State of Innovation

Patents and Innovation Economics

Inventing to Nowhere: The Movie

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.


December 12, 2014 Posted by | News | , | Leave a comment

Patent Trolls vs. Legal Trolls

There has been a lot of media attention about so called patent trolls.  I am intimately familiar with these issues, but the characterization is incorrect.  There are legal trolls, some of whom specialize in patents, but they prey upon the same problems that infects all of our legal system and so there is nothing unique regarding patents.  As happens so often, the government creates one problem and then people see the symptom and propose more improper government policies, which will just cause more problems.

I had a small software startup that was contacted by a legal troll.  The troll had selected the company because its website stated it was in a somewhat similar space to the patents they were attempting to enforce.  I analyzed the claims and it was clear the company was not practicing the patented invention.  When I contacted the troll they were unwilling to review the case or the claims.  They did not appear to be interested in the truth.  The company decided it would rather die litigating than take a license they did not require.  They also worried that taking the license would make it harder to be acquired.

Another case that illustrates the point, happened before the term “troll“was invented.  A patent counsel for a large Fortune 500 company received a complaint for patent infringement of over 30 patents.  Under the CAFC rules at the time, the company would have to spend at least three hundred thousand dollars on opinions just to respond to the complaint.  A couple of days later the troll offered to settle for about one hundred thousand dollars, knowing full well that both the costs and time constraints made this a great hold up game.  The patent counsel was so pissed off about this clear extortion, that he refused to give in and found there was a cross licensing agreement that gave his company the right to use the patents.  Nevertheless, this was an attempt to extort the company for a quick Christmas bonus and all that happened to the troll was they had to eat crow and some minor legal fees.

These situation arose not because of patent laws that protect the rights of inventors, but because of our overly burdensome federal litigation system and because Rule 11 sanctions are almost never enforced against legal trolls.  The reality is that legal trolls have been using the complexity of the law and the absurdly lenient standard for pleading to extort money from companies since at least the 1970s.  These Legal Trolls use medical malpractice, product liability, securities laws, and many others areas of law for this purpose.  However government is one of the biggest legal troll of them all.  They use the environmental laws to extort money from companies, OHSA rules, the IRS and many others.

In the case of medical malpractice lawsuits, 90% of those that go to trial fail.   In a rational system you would expect about a 50% rate of success.  Otherwise it should be in the interest of the parties to settle.

Here is an article, Annual Meeting Holdup: Securities Class Action Lawyers’ Latest Scheme, on the latest holdup innovation by securities plaintiff attorneys.

But, as I pointed out, the government is the biggest legal troll of them all.  The EPA regularly demands people comply with their arbitrary ruling or face bankrupting daily fines.  One example of this, Sackett v. EPA, made it to the Supreme Court.  The EPA has not only given itself the ability to assess this fines separate from a court or a trail, but they have argued successfully that they do not need to get a warrant to investigate a person.  This case is hardly unique.  In fact EPA administrator Al Armendariz admitted the EPA purposely terrorizes companies to force compliance among subsequent targets.  He compared it to the Romans, when they conquered a village they would crucify five people arbitrarily to ensure compliance.

The SEC refuses to define “insider trading.”  Accusing people of insider trading has been the favorite political stepping stone for attorney generals out of New York.  See Rudolf Giuliani and Elliot Spitzer.  How can you be charged with a crime the government won’t define?  How do you know if you violated the law?  How can you have mens rea?  The securities laws are just politics disguised as law – also see anti-trust laws.

Clearly, we have a problem with legal trolls not with patents.  So how do we fix the problem?  I will ignore how to fix the abuses of our government.  First,we need to clearly define what we mean by legal troll.  I would define a legal troll as any group that uses the complexity of the legal system to make a profit when they know their case is dubious.  Based on this definition there are two main components: the complexity of the legal system and baseless lawsuits.

In an attempt to promote justice our legal system reduced the requirements for pleadings and provided a wide open discovery process.  These are the two main reasons why lawsuits are so expensive.  The requirement for a good faith investigation of the facts before filing a complaint should be made stricter.  However, it is utopian thinking that judges are going to enforce this.  I will propose a solution in the next section for this.  The discovery process should be time limited and page limited.  Discovery should not be used as a fishing expedition.  Another problem is that we have an over worked Federal Judiciary.  This is in part because we do not have enough federal judges and partly because we have federalized too many crimes/regulations.  On the patent level we should have judges who have technical backgrounds and have passed the patent bar.

Rule 11 sanctions are supposed to prevent frivolous lawsuits, but judges almost never apply them and when they do it is so arbitrary as to appear politically motivated.  I suggest that the Rule 11 type sanctions should be a private right and award.  This would balance the risks of filing frivolous lawsuits.  In addition we might want to consider a loser pays type rule.

We do not have Patent Trolls we have Legal Trolls.  The biggest Legal Trolls of all are governments.

June 4, 2013 Posted by | -Law, -Philosophy, Patents | , , | 1 Comment

Reason Magazine: Using Emotion and Faith to Advance their Anti-Patent Agenda

Reason Magazine has released a video, entitled How Patent Trolls Kill Innovation.  The magazine banner states that they support “Free Minds and Free Markets” but this video relies on the same irrational, emotion driven logic as the media.  I cannot point out all the errors in this video, but below I will highlight some of the major points.  Before I do that , let me show some of the sleazy attempts by Reason Magazine to use emotion and hidden assumptions to advance their argument, instead of reason and logic.

Emotion and Faith

*The video starts with the hidden assumption that patents are not property rights – faith not reason.

*The video uses the phrase “patent trolls” to immediately define who is right or wrong without actually proving their case – an emotional appeal.

*The video selects a small entrepreneur to narrate their story – using the typical liberal tactic of pretending this is a fight between a small virtuous entity against a big faceless entity.  The reality is that so-called “Trolls” sue large entities much more often than small businesses.  Emotional appeal, not reason.

*The video uses an “expert”, Julie Samuels, from a biased source, (Mark Cuban’s lobby group) who has no qualifications in the subject.  She has a degree in Journalism and Law, which means she is NOT A PATENT ATTORNEY and does not have the technical skills to understand the underlying technology of patents.  Faith not reason.


Title Search

The video never asks if Austin Meyer did a patent search and clearance opinion before building and selling his software.  You would not build a house without doing a title search to make sure you owned the land.  Given Mr. Meyer’s surprise that he was being sued for patent infringement, he almost certainly did not undertake this simple due diligence step.


Using Other Peoples’ Property

Mr. Meyer complains that he may have to pay the patent holder for the life of his product.  Yes, that is what happens when you use someone else’s property.  This is like a steel manufacturer complaining that they have to continue to pay for coal or pay rent for a building they do not own.

Note that the underlying technology is critical to Mr. Meyer getting paid, but he doesn’t want to pay for it.


East Texas

The anti-patent crowd always complains that these suits are brought in East Texas.  If someone refused to pay you rent for staying in your house, would you chose the slowest court in the country or a faster court?  Federal Court for the Eastern district of Texas has been one of the fastese to bring invention squatters to justice.


Patent Trolls

The video makes the implicit assumption that non-practicing entities (NPE) are evil.  However, Edison was a NPE, as was Tesla, as was almost every great inventor in the last 200 years, as our most major corporations, as most of our Universities and Government labs.  Our Founders looked at the issue of requiring inventors to practice their invention in order to keep their patent and rejected it.  They voted for a FREE MARKET system where people could be independent inventors, just like writers do not have to be publishers in order to obtain or keep their copyrights.  This is consistent with Adam Smith’s division of labor theory.

The video takes the stand that if you buy the patent rights instead of being the inventor,this is somehow evil.  First, all corporations buy their patents – often by paying wages.  Corporation don’t invent so they have to buy their patents.  Second, we do not argue just because you didn’t build your house you cannot rent it out .


Old Technology

Mr. Meyer states in the video that the technology he wants to use is old, from the 80s.  If this were true, Mr. Meyer would be free to use it.  But, instead, he wants the updated version of the technology that ensures he gets paid, he just doesn’t want to pay for it.


The Patent Should Not Have Issued

Neither Mr. Meyer nor the so called expert, Julie Samuels, are patent attorneys.  They are NOT QUALIFIED to evaluate the scope of the claims of a patent.  It is interesting how lay people (I include attorneys who are not patent attorneys in this definition) believe they can just read a patent and evaluate it, but they would never try to do the same thing with a Warranty Clause in a contract or an Indemnity Clause.  No one would believe a Journalism major or an attorney (non-technical) is qualified to comment on software technology; but somehow they are qualified to comment on patents on software?  This is like asking a plumber to comment on the design of a Nuclear Power Plant.


Patents and the Free Market

Patents are property rights, just like a property right in a farm.  The basis for all property rights is creation.  Inventions are clearly creations.  Property rights are part of the free market.  Those countries that are the freest economically have the strongest patents laws, are the most innovative, and have the highest standards of living.  REASON MAGAZINE is pushing a point of view that is much more consistent with a Marxist’s labor theory of value than Capitalism.



REASON MAGAZINE is neither promoting REASON or FREE MARKETS in posting this video.





Reason Magazine: How Patent Trolls Kill Innovation

February 21, 2013 Posted by | -Economics, -Philosophy, Blog, Innovation, News, Patents | , , , , , | 5 Comments

IPXI Exchange Model Issues

Gametime IP and IPWatchdog have recently written excellent articles on IPXI.  However, I still see a problem with IPXI’s model.  Namely – are the number of ULR limited?  If so then they will become all used up.  Now imagine launching a new product that is going to need a license.  Yes, I can buy a number of ULRs, but I don’t know how many I will need.  If the product is highly successful, I might need more ULRs than are ever offered.  I doubt many business is going to take that risk.  Alternatively, if the number of ULRs are not limited how do I know that IPXI will not flood the market?  If they can issue additional ULRs for the same patent, I am going to have a very difficult time determining what price I should pay for them.

There are two broad exchange models out there.  One is the stock market and the other is the commodities market.  Because Mr. Gerard Pannekoek, CEO of IPXI, comes from the commodities side of the world, it appears that IPXI is trying to model there exchange on a commodity exchange.  A commodity exchange has a consumable item it is exchanging and the ULR is an attempt to create a similar consumable item.  With a commodity additional units can be produced.  With a patent the number of ULRs to the patent could also be increased, but they do not have to be produced in any sense of the word.  You can rationally price a future contract for a commodity because the amount of production is limited.  For instance, only so much land is devoted to corn production.  It takes a certain amount of time for the corn to be produced.  The amount of corn in storage can be determined.  In addition, the need for the corn is likely to be fairly well defined.   None of this is true of ULRs.  If you are designing a new product that requires a ULR, then you have no idea what the sales of the product will be in ten years.  You have no idea if the underlying technology will still be important in ten years.  Finally, you have no idea how many ULRs will exist.  So you neither can predict the demand or the supply for a ULR – unless it is only dealing with products and technologies that have been in the marketplace for awhile. You cannot rationally price a ULR (assuming more can be issued for the same patent) because there are no constraints on the issuing of more ULRs.

A stock exchange model would be more complex, but I believe a more viable model.  Each patent or a portfolio of patents could be seen as a company.  IPXI could issue shares in the patent groups and the shareholders would receive a percentage of the earnings.  These securities would look a lot like oil and gas leases, in that they have a finite life.  The value of the patent security would be based not only on the value of the underlying patent(s) but in the ability of the management group to increase revenues.  Most economic models show that the biggest return for a patent is to non-exclusively and widely license the technology.  Since the patent company would not be a producer, their interest would be consistent with a widely licensed technology.  They would also have an incentive to provide technical expertise on how to use the technology and a disincentive for frivolous litigation.  They could offer standardized licensing contracts that would also eliminate the high cost of bilateral negotiations.  The money from the initial offering would be used to create the management team and promote the patented technology.  Investors would have the knowledge of sales and earnings that they have for a company or oil/gas lease.  These companies would probably exist today but for Sarbanes Oxley and other related securities laws that make it too expensive to go public in the USA.

June 18, 2012 Posted by | Business Models, Patents | , , , | Leave a comment

8 Millionth U.S. Patent Issues

According to the USPTO website, 8,000,000 patent issued today, August 16, 2011.  The patent is entitled “Visual Prosthesis” and the inventors are Greenberg, Robert J. (Los Angeles, CA, US), Mcclure, Kelly H. (Simi Valley, CA, US), Roy, Arup (Valencia, CA, US).  The patent is assigned to Second Sight Medical Products Inc.  The patent took almost four years from filing, October 18, 2007, until issuance.  Hopefully, this company did not need this patent to secure funding, which is common.  This illustrates one of the major problems with our patent system – namely the absurd length of time it takes to get a patent issued.  A patent is a property right and if it took you four years to obtain title to a car or house or stock you bought you would think you were living in a third world country.

According to the Patent Office’s press release the patent explains:

In a healthy eye, the photoreceptors (rods and cones) on the retina convert light into tiny electrochemical impulses that are sent through the optic nerve and into the brain, where they are decoded into images.  If the photoreceptors no longer function correctly, the first step in this process is disrupted and the visual system cannot transform light into images, causing blindness.

The system awarded patent number 8,000,000 is designed to bypass the damaged photoreceptors altogether.  A miniature video camera housed in the patient’s glasses sends information to a small computer worn by the patient where it is processed and transformed into instructions transmitted wirelessly to a receiver in an implanted stimulator.  The signals are then sent to an electrode array, attached to the retina, which emits small pulses of electricity.  These electrical pulses are intended to bypass the damaged photoreceptors and stimulate the retina’s remaining cells to transmit the visual information along the optic nerve to the brain.

Of course, I am sure that the patent critics will complain that this patent is an example of how the Patent Office issues bad, overly broad, patents for inventions that were created years ago.  This is clearly obvious in light of modern electronics and an understanding that the brain is really just electrically signals.  What is unique about converting light signals into electrical signals anyway?  It really all boils down to wiggling electrons, which has been done since man first harnessed fire.  I am sure that the critics will point out how this patent does not encourage innovation and is just legal title to sue and waste resources that would be better spent on engineers????????????????????????????????


August 16, 2011 Posted by | News | , , , , , | 6 Comments

Edison was a Patent Troll

The excellent book Great Again by Henry R. Nothhaft with David Kline points out that in the middle 19th century:

Foreign observers attributed much of the country’s (U.S.) rapid technological progress to its distinctive patent system.  Quite revolutionary  in design at inception, the U.S.patent system came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies.  These features attracted the technologically creative, even those who lacked the capital to directly exploit their invention  . . . and also fostered a division of labor between the conduct of inventive activity and the application of technical discoveries to actual production.  It is no coincidence that Britain and many other European countries [later] began to modify their patent institutions to make them more like those of the Americans. (emphasis added)

They point out that in the U.S 85% of all patents were licensed by their inventors, while only 30% of patents in Britain were licensed.  In the late 19th centuryU.S. inventors were increasingly operating as independent inventors who extracted returns from their discoveries by licensing or selling their patent rights.  Among these inventors were Edison, Bell, Tesla, etc.  “An astonishing two thirds of all America’s great inventors in the nineteenth century were actually NPEs” (Non-Practicing Entities).  But today’s modern Luddites would call these great inventors trolls.  They claim all value is created by production and marketing or if they are economists they claim all value is create by manipulating monetary instruments and deny the source of all human values, the mind.  They denigrate inventors who demand a return on their efforts as imposing a tax on innovation.  Invention is the only source of per capita increases in wealth.

The book asks:

 Does it really make sense to consider Edison a “patent troll” just because he licensed most of his inventions rather than commercializing them himself?  As the inventor of electric light and power, the phonograph, and many other world-changing new technologies, his contributions toAmerica’s economic progress are beyond dispute.

Is there any evidence of a patent litigation (troll) explosion?

Judge Michel former head of the CAFC, the court which hears all patent appeals, points out that the number of patent suits filed each year has remained constant at less than three thousand.  Only about 100 of these suits ever go to trial.  In a technology based economy with over 300 million people and 1 million active patents this is trivial.

The reality is the Patent troll/ litigation crises is a very clever marketing ploy by large multinational companies that want to be able to steal U.S.inventors’ technology.  The America Invents Act will put the final nail in the coffin of U.S.innovation if it passes, by making it even easier to steal U.S. innovation.  It is a product of these same multinational companies that are not interested in vitality of the U.S.economy, but in their short term profits.

May 8, 2011 Posted by | Patents | , , , , , , , , , | 3 Comments

The Ballad of the Patent Troll

This videoby Alexander Poltorak takes on a number of the myths associated with patent trolls.  The video explains the hypocrisy of large companies complaining about “Patent Trolls.”  It also makes an interesting point that patents are not a tax on innovation but a tax on copiers (non-innovators).  While I do not agree with all the points in the video, it makes a valuable contribution to the discussion about the value of patents.

March 15, 2010 Posted by | Uncategorized | , , | 8 Comments

In Defense of Patent Trolls

The term patent trolls is usually applied to companies that enforce patents that they are not practicing.  These Non-Practicing Entities (NPEs) include companies specifically organized for this purpose such as Intellectual Ventures.  However, it also includes Universities and divisions of most large corporations such as IBM.  Many of these corporations complain about NPEs.  However, any consistent definition of a NPE (troll) would include these hypocrites. Continue reading

September 18, 2009 Posted by | Uncategorized | , , , , , , , | 1 Comment