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Archive for January, 2012

SOPA, PIPA and Kim Dotcom

The arrest of Kim Dotcom and the raiding of Megaupload plays into the SOPA & PIPA argument about stopping online piracy.  Goggle & Wikipedia just did a blackout to protest these pieces of legislation.  The problem with this whole area of legislation is that it is dominated by special interests instead of based on fundamental understandings of property rights and the due procedure.  The two groups doing battle are Hollywood and the content providers against Google/Wikipedia and the free internet nuts.  The legislation was written by Hollywood and basically allows the government to take down a website without any due process.  It allows “in rem” suits in which the website is the defendant instead of the owner – essentially making it a one-sided hearing.  Hollywood wants more tools to stop online theft.  However, Hollywood has gotten a number of laws related to this problem passed already.  My other complaint is that Hollywood is great at publicizing its plight, but the more economically important theft going on is the theft of our technology.  In that case we have a government website that tells people exactly how to steal out technology – it’s the USPTO website.  Google and friends don’t have much of a moral ground to stand on, since they have been happy to steal other people’s intellectual property.  Google pushed for laws to weaken patents (property rights) and has been unwilling to pay patent holders for the technology they have used in their Android phones.  In addition, their heavy handed approach to other people’s copyrights in their Google Books Library Project shows they are not above stealing other people’s intellectual property.  Google’s founders are quite happy to manipulate the laws of this country for their own benefit.  For instance, they invested in several solar energy companies and were quite happy to take tax dollars to bail themselves out of their failed investments.  (See Throw Them All Out, by Peter Schweizer).  Unfortunately, this whole area is just power politics at its worst.


H.R.2930 Crowdfunding Passes House

According to an article, entitled House Passes First Crowdfunding Legislation  the House has passed a bill modifying the securities law to allow “crowdfunding.”  The proposed legislation appears to be a fairly well crafted piece of legislation, which is quite unique for Congress lately.  The bill is less than 2000 words and does not appear to have any special interest provisions.  The Bill would allow companies to raise up to $1M online within a year without audited financial statements and up to $2M online with audited financial statements.  Another positive of the Bill is that it does not require investors to be accredited to invest.  However, it requires that no one investor contribute more than $10k or 10% of their income, whichever is less.  The Bill appears to require a number of statutory warnings about how risky it is invest in the company.  It makes it difficult for an investor to sell their stake in the company within a year of the purchase.  It also does not require a broker to be licensed with the SEC to sell shares in the company.  However, it does require someone acting as a broker to provide information to the SEC.  The SEC could expand these requirements under its rule making authority.  In general, I consider this good news for start-ups.

The downside of this legislation is that it is a band aid to fix the problems with our Securities Laws.  Every academic study of the effectiveness of our Securities Laws shows that they have been either totally ineffective at protecting investors or worse counterproductive.  The real answer to the lack of funding for start-ups would be to repeal all Securities Laws and Regulations except the common law requirements under contract and tort law. 

Book Review: It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom

It Is Dangerous to Be Right When the Government Is Wrong: The Case for Personal Freedom, by Andrew P. Napolitano

Judge Napolitano has written an excellent book on Natural Law from the perspective of an attorney.  He attacks legal Positivists, who believe the law is whatever the government says it is.  He points out the moral bankruptcy of Positivists by pointing out that they have no logical basis to be against Hitler’s final solution of wiping out all Jews – since it was a validly passed law.  He also rejects the non-sense of “majority rule” or Democracy.

He explains that Natural Law is like science.  He states:

Only man-made theories for what those rules are and how the operate may change.

However, without an explanation or understanding, those rules remain just as “true”: Penicillin will combat certain infections, and gravity will always pull things toward the center of the Earth, regardless of whether or not we understand how.

He also states something that will not sit well with conservatives:

Truisms reject moral relativism, and American Exceptionalism.  They compel and understanding of the laws of nature that animate and regulate all human beings at all times, in all places, and under all circumstances.  And truisms equal freedom.

The book starts off with the Declaration of Independents.  It moves onto eminent domain issues where the judge has a number of illuminating points.  I particularly liked the freedom of association chapter.  Napolitano I think is one of the few people to write about this issue.  I also found the right to petition chapter illuminating.  I believe that only someone with Judge Napolitano’s legal background could have done this chapter justice.  His chapter on the growth of the Defense Industry was illuminating.  While I did not agree with all his points, he makes it clear that the Defense Industry has grown completely out of control.  According to the Judge the US military is in over 130 countries.  The quote from Fredrick the Great comes to mind “in trying to defend everything he defended nothing.”  The US military has become just another welfare/crony capitalism project.  The military will complain that defense spending as a percentage of GDP is less than it was during the Korean War.  However, we did not have the Department of Homeland Security, the Department of Energy, the Border Patrol, etc, which are all really part of our defense spending at the time of the Korean War.

Unfortunately, the book is marred by two problems.  I am in complete agreement with the Judge’s emphasis on Natural Law, but he defines it in terms of “essential yearnings.”  Someone might have an essential yearning to torture people or kill them.  That does not make it a natural right.  It is enough to state that people have ownership of their body.  The rest of Natural Law and Natural Rights flows from this simple concept.  Once I own myself, I clearly own the product of my labor which leads to all of property law, including patents.  Criminal law comes from violating my rights in my body or in my property.  The “essential yearnings” adds nothing to the concept of Natural Law and Natural Rights.

The second problem with the book is Judge Napolitano’s analysis of fractional reserve banking.  The Judge and some Austrian economists incorrectly state that fractional reserve banking allows banks to create money out of nothing.  A fractional reserve bank is a bank that lends out part of its depositors money.  Fractional reserve banking is how all modern banks (since at least 1750s) operate.  Wikipedia defines a Fractional-reserve banking as a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally on-loan to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.

The history of fractional reserve banking starts with the concept of an exchange bank.  I explain in my book, The Decline and Fall of the America Entrepreneur: How Little Known Laws and Regulations are Killing Innovation:

Modern banking started in the early 1600s with the Bank of Amsterdam.  Merchants could deposit coins with the Bank of Amsterdam and use this account to pay for transactions.  Using checks, a merchant’s account was debited and another merchant’s account was credited.  This meant that coins did not have to be transported from one merchant to another with the attendant risk of theft and loss or the cost of transportation.  The Bank of Amsterdam was just an exchange bank that facilitated transactions between merchants.  Next came the Swedish Riksbank established in 1656.  The Riksbank was not only an exchange bank, it also lent money making it the first modern fractional reserve bank.  Fractional reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.  Commonly, loans are made against collateral such as land or jewelry.  … Some people believe fractional reserve banking creates money out of thin air, but what really happens was the money for these loans were backed by some collateral other than coins or bullion.  The downside of other types of collateral is they are not as liquid as species (coins, bullion).  As a result, if large numbers of customers of a fractional reserve bank wanted species (currency) at the same time, the bank would not able to fulfill all its customer’s demands.  This is a classic run on a bank.  A run on a bank is a cash flow issue.  A sound bank may have plenty of collateral and performing loans, but if most of its customers demand species at the same time it will not be able to fulfill these requests.  Fractional reserve banks free up capital from low performing assets so that they can be invested in higher performing assets.  For example, if you owned a large tract of ranching land that was not highly profitable but represented a large amount of capital and you want to invest in an oil well, without fractional reserve banking you would have to sell some of the land in order to invest.  With fractional reserve banking you could convert your land into a generally accepted form of money, by pledging your land as collateral to a bank for a loan.  In the modern world, the loan to you is just a computer entry in your bank account.

It is clear from history that fractional reserve banks are not some sort of government institution, like the Federal Reserve.  Without fractional reserve banking it is would be very difficult to securitize (Collateralize) many assets, such as houses and land.  This would significantly impede the economic growth of a country.  Logically if you are against fractional reserve banking you should be against a stock market.  Both are just a way of securitizing assets.  The stock of paper money act as a claim against various assets and/or future earnings.


Obama’s Fundamental Change Means – US is No Longer the LAND OF THE FREE

The Heritage Foundation has just released its Index of Economic Freedom.  The US has fallen to 10th place in the rankings.  It appears the President Obama’s idea of fundamentally remaking the US is to no longer have the US the LAND OF THE FREE.

Fixing our economy and our unemployment problem is a straight forward case of increasing our ranking of economic freedom.  The Heritage Foundation put out an excellent video explaining the results of a declining level of economic freedom.

The passage of the America Invents Act is part and parcel of losing our economic freedom.  It had a number of special provisions for Wall Street and big Pharmaceutical companies.  It weakened the rights of startups and individuals in their inventions.  This has made it more difficult for inventors and startups to raise capital.  Technology startups are the driving force behind new jobs and high quality jobs.

Book Review: Why America Has Stopped Inventing?

Darin Gibby, a patent attorney, has written the book Why America Has Stopped Inventing?.  Let me first say that I agree with Mr. Gibby’s premise that America has quit inventing and that it is hurting our economy.

The book has an excellent review of the history of how patent law developed in the US, with the 1836 Patent Act playing the hero of the book.  The Act was modeled on the patent statute in Venice in the 1400s, according to Gibby.  This leads to an explosion of invention in the United States and in the economy.  This story is told through the lens of the great inventors of the time, including Morse, Colt, and Goodyear.  These stories are well told and compelling.  The book is a fount of knowledge about the early history of inventing and patent law in the United States.

The book argues that the change in the patent laws resulted in a brain drain from England and that there was an explosion of invention in the US.  The book states:

The rate of innovation as determined from the number of patents increased six times from 1840 to 1850, nine times from 1850 to 1860, and 13 times from 1860-1870, as compared to the increase in population.

The book claims that our per capita rate of inventing is less than half of what it was in the 1860s.  The US rate of inventing has decreased over the last decade.

The conclusion of the book is that our patent system is broken and this is hurting innovation and the US economy.  While I generally agree with the conclusion, I believe the premise could have been better supported.  Also, I think it is impossible to talk about the lack of invention without also mentioning the restrictions on raising capital by inventors.  Perhaps the biggest impediment to raising capital has been Sarbanes Oxley.  This is not mentioned at all in the book.

The biggest downfall of the book is that the author calls a patent a monopoly.  A patent is not a monopoly.  35 U.S.C. 261 makes it clear that a patent is personal property.  Patents have all the attributes of property and none of the attributes of a government monopoly.  Property rights arise from of the act of creation – but for the creator the item would not exist, therefore they have a property right in the item.  Inventing is creating a new product, process, or service that did not exist before.  The fact that a patent attorney could make this mistake is hard to believe, but more importantly I believe this completely undermines the thesis of the book.

The book has a number of specific proposals for fixing the patent system.

Complex Patent System: The book states that the biggest reason for our inventive decline is the overly complex, over administered, and underfunded patent system.  I agree that our patent system has become overly complex, too expensive, and overly officious.  The author believes this is the result of a judicial reaction to the Wright brothers’ patent, which he believes was too broad.  Here I completely disagree with the author.  The Wright brothers’ patent broadly claimed the ability to control an airplane by “having lateral marginal portions capable of movement to different positions above and below the normal plane” of the wing.” (USPN 821393)  The author believes the Wrights only invented wing warping.  I disagree.  The Wright brothers clearly showed that any method of altering the flow of air over the wing could be used to control the airplane.  If the Wright brothers had been limited to the author’s interpretation, then Glenn Curtis and others would have been able to free load off of the Wright brothers’ invention.

The author also argues that the growth of the airplane industry was retarded by the Wright brothers attempting to enforce their patent.  This argument is also made by anti-patent forces and is without any logical basis.  We have no idea how long it would taken for someone else to have created a controllable airplane if the Wright brothers had not done so.  It is just as likely that, but for the Wright brothers it would have taken years for someone else to invent control surface for airplanes.  If there was any delay in the development of the airplane, it was the fault of Glenn Curtis and others who refused to pay the Wright brothers for their invention.

I think it is also inexcusable that the book does not mention the detrimental effects of antitrust law on patents.  The anti-patent backlash in the early 20th century was not a result to the Wright brothers patent, but to the rise of antitrust law.  The author’s lack of understanding that patents are a property right and not a monopoly has blinded him to this simple fact.

Require Models: The author wants us to return to a patent system that requires models.  He suggests that computer models would be acceptable, so we would not have the problem of storing these models.  The author’s main reason for this requirement is based in the belief that the Wright brothers, Seldon, Bell and others received overly broad patents or really were not the true inventors.  In the case of Bell, the author suggests that Bell’s attorney copied Elisha Grey’s patent application by hand into Bell’s application upon filing the Bell application.  I cannot comment directly on these assertions.  But the book does not even mention that there was an interference between Bell, Grey, and Edison (see Bell).  All of these inventors had top patent attorneys and I seriously doubt that hand copying part of another person’s application would have survived very long in an interference.

The author seems to want to use models to limit the scope of the claims.  This would allow inventors who improved another person’s invention not to have to pay royalties for using their underlying invention.  I don’t see any advantage to this system and I believe the author has fallen for the anti-Wright brother, and anti-Bell propaganda.

Abolish Obviousness Standard and Doctrine of Equivalents: The author makes a strong case for abolishing the obviousness standard, which I agree with.  He explains that the obviousness standard is subjective and unworkable.  He suggests that the doctrine of equivalents and the obviousness standard are opposing ideas used to overly broaden or overly narrow the rights of an inventor.  I did not initially agree with the author, but he made strong points in defense of his thesis.  Specifically, he argues that eliminating the obviousness standard would allow inventors to craft their claims to correctly define their invention.  As a result, he believes that it would be unfair for inventors to then be able to expand/change the scope of their invention in litigation.  The only problem with the author’s argument is the doctrine of equivalents has been dead for all practical purposes for at least twenty years.

The author also makes the excellent point that eliminating the obviousness standard would significantly reduce the backlog of unexamined patents.  His reasoning is that moving to an objective system of patentability would eliminate a lot of wasted effort on the part of the Patent Office and Applicants.

Cut the Current Twenty-Year Patent Term in Half: I disagree with the author and I think his point of view is based on the erroneous belief that patents are a monopoly.  Shortening the term for patents is likely to reduce the value of investing in new inventions.  This would decrease the rate of new technologies being created and introduced into the economy.  The result would be slower economic growth and lower per capita incomes.

Curtail the Continuation Practice: Continuations are critical for start-up companies to reduce their cost.  While I agree that eliminating the obviousness standard would reduce the cost of filing patent applications, this advantage is unlikely to be enough to protect our highly innovative start-up companies.


First to File System: The author buys into the absurd idea that eliminating interferences is going to free up resources at the Patent Office.  With less than 100 interferences a year, this is very unlikely to occur.  He also argues that this will be good for individual inventors and startups.  While he is correct that interferences are too expensive for individual inventors (start-ups), the solution is not to subvert the Constitution and award exclusive rights to the first person to file instead of the inventor.  The solution to this problem is to reduce the absurd cost of all federal litigation.

There have been several studies on the effectiveness of changing from a first to invent system to a first to file.  All these studies have shown a decrease in patenting by the most innovative groups in our country – namely individual inventors and start-ups.

Conclusion: Overall there are many important points in this book.  But the author’s incorrect labeling of a patent as a monopoly undermines many of the most important points he is trying to make.


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