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In two cases this week, the Supreme Court preserved the integrity of our patent system. In the Stanford University v. Roche Molecular Systems, case the ownership of three patents for a diagnostic test used worldwide to measure the concentration of HIV in patients’ blood plasma was at issue. The Court emphasized that U.S. patent law is based on the concept that the inventor is the first owner of his invention.
“Since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor,” Chief Justice John G. Roberts Jr. wrote for the court’s majority. “Although much in intellectual property law has changed in the 220 years since the first Patent Act, the basic idea that inventors have the right to patent their inventions has not.”
The second case was Microsoft Corp v i4i Limited Partnership, in which Microsoft argued that prior art not considered by the Patent Office should only have to meet the “preponderance of evidence” test to invalidate a patent. The court disagreed and upheld the CAFC (Court of Appeals for the Federal Circuit) in requiring “clear and convincing” evidence. If Microsoft had prevailed it would have significantly weakened patent rights.
These two cases taken together seem to signal a change in the Supreme Court towards patent cases. For the last 3-5 years the Supreme Court has ruled on a number of patent cases that all weakened the patent right. For instance, the KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007), made it easier to find a patent invalid for obviousness. The eBay Inc v. MercExchange, L.L.C., 547 U.S. 388 (2006) case made it more difficult to obtain an injunction against an infringer, even after winning a case showing that there was infringement. The In re Bilski, 545 F.3d 943, 88 U.S.P.Q.2d 1385 case narrowed the scope of patentable subject matter. The Medimmune, Inc. v. Genetech, Inc., 549 U.S. 118 (2007), case overturned a long-standing rule that a licensed patent user cannot file a declaratory judgment action when they have not breached the license terms. These cases showed a Supreme Court that had become hostile to patents and was willing to ignore or rewrite the law to weaken patent rights. While neither of these cases strengthens the rights of inventors, at least they did not undermine patent rights. The timing of the Stanford case appears to be a way for the Supreme Court to weigh in on the Constitutionality of the America Invents Act before it passes.
Over half of the earnings of the S&P 500 companies are derived from foreign operation, according to Stuart Varney. As a result, the financial returns of these companies are not directly related to the UnitedState’s economy. This is part of the reason why the stock market is no longer a good a leading indicator of the American economy. There are a number of other differences that have led to a decoupling between main street and wall street. For instance, large companies have been able to tap the Federal Reserve for short term loans – see Federal Reserve Discloses $2.3 Billion Short-Term Loan to Harley-Davidson – $3.3 Trillion in Total to Others. Note that some of the companies the Fed bailed out were not even American companies. Wall Street was not only able to obtain short term loans from the Federal Reserve, they received TARP funds, and they have been able to use these funds to make money on carry trades. It is clear that the interests of Wall Street banks and large multinational companies are not aligned with America’s.
Despite this lack of alignment in the economic interests of the American people and Wall Street, the Bush and Obama administrations and Congress only consult large businesses and Wall Street when setting policy. For instance, the Senate refused to hear testimony from individual inventors and startups when debating the “America Invents (not) Act.” This Bill contains a special provision for Wall Street that allows Wall Street banks to attack “business method” patents that they are infringing. This doesn’t extend to any other industry, only business methods—another Wall Street giveaway. Wall Street is not interested in competing based on merit, it wants to compete on political connections and pedigree, which is clearly un-American.
Securities laws have consistently skewed the rules to favor large Wall Street firms, including Sarbanes Oxley and Dodd Frank, which are so complex they drive out startup and small investment banking firms. The law on retirement saving was another big give away to Wall Street. These laws pretty much restricted IRAs, etc. to investment products sold by Wall Street. This drove investment dollars from home towns to New York to the detriment of main street and America. Wall Street also has a vested interest in government debt, since they get a commission for placing government bonds and make commissions every time they are traded. According to Charlie Munger 25% of the United States GDP is now earned by finance companies. Finance companies facilitate purchasing and investing transactions the do not make anything and only provide finance services. When they earn 25% of every dollar in the country, you can be assured that things are seriously out of whack.
The interests and performance of Wall Street are no longer aligned with the interests of the American people. Wall Street is un-American.
 A carry trade is when the Federal Reserve allows banks to borrow money at a lower interest rate than they can loan it out at (risk free). The most egregious example is when political powerful banks (corporations) can borrow from the Federal Reserve at a lower rate than short term Treasury Bills are yielding. This takes absolutely no intelligence to make huge amounts of money, as long as the Federal Reserve will loan out money. This is how the TARP banks have been able to pay back their TARP loans. However, it is just a fraud and the cost of this fraud is being paid for by the American taxpayer/worker.
 This might be okay in a small banking oriented country, such as Luxenburg, but is devastating indictor for a large country like theUnited States, which requires a diverse economy.
This case, TEWARI DE-OX SYSTEMS, INC., v. MOUNTAIN STATES/ROSEN, L.L.C., in Texas shows the damage done by the publication rule for patents applied for a patent on a method of extending the shelf life of meat in a retail setting on May 8, 2003. The patent application was published on April 15, 2004 (earlier than 18 months because it was based on a provisional). In March of 2005 Tewari approached Mountain States on how they could increase the shelf life of meat products. Mountain States signed a Non-Disclosure Agreement (NDA) and Tewari explained how their process extended the shelf life of meat. Subsequently, Mountain States started practicing Tewari’s process. Tewari sued Mountain States for theft of their trade secrets. Mountain States claimed no trade secret existed at the time of the NDA because Tewari’s patent application had already been published and the court agreed.
If theU.S.had not adopted the publication rule, Tewari’s process would have been (probably) a trade secret. It is likely that Tewari eventually found that it was just too expensive to fight the “rejection equals quality” mentality of the Patent Office at the time they would have been arguing their case, although I did not examine the prior art. But, because of the publication rule Tewari did not have this choice. (If they did not foreign file, they could have opted out of publication, but the rules make this onerous.) As a result, Mountain States was free to steal Tewari’s trade secrets. This allowed a large company to free load off of the efforts of an innovative startup. Even if Tewari was legitimately denied a patent, it most likely would have had a defensible trade secret. Note that the Tewari’s patent application was published before they received their first office action. Tewari had no opportunity to determine if it was going to get a fair deal from the patent office before their invention was publicly disclosed to the world. The publication rules were sold under the theory that most patent application issue within 18 months. Now days the pendency time for the first office action is 25.2 months – seven months after the patent application is published.
Tewari was denied the rights to their intellectual property because of the publication requirement. A large, lazy, non-innovative company was the benefactor of this theft. This undermines investment in start-up technology companies that create most emerging technologies and provide high quality, high paying jobs. The publication requirement should be abolished.
According to Stephen Hawkins:
As a cosmologist, you may be interested to know that my illustrious predecessor Galileo Galilei had his design for a compass stolen, by his one time protege Baldassar Capra. I know that patent theft is one of the big issues that innovative SMEs face today. Galileo described such theft as ‘worse than murder, the victim feels the loss of fame, honour and merited glory, obtained not by nature, fate or chance… but from studies, hard work and long vigils
Hear is an excellent article, IT’S OFFICIAL: The IPO Market Is Crippled — And It’s Hurting Our Country in the Business Insider, on the damage we have done to our capital markets. The article starts out by showing that many of our biggest companies went public when they were very small. At the time there were numerous underwriters and often the main inventors were individual investors. For instance, the article explains:
As recently as 1986 Adobe had an IPO raising $6M. None of these companies could have gone public in today’s environment even adjusting for inflation. Virtually all the buyers at the time were individuals and there was a robust “over the counter” after market for young companies.
The article then explains that a company has to have a market valuation of $250M or more to be viable in today’s market. My estimates are higher. The article points out that a major reason for this change in the market is because of Sarbanes Oxley or SOX, which imposes onerous accounting requirements on companies. The article then discusses some attempted solutions to this problem. (I have suggested an alternative in my post Circumventing Sarbox and the IPO drought)
This has been a disaster for the venture capital industry. As a result, VCs are looking for companies that can exit by M&A at earlier states. VCs are also not investing in capital intensive companies.
Unfortunately, the article calls for half measures of curtailing but not eliminating SOX. They suggest this course of action despite the fact that they do not single benefit provided by SOX. The authors point out that:
The number of annualU.S.issuers listing IPOs onU.S.exchanges has declined since 1996 from 756 to a low of 36 in 2008 and 50 in 2009 and 120 last year according to Dealogic. By contrast, there have been 346 Chinese issued IPOs listed onChinaexchanges in 2010 even though the U. S. GDP is 3x larger thanChina’s.
This is just one more example of how were are exporting our innovation and jobs overseas.
The insane thing about our securities laws is that in the U.S. you have to hire a lawyer to invest in a non-public company, but you can blow your money in Vegas, Atlantic City, etc freely. One activity creates jobs and wealth and creates value. The other is a less than zero sum that destroys wealth.
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?
In a January 2, 2011 column (Needed: A science stimulus) in the Washington Post, George Will points out that the US is suffering from a lack of innovation. He makes a token node to the patent system in the article and then he focuses on government spending on science and engineering and does not mention the patent office is underfunded. George reflects Washingtons and the elitists attitude that government spending is what drives the economy. He just believes government spending should be directed to science. In addition, he repeats the elitist comment that most of the science is done by the elite and us peasants don’t really contribute much.
The late Nobel laureate Julius Axelrod said, “Ninety-nine percent of the discoveries are made by 1 percent of the scientists.”
This elitist attitude contradicts all the available evidence. As the book, The Most Powerful Idea in the World, discussed in Georges’ article points out, sustained economic growth does not happen until property rights for ideas (patents) are enacted. This releases a flood of inventions, not by the elite, but by ordinary citizens. It was the democratization of the inventing process that lifted the masses out of the Malthusian Trap.