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Archive for February, 2012


Forbes: Patent Litigation Debate Exposed

Forbes magazine has an excellent article that provides the real facts behind the so called patent litigation explosion entitled “No, the Patent System Is Not Broken.”   The article explains:

“The truth is that today’s patent litigation rate is less than half what it was in the mid-nineteenth century, a period widely recognized as the golden age of American innovation.”

The article puts today’s patent litigation rates in context.

According to Lex Machina’s authoritative “Database of U.S. Patent Litigation 2011,” the number of patent suits filed between 2001 and 2010 has held steady at less than 3,000 per year. Only about a hundred of these cases actually went to trial each year

To put it in even broader historical context, the estimated 100 patent suits currently filed in the smartphone industry is actually less than one-fifth the number of suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated a whopping 587 patent cases alone.

Perhaps even more importantly the article explains that a strong patent system creates a division of labor between inventors and manufacturers.  According to Adam Smith the division of labor is key to increasing our wealth.

“The growth of market trade in patents raised the returns to invention and encouraged a division of labor whereby technologically-creative individuals increasingly specialized in their comparative advantage—invention,” observed Lamoreaux and Sokoloff. “It was the expanded opportunities to trade in patented technologies that enabled the independent inventors of this golden age to flourish—and that stimulated the growth of inventive activity more generally.”

By 1865 the per capita patenting rate in the U.S. was triple that of Britain, and the vast majority of those citizen-inventors were what we now call “non-practicing entities,” or NPEs, who licensed their patents to others to commercialize into new products.  Indeed, patent and legal records from the nineteenth century indicate that more than two-thirds of the 160 so-called “great inventors” of the Industrial Revolution, including Thomas Edison, were NPEs.

 

Please check out the full article at:

No, the Patent System Is Not Broken

 
Design Patents and the Cold Civil War

The bill H.R. 3059, titled the “Promoting Automotive Repair, Trade, and Sales” (PARTS) Act claims to reduce the cost of automotive repairs by limiting design patents for automotive parts to 30 months.  This bill pits automobile manufacturers against insurance companies and consumer groups.  The argument for the bill is that it would reduce the cost of automotive repairs.  As I understand it if your car is in an accident and for instance your headlight is damaged it is likely that if your car is relatively new the headlamp is covered by a design patent.  As a result, when you go to replace the headlamp you either have to buy it from an OEM manufacturer or from someone who how pays royalties to make a look alike headlamp.  According to the insurance companies it would be cheaper to replace the headlamp if it was not covered by a design patent.

The law on point is:

 35 U.S.C. 171 Patents for designs

“Whoever invents any new, original, and ornamental design for an article of manufacture may obtain a patent therefor, subject to the conditions and requirements of this title.”

There does not appear to be any reason why the designer of the headlamp should not receive a design patent according to the law.  Under the case law it appears that there might be some argument that the design patent does not apply because it falls under the repair exception to patents.  However, if the patent holder got a design patent on the headlamp, then this would not appear to apply since the headlamp is not being repaired it is being replaced – manufactured.

The economics on point do not appear to be so straight forward.  If the designer of an automobile determines the price of a car based on their total return, then they probably include the residual income they expect to make from repairs.  If this is the case then the law will just increase the cost of new automobiles and reduce the cost of repairs, but the total cost of ownership will stay the same.  In addition, if the bill becomes law it is likely to reduce the value of original designs.  As a result, we will trade unique designs for me too designs.  This is likely to help low cost me-too producers at the expense of innovators.  The economics of the situation are ambiguous at best, but it is likely to hurt manufacturers at the expenses of the financial industry (insurance companies).  Given the recent performance of financial companies and the fact that they have inordinate influence on Washington, I am inclined to say the net result will be detrimental to average Americans.  Manufacturers tend to employ many average Americans at good wages.  Finance companies tend to inordinately enrich a few people at the top.

The real problem with this bill is that it is not based on a discussion of property rights.  It is an example of power politics at its worst, much like the SOPA and PIPA bills.  It pits the lobbying power of the automotive industry against the lobbying power of the insurance industry.  In other words this is just another example of how our country has deteriorated into a Civil War without guns.  Each group uses the government to steal from the other group, which is why I call it a Cold Civil War.

From a property rights perspective a manufacturer should be able to obtain a design patent for each part that is manufactured – assuming it is an original design.  Given the narrow nature of design patents, it should be relatively easy to modify the design to avoid the patent.  For instance, a slight change in the headlamp assembly should avoid the design patent.  In a free market, a consumer should have the choice to select a car that has a common design and the cost of repairs are low because few design patents apply or a highly stylish design where the cost of repairs are high because many design patents apply.  The cost of insurance would also vary based on this information.  As a result, the insurance industry should not be disadvantaged.  The fact that they insurance industry is whining about this just shows that their goal is to obtain unjustified profits (based on a property rights point of view) at the expense of manufactures.  Of course, we don’t live in anything like a free market and there is all sorts of other government interference in the market that one or the other side might make them believe they have the right to ignore the property rights of the other group – Government bailouts of insurance companies and automobile companies come to mind.

The US is no longer a nation of laws, because we no long have a meaningful Constitution and we no longer protect or understand property rights.  The PARTS Act is just another sad example of how we have become a country in a COLD CIVIL WAR.

 
Virtual Patent Marking

The America Invents Act (AIA) has changed the rules for marking products with patents.  The law allows you to “mark” you product by providing a website that explains which patents cover which products.  This is a positive step to move the patent system into the 21st century.

The reason for marking you product with a patent number is that it provides “constructive notice” to infringers of your patent.  Damages for patent infringement accrue from the date of actual or constructive notice to the infringer.  As a result, the damages you may recover will be larger the sooner an infringer is deemed to have notice of your patent.

From a practical point of view, having a website explaining which patents cover which products is significantly easier and less expensive than marking the actual product or the product’s packaging.  If it is not too expensive to also mark your product or its packaging I would suggest that inventor’s do both.

 

Here is how Section 16 of the AIA reads:

(a) VIRTUAL MARKING.—

(1) IN GENERAL.—Section 287(a) of title 35, United States Code, is amended by striking ‘‘or when,’’ and inserting ‘‘or by fixing thereon the word ‘patent’ or the abbreviation ‘pat.’ together with an address of a posting on the Internet, accessible to the public without charge for accessing the address, that associates the patented article with the number of the patent, or when,’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to any case that is pending on, or commenced on or after, the date of the enactment of this Act.

 

 
CATO & Reason Demonstrate Ignorance of Property Rights – Patents

The CATO Institute are reiterating the findings of the flawed paper The Private and Social Costs of Patent Trolls , Boston University School of Law Working Paper No. 11-45, by James E. Bessen, Michael J. Meurer, and Jennifer Laurissa Ford.  This paper looks at lawsuits filed by NPE (Non-Practicing Entities) and the subsequent drop in the stock price of the company being sued.  The paper suggests that this loss of wealth is all “deadweight” loss, since little of the money ends up with the original inventors of the technology.  This last part is an intellectually dishonest slight of hand.  The authors make no attempt to determine if the cases are meritorious.  If the firms are infringing a valid patent, then the filing of the lawsuit represent the cost to society of deterring the theft of inventions.  This cost discourages further theft by companies.  If half the patent lawsuits (by cost) are meritorious then the net cost of these lawsuits is zero.  Unless you assume that the cost of protecting property rights has no value, which I am afraid is the ultimate problem with anti-reason people at Reason Magazine and CATO.  Neither of these organizations seems to understand property rights.

This lack of understanding of property rights causes multiple errors in both the paper and CATO’s and Reason’s analysis of this issue.  For instance, once you understand that patents are property rights you understand the purchase of patents by investors is not different that the purchase of a building from the builder.  The profits by the subsequent purchaser of the building are not “DEAD WEIGHT” costs and neither would a lawsuit by the purchaser to demand rent for someone squatting in their building.  When the (paying) occupancy rate for buildings is high this encourages the building of new structures.  The same is true for patents – when owners of patents receive good returns on their assets then inventors create more of these assets.

Unfortunately, the CATO Institute has become hopelessly lost on the issue of property rights.  They have adopted the Utilitarian point of view that property rights are just an efficient way of allocating scarce resources.  Professor Adam Mossoff has commented on this nonsense.  Mossoff states that Jeremy Bentham’s ideas are at the root of Libertarian’s attack on IP.  Bentham basic philosophy was Utilitarianism – the greatest good for the greatest number. Bentham stated that the reason for property rights was because of scarcity and conflict resolution not natural rights.  Mossoff then points out that the followers of Bentham argue that there is no conflict between people using the same ideas like there is with land.  Ideas can be copied and used endlessly.  This argument fails for because there is a conflict when a physical embodiment of the idea (invention) is created. The copier has clearly limited the return for the inventor and patent law only prohibits the physical embodiment.  I discuss the fallacies behind the scarcity theory of property at my post Scarcity: Does it Prove Intellectual Property is Unjustified and Scarcity -2 and Scarcity -3.  Mossoff points out that this is the philosophical point of view used by the Cato Institute and the Von Mises Institute to attack patents (IP).

Utilitarianism’s “greatest good for the greatest number” always leads to totalitarianism.  It also never leads to the purported goal.  The reason for this is that utilitarianism is merely a justification for short term actions.  Once something has been produced, it always looks like the greatest good is to redistribute the creation.  However, this is clearly only true in the short term.  In the long term it is clear that this always destroys the economy.  This is the theory behind the USSR, North Korea, and all socialist states.  As Ayn Rand pointed out you only need open your eyes to see that these countries do not produce the greatest good for the greatest number.  This is because stealing the product of one’s mind (mental labor is labor) is no different than banning free speech.  It stifles the mind, which source of all economic progress (values).

The CATO Institute’s article is under the header “Regulation.”  This again demonstrates that the CATO Institute does not know the difference between property rights and regulations.  Here are three easy questions for Libertarians, Socialists, and Economists to determine if a right is a monopoly (rent seeking) or a property right.

1) Does the right arise because the person created something?

2) If someone else was the creator would they have received the right in the creation?

3) Is the right freely alienable?

Patents meet all the tests of property rights.  They are not a regulation.  Enforcing property rights does not result in dead weight costs.

Another great article on this issue can be found at Gametimeip entitled Myopic Patent Cynicism.

 

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