 (b))

1996

Removal of remedies for infringement of patents for surgical processes. (35 USC 287(c))

1998

The Court of Appeals for the Federal Circuit in State Street Bank v. Signature Financial.[46] holds that there is no prohibition in U.S. law on patents for business methods as long as they are new, useful and non-obvious.

See the Bilski case

1999

The Intellectual Property and Communications Omnibus Reform Act of 1999 is passed. This law makes a number of amendments to the United States Patent Law and also includes provisions intended to curtail cybersquatting and to deal with satellite home viewing and rural local television signals. The changes to the United States Patent Law include providing for early publication of patent applications where equivalent applications are published abroad, the protection of inventors using the services of invention promotion services and first inventor (prior user) defense for prior users of business methods. Other changes were also made to the US Patent Law. You can learn more by referring to the following articles: US Patent Law Amendments 1999 and United States – 1999 – 2000 Revisions of the Patent Law and Rules.

The Publication Law was a huge change in our patent laws – it was also a breach of the social contract between the inventor and society.  Harmonization was again the justification for this change that destroyed the fundamental basis of our patent laws.

2002

Amendments relating to re-examination practice to try to make this option more useful and to clarify the law on the effect of a third party’s prior PCT application on a later-filed U.S. application.

This is another provision to harmonize our patent laws with other countries.

2004

Jon Dudas appointed as Director of the Patent and Trademark Office (PTO).  He institutes Rejections equals Quality.

Mr. Dudas is not a patent attorney, never passed the patent bar, never filed for a patent, never worked for a technology company.  But, like many of our government bureaucrats he knew more than anyone.  During his tenure he almost completely destroyed our patent system.  His actions were traitorous.

2006

eBay Inc v. MercExchange, L.L.C., 547 U.S. 388 (2006) holding that a permanent injunction should not automatically issue as part of a judgment of infringement.

This case was based on a mischaracterization by the Supreme Court that enforcing patent rights is an injunction and an equitable remedy.  In a patent case, an order that the infringer stop infringing is enforcing the inventor’s patent rights, it is not an equitable remedy.

2007

Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), Supreme Court overturns a long-standing rule that a licensed patent user cannot file a declaratory judgment action when they have not breached the license terms.

KSR International v. Teleflex, 550 U.S. 398 (2007) the Supreme Court makes it easier to find a patent invalid and harder to obtain a patent by changing the standard for obviousness from an objective standard to a subjective standard.

2010

In re Bilski, Supreme Court changes the standard of patentable subject matter, from everything under the sun made by man to a confused standard.  The Court stated the machine or transformation test is not the sole test but many of the Justices wanted a categorical rule against business methods.

How can anyone suggest that the last comprehensive changes to our patent laws were fifty years ago??


I want to thank Ladas and Perry.  Much of the information about the patent law changes was found at the Ladas and Perry website http://www.ladas.com/Patents/USPatentHistory.html

 
Could Congress Abolish Patents and Copyrights?

Some people are suggesting that Congress has the power to abolish patents and copyrights in the United States.  The argument is that Article 1, Section 8, Clause 8 of the Constitution states “The Congress shall have Power To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writing and Discoveries” and whether they exercise this power is optional.

This interpretation relies on the idea that when Congress is granted a Power it is unlimited.  The United States was founded on the idea that Government power is not unlimited like the Devine Right of Kings.  The United States was founded on the idea that powers of government are limited and come with duties, while Rights of citizens are unlimited and do not come with duties.  I know this will come as a shock to those people raised on the modern liberal interpretation, which wants unlimited powers for government and sees the Bill of Rights as a list of negative rights – see Barack Obama.  Congress, under Article 1, Section 8 also has the power to set “an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.”  This is not optional on the part of Congress, with the power comes the duty to establish these rules.

The interpretation of the Constitution that suggests Congress has the option to establish systems to protect inventors’ and authors’ rights is totally inconsistent with the history of the Constitution.  The purpose of the Constitution was to set out the powers of the federal government.  Article 1, Section 8 lists the powers but also the responsibilities of Congress.  For instance, even the power to declare war comes with the responsibility to do so when the U.S. is under attack from foreign powers.

How do we know that Congress has the duty to protect the “Rights” of inventors and authors?  Because the Declaration of Independence say so:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men,

It is well known that the unalienable Rights of the Declaration of Independence are the Natural Rights of Locke – Life, Liberty, and Property.  Many people believe that Jefferson changed property to the pursuit of happiness because he was worried it would be interpreted as endorsing slavery.  When the Founders used the word “right” they meant natural rights.  The purpose of government is to secure these rights.  When the Constitution states that inventors and authors have “Rights” in their creations, they mean natural rights and they understood that the purpose of governments was to secure these rights.  This means that Congress has a duty to secure the rights of inventors and authors under Article 1, Section 8, Clause 8.  If the words patent and copyright are meant as rights in inventions and writing, then it is clear Congress does not have the option of eliminating them.  It is also clear that patents and copyrights are not limited by the preamble.  Natural rights are not utilitarian, but are endowed on men by their Creator.

 
The High Cost of Marketing and Selling an Invention

Inventors and critics of the patent system often ignore or are ignorant of the high cost of marketing and selling a new product embodying an invention.   I discussed this cost in Invention- A Financial Analysis http://hallingblog.com/2010/08/13/invention-–-a-financial-analysis/.  This cost is the variable Mi in the equation I developed as part of the financial analysis.  Another paper that discusses this additional cost that inventor’s incur in marketing and selling their invention compared to a me-too produces, is The Nature and Function of the Patent System[1].  Kitch, the author, explains:

Even in the case of an innovation patented in fully commercial form – as is the case with many relatively trivial patents – the firm must make significant investments to simply distribute and market the invention.  But expenditures necessary to identify the market for the product and to persuade potential customers of its utility can easily be captured by competitive imitations.  Absent a patent on the product, the incentives to provide information to purchasers about their need for a product as opposed to information about the particular characteristics of the seller’s product are limited.  The trademark law protects only the names and symbols identifying the seller’s product; it confers no protection against imitators of the product itself.  Thus competitors can ride on the demand for the product created by the first seller without incurring the expenses necessary to inform buyers of the advantages of the product.  Only in the case of a patented product in a firm able to make the expenditures necessary to bring the advantages of the product to the attention of the customer without fear of competitive appropriation if the product proves successful.  This aspect of the cost of introducing innovations is stressed here both because managements find that marketing is a major cost in innovation and to illustrate that even in the case where nothing remains but to make and sell the patented invention, there are significant costs whose return could be appropriated by competitors.  Absent a patent, firms have less than the optimal incentive to invest in providing information about and techniques for using the new technology.[2]

Inventors need to take these additional costs into account when undertaking a new venture.  There are several strategies that can be used to reduce these costs.  For instance, teaming with an existing company that has a strong market presence (marketing channel partner) in your marketplace.  Another solution is to invent only line extensions to a company’s existing products.  This second solution is common for large companies and is why large companies are not known for inventing revolutionary or disruptive technologies.

Critics of the patent system have to answer why they believe inventors will develop new technologies when it puts them at a cost disadvantage compared to copiers.


[1] Kitch, Edmund W., The Nature and Function of the Patent System, Journal of Law and Economics, Vo. 20, No. 2 (Oct., 1977) pp. 265-290.

[2] Ibid. p. 277

 
The US Economy and the State of Innovation

About a year ago I finished my book The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation.  The book argues that the US economy was faltering long before the financial crises because changes to our laws were inhibiting investment in technological advances.  Intellectual, financial, and human capital are the three foundations necessary to develop new inventions and all three have been undermined since 2000.  In this post I will review how the policies affecting these foundations have changed in the last year.

Intellectual Capital: patents mainly represent this prong.  The good news is that David Kappos replaced the incompetent and traitorous Jon Dudas.  Kappos is a patent attorney and therefore also has a technical background.  Unfortunately, he spent his whole career working for large companies and does not understand the challenges of individual inventors and technology start-up companies.  The bad news is that Supreme Court again illustrated their utter incompetence in the Bilski decision.  None of the Justices understand the difference between the utility requirement under 35 USC 101, the novelty requirement 35 USC 102 and the obviousness requirement 35 USC 103.  The justices demonstrated that they do not understand the need for a working embodiment (35 USC 112) in order to even evaluate 101 and 102 issues.  They presented nonsense hypothetical’s in oral argument that were not enabled and then demanded to know whether these hypothetical’s meet the utility requirement.  They also made absurd statements that patents limit the flow of information.  Another low point in the year was the farcical ruling in the ACLU v. Myriad case.  The judge ignored the law and wrote 100 pages of nonsense to his cover up his crime.

Despite some progress in this area, overall the US continued to weaken the Intellectual Capital foundation necessary for economic growth, job creation, and investment in inventions.

Financial Capital: Sarbanes Oxley significantly undermined this foundation.  The only good news is that the financial reform bill raised the threshold for the application of SOX to $60 million in market capitalization.  However, SOX did incredible damage to our economy in only 60 pages.  The financial reform bill is 2700 pages and no one knows all the damage it will cause, but it certainly was not a step in the right direction.  The major issue financial reform should have addressed was Fannie and Freddie and it did not even address this issue.

There was no progress at all in this area.

Human Capital: this was undermined by the FASB rules requiring the expensing of stock options.  Despite the fact that accountants are unable to understand the simple fact that dividing a pie does not reduce the size of the pie, this idiotic policy continues unchallenged.

The US has made no progress in the last year in implementing policies that would encourage technological entrepreneurship.  The US is continuing its corny capitalism policies that reward political connections over true economic progress.

The US is also likely to increase the capital gains tax rate from 15% to 20% in 2011.  This will further damage the incentive to invest in new technologies.  The Obama administration is proving that it is even more incompetent than the Bush administration.

 

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