I have been invited to a debate at Freedom Fest 2015. The topic of the debate is “Competition in Business: Good or Bad?” I will be taking the competition is for loser side of the debate.
This documentary explains how the United States is destroying its Patent System that has been the engine on which America’s technological and economic leadership has been built. The movie can be seen in a number of cities on December 15.
Invention is as old as human existence, and no country has promoted and thrived on invention more than the United States thanks to its patent system. But is American invention at risk?
Framed around the story of two first-time inventors, Inventing to Nowhere explores the stakes in policy fights over the American innovation economy, with interviews of legendary inventor Dean Kamen, historians, members of Congress and other key players in the effort to keep the country innovating.
For more than 200 years, the U.S. patent system has helped protect and grow ideas. This reverence for intellectual property rights has been a driving force in making the United States an economic superpower. But as the patent-law debate becomes more influenced by special interests, the future of inventors and entrepreneurs is in jeopardy.
According to Alyssa Bereznak of Yahoo Tech, in an article entitled The U.S. Government Has a Secret System for Stalling Patents, the United States Patent Office has a secret program called the Sensitive Application Warning System (SAWS) designed to delay and deep six certain politically sensitive patent applications. The Patent Office only admitted to the program after a FOIA request. The program goes back to at least 2006 and therefore includes the actions and knowledge of both Jon Dudas and David Kappos. Both men should be brought up on Capitol Hill for investigations. Did Kappos favor IBM patent applications or delay IBM’s competitors? Did Jon Dudas, who is not a patent attorney and is not legally or factually competent to be a patent attorney, provide favors to enhance his post public life position? If they were aware of this program, and it is hard to believe they were not, their pensions from the PTO should be revoked and they should be disbarred at a minimum.
I have actually had examiners tell me that they were not going to allow a patent application because they did not want to see the patent end up on the front page of the New York Times. I am not sure where that is in the statute, but it is illegal and unconstitutional. According to the article applications can end up in this purgatory for astonishing number of vague reasons including the application is “broad” or has “pioneering scope,” “seemingly frivolous or silly subject matter,” or those “dealing with inventions, which, if issued, would potentially generate unwanted media coverage (i.e., news, blogs, forums).”
I wrote a novel with my wife entitled Pendulum of Justice, where a plot device was abuse of this kind by the Director of the USPTO. Turns out fact is stranger than fiction.
An article on Cato Unbound entitled, “What’s the Best Way to Fix the Patent System’s Problems?” by law professor Christina Mulligan, argues for two different solutions of what she perceives are problems with software patents. One solution advocated by Eli Dourado is to eliminate all software patents (See CATO and Mercatus Center: Another Flawed Study on Patents). The other solution, advocated by John F. Duffy, is a more rigorous application of the obviousness standard. Ms. Mulligan comes down on the side of Eli Dourado’s solution of eliminating patents on software.
What is amazing is that Ms Mulligan never even addresses the inherent contradiction that if you are going to eliminate patents of software you have to eliminate all patents on electronics. Of course this may be because Ms. Mulligan does not have a technological background, she is not a patent attorney nor is she legally or factually competent to be a patent attorney. Software is a way of wiring an electronic circuit. Any invention implemented in software executed on a computer can be implemented in hardware (i.e., an electronic circuit) as any competent electrical engineer knows. In fact, this is exactly what happens when software is executed, it is converted into a series of voltage levels that open and close switches in a general purpose electronic circuit called a computer to create a specific electronic circuit.
Ms. Mulligan quotes the clearly incorrect statement that:
Many software patents are merely mathematical formulas or abstract ideas and should not be considered patentable subject matter because they remove too much “raw” material from the public domain.
This statement confuses two separate points. One point is that many software patents are merely mathematical formulas or abstract ideas. The second point is that software patents remove too much raw material from the public domain. The idea that any software patent is a mathematical formula is complete and obvious nonsense to anyone who has worked with computers. While it is true that software often uses mathematical formulas, so do electronic circuits, radar, rockets, mechanical systems, chemical processes, in fact almost every area of technology.
Ms. Mulligan does not define what she means by an abstract idea. In one sense every invention in the history of the world is an abstraction. Inventions define a class of things. For instance the invention of the incandescent light bulb is not a specific incandescent light bulb, but the class of these objects. The only logical definition of an abstract idea is “a thought or conception that is separate from concrete existence or not applied to the practical”. Every invention that meets the requirements of 35 USC 112 first paragraph is not an Abstract Idea, since this section requires that the invention be described in a manner so one skilled in the art can practice the invention. Something that can be built and used (practiced) is concrete and applied, therefore it is not an abstract idea. Clearly software patents are not abstract ideas because they are concrete and applied to a problem of life. If they did not solve a problem of life, then no one would care, because no one would want to practice their invention.
The second point is that they remove too much raw material from the public domain. This is a bald statement without any support. In fact, patents do not remove any material from the public domain. They secure the property rights of an inventor to their invention that did not exist before they created the invention. To suggest that this removes anything from the public domain would make even the most strident Marxist blush.
Ms. Mulligan attempts to use Ayn Rand in support of her position.
Even Ayn Rand sidestepped suggesting a length for intellectual property terms, stating that if intellectual property “were held in perpetuity . . . it would lead, not to the earned reward of achievement, but to the unearned support of parasitism.
Of course she forgets to mention that Rand stated “Patents and copyrights are the legal implementation of the base of all property rights: a man’s right to the product of his mind.” You can see from this statement that it is very unlikely that Ayn Rand would have supported Ms. Mulligan’s position.
More importantly, all property rights are term limited. A dead person cannot own property. Property is a legal (moral) relationship between a person and something. Once the person is dead they cannot have a legal relationship to something on this Earth that would be a contradiction. There is only a question of what happens to property relationship when someone dies. But no property rights go on forever.
Ms. Mulligan also ignores the obvious Constitutional problems with a law prohibiting patents on software or any other group of inventions. Article 1, section 8, clause 8 requires that the right of inventors to their inventions be secured. There is no basis under the Constitution to discriminate between securing the rights of inventors for chemical inventions, but not to software inventions for instance. Ms. Mulligan may argue that the preamble to article 1, section 8, clause.8 is a limit on patents, but this is a clear misinterpretation of a preamble under legal construction. Preambles are never considered limiting in law. In addition, if the founders intended such a limitation then they would have said Congress can take whatever steps they believe will promote the sciences and useful arts.
Ms. Mulligan’s arguments do not stand up to scrutiny. Part of the problem may be that Ms. Mulligan is not a patent attorney. But some of the problems are so outrageous, especially for someone who is a Yale Law professor that the only conclusion is that she has a political agenda.
The United States of America created the strongest patent system in the world. Most of the greatest inventors in the history of the world, Edison, Tesla, Bell, etc. lived and worked in the United States. In less than 100 years, they created the most technologically sophisticated country ever. Almost every modern product you use today was subject to a patent or a patented processes at some point. Your cell phone is the subject of hundreds of patents. The same is true of your computer, the Internet, the power system, the medicines your take, the car your drive, even your glass windows (Venice patent system), even cement. For Ms. Mulligan to suggest that patents on software or anything else inhibit the progress of technological is an extraordinary claim and requires extraordinary evidence. Ms. Mulligan has failed to provide even a scintilla of evidence and logic for her position.
This statement is from a Peter Thiel interview. Peter Thiel is a founder of Paypal, investor in Facebook and many other technology startups. Mr. Thiel is talking about entrepreneurs and businesses and that you want to create a unique company and dominate your market space. I have just finished a manuscript for a non-fiction book that makes this point from an economy wide point of view. Wealth is not created by manufacturing undifferentiated, me-too products, it is created by new technologies. There is no contradiction between what is good for the economy and what is good for an entrepreneur, despite the statement of economists on perfect competition.
One of Peter Thiel’s interview questions is tell me something you know to be true that no one else knows is true? How would you answer that question?
My answer is that the source of real per capita growth is inventions and patents, property rights in inventions, are the key to stimulating people to invent, resulting in the Industrial Revolution and our present standard of living.
The CATO Institute attacks patents in an article entitled What Is a Software Patent?, by Christina Mulligan. The article argues that the word “process” in the patent statute should be limited to those processes that have an effect on matter. The article suggests that this would eliminate the “wrong” kind of patents. Software is not patentable, per se, software is a set of written instructions and are just bad prose. When people use the term “software inventions” they are talking about executing the software in hardware (electronic circuits). What the software does is define the connections or wire the general purpose electronic circuit that we call a computer. This special purpose electronic circuit consumes energy, generates heat, causes electrons to move – in short, it has an effect on matter. The whole premise of the article is based on a lack of understanding of what software is. Logically, the article has to address the issue that all “software inventions” are electronic circuits and therefor the article’s position requires that it explain why certain electronic circuits should be patentable and other electronic circuits should not be patentable. It should be noted that the author is not a patent attorney, has never written a patent or a claim, nor does she appear to have a technical background. While this is not absolutely required, it leads to the obvious mistakes made in this article.
The Constitution requires Congress to protect the rights of inventors to their inventions. There is no justification for the distinction made in this article. An invention is a human creation with an objective and repeatable result. For instance, the incandescent light bulb always puts out light when electricity of the right voltage and current is applied. Art is a human creation with a subjective result. Software enabled inventions are clearly a human creation and they have a repeatable, objective result. The first patent ever issued in the US was for a Method of making potash and it was a method of doing business. The inventor was not making potash as a hobby, he planned to make a business of it. The label of “business method patent” is thrown around commonly, but never defined as it is not in this article. All patents are about a method of doing business.
The article ends with praise for Mark Lemley. Another law professor who is not a patent attorney, is not legally or factually competent to be a patent attorney, has never written a patent, has never written a patent claim, but somehow knows that we should not use “functional claiming.” Mr. Lemley does not even know what functional claiming is. What he appears to mean is that the claims should have to include every little step or element in the invention. This would mean that if you were writing a patent about cell phones, you would have to claim the individual transistors. Patent law had determined that this made no sense and as long as, for instance, heterodyne receivers were well known you could claim the heterodyne receiver without claiming the individual transistors or even explaining the invention to this level of detail. Patent law is right on this point and Lemely and the author are clearly wrong.
As a patent attorney, with a BSEE, an MS in Physics and twenty years of practicing patent law, it would be nice if CATO, when discussing patents and patent policy would actually include those who are factually and legally competent to be patent attorneys in technical discussions about patent law, including defining what software is.
Dale B. Halling
What Is a Software Patent?, by Christina Mulligan.
I have had the fortune or misfortune to be dealing with the aftermath of Hurricane Odile. I have a client that has an invention that would have been able to restore power in just two days. His invention is described in patent number 7589640. It senses the force load on a power pole and if it exceeds a certain level, the invention lowers the cross bars and power lines gently to the ground and turns off the sector switch (power). Once the electrical lines and cross bars are on the ground, the wind loads are almost eliminated, which means the power pole is standing at the end of the storm. Utility workers then remove the debris and use a winch type mechanism to raise the power lines and cross bars.
This invention cannot only save billions of dollars in utility repair damage per year, get power up in a tenth the time of present techniques, eliminate billions in lost business per year lost business, it also reduces the risk of injury to utility workers who are no longer required to climb utility poles and bystanders. But that is not all, the inventor has engineered his poles so that they are less expensive to install originally than present utility poles.
GUESS WHO is opposing the inventor? Unions. Their members make a lot of money working storms and they don’t want any system that allows less skilled workers to setup utility poles. Utility companies are ambivalent, because they are regulated and only allowed a certain return on capital. Thus, all the money they save using the inventor’s system will not improve their bottom line one iota. This is just another example of how regulation stifles inventions and makes our lives worse, more expensive and less safe.
The paper, Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer assumes that NPEs are enforcing patents of questionable validity. However, the paper offers no proof of this and does not even try to justify this position. Once you start with that position, it is a foregone conclusion that any litigation is unjustified and wastes resources. However, the initial assumption is not proven and in fact many papers have shown the opposite. If you do not start with this assumption then the paper’s whole argument falls apart. Litigation losses by operating companies are a justified return to the inventor and their investors. The operating companies are not victims, but victimizers and the return to inventors and their investors encourages more inventive activity.
The paper’s big conclusion is:
“Specifically, in the years following litigation, firms against whom cases are dismissed produced spent on average $211 million (t = 1.96) more on R&D expenditures than firms that lost to NPEs. These firms also spent on average $49 million more (t = 2.95) to acquire more in process R&D from outside.30 Furthermore, in the years following litigation, firms against whom cases are dismissed produced 63.52 more new patents (t = 2.96), and these new patents received 723.98 more citations (t = 3.45), relative to the group of firms that suffered the cost of NPE litigation.31 These large differences in R&D expenditure, patent production and in the quality of produced patents do not appear until after NPE litigation.”
Inherent in this statement is that anytime an operating firm that loses a patent litigation case to a NPE is a bad result. If the firm was stealing an invention, then the fact that they lost is a good thing.
The companies that lost in litigation spend less on R&D according to the paper. Perhaps that is because they were not as inventive to start with, perhaps it is because they decided to focus on manufacturing and purchasing their R&D from outside inventors, and perhaps it is because they lost a substantial amount of money. These are not dire results or unexpected results or necessarily bad results.
The paper implies that NPE lawsuits result in less spending on R&D, but just because firms that lose patent lawsuits spend less on R&D in the years immediately following, does not mean that total R&D is down. When inventors see their rights are upheld then they are encouraged to spend more time inventing. Unless you measure the amount spent by independent inventors or inventive firms who now see their rights upheld, you cannot draw that conclusion. These comments also apply to the citation differences. The authors are only looking at the microeconomic system that they care about, but you cannot draw the macroeconomic conclusions they do, because they don’t consider all the macroeconomic effects.
The paper does not define what a NPE is. It starts with this surprising conclusion, “We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks).” They needed a study to tell them that? Of course NPEs focus on companies with cash on hand, why would they waste their time suing companies that could not pay them? Especially after the eBay decision, in which they are unlikely to get an injunction.
The paper goes on to state:
“A new organizational form, the non-practicing entity (hereafter, NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to prosecute infringement on their patent portfolios.”
Edison, Tesla, Bell, Amstrong ‘amassed patents.’ In fact, most of the US’s greatest inventors were just inventors. They did not create patents ‘for the sake of producing commercial products.’ They specialized in being inventors and let manufactures concentrate on manufacturing. All of them were involved in numerous lawsuits. The difference between them and today’s inventors is that the courts were much more likely to uphold their rights to their inventions. As a result, manufacturers were much quicker to license inventions. In fact, one study showed that in the late 1800’s an inventor’s chance of monetizing their invention if they received a patent was around 85%. In other words they made money specializing as inventors. Today that figure would be less than 2%. Because courts allow companies like Google, Microsoft, Samsung, etc. to get away with stealing other people’s inventions, they make the calculated risk that it is better to go to court than pay an inventor a licensing fee. As a result, inventors often have to team with someone with a deep pocket in order to get large corporations to pay them the licensing fees they deserve. In fact, large companies such as IBM, Microsoft and others will also often team with people who are experts in licensing or litigation.
Division of labor is generally considered a positive in economics. The fact that this paper is arguing against it means that it has to give extraordinary proof for its extraordinary claim. The attack on NPEs is really an attack on the profession of inventing. A uniquely American profession.
This is not an academic paper, it is a propaganda paper pretending to be science.
Patent Trolls: Evidence from Targeted Firms, by Umit G. Gurun and Scott Duke Kominer
The paper, The True Story of How the Patent Bar Captured a Court and Shrank the Intellectual Commons, has a number of errors that show its conclusions are flawed. The author’s errors in a related article, entitled How Many Jobs Does Intellectual Property Create? were well documented by Adam Mossoff and Mark Schultz in Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong. This paper’s title purports to show the Court of Appeal for the Federal Circuit has been captured by patent attorneys, but never actually provides any evidence to support this assertion. Below I will detail a number, but not all the other errors in this paper.
1) The article states. “Just as other property rights internalize the social benefits of improvements to land, automobile maintenance, or business investment, patents incentivize the creation of new inventions, which might otherwise be undersupplied.”
This is the utilitarian model of property rights. The US was not founded on the Utilitarian model it was founded on natural rights, which are incorporated the Declaration of Independence and into Blackstone’s Commentaries which formed the basis of US common law for the first century of the US. In fact, Blackstone specifically states that patents and copyrights are property rights based on Locke’s formulation. See The Second Treatise of Civil Government; 1690; John Locke; CHAP. IX., Of the Ends of Political Society and Government.
There is no such thing as balancing test for property rights as implied by the author, this is a Utilitarian formulation of property rights.
2) The article states. “A single, politically captured circuit court with exclusive jurisdiction over patent appeals has consistently expanded the scope of patentable subject matter. This expansion has resulted in an explosion of both patents and patent litigation, with destructive consequences.”
The myth of an explosion in patent litigation has been debunked many times. As pointed out in the article The “Patent Litigation Explosion” Canard,
“First, it’s simply untrue. Award-winning economist, Zorina Khan, reports in her book, The Democratization of Invention, that patent litigation rates from 1790 to 1860 fluctuated a lot, but averaged 1.65%. Today’s patent litigation rates are around 1.5%. As Yoda would say: patent litigation explosion this is not, hmm, no. In fact, for three decades in Khan’s study patent litigation rates were higher than today’s litigation rate. From 1840-1849, for instance, patent litigation rates were 3.6% —more than twice the patent litigation rate today.”
Second there has not been an explosion in the number of issued patents. The number of patents issued to US inventors in 1980 were 37,355 and in 2011 there were 108,626 that is a 3.5% increase in the number of patents per year, hardly an explosion in the number of issued patents.
The research and development cost per patent has increased from around $1.2 Million per patent to around $4 Million per patent from 1955 to 2005 and GDP per patent over the same time period in constant dollars has increased from 60 million per patent to around 170 million per patent. According to a paper by the Federal Research Bank of San Francisco, real industrial R&D has been growing at 3.7% per year between 1953 and 2000, while the number of patents per capita has been growing at 1.7% per year over the same period. The number of citations per patent increased 3.3% per year over the 25 year period from 1975-1999.
3) The article states. “As early as 1951, Simon Rifkind, a former federal judge in New York City, warned in a prescient essay that then-current proposals to create a specialized patent court would lead to “decadence and decay.”
This was the time period in which a Supreme Court Justice in 1948 would write “the only patent that is valid is one which the Court has not been able to get its hands on.” Jungerson v. Ostby and Barton Co., 355 US 560. This was also when the Supreme Court was applying its “flash of genus standard to patents.” If Rifkind meant that it would result in courts that did not have this utter disdain of patents he was right. However, this is hardly an objective measure.
4) The article states. “Using a dataset of district and appellate patent decisions for the years 1953–2002, economists Matthew Henry and John Turner find that the Federal Circuit has been significantly more permissive with respect to affirming the validity of patents.”
Well given the Supreme Court’s attitude the only patent that is valid is one which the Court has not been able to get its hands on that is hardly a surprise. One of the first things that Reagan did upon becoming president, was to create the Court of Appeals for the Federal Circuit. This court does hear all patent appeals and actually had about half the Justice that were actually trained in patent law. In order to be legally or factually competent as a patent attorney you have to have a technical background in science or technology, which none of the present Supreme Court justices have. In addition, patent attorneys have to pass a separate bar exam that has one of the lowest pass rates in the US. Patent law is a highly technical and specialized area, just like quantum mechanics is highly specialized and technical. You would not ask an English professor how to solve a problem in quantum mechanics and expect anything sensible. The same is true for patent law.
5) The chart in the article is a lie. It shows the number of patents linearly, which would show any compound growth as an exponential. In fact the number of issued patents has grown at a rate 3.5% from 1980 to 2011, hardly an explosion.
6) The article states. “They estimate that patentees are three times more likely to win on appeal after a district court ruling of invalidity in the post-1982 era. In addition, following the precedents set by the Federal Circuit, district courts have been 50 percent less likely to find a patent invalid in the first place, and patentees have become 25 percent more likely to appeal a decision of invalidity.”
The 1970s was a period of time in which several appeals circuits had not upheld the validity of a patent in 25 years. The FTC had a policy of nine no-nos of what you could not do with your patent without running afoul of the antitrust laws. It is hardly surprising that Reagan and Congress wanted to strengthen the property rights of inventors.
7) The article states. “The U.S. Supreme Court reversed the Court of Customs and Patent Appeals, holding that mathematical algorithms (and therefore software) were not patentable subject matter.”
Here the Supreme Court showed their complete ignorance of what a computer is and what software does. Any electrical engineer knows that any device implemented in software can be implemented in hardware. In fact, software just wires an electronic circuit (computer) to create an application specific device. Engineers choose between these options based on the need for flexibility and lower cost (software) and speed (hardware) and have several choices in between.
In order to be logically against software patents, one has to be against all patents for electronic circuits. This is the sort of nonsense you get from a court that does not understand the underlying technology.
8 ) The article states. “State Street Bank v. Signature Financial Group (1998), the Federal Circuit broadened the criteria for patentability of software and business methods substantially, allowing protection as long as the innovation “produces a useful, concrete and tangible result.”
35 USC 101 states “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” A computer implemented invention is a new and useful machine and useful process. Seems like the Federal Circuit got it right.
9) The article states. “The GAO estimates that more than half of all patents granted in recent years are software-related.”
The GAO counted any invention that includes some sort of software, firmware, or related. Let’s see, a procedure to sequence DNA would probably use a machine that had software or firmware and therefor met the GAO’s definition. A chemical patent that used any computer controlled machinery would count as a software patent under this definition. Today most transmission systems are computer controlled and therefore meet this definition. This standard is so loose as to meaningless.
10) The article states. “While more patents have not resulted in faster economic growth, they have resulted in more patent lawsuits.”
This statement will take some unpacking. First of all the 1980s and 1990s saw significantly faster growth than the 1970s, which had a significantly weaker patent system. Second of all the patent laws were weakened starting in 2000 with the Patent Act of 2000. This trend has continued to this day. In 2002, we passed Sarbanes Oxley which made it almost impossible for startups to go public, which starved startups and VCs of capital. Economic growth did not start to fall off until around 2000. So actually the data is consistent. Weaker patent laws are associated with weaker economic growth. Third, the patent system cannot function in a socialist system. The US by CATO’s estimate takes 60% of the GDP today. What does it mean to own your patent in a world where the EPA can take your land at any time, in which the eminent domain can be used to take your property for a project that promises higher tax revenue, a world in which the government publishes your invention for the whole world to see before they provide you any patent protection, a world in which the government does not accept any limits to tax you or regulate you? The author is right that a patent system cannot cause economic growth in the USSR, which tried to implement a patent system. A patent system is based on a system of property rights. Since 2000 we have created a patent system that supports crony socialism (capitalism), not surprisingly our inventors and entrepreneurs are not creating economic growth.
The macroeconomic evidence is overwhelming for patent systems creating growth. Those countries with the strongest patent systems are the most inventive and have the greatest technological dispersion and are the wealthiest in the world. While those with the weakest patent systems do not contribute any inventions and have very poor technological dispersion and are some of the poorest countries in the world.
I for one am very disappointed that the CATO Institute would publish such a poorly researched and reasoned article.
 Wilson, Daniel, “Are We Running Out of New Ideas” A Look at Patents and R&D”, FRBSF Economic Letter, Number 2003-26, September 12, 2003.