Archive for March, 2011
Ayn Rand’s ground breaking novel Atlas Shrugged has been made into a movie. The movie is tackling the book in three parts. The first part opens on April 15th – how appropriate. Click here for a voice mail from Francisco d’Anconia.
A number of movie theaters appear to be boycotting the movie. If you want to demand that they bring the movie to your town click here.
The US is already actuarially bankrupt, meaning that our unfunded liabilities are greater than our assets. Our unfunded liabilities are estimated to be about equal to our total assets at $144 Trillion. A number of people take comfort in the idea that these unfunded liabilities are not due until sometime in the future. Of course this attitude would land you in jail if you ran an insurance company, but government officials make the rules, they don’t follow them. Unfortunately or perhaps fortunately, there are some rules they cannot change such as gravity and the basic laws of economics. One of the basic laws of economics is that total consumption (worldwide) cannot exceed production plus the store of goods and services (worldwide). Governments also cannot repeal the general rule embodied in the Laffer Curve, namely there is some level of taxation at which the total revenues received by the government decreases.
There are two general definitions of bankruptcy: 1) your liabilities exceed your assets, and 2) your cash flow is not sufficient to cover your obligations. The US is already bankrupt under the first definition. So the question is when we will bankrupt based on the second (both) definitions? I did a simple spreadsheet to figure out when this would occur. I defined cash flow bankrupt as the point at which the payments on the interest plus the cost of Social Security and Medicare equaled 100% of the likely U.S. federal budget. Naturally, this involved some assumptions. The assumptions included:
1) The inflation rate will increase by 1% a year for the next decade,
2) The number of retires on Medicare and Social Security will increase by 5000 per day (10000 baby boomers retiring a day less 5000 death a day),
3) The cost of retires today is $20,000 per year,
4) The US will grow at 2% per year,
5) The federal annual debt will increase at the rate of inflation,
6) The US will pay 1% over inflation for its debt (realized not unfunded), and
7) The cost of Social Security and Medicare per recipient will grow at the rate of inflation.
I believe the first assumption of inflation growing at 1% per year for the next decade with a starting level of 2% in 2011 is a very conservative estimate. Where conservative means that it errs on the side of the US not going bankrupt. The second assumption of 5000 net people per day going on Social Security and Medicare is based on the best estimates I can find. Note that there is no cost associated with Obama care in this calculation, which makes this even more conservative. The third assumption of the cost per retiree is based on the best available information I could find. The fourth assumption of the US growth rate is extremely generous. The long term growth rate of the US is 2% a year and presently it is very doubtful that US will grow at this rate this decade. The fifth assumption that the federal debt will only grow at the rate of inflation over the next decade is almost laughable. This would mean that the debt to GDP ration would actually decline. The Tea Party Republicans wanted to cut $100 billion dollars from this years budget and they were said to be cutting it to the bone. This $100 billion is just 1/16th of the total deficit and only 1/37th of the total budget. The seventh assumption that Medicare and Social Security costs per retiree will only increase at the rate of inflation is much lower than the growth rate over the last 20 years.
Below is a chart that shows how the total recognized federal debt grows
Here is a chart of these costs as a percentage of the Federal Budget
Here is the spreadsheet for anyone who is interested
|New enrollees cost||0.0365|
John Locke wrote “whenever the Legislators endeavour to take away, and destroy the Property of the People . . . they put themselves into a state of War with the People, who are thereupon absolved from any further Obedience.”
Is this not exactly what the U.S. government is doing today? Tax law is not about equitably raising funds for the needs of the government, but a method of punishing the politically unpopular. Patent Reform (America Invents Act) is not about protecting property rights, but weakening them for the politically connected large corporations. TARP was not about saving the economy, it was about taking money from the People to support politically connected Wall Street banks. Obama Care is not about helping the needy, it is about destroying the independence of the wealth producers in this country. Has the Government and the politically favored groups put themselves at war with the People? Is the U.S. on the verge of Dis-Integration?
The Wall Street Journal reported that only 72 venture backed companies went public last year. Professor Bainbridge has an excellent post analyzing the damage done by SOX – please read the full article. This just adds to the evidence of the damage caused by SOX as chronicled in my book, The Decline and Fall of the American Entrepreneur.
Business Insider: Google Gets An Absurd Patent For Its “Google Doodles”, by Matt Rosoff
An article in Business Insider, argues that Google’s patent (USPN 7912915) on Google Doodles is absurd. The patent describes a computerized method of creating a new company logo associated with an event. The modified company logo is associated with a link. Google uses this on their search page. The goal is to entice people to visit the webpage and increase the webpage’s traffic. A major goal of most websites is to increase their page views and the patent describes a new technology to achieve this goal.
The article demonstrates the ignorance of the author, Matt Rosoff. A patent is a property right in an invention. An invention is a new creation. This means that it has to be useful and to be an invention it has to use technology to solve the problem. This is exactly the sort of invention that patents were designed to protect. If someone copies Google’s technology, then they are clearly free loading off the efforts of Google. If the invention has no value, then the patent will not hamper anyone’s development efforts. If the invention has value, then using it without authorization is theft. As someone who has been enticed to click on the modified Google logo, I would say the invention appears to have value.
The author is so typical of anti-patent religionists that either ignore or are ignorant of what the true limits of a patent are. The author describes the patent as:
The actual methods described in the patent don’t seem to be anything special — it’s not like Google has some amazing unique way of changing its logo daily. It’s just creating a new image, storing it on a server, and uploading it to the Web server.
The scope of a patent is defined by its claims and the above characterization is much broader than the actual claims and makes it sound like there is no new technology involved in the patent. The claims require modifying the link to be associated with an event. The modified logo has to be linked to another page. And even my characterization does not capture all the limitations in the independent claims.
The anti-patent crowd misinterprets (purposely?) the scope of a patent making it much broader than it actually is, ignoring the real technology behind the invention. They then use these misinterpretations to demonstrate the absurdity of the patent. This dishonest technique has successfully hoodwinked the public and has resulted in exactly the outcome the author is against: namely a patent system that is biased in favor of large corporations at the expense of individual inventors and startups.
Business Insider: Google Gets An Absurd Patent For Its “Google Doodles“, by Matt Rosoff
The Economist in an article entitled The spluttering invention machine repeats a number of lies associated with patent reform. For instance, they repeat the Patent Thicket theory for which there is absolutely no empirical evidence. You would expect that a magazine like the The Economist would at least do a little research on the topic. Here are some of the errors in the article.
This Article repeats the Patent Thicket theory (too many patents inhibit innovation). Every single empirical study has found little or no evidence for the Patent Thicket theory. For instance see R&D, Invention and Economic Growth: An Empirical Analysis, by Professor Hulya Ulku and Ted Buckley, Ph.D., The Myth of the Anticommons, Bio, www.bio.org (2007) and Epstien, Richard A., Kuhlik, Bruce N., Is there a Biomedical Anticommons, Regulation, (Summer 2004), pp. 54-58. You would expect an organization like the Economist to do their homework before they repeat these myths.
However, there is plenty of evidence that a lack of a patent system or a weak patent system inhibits innovation and economic growth. For instance, North Korea has no patent system and has absolutely no innovation. Those countries that first adopted a modern patent system have been the most innovative. When the patent system was under attack in the US in the 1970s the US suffered stagflation. For more information see The Source of Economic Growth.
This Article also repeats the myth of low patent quality in the US. By every objective measure the quality of patents has been increasing, including GDP per patent, R&D spending per patents, and number of citations per patent. See Patent Quality Nonsense and The Patent Quality Myth. It is disappointing that the Economist repeats these diatribes against patents without even a cursory check of the facts.
PATENT REFORM: America Invents Act
The main problem with the US patent system is the long pendency time. This is a result of the underfunding (stealing of user fees) of the Patent Office. Suffice it to say that correcting this situation is not the major thrust of this legislation. The main point of this legislation is to weaken the US patent system, by the addition of oppositions and the weakening of the US grace period, so that it easier for large corporations to steal the inventions of startups and independent inventors.
Food prices rose 3.9% last month, the most they have gone up a single one month in 36 years. Of course unemployment is still at 9% or 16% if you look at the broader U2 numbers. Ben Bernanke has repeated that he is not worried about inflation. I wouldn’t be worried if I was the first one to receive the output of the printing presses either. But since I and most American’s are not the first to receive the funny money, we are worried that Ben will not wake up to the problem until we have double digit inflation.
Of course inside the Beltway, they know all this nonsense that Ben does not want to create inflation is a big hoax to keep the peasants (taxpayers) in the heartland complacent. Bernanke’s main goal is to create inflation to reduce the value of the debt, not to create full employment and not to stimulate the economy. This cynical attitude toward the American people is common in DC. It is time for the taxpayers to demand a better deal, but taxpayers make up less than 50% of the population in the US.
When QE II was first proposed (10/10) I said it would lead to massive inflation. Here is what I said at the time:
QE2 is geek speak for quantitative easing two. This means that the Federal Reserve is going to purposely debase our currency. Hyper inflation will be the inevitable result. It may take up to two years for the inflation to show up everywhere, but it is already showing up incommodities and the declining value of the dollar. When Ben Bernanke, Tim Geithner, and the Obama administration say they never say inflation coming, you will know that they are lying. They have been warned about this numerous times, for instance see the interview of Peter Schiff.
Bernanke believes that inflation will help the unemployment situation and exports. The idea that inflation causes increases in employment is based on the discredited Phillips Curve. Inflation reduces the return for producing goods and services, by increasing the input costs and making a discounted cash flow analysis of any investment extremely expensive. Because of this, people flee productive enterprises and invest in hard assets and real estate. Neither of these increase the goods and services available to people. As a result, there will be fewer businesses that produce goods and services and these are the major businesses that hire people.
QE2 will hurt American innovation because a discounted cash flow analysis of any inventive activities will show that it is almost impossible to make any R&D payoff if it takes longer than five years to commercialize. This will further hamper American competitiveness.
Bernanke also believes that debasing our currency will increase exports. This will not occur because people will be discouraged from investing in businesses that produce goods and services. As a result, we will have less to export. However, it will lower the value of every American’s paycheck.
QE2 will also be another subsidy for the big Wall Street banks. Bernanke will purchase Treasuries from Wall Street banks at inflated prices. If the banks were forced to hold these treasuries for a couple of years, their value would fall precipitously as the reality of hyper inflation because clear to everyone. I believe that QE2 is a purposeful bailout of Wall Street. The Wall Street – Washington evil axis is fleecing America without shame.
David Boundy, a well known well respected patent attorney, provided the following analysis of the first to file issues in a comment on the blog Patently O.
The section of the bill titled “first to file” has two completely distinct effects — (1) changing the § 102(g) tie-breaker rule, for deciding between two near-simultaneous patent applications directed to the same invention, and (2) weakening the §§ 102(a)-(f) grace period, the deadline for filing a patent application.
The proponents are correct that first-to-file vs first-to-invent as a tie-breaker between two near-simultaneous patent applications for the same invention yields no significant difference in the outcome, but first-to-file (if the bill changed only the § 102(g) tie-breaker rule) is almost certain to yield significant cost-savings and efficiencies.
The answer is — so what. The § 102(g) tie-breaker rule affects just over one hundred patent applications per year.
The small business folks are concerned about the other part of the same section, the §§ 102(a)-(f) grace period, the deadline for filing a patent application. The grace period is a make-or-break issue for small companies and startups, that need the extra time to seek investors, test their inventions, and the like. The grace period rule is a far larger issue — it affects hundreds of thousands of inventions per year, largely by taking away the time to investigate, think, and make careful efficient economic decisions, and decide not to file patent applications to inventions that turn out to be duds. Those applications are not filed today, but will be filed under Patent Reform, costing small companies about $1 billion per year. And they will bog the PTO under 50,000 to 100,000 more applications, most of which are written in haste, and most of the incremental applications directed to inventions that would have dropped out of the system with more time to think.
The weak grace period of S.23 creates an impossible catch-22 for small companies. Under patent reform, entrepreneurs won’t be able to discuss their ideas with potential investors or other strategic partners until after a patent application is filed because of the risk of losing all patent rights. On the other hand, many entrepreneurs don’t have the money available to file patent applications until after they have funding in hand. This circular dependency will make it impossible to proceed. Current law gives small companies a way out of this deadlock: they take advantage of the grace period to discuss their ideas with investors and partners while they work to get their company running, and file patent applications once investors come on board. But the changes in S.23 create commercially-unacceptable risks for companies that must seek outside investors and partners unless the inventor can find the many thousands of dollars to file a patent application first. That change in the grace period is just fine for multinationals like Kodak, IBM, GE, the big Pharma’s, etc. but for small companies and startups, it’s simply unworkable.
(Note well, all patent attorneys not working in-house—-a weak grace period will send your malpractice premiums through the roof.)
Two economists at McGill University (one of Canada’s two premier universities) studied the economic effects on Canadian inventors and companies when Canada made the same switch in 1989. They found that Canada’s shift to essentially the same weak grace period as in S.23 created no significant benefit, but selectively disadvantaged small companies and domestic-focused companies, and favored large multinational companies. The McGill authors specifically noted that the adverse effects on the U.S. would be larger than they were in Canada, because of the U.S.’s larger fraction of small companies, and larger reliance on our domestic markets.
The data are pretty clear on both sides. The change in § 102(g) tie-breaker rule makes sense, and change to the § 102(a)-(f) grace period rule will be destructive to the U.S. economy. The latter effect is far larger.
Call your representatives, and call your clients and ask them to call your representatives. All that is required for the triumph of evil is for good men to do nothing
The two key papers, analyzing empirical data from Canada and Europe, are
Lo & Sutthiphisal, “Does it Matter Who Has the Right to Patent: First-to-Invent or First-to-File? Lessons from Canada,” April 2009, NBER Working Paper No. w14926, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1394833
Boundy & Marquardt, Patent Reform’s Weakened Grace Period: Its Effects On Startups, Small Companies, University Spin-Offs And Medical Innovators, “Medical Innovation & Business Journal, vol. 2 no. 2 (Summer 2010) http://journals.lww.com/medinnovbusiness/Citation/2010/06010/Patent_Reform_s_Weakened_Grace_Period__Its_Effects.6.aspx
Below is a letter by Steve Perlman, a highly successful inventor, on why first-to-file will be bad for small inventors. For the images see http://www.rearden.com/public/110301-Steve_Perlman_S.23_Letter_to_Senator_Feinstein.pdf
The Honorable Dianne Feinstein 331 Hart Senate Office Building Washington, DC 20510
Why “First-to-Invent” Is Essential for America’s Unique Process of Invention
(Feinstein-Risch Amendment Striking “First-Inventor-to-File” from S.23 is Critical)
Steve Perlman, President & CEO, Rearden, OnLive and MOVA
Dear Senator Feinstein:
I am an American inventor. I hold over 100 US patents with over 100 pending. My inventions are found in most computers and mobile devices and many TV devices sold today as well as in the production of major motion pictures with advanced visual effects, such as the latest Harry Potter movie.
The Patent Reform Act of 2011, S.23 is about to come to the Senate floor. While much has been said through the four sessions of Congress the Bill has spanned, almost all discussion has been conceptual with very few, if any, real world examples of how patents are actually used in the US for the invention and development of the major innovations that form the backbone of US economic growth.
This letter provides real world examples of how patents are currently used in the development of actual US inventions and how, absent amendment, core provisions of S.23 would disrupt this process, particularly for startups and other small entities that are the primary drivers of innovation in the US.
In terms of background, my inventions include QuickTime, WebTV, MOVA Contour, and OnLive, and span a wide range of fields, including video, audio, animation, special effects, 3D imaging, wireless, alternative energy, semiconductors, optics, material science, mechanical systems and medtech devices.
In addition to founding 8 US-based startups backed by my patents, I was a Principal Scientist of Apple, and a President of Microsoft. My work is found in all Macs, iPhones, iPods and iPads, most PCs, all of Microsoft’s TV-based products and in many TVs, cable/satellite/IPTV set-top boxes, and video games.
My inventions have supported investment of hundreds of millions of dollars into my startups, have resulted in billions of dollars of revenue and profits, and the creation of thousands of US jobs. All of my companies have been pure “practicing entities”: my patents have been used purely to back the products my companies have developed, never sold or licensed for royalties. 2
The Process of Invention in America Today—A Real World Example
You’ve likely seen movies with computer-generated (CG) faces, but it wasn’t until Brad Pitt’s reverse-aging face in A Curious Case of Benjamin Button that you saw a computer-generated face that looked completely real, winning the film an Academy Award® in Visual Effects (see attached Slide 1 showing the technology in use and the end result of Brad’s computer-generated face at different ages). One of my startups invented the technology, MOVA Contour, that made this possible. The invention process we went through is uniquely American, and is the same process used for most of my inventions (as well as for inventions of Edison and the Wright brothers, among others) that literally could not be accomplished outside the US, given the patent laws of other countries. If S.23 becomes law without striking “First-Inventor-To-File”, this uniquely American invention process will cease to exist.
To understand why, I’ll walk you through Slide 2, showing the process we used to invent MOVA Contour.
A large part of invention is trying out a vast number of ideas (such as Edison with thousands of light bulb filaments, or the Wright brothers with vast numbers of wing shapes). When we set out to invent MOVA Contour, we came up with dozens of approaches to precisely capture the human face in motion and explored each of them until we ran into a dead end. Each of these initial inventions is shown as a black box on the left side of slide 2. The tan line ending from each shows how far we explored each invention. A dot shows where we hit a dead end.
In the upper left, you can see tan arrows where the 2 most promising approaches were combined and then led to 7 more secondary inventions, which unfortunately all led to dead ends. But, one of them led to a Key Insight, shown in a dashed green arrow, that led to the rethinking of another initial invention (with a green arrow going to 5 boxes) into 5 more secondary inventions. One of these secondary inventions combined with another initial invention led to the first practical prototype, shown as a green circle with the word “Success!”.
At this point we had a working prototype that showed the basic idea worked, but not a practical product. Another 7 inventions followed for Practical Refinements, of which one led to a commercial product. For a Complete Practical System, 2 other adjunct inventions were needed (special lighting and makeup), and each of these resulted from testing several inventions, and selecting one. This entire process took about 5 years of intensely-focused R&D (this diagram shows only part of the work).
In total, about 100 inventions were conceived over the 5 years of development, but only 6 inventions were actually used in the final system, filled in green, and those are the only inventions for which we filed patents. The reason we did not have to file patents on the other 90+ inventions is because the US is a “First-to-Invent” country and so long as we carefully document each invention, we maintain priority to the date of conception. This gives us time to determine which inventions are needed for the product, and it also gives us time to get a working prototype before we file patents so that we have something to show when we seek venture funding to cover the cost of the filings (the US system allows a 1-year grace period after disclosure to file a patent). Lastly, by only filing patents that matter, we minimize distractions to our key engineers and scientists in working with patent attorneys. 3
If the US were not a “First-to-Invent” country, and instead was a “First-(Inventor)-to-File” country, then the process of invention would be completely different. To preserve defensible priority, every one of the 100 inventions would have to be filed as a patent immediately upon conception (which is why inventors throughout the world refer to “First-to-File” as “Race-to-the-patent-office”). Also, before a disclosure to investors (who rarely will sign a non-disclosure agreement) could be made, the patents would have to be filed, so venture dollars could not be used to file the patents. And lastly, the key engineers and scientists would be constantly working with patent attorneys to explain every idea they come up with as soon as it is dreamed up and have far less time to do development.
It typically costs us $20,000-$30,000 to obtain a commercial-grade patent. As you can imagine, in a First-to-File country, as a startup, we could only file patents on a small fraction of the inventions at the time of conception.1 Further, in the case of MOVA Contour, the inventions that looked the most promising at the outset turned out to be dead ends. Had we filed patents on them, it would have been wasted money, while the inventions that mattered would not have been patented at all, potentially making it impossible to fund the company. It is no surprise that the US is by far the leading nation in the world when it comes to startups and, since its earliest days (when “First-to-Invent” was established), America has been known as a mecca for invention.
1 While the US provides a type of shallow interim filing called a “Provisional”, it is a common misconception that such filings preserve priority at a lower cost. In our experience, we have always easily overcome patents based on Provisionals. They weaken the eventual patent by tying the patent to a muddy and/or vague disclosure. There is no avoiding the filing cost of an enforceable patent.
Like MOVA Contour, most of the products I’ve developed in my career simply could not have come into existence in a “First-to-File” country. And even with the financial resources I have at this stage of my career, it is still the case that the distraction to key engineers and scientists (myself included) in filing vast numbers of shallow and largely pointless patents would dramatically reduce our productivity in what are already intense multi-year developments, let alone further burdening the patent office.
S.23’s switch from “First-to-Invent” to “First-Inventor-to-File”
In dropping “First-to-Invent”, S.23 proposes the US switch to an obtuse “First-Inventor-To-File” concept which is “First-to-File” muddled with an immensely complex set of priority rules unlike any patent priority system ever used before in any country. It is far worse for small entities than conventional “First-to-File” because of the highly complex and obscure priority rules. Switching to “First-to-File” would be bad enough, as detailed above, but switching to a completely different system introduces immense complexity and risk. It does nothing to “harmonize” with other countries, and most certainly does nothing to reduce uncertainty of priority. Under “First-to-Invent” there are only about 200 “interference hearings” a year to resolve priority disputes, out of hundreds of thousands of patents filed. In short, “First-to-Invent” works exceptionally well in actual practice. Why risk changing it? 4
If “First-(Inventor)-To-File” is made into law, it most certainly will face constitutional challenges. The plain language of the Constitution grants patents to first inventors, not first filers. The issue has been analyzed extensively by Constitutional scholars, and the overwhelming consensus is that changing US law to “First-(Inventor)-to-File” is unconstitutional.
Lastly, it is important to point out that under First-to-Invent, a company with extensive resources can choose to practice First-to-File, by simply racing to the patent office as soon as every invention is conceived, eliminating any need to keep records of invention conception. Meanwhile, a company with limited resources can still utilize First-to-Invent, only filing patents that matter after funding is obtained.
Under First-(Inventor)-to-File, the reverse is not true: all parties, regardless of their resources, must adhere to “race to the patent office”. This places small entities at an enormous disadvantage to large entities. Indeed, it is a key reason why no other nation has anything close to the number of startups as the US.
S.23 and the Massive Patent Backlog
The core issue facing the US patent system today is the USPTO’s massive patent backlog. Innovation and new jobs are now sitting on the shelf at the USPTO
Consider a real world example: A key patent for one of my startups just issued in December of 2010. It was filed in 2002, 8 years earlier. This patent was not even examined for 5 years. In the fast-moving world of high-tech, few technologies are so fundamental that they are even relevant 8 years later, and certainly it is impossible for small entities to utilize a patent for funding or closing key partnerships with such long pendencies.
While S.23 has a provision for the USPTO to increase its fees, it has no provision for the USPTO to retain its fees, which is the core issue. As recently as last October, Congress yet again took away the USPTO’s surplus fees, leaving it yet again underfunded to address the backlog. To the extent a Manager’s Amendment provision for the USPTO to retain its fees is effective, the provision should be supported. Increasing the fees absent the ability to retain them only further burdens inventors and small entitles.
When patents are delayed past their product’s marketable window, the patents are largely useless to small entities, despite the enormous cost associated with filing them. Many of these patents are abandoned. One of the few ways to monetize such patents is to sell them to patent aggregators (pejoratively called “patent trolls”) who then may use the patents to retroactively sue companies who have introduced infringing products during the long pendency.
Despite this massive backlog, S.23 proposes to add a Post-Grant Review period after a patent issues to allow further challenges against that patent than those already allowed. Even setting aside the significant problems for small entities that Post-Grant Review introduces, given the current extraordinarily long pendencies facing small entities, we can’t afford any further delay to the certainty of the enforceability of a patent. With a large percentage of my patents taking 5 to 10 years to issue, we 5
already have had to abandon several significant products because they were unfundable without the certainty of an issued patent. Until the patent backlog is addressed (which will take years, regardless of the level of funding to the USPTO), tacking on more time for potential Post-Grant Review challenges will simply cause more products to be canceled and likely hand more patents to patent aggregators. The Manager’s Amendment provisions about Post-Grant Review reflect that in the wake of the massive backlog of patents, Post-Grant Review is highly problematic. We should strike Post-Grant Review entirely until the backlog is under control and we understand the dynamics of a normally-functioning patent system. Our economy can’t afford any provision that delays patent issuance and certainty until the backlog is gone.
1. Above all, “First-Inventor-to-File” must be stricken from the Bill, per the Feinstein-Risch Amendment.
2. A provision allowing the USPTO to actually retain its fees is essential to reduce the backlog and better attract and retain examiners. Absent such a provision, increasing fees only burdens small entities.
3. Post-Grant Review, even with the modifications of the Manager’s Amendment, should be stricken from the Bill. We can’t possibly know what form Post-Grant Review should take, if any, until we have a normally functioning patent system.
Absent these changes, S.23 undermines the uniquely American process of invention. It casually sweeps aside established paradigms that have successfully fueled the engine of innovation in America since its founding, and demonstrably fuels it today. We don’t want American invention to be like that of other countries. We want America to continue to be the world’s mecca for invention.
Steve Perlman President & CEO OnLive, Inc., MOVA LLC Rearden LLC 181 Lytton Avenue 355 Bryant Street, Suite 110 Palo Alto, CA 94301 San Francisco, CA 94107 (415) 947-5501
www.onlive.com, www.mova.com, www.rearden.com
Intellectual Property’s Great Fallacy,by Eric Johnson
This paper starts with a bold statement that the theoretical underpinning for intellectual property (patents & copyrights) “has been washed away.” Shortly thereafter it states “it’s hard to imagine big-budget Hollywood movies being made without copyrights. And many new pharmaceuticals would not have been brought to market without the inducement of the patent laws.” The paper never attempts to resolve this contradiction. But this is far from the only problems and errors with the paper.
Property Rights: Mr. Johnson does not seem to understand the basis of property rights or the difference between property rights and monopolies. He incorrectly states that patents and copyrights are monopolies. Patents and Copyrights are property rights and any definition of monopoly that includes patents also includes all property rights. This of course leads to the nonsense that all property rights are monopolies. For more information see The Myth That Patent are Monopolies.
Mr. Johnson tries to denigrate patents and copyrights by showing that their origin is from arbitrary government grants. In the case of patents this was reformed by the Statue of Monopolies. The exact same thing can be said of all property rights. All land was considered to be owned by the King and he arbitrarily gave monopolies over certain areas of land. This usually included the right to profit from the peasants on the land. If the noble who received this arbitrary grant of land crossed the King, the King could and did take back the grant. This practice continued at least until the U.S. Revolutionary War. For instance, most of the colonies were arbitrary grants of land and President Washington was given large tracts of land for his service in the French and Indian War. It was not until Locke that the theoretical basis for property was established, which is productive effort. Patents and copyrights are property rights given for the inventor’s or author’s productive effort. This theory of property rights acknowledges the reality that but for the creator the property would not exist and therefore the creator is the owner.
Extrinsic vs. Intrinsic Rewards: The main thesis of the paper is that creative activities do not need extrinsic rewards. In fact, the author argues that extrinsic rewards actually reduce the amount of creativity. His evidence appears to be survey data. However, survey data tends to be subject to a number of bias errors. The paper ignores the actual empirical evidence. The industrial revolution was an outpouring of new inventions. As explained in the book The Most Powerful Idea in the World “For a thousand centuries, the equation that represented humanity’s rate of invention could be plotted on an X-Y graph as a pretty straight line.” “Then during a few decades of the eighteenth and nineteenth centuries” in England and the US that equation changed. Michael Kremer published a study (Population Growth and Technological Change: One Million B.C. to 1990) that argued that inventive talent and motivation are randomly distributed throughout the population. His model works well until the industrial revolution. Then England and other common law countries significantly out invent the rest of the world and their GDP per capita also grows much faster than the other countries in the world.
Mr. Johnson also repeats the myth of the First Mover Advantage. Even the author of the seminal paper on the first mover advantage has admitted that he overstated the case. There are numerous business books that have argued that it is better to be a copier, including In search of Excellence and more recently Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge. For more information see More Evidence that Stealing Invention is a Business Strategy. My post Invention – A Financial Analysis, show that an inventor is always disadvantaged compared to a copier without property rights in his invention.
The paper argues that R&D managers at large corporations believe there are plenty of incentives for companies to invent aside from patents. First of all this survey data is selective. There are plenty of studies that show patents are critical for the success of start-ups. See Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing . Once again Mr. Johnson’s data is selective at best. Large corporations are not highly inventive. According the SBA most emerging technologies are created by individual inventors and startups. See An Analysis of Small Business Patents by Industry and Firm Size.
Free Markets and Patents
Mr. Johnson makes a number of statements like “While intellectual property entitlements are conceded to be modes of interfering in a free market, they are nonetheless understood to be necessary to address a problem of “market failure.” This statement is based on the “Efficient Market Hypothesis.” This hypothesis has been an major excuse for interfering with markets and property rights by statists, while pretending to support free market capitalism. For instance, it is used to justify government involvement in education, labor markets, and limiting property rights through antitrust laws. Free market capitalism is not based on the efficient market hypothesis. It is based on property rights and contracts and the right of individuals to exercise these rights without government interference.
Value of Patents
Mr. Johnson makes the outrageous and completely unsupported statement that, “Patents have turned to be largely worthless to own, and, even worse, costly to defend against.” As shown above Patents (property rights for inventions) were essential for humans in escaping the Malthusian Trap. Patents have been shown to be critical for startups, see Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing. IBM makes over $3B a year from licensing fees. Once again Mr. Johnson’s assertion is selective at best and perhaps purposely misleading.
Mr. Johnson argues that the low cost of inventing has opened up opportunities for most people to be inventive and they are doing so in increasingly large numbers. Again his data is selective at best if not outright misleading. Since the advent of the open source and anti-patent movement the U.S. has faded from the clear technological and innovation leader of the world to being a second tier country according to most observers. People in the US are not talking about the explosion of innovation, but the implosion. Mr. Johnson seems to live in an academic fantasyland.
This paper may pass for an academic paper in today’s world, but it is not science. At best is a selective survey of existing research in this area. It does not add any new data, informatio, or conclusions. If it were a patent application, it would not pass the novelty test. However, this appears to be the norm for most of what is considered academic research today.
Intellectual Property’s Great Fallacy, by Eric Johnson
 Rosen, William, The Most Powerful Idea in the World”: A Story of Steam: A Story of Steam, Industry, and Invention, Random House, Kindle Version, location 258-264, 2011.
 Rosen, William, The Most Powerful Idea in the World”: A Story of Steam: A Story of Steam, Industry, and Invention, Random House, Kindle Version, location s64-270, 2011
Kremer, Michael, Population Growth and Technological Change: One Million B.C. to 1990, Quarterly Journal of Economics, Vol 103, p. 681-716, 1993.
According to Broadbandbreakfast.com, Senator Feinstein nailed it!
“I think this is really a battle between the small inventors beginning in the garage, like those who developed the Apple computer that was nowhere, and who, through the first-to-invent system, were able to create one of the greatest companies in the world,” Feinstein said. “America’s great strength is the cutting-edge of innovation. The first-to-invent system has served us well. If it is not broke, don’t fix it. I don’t really believe it is broke.”
Feinstein discussed the importance of the first-to-invent standard in the United States at length, as well as the importance of the associated “grace period” to independent inventors.
She said that the changes sought in the current legislation would make it much harder for inventors to prove that they were the first to come up with an idea.
“Another problem with the bill’s first to file system is the difficulty of proving that someone copied your invention,” she said.
“Currently, you as a first inventor can prove that you were first by presenting evidence that is in your control–your own records contemporaneously documenting the development of your invention,” she continued. “But to prove that somebody else’s patent application came from you under the bill, was “derived” from you, you would have to submit documents showing this copying. Only if there was a direct relationship between the two parties will the first inventor have such documents.
If there was only an indirect relationship, or an intermediary–for example, the first inventor described his invention at an angel investor presentation where he didn’t know the identities of many in attendance–the documents that would show “derivation”–copying–are not going to be in the first inventor’s possession; they would be in the second party’s possession. You would have to find out who they talked to, e-mailed with, et cetera to trace it back to your original disclosure. But the bill doesn’t provide for any discovery in these “derivation proceedings,” so the first inventor can’t prove their claim”
Feinstein also dismissed the arguments for a change in the system, noting that there are only 50 proceedings a year at the United States Patent and Trademark Office that dispute who created a new invention first.
That is a minuscule number considering that there are about 480,000 patent applications a year.
Article I, Section 8, Clause 8 of the United States Constitution states:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.
An inventor is a person who creates something new. With the Feinstein amendment voted down, S.23 now called “Invent America Act” changes the U.S. to a “First to File” country. This violates the Constitutional mandate. By changing our patent laws to a first to file rule, Congress is not securing the exclusive rights of inventors. It is taking rights from inventors and giving them the person who games the legal system most effectively – files first.
Congress cannot just ignore the definition of inventor. This is not Alice in Wonderland. The inventor is the person who first creates something. S.23, the “Invent America Act” is unconstitutional.
The proponents of so called “Patent Reform” have been pushing the misleading idea that the bill does not change the US to a “First-to-File” but to a “First-Inventor-to-File.” There is no such thing as “first-inventor-to-file.” Only one person or group can be an inventor, the other people are just clever engineers. For instance, if I recreated calculus without any apparent training in calculus, that would not make me the discover of calculus, it would just make me clever at math.
Proponents argue we do not have a “first-to-invent” system today but a first to invent who is diligent. A number small inventors and start-up companies I know have had to put off patent and development efforts because of lack of funding. These groups would not receive patents for their inventions when a bigger company outspent them and filed first. Under the “first-to-invent” rule these people are awarded the patent.
Finally, these situations where two people come up with similar or the same invention independently are extremely rare. The only justification for changing our patent system to a “first-to-file” system is harmonization. But the countries that have a “first-to-invent” system do not have a vibrant start-up market or independent inventor sector. Since the SBA has shown that most emerging technologies are created by start-up companies and individual inventors, this change in our system will only hurt our economy.
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