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Posts Tagged ‘Intellectual Property Innovation’


Patent Deform Act of 2011: Approved by Senate Committee

So called Patent Reform is a bad idea that just will not die.  This is the sixth year in a row where this idea has been brought to the floor of the Senate or House.  While some of the most offensive provisions have been eliminated, it is still a bill designed to weaken our patent system and help large companies at the expense of startups and individual inventors.  For instance, the bill still contains “First-to-File” provision.  A first to file system will result in many poorly thought out patent applications increasing the PTO’s workload and increasing the number of Continuations-In-Part (CIPs).  The confusion created by this system of filing early and then following up with corrected applications will result in litigation being more expensive and less certain.  In addition, this system will further bias the patent system in favor of large entities.  Large entities will use a first to file system to flood the PTO with patents to overwhelm small entities and individual inventors in the race to the patent office.  Small entities and individual inventors will never be able to compete financially in this race.  According to the SBA, most emerging technologies are created by small entities not large entities.  As a result, we need to make sure that our patent system is friendly for small entities if we want it to encourage innovation.

In addition, the bill expands post grant oppositions.  This again stacks the deck in favor of large corporations who can afford to fight these oppositions.  It is likely that post grant oppositions will be used by large corporations to bankrupt startups.  If we are going to have post grant oppositions we need to make patents incontestable, like trademarks, after a certain period of time.  See Making Patents Incontestable

Real Patent Reform

Here are my suggestions for real patent reform that would not only help small inventors but the US economy.

1) Repeal Publication: This would restore the social contract

2) Repeal KSR: A subject standard of patentability just increases costs and uncertainty associated with the patent process.  KSR makes bureaucrats the ultimate arbiter of what is patentable instead of logic.

3) Repay PTO & End Fee Diversion:  Congress should repay the over $1B it stole from inventors with interest.  It should also end fee diversion, which if Congress was subject to Sarbane Oxley would land them in jail.

4) Regional Offices for PTO:  This would ensure steady funding of the PTO, increase examiner retention, and ensure that the PTO is not so Washington biased.

5) Repeal eBay:  This decision is a logical absurdity.  If a patent gives you the right to exclude, then if you win a patent infringement case you must be able to enforce your only right – the right to exclude.  This is not an issue of equity, it is an issue of enforcing the right associated with a patent.

6) Eliminate “Combination of Known Elements”:  The fact that the Supreme Court does not understand that every invention in the history of the world is a combination of known elements is pinnacle of ignorance.  Have they ever heard of “conservation of matter and energy”?

7) Patent Reciprocity:  If you drive your car across the border into Canada you do not lose title to your car.  If you take your manuscript across the border into Canada you do not lose the copyright to your manuscript.  But, if you take your invention across the border into Canada, you lose your patent protection and anyone can steal the invention – not the physical embodiment, but the underlying invention.

Patent reciprocity would automatically provide patent rights in a foreign country when you obtained a patent in the US and vice versa.  This idea was first proposed by the US in the mid 1800s according to B. Zorina Kahn’s book “

The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 


 
Invention – A Financial Analysis

Jacob Schmookler, an economist and author of Invention and Economic Growth, developed a financial analysis of the invention process.[1] The main point of this mathematical modeling of the invention process was to show that the probability of any invention being created is related to the size of the market for the invention.  I intend to present a model of the cost of inventing compared to creating me-too products.  I am not a fan of mathematical models for explaining most economic effects, because the terms in the equation are either unmeasurable or vary in an unpredictable manner.  As a result, I think these mathematical models give the impression of the accuracy of a physical science, which they clearly do not provide.  This can lead to logical errors.[2]

Despite this, I believe a simple mathematical model of the invention process will illustrate some important points.  In addition, some people understand concepts better when presented in a mathematical model.  Here is my model for the costs associated with introducing a new product based on an invention and me-too product:

Ci(n) = (Inv + Mi)/P + NRE + PC*n + OH*n   (New Product based on invention)

Cmt(n) = NRE + PC*n + OH*n  (Me-too product)

Where Ci is the cost of creating a product for the owner of the invention, Inv is the cost of creating the invention, P is probability of that the invention will succeed in the market, Mi is the incremental marketing and sales cost of introducing a new invention, n is the number of products that have been produced, NRE is the nonrecurring engineering cost of setting up production, PC is the production cost of the making n products and OH is the cost of overhead for producing n products, Cmt is the cost of creating a me-too product.

The reason I add the probability that the invention (P) will succeed is that not all inventions are successful.  An economist who wants to capture all the costs associated with introducing a product based on a new invention has to include this probability to determine the true cost of inventing.  This probability will vary based on the type of invention.  For instance, line extension inventions are much more likely to succeed than inventions that create whole new markets.  An example of an invention that created a new market was Webcrawler, which was the first full text web indexing search engine introduced in 1994.  On the other hand adding image or video searching to Google is a line extension.

The cost for marketing and selling a product based on an invention (Mi) is separate from the cost of marketing and selling a me-too product.  It takes significantly more money, time, and effort to sell a product based on an invention that is creating a whole new market than a me-too product.  Any sales person who has tried to sell a truly unique product knows that it is much easier to sell an existing product or a me-too product because you do not have to explain the value of the product, how the product works, and why the customer would want the product.  A true me-too product can be sold mainly on price.  A line extension product takes less marketing and sales effort than a revolution product.  Large companies tend to focus on line extension inventions because it reduces the risk that the product will not succeed and reduces the cost of marketing and selling.  Many start-ups sell through marketing channels in order to reduce this cost.

I include the cost of selling, advertising, and marketing of me-too product in overhead.  Once a product based on an invention is well known, then it will incur the same cost as a me-too product of selling, advertising, and marketing.  I believe this is an accurate characterization.  Non-recurring engineering (NRE) is the same for both the me-too product company and the inventor company.  The reason for this is that me-too products will incur approximately the same cost of setting up production as the owner of the invention.

The values of these variables will vary based on the type of invention involved, the type of market in which the invention is sold, and the point in time the product is introduced.  This model is not exact.  For instance, overhead (OH), production costs (PC), and marketing cost of the invention (Mi) should all be functions of the number of products sold (n).  Production costs usually decrease with the number of products sold.  Marketing costs of the invention (Mi) should be spread out of the first X number of products sold.  In addition, the total marketing cost of the invention (Mi) should not be included for failed products based on an invention, since the owner is likely to kill the project earlier and not spend as much as on a successful product launch.  There are probably other shortcomings of these equations.  However, certain facts are clear even with any flaws in these equations.  The cost of inventing increases the cost to the inventing firm over the me-too firm.  As a result, inventing is a market disadvantage without intellectual property.

Invention Law:  The cost of inventing increasing the expenses of the inventing firm compared to the expenses of the me-too firm.

There are only two common ways to compensate or incentivize inventors.  One is to provide the inventor with a property right (patent) in their invention.  The other is to have the government pay for the cost of inventing.  The first is consistent with a free market economy and has proven to be extremely successful.  The second is consistent with a command and control economy (statism) and has proven to be inefficient and political.

Intellectual Property Law: Inventing is a market disadvantage without intellectual property.

Now I will look at some specific scenarios to provide some insight to these laws.

Pessimistic Scenario

Scenario 1:

Consumer good sold through retail outlet

Inventing = New Market

Target Retail Price $10.00

Cost of inventing (Inv) = $100,000.00

Cost of Marketing Invention (Mi) = $900,000.00

Probability of Success (Pi) = 0.1

Nonrecurring Engineering (NRE) = $30,000.00

Production Costs per Unit (PC) = $2.00

Overhead Costs per Unit (OH) = $1.20

Unit Inventor’s cost per unit Copier’s cost per unit
1 10030003 30003.2
10 1003003 3003.2
100 100303.2 303.2
1000 10033.2 33.2
10000 1006.2 6.2
100000 103.5 3.5
1000000 13.23 3.23
10000000 4.203 3.203
100,000,000 3.3003 3.2003

It is assumed the manufacturers are selling their products $4.00, which is a standard double over manufacturing costs.  The 1/5th of retail price is a minimum necessary for the manufacturer to obtain a return that justifies manufacturing the product and selling it through a standard retail channel.  As you can see the inventor has to sell 100 million units ($1B in revenue) in order to get within 10 cents of the same manufacturing cost as the me-too manufacturer.  The copier’s break even[3] point is somewhere between 10 thousand units and 100 thousand units while the inventor’s break even is point is over 100 times as many units.

It is likely that this scenario overstates the difference between the costs of the inventor and the copier.  For instance, the inventor is unlikely to spend the full cost of marketing the invention (Mi) for the other nine failed product.  In addition, the percentage of successfully launched products is based on the stated success rate of venture capitalists.  Most VCs state that they have one highly successful company for every ten investments.  They also usually have 2-3 other companies in the portfolio that produce moderate returns or losses.  Not all of the other companies are in their portfolio are a complete loss.

Optimistic Scenario

Let’s look at a much more optimistic scenario.  Let assume the probability of success (P) includes these moderately successful investments and lets also include the idea that the probability includes some line extensions which have a 70% probability of success or higher.  We will also move up the probability of success to compensate for the fact that the inventor is unlikely to spend the full cost of marketing the invention (Mi) on failed inventions.  I will make the wild guess that setting the probability to 45% will compensate these differences.  I will also assume that instead of taking $1M to launch a new invention that it takes only $100 thousand.  Part of the justification for this difference is that the inventor and other founders are likely to not take a salary until the company has significant revenues.  I will also lower the overhead significantly, because this is one of the big advantages of a start-up.  My optimist scenario is:

Scenario 2:

Consumer good sold through retail outlet

Inventing = New Market

Target Retail Price $10.00

Cost of inventing (Inv) = $10,000.00

Cost of Marketing Invention (Mi) = $90,000.00

Probability of Success (Pi) = 0.45

Nonrecurring Engineering (NRE) = $30,000.00

Production Costs per Unit (PC) = $2.00

Overhead Costs per Unit (OH) = $0.50

Unit Inventor’s cost per unit Copier’s cost per unit
1 252224.7 30002.5
10 25224.72 3002.5
100 2524.722 302.5
1000 254.7222 32.5
10000 27.72222 5.5
100000 5.022222 2.8
1000000 2.752222 2.53
10000000 2.525222 2.50

In this scenario, the break even point for the copier is between 1000 and 10,000 units, while the break even point for the inventor just over 100,000 units.  The inventor is still at a significant disadvantage to the copier.  Some of this disadvantage may be offset by the first mover advantage.  However, if the inventor company is a start-up its first mover advantage is likely to be significantly offset by the established relationships of an established copier company.  In addition, the inventing company may sell more of their initial units directly (not through a retail channel) and their margins will be significantly higher for these units.

It is clear that inventing without intellectual property is a competitive disadvantage.  Large companies that invent can offset some of this disadvantage by using other competitive barriers to entry.  For instance, an established company can use its network of relationships to create a barrier to entry from start-up copier companies and may be able to use its relationships to provide some barrier to entry from other large established companies.  The empirical evidence is that established companies mainly produce incremental inventions.  This is because the invention process is risky and as an established company they often have less risky methods of providing incremental revenue or profit gains.

Start-up companies produce all the net jobs in America according to the Kauffman Foundation.   They are also the biggest producer of emerging technologies – see Do Individual Inventors and Start-ups Invent Anything Important?.  Advances in technology are the only way to increase our real per capita income.  We need to encourage investments in inventions, if we want to leave our children a better world than the one we live in.  Technology start-ups need the incentive of property rights in their inventions (patents) in order to justify the investment in these companies.


[1] Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge Massachusetts, 1966, pp 113-115.

[2] For instance, the measurement of GDP is said to be consumer spending plus investment plus government spending plus exports minus imports.  This equation leads to the logical error of assuming that consumer spending and government spending results in an increase in the output of a nation.  The reason this is a logical error is that people confuse the cause with the effect.  Consumption does not create goods and services.  Production creates goods and services, which is related to the consumption of good and services.  An engineering analogy is that temperature is often measured by determining a change in the resistance of a resistor.  If I change the resistance being measured by adding resistor in series with the thermistor this does not change the temperature of the environment being measured.  This is what economists are arguing when they suggest that increased government spending will cause the economy to grow.  Government spending does not create any new goods and services; it just either consumes production or transfers the return for production from one person to another.  Similarly, consumer spending is a way of measuring production.  Artificially increasing consumer spending does not increase production.  For instance, giving people income tax rebates when they never paid any income tax does not increase production, it just steals the productive effort of those who do pay taxes.

[3] The break even point is when the cost per unit is equal to the sales price per unit.

 
Another Confused Libertarian on Intellectual Property

Timothy Sandefur is another Libertarian confused about intellectual property – see his article.  He suggests that Adam Mossoff’s article on Natural Copyrights and Ayn Rand’s thoughts on intellectual property are incorrect.  Mossoff and Rand have the better argument.  First of all it is clear that intellectual property rights are consistent with Locke’s view of property rights.  You own yourself and therefore you own the product of your labor mental or physical.

Portuguese Claim to Sea

The argument about the Portuguese claim to the sea is an attempt to condemn Locke by a misapplication of Natural Rights theory.  The Portuguese did not improve the sea.  According to the Portuguese argument when I drive over the road I own the road or if I walk over land I own the land.  Using a misapplication of Natural Rights theory is a red herring argument.

Non-Exclusive Nature

Patents do not keep you from thinking about the invention and in fact it is a purpose of patent law to encourage the dissemination of knowledge associated with inventions so that other inventors can improve upon these inventions.  Patents only restrict you from making a physical version (or threatening to do so – offer for sale).  An infringer of a patent is no longer making a non-exclusive use of the invention when they make it.  They have taken a part of the potential market for the invention.  This market is neither unlimited or non-exclusive.

Your argument about two people having two separate copies of the invention ignores the property right involved in patents.  The property right is not in the physical item.  When you steal my invention by making an unauthorized copy, you have initiated force not the patent holder.  This is similar to me stealing apples from your orchard.  I have not initiated any force against you, it is only when you call the police or come out with your shotgun that force is initiated.

The exclusive nature of real property is illusionary at best.  You only occupy and exclude the space you are presently in.  You do not occupy your whole apple orchard all the time.  If I take an apple from your orchard that you are not presently holding or eating then there is nothing “naturally” exclusive about your ownership of that apple.  If you own more land than you can farm or otherwise take advantage of and I decide to plant crops on that land I have not hurt you.  You have initiated force against me when you kick me off your land and you inhibit productive enterprise.

The non-exclusive nature of intellectual property is a confused argument.  If you are talking about physical exclusion then you should only own real and personal property that you are presently using, which would destroy the concept of  property rights generally.  If you are talking about the legal right to exclude others from using your property, then you have to be consistent with your definition of the legal right involved.  Intellectual property is not about physical ownership, so making a copy of another invention is a clear breach of the property right.

Simultaneous Invention

In your statement about “innocent” simultaneous inventors that, “but because you make it to the patent office first, you get the patent on that thing, and can therefore forbid the other person from making or selling his thing” is wrong.  The US is a first to invent country (at least so far) not a first to file country.  So just because someone beats you to the patent office does not mean they receive the patent.  However, you do make a strong point for why we should not change our patent laws to a first to file system.

More generally, the definition of an inventor is the first person to discover a new invention.  Only the first person adds to the store of human knowledge.  The second person is just clever.  If a person living in India rediscovers Calculus he is not the discoverer of Calculus because he did not add anything to the store of human knowledge.  In addition, there are an infinite number of potential inventions and increases in technology are the only way to increase our standard of living.  As a result, we want people to invent not to copy other people’s inventions.

Fair Use

Copyrights protect the artistic expression of an idea.  They do not protect every component of a written work for example.  Fair use is just a statement of this fact.  So copying a small portion of work is not a violation of the owner’s copyright because you have not taken their expression of the idea.  This is why one of the factors of fair use is how much of the work did you copy.

Intellectual Property and Free Markets

You state, “natural copyright is very dangerous to the free market, in that it proposes to forbid entrepreneurs from legitimate and praiseworthy uses of their liberty.”  Actually, the exact opposite is true.  By undermining intellectual property you are undermining the very basis of property rights and liberty.  The empirical evidence also shows that whenever a government refused to protect intellectual property rights they also do not respect other property rights or the mechanisms of a free market.

Locke’s Natural Rights

Natural rights theory is not only the historical and logical basis for property rights but explains most common law crimes.  The natural rights labor theory of property explains why slavery is immoral.  If you own yourself, then no one else has the right to own you.  It also explains why murder and manslaughter are immoral, why stealing is immoral, why assault and battery are immoral and why we have laws against all these actions.  The natural rights labor theory defines how property should be allocated and how people come into possession of property morally and legally.  The labor theory explains all of our basic criminal law and all of our basic property laws.  What does scarcity explain?  It offers no justification for why slavery, murder, manslaughter, assault and batter and theft are immoral, except that they are inefficient at allocating resources.  Thus, all of these crimes would be allowed if they were efficient at allocating resources.  Scarcity does not explain who has ownership in property or why they should have ownership in property.  It merely explains that private property ownership is an efficient manner in allocating scarce resources.

In science, the theory that has the greatest ability to explain the widest number of facts is considered to be the correct or better theory.  Here the “scarcity” theory of private property requires the additional assumption that it is preferable to have efficient allocation of resources.  However, it fails to explain how the resource should be initially distributed, it does not explain how property law determines ownership and has no power to explain criminal law.  Trading scarcity for the labor theory of property is like trading the theory that “what goes up must come down” for Newton’s Law of gravity.  The fact of the matter is that the proponents of scarcity have confused cause with effect.  A system of private property results in efficient allocation of resource, but it is not the reason for private property – it is the effect of private property.

For more information see Scarcity – Does it Prove Intellectual Property Rights are Unjustified? http://hallingblog.com/2009/06/22/scarcity-%E2%80%93-does-it-prove-intellectual-property-is-unjustified/

 

Terratec’s AggreScreed was named one the top innovations by the magazine Equipment World .  The AggreScreed allows a contractor to lay a gravel road of a set depth without the cost and time of placing survey stakes.  This invention saves contractors time and money by eliminating survey costs, reducing wasted aggregate, and eliminating rework.  This is exactly the sort of technological innovation for which the patent system was designed.  Unfortunately, it took Terratec around four years to obtain its patent.  This in not untypical and it points out that the US patent system is broken, but not for the reasons suggested by those people pushing patent reform.  The Patent Office is hopelessly backlogged but Congress will not fully fund it.  The Supreme Court’s recent decision have increased the uncertainty over whether a patent will be held valid or approved by the patent office.  We need real patent reform that provides the Patent Office the funding they need to do their vital job and provides an objective standard for which inventions are patentable.

 
A Modest Proposal for Academic Economists

In one of my earlier posts, Patent Quality Non-Sense , I pointed out that the R&D (Research and Development) per patent ratio, GDP per patent ratio, and number of citations per patent have all increased over the last fifty years.  These were all statistically significant changes.  Based on this evidence I concluded that the quality of patents (or threshold for obtaining a patent) has increased over the last fifty years.

I was fortunate enough to have an academic economist send me a message pointing out that there were several papers by academic economists that have been debating why the R&D per patent and GDP per patent ratio have been increasing.  One of these papers suggested the reason for this phenomena was that as technologies are explored they become mined out – the cost of obtaining a new invention keep increasing.  Of course this issue had been explored in the 1950s by the famous economist, Jacob Schmookler, in his book “Inventions and Economic Growth.”  Professor Schmookler showed that across multiple industries the amount of R&D per patent was essentially the same.  See figure 2, page 46, figure 22, page 138, figure 23, page 139. 

 

Since these industries included both new industries and mature

 

There has been a lot of discussion about whether the Venture Capital Model is dying. Some suggest that there is just too much money in venture capital other suggest that it is just a cyclical downturn. However, the evidence does not support this.  Click here to see the video

 

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