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CATO on Software Patents

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.

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.

New Zealand to Outlaw Patent on Software

According to Kiwi Blog “A good move from the Gov’t on patents” there is a new Patent Bill that will prohibit patents on software.  Logically, this suggests that there is something special about software that is incompatible with patents.  In order to determine, we first have to have a clear understanding of what software is and what a patent is.  A patent is a property right that a person earns by creating a new invention.  But what is an invention?  An invention is anything created by man that has an objective result.  This definition clearly delineates that inventions are not things in nature or occurring naturally.  An invention, also, is not everything created by man.  For instance, a painting or a song is a creation of man, but they do not have an objective result.  Songs and paintings fall into the category of aesthetic creations.  Their goal is to elicit a subjective response and people will react differently.  An invention has an objective result.  For instance, a controllable heavier than air powered craft, such as the Wright brothers invented has the objective result of controllable powered flight.  Software is a set of written instructions that are converted by a compiler (interpreter) into a wiring scheme that opens and closes transistors.  Software that is not converted into instructions is just a bunch of bad writing.

Now that we have a clear definition of a patent and software, we can examine whether there is something special about software that would cause it to not be patentable.  The written instructions of software do not have an objective result, unless they converting into a wiring scheme.  Therefore, software code is not patentable.  No country has patent laws that apply to software code.  The way this is normally stated is that software per se is not patentable.

If this was all the New Zealand bill was proposing, we could stop here.  But all indications are that the proposed law would not allow patents for inventions in which software was used to wire an electronic circuit.  As any electrical engineer knows and software developer should know, solutions to problems implemented in software can also be realized in hardware, i.e., electronic circuits.  The main reason for choosing a software solution is the ease in implementing changes, the main reason for choosing a hardware solution is speed of processing.  Therefore, a time critical solution is more likely to be implemented in hardware.  While a solution that requires the ability to add features easily will be implemented in software.  Software is just a method of converting a general purpose electronic circuit (computer) into an application specific electronic circuit.  If software is not patentable it leads to absurd results.  For instance, if I design a pacemaker using logic circuits, it is patentable.  However, if I use a microcontroller to do the exact same thing, it is not patentable.

Software per se is not patentable.  Executed software is just a way of wiring an electronic circuit.  Electronic circuits have objective results, are a creation of man and therefore an invention.  There is no logical reason to distinguish between software-implemented inventions and other inventions.  This bill is based on emotion or an anti-property rights agenda or both.

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

Software Patents and Music and the Myth of Simultaneous Invention

People who believe that software should not be patentable often argue that there are only so many combinations of instructions that can be made.  Since the universe of instructions is limited all possible combinations are conceivable and therefore obvious and of course each instruction acts in a predictable manner.  If we used this line of reasoning for music, which only has thirteen unique notes[1] (all of which act in a predictable manner), you would assume that over the course of history every song has been written.  And yet we find that people keeping coming up with new songs.  It is very rare for two songs to be the same or even similar unless the second composer had access to the first composer’s song.  With so few basic building blocks, much fewer than any high level computer language, how is this possible.  We hear the Free Software Priests tell us it happens on the time in the world of software.  Perhaps a little math can help us unravel this conundrum.  The number of possible combinations for combining thirteen notes at one time is 6.2 billion.  Now it would be fair to say that some of the combinations would never be found in any musical score, but this is just for one note in time.  If we assume the average song is three minutes longs at 100 BPM (Beats Per Minute), which at the lower middle range of a metronome, and a unique combination of notes is played every beat, then we end up with 1.8 trillion possible songs.  It is not too surprising, given this that artists do not simultaneously create the same song and that we have not run out of songs.

This whole line of reasoning also degrades what the creator of a song does.  It suggests that they just string together random notes and then decide which random group sounds is pleasing.  To listen to each of these possible combinations would take 10.8 million years.  Even if one in a thousand of these combinations was a useful song that would require fifty hours of listening and then having the discernment, intelligence, and diligence to pick it out of that random group.  Something I bet only a skilled musician could do with any meaningful success rate.  So it is clearly absurd to suggest that just because the number of unique notes in music is very limited that it takes no or even ordinary skill to create a quality song.  It is even more absurd in the case of software.  The number of instructions in high level software is in the hundreds or more.  While each instruction may not be unique changing the variables on which it operates makes it different.  So clearly software has many more building blocks.  But the Free Software Priests might complain that most software is executed one instruction at a time.  This is true, but even a slow processor, such as the 80386 could execute three Million Instructions Per Second (MIPS) so in comparison to the thirteen unique notes at 100 BPM we are talking about more than 1.6 million unique combination per beat.  Clearly the numbers get astronomical.  The Free Software Priests (FSPs) are pedaling their own Kool Aid in order to steal other people’s work or cover up their inadequacies as programmers.



PS. Chemistry is made up of only 102 elements.  How long do you think it would take you to discover a simple element like methane by randomly combining elements?  There are at least 108 million possible combinations and this hardly covers the problems of how to create these combinations.  The FSP are not dealing in logic and reason, they are dealing in propaganda that hides their anti-property, anti-individual, anti-reason thesis.

[1] In one octave there are only 13 notes including sharps and flats.  Other octaves are just harmonics of these notes.


Patrick Anderson at GametimeIP has an interesting post that explains investment in new technologies is affected by competition between the patent systems of countries.  He quotes Judge Rader as pointing out that

By creating obstacles to patent protection, the real-world impact is to frustrate innovation and drive research funding to more hospitable locations. To be direct, if one nation makes patent protection difficult, it will drive research to another, more accommodating, nation.

Anderson further explains:

Rader then recounts the tale of the European patent system, which he says “became known for subjecting [biotech] inventions to delays in the patent office, challenges in litigation, increases in cost, and uncertainties in the legal landscape.”  Consequently, Rader continues, “investors, corporations, and clinics shifted their research from Europe to the United States.”  Rader then warns that the tide can turn against the United States just as easily.

It appears that in these difficult economic times other countries are waking up to these facts.  The post talks about a Halliburton case in the UK in which the judge took a narrow approach to excluding software inventions.  The judge made this insightful comment:

Thus when confronted by an invention which is implemented in computer software, the mere fact that it works that way does not normally answer the question of patentability. The question is decided by considering what task it is that the program (or the programmed computer) actually performs. A computer programmed to perform a task which makes a contribution to the art which is technical in nature, is a patentable invention and may be claimed as such. Indeed in those circumstances the patentee is perfectly entitled to claim the computer program itself.

Please read the full post at GametimeIP.



This is a guest post by David Boundy directed to fellow patent attorneys.

The bill tilts the playing field in favor of multinational corporations and market incumbents.  The bill shifts from today’s emphasis on disclosure and disruptive innovation to favor trade secret and market incumbency, in the following ways.

  • The § 102(a) grace period is totally repealed.  Every inventor will be in a race against all other possible disclosures—no inventor will have the time to perfect and test an invention before filing.  All companies will be forced to file before an invention is fully understood or tested.  That will be expensive for your clients and trouble for you as an attorney, and reduce patent quality.
  • Inventors, entrepreneurs, and startups use the grace period of § 102(a) to meet with investors, do the trial-and-error of R&D, and test their inventions. Under today’s law, the implied obligations of confidentiality in conversations with investors and early-stage partners give sufficient protection to permit these ordinary business activities.  The bill repeals all these protections, and replaces them with a flimsy grace period that creates unacceptable risk of loss of patent rights, that no business can rely on—though adds strong protections for large companies that can raise all their financing, and do all their manufacturing and testing in-house.  Inventors won’t be able to talk to investors without a patent, and won’t be able to file an application without an investor.
  • The bill states that an inventor can recover patent rights if he can prove that all other disclosures originated with the inventor—but the bill neglects to create a procedural forum for showing derivation in cases where the leak is not embodied in a patent application, or where the leak neglects to attribute the original inventor.  As a practical business matter, the bill leaves no commercially-feasible grace period, an integral part of U.S. patent law since 1839.—you will have to file every application as soon as possible, often long before the invention is ready.
  • Today’s law gives Americans several advantages over foreign inventors (under the “Hilmer rule”).  The bill removes these advantages, and instead places American inventors at a disadvantage to foreign inventors.   Consider this fact pattern:
  • A German inventor files a patent application in Europe, and later in the U.S. under a bilateral treaty
  • Shortly after the German’s first filing, an American files a patent application in the U.S. on a similar (not identically the same) invention, and then under the same treaty in Europe

Under the proposed legislation, the German’s patent application will be prior art that blocks the American in the U.S.  If we switch them around, so that the American files first, then the American does not block the German in Europe.  The bill does not “harmonize” the law, and the difference disfavors Americans.

  • The bill provides that all disclosures within and by a single company do not create bars.  This is great for multinational companies, with large in-house staffs, but totally useless for a startup or small company that has to partner with outsiders.  Startups use and need the options and protections of current law, but the new bill cuts them away.
  • A single offer for sale or public demonstration one day before filing a patent application will irretrievably destroy patent rights, if the poorly-drafted language is interpreted literally.
  • The § 102(b) grace period is cut back—it no longer protects against activities by third parties, but only the inventor’s own activities.
  • A new “post grant review” procedure allows a competitor, at a time of his own choosing, to start a half‑million dollar proceeding against a patent holder that has threatened no one.  Existing, more modest versions of this procedure have already put companies out of business.
  • As a patent attorney, you will no longer have time to do a good job preparing a patent application, you’ll be “forced to file” prematurely.  This will expose you to risks and destroy your weekends.  Poor initial applications will drive up post-filing prosecution costs.   The stricter and earlier filing deadlines will place you at a blocking point for many of your clients’ business activities, harming your client relationships.  Where good patent attorneys are allies in creating value for businesses today, the bill will move you to being a cost—at a much lower billing rate.

The bill destroys commercial certainty and corrupts the incentives in the system:

  • Various statutory requirements that an applicant act “without deceptive intention” are repealed—in the future, applicants will have incentive to act with deceptive intent.
  • Key terms of art are redefined—you’ve spent a career learning the meaning of “on sale” and “public use,” but the legislative history fundamentally redefines these terms.  It will take decades for courts to establish new precedent to provide any meaningful commercial certainty.
  • The Metallizing Engineering “secret commercial use” bar is repealed—a company will be able to use an invention as a trade secret, and then spring a patent on the public years later.  That favors market incumbents, but makes innovation harder for everyone else.
  • The “best mode” requirement is reduced to a sham: a patentee will be permitted to disclose only a fictitious embodiment, while holding the best as a trade secret.
  • The bill gives companies the right to patent and repatent inventions for years, to keep them locked up, neither using them nor permitting them to be used, for far longer than 20 years.
  • Several aspects of the “first-inventor-to-file” provision—the ones that give patents to second inventors, and to companies that kept inventions in secret for years before filing patent applications—violate constitutional limits on Congress’ authority—years more litigation and commercial uncertainty.
  • The Act 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.

The bill is out of committee—further amendments are unlikely. It is literally impossible to alter the bill to meet the needs of startups through an amendment strategy at this late date.  The multinationals and their congressional allies smell victory.  They see no reason to allow any weakening of their preferred bill through amendments favoring small businesses.   The only option at this point is to vote it down.

Typical inventor activities that no longer “work”

Most startups, and many inventions at established companies, go through at least one of two “stories.”  They’re reasonable commercial practice under today’s law, but not under the bill:

  • An entrepreneur with nothing but an idea typically has to present his idea to dozens of venture capitalists and potential manufacturing or marketing partners, without formal confidentiality agreements, to get a company started. (VC’s never sign confidentiality agreements for first meetings.)  This works under today’s law, because of the implied obligation of confidentiality and the protection of § 102(a), but under the bill, these conversations will create commercially-unacceptable risks to the investor and partner.  U.S. inventors will be under the same “Catch-22” as European inventors—unable to talk to potential investors until a patent application is filed, but unable to file a patent application without an investor.  Startups will die before being born.
  • Companies that need a long “invention incubation” period—trial and error, conceive, test and discard, until finding the “magic combination” of techniques—use the § 102(a) grace period to do their R&D in confidence, and file patent applications only when it’s clear which inventions are valuable, and how they work.  Under the bill, a company will have to file a continuous stream of patent applications, many directed to inventions that are dumped under current law.  This will increase patent costs remarkably.

Almost every startup goes through one of these two, many through both, as new companies create new wealth and new jobs under today’s law.  Inventors wait to file quality patent applications until they have quality inventions.  America’s unique and strong right to file in the future, after the inventor and investor know whether the invention is valuable, makes business easy, and prevents wasted costs for inventions that prove worthless.

The “America Invents Act” revokes this historic right.  Property rights turn on non-business legal technicalities created to satisfy bureaucrats, technicalities that will cost $1 billion annually. The bill requires a company to file premature, hasty, and expensive patent applications on every baby-step idea to preserve rights against third parties who are dabbling in the field without intent to develop a commercial product.  The America Invents Act makes these two stories nonviable for startups—because the authors “didn’t think” about them, or didn’t want to.

In 2010, the Kauffman Foundation and Census Bureau released two studies on job creation.  Both found that “net job growth occurs in the U.S. economy only through start up firms.”  If creating new jobs is Congress’s Job One, then killing the America Invents Act is a good place to start.

The proponents’ arguments do not survive scrutiny

Proponents suggest that the bill does away with complex and costly interferences.  That’s true, but irrelevant.  Under 100 applications per year end up in interferences.  In contrast, the change to today’s “§ 102(a)” grace period affects commercial decisions and raises costs for hundreds of thousands of inventions per year, during the time before filing, by giving inventors and patent attorneys time to get it right the first time.  Because the Patent Office has no insight into the pre-filing process of invention, it simply hasn’t taken into account the realities of invention incubation and the costs of its proposal.  Further, the proposed replacement, “derivation proceedings,” are the most costly disputes in patent law in those jurisdictions where they exist.

Second, proponents argue that provisional applications will be a cheap way to preserve rights.  But that isn’t true under the new law.  Under current law, a cheap provisional is useful to show conception and diligence.  But under Patent Reform, a provisional application only provides legal benefit if prepared with full § 112 ¶ 1 care and completeness.   For a typical startup invention, the cost in attorney fees and inventor time for a provisional application is $10,000 or more—a formidable barrier to an entrepreneur’s first conversation with an investor.

Third, proponents argue, “The bill locks in rights if you publish a disclosure of the invention.”  But all companies rely on secrecy for their future plans.  No company publishes its most sensitive and advanced technology years before introduction.  This argument ignores business reality.


This intriguing question and its implications for US economic policy are tackled in the groundbreaking book Great Again, by Henry R. Nothhaft with David Kline.  They answer the above query with a series of questions:

Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, the manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before?  One whose potential uses were at best unknown, and possibly nonexistent?  And one for which the total current market size was exactly zero?

Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months.  The book asks “how many of today’s Apples are not getting a chance?”

The authors use the above example to make a broader point that theUSis failing economically and technologically because of the policies we are pursuing.  They show that all net new jobs created in theUSsince 1977 (and possibly longer) were created by startups like Apple.  All increases in real per capita income are due to new technologies and most revolutionary/disruptive technologies are created by startups and individual inventors.  So what are the policies that have undermined our economy, by undermining technology startups?

The book examines five areas:

1.Role of regulations.  The Authors show that our tax policies, Sarbanes Oxley and our indifferent (some might say arrogant) regulators’ application of well meaning regulations to startups is driving them either overseas or out of business.

2. Underfunding the patent office. This is costing theUS millions of jobs and billions in GDP.  According to the authors, each issued patent is worth 3-5 jobs on average, particularly patents issued to startups.

3. Manufacturing policies in the US.  Manufacturing is key, particularly in a world that does not respect property rights in inventions, to ensuring that theUS profits fromUS innovation and not other countries.  TheUS is also losing the global battle for human talent.

4. Battle for global talent. Our restrictive immigration policies are depriving theUS of talented entrepreneurs such as Andy Grove, founder of Intel.

5. Funding for research.  The book shows that our spending on basic science and engineering is not only declining as a percentage of GDP, but the system has become short-term oriented and bureaucratic.

While this book tackles complex issues, it is a quick easy read.  It is full of interviews from entrepreneurs, venture capitalists, and technologists who built America’s technology startups over the last three decades.  Great Again provides numerous real life examples to illustrate its points.

This pioneering book shows how the US can create jobs and increase per capita income.  The policy prescriptions are based on solid science.  Just cutting government spending (balancing the budget) will not cause theUSeconomy to grow vigorously, we need pro-growth policies.  The authors are some of the few people that understand what policies are needed for the US to be GREAT AGAIN.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft and David Kline

BILSKI: the Good, the Bad, and the Ugly

First, the decision that Bilski’s claims were not considered to be patentable subject matter is not surprising.  The Supreme Court’s hostility to the Bilski patent was evident in oral argument.


It is not surprising that the most patent friendly Justice (based on the opinions in this case) is Justice Kennedy.  President Ronald Reagan, who was the last president to understand the importance of patents to economic growth, appointed him.  For more information see National Inventor’s Day.  The so-called “conservative” justices on the court could learn a lot by reviewing Reagan’s understanding of patents and how they fit into his economic program.

No categorical rule was proclaimed against business method patents.

Section 101 similarly precludes the broad contention that the term “process” categorically excludes business methods. The term “method,” which is within §100(b)’s definition of “process,” at least as a textual matter and before consulting other limitations in the Patent Act and this Court’s precedents, may include at least some methods of doing business. p. 10.

The Court acknowledges that the “machine or transformation test” might inhibit patents on software.

The machine-or-transformation test may well provide a sufficient basis for evaluating processes similar to those in the Industrial Age—for example, inventions grounded in a physical or other tangible form. However, there are reasons to doubt whether the test should be the sole criterion for determining the patentability of inventions in the Information Age.  As numerous amicus briefs argue, the machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals. p. 9.

The Court acknowledges, (Kennedy), that there is no good definition of a business method patent.  I have made a similar observation in Bilski, Software Patents and Business Method Patents.

The following passage provides a ray of hope that the Court may someday reach a proper analysis of section 101:

that the term “process” categorically excludes business methods. The term “method,” which is within §100(b)’s definition of “process,” at least as a textual matter and before consulting other limitations in the Patent Act and this Court’s precedents, may include at least some methods of doing business. See, e.g., Webster’s New International Dictionary 1548 (2d ed. 1954) (defining “method” as“[a]n orderly procedure or process . . . regular way or manner of doing anything; hence, a set form of procedure adopted in investigation or instruction”). The Court is unaware of any argument that the “‘ordinary, contemporary, common meaning,’” Diehr, supra, at 182, of “method” excludes business methods. Nor is it clear how far a prohibition on business method patents would reach, and whether it would exclude technologies for conducting a business more efficiently. p. 10.


The concurring opinions (Stevens, Ginsburg, Breyer, Sotomayor) (Breyer, Scalia) show that most of the Justices want a categorical rule against business method patents.  However, they fail to provide a definition of a business method patent.  Because the Justices refuse to provide a definition, it is likely that different Justices mean different things by a business method patent.  The only clue as to what they mean by a business method patent is either a way of organizing people or a patent related to finance or money.  I explain why excluding finance and money from patentable subject matter is flawed at Is Money and Abstract Idea.

The Opinion leaves behind a confused set of Jurisprudence on Section 101.  Steve Kunin’s AIPLA presentation is excellent at pointing out the nonsense of the Court’s previous opinions on point.

The Opinion seems to overturn State Street, which was the most intelligent statement of section 101 by our Courts.


The Court confuses statutory subject matter 101 with Novelty 102 and Non-Obviousness 103.  For instance, Justice Kennedy writes:

In light of these precedents, it is clear that petitioners’ application is not a patentable “process. Claims 1 and 4 in petitioners’ application explain the basic concept of hedging, or protecting against risk: Hedging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class. p. 15.

Whether Bilski claims a well known economic practice is irrelevant to a 101 analysis.  Confusing and blending the different sections of the patent statute is a consistent problem of the Supreme Court,  and first year patent law associates.

The Court again proves that they do not understand that every invention is a combination of known elements and that pointing out that one of the elements is known provides no insight about a patent.  Specifically the Court writes,

These claims attempt to patent the use of the abstract idea of hedging risk in the energy market and then instruct the use of well-known random analysis techniques to help establish some of the inputs into the equation.

For more information see   Non-Obviousness: A Case Study in Judicial Activism.

All of the opinions of the Court embrace the myth that a patent is a monopoly.  A patent is a property right.  Just as individuals have property rights in land or automobiles.  Property rights are derived from Locke’s theory of Natural Rights. This is completely consistent with patents.  For more information, please refer to, The Myth that Patents are a Monopoly: and Scarcity – Does it Prove Intellectual Property is Unjustified? .  The Court would be wise to consult the preeminent  philosopher on Capitalism: see Ayn Rand on Intellectual Property.

The Court repeats the familiar myth about the Preamble to the Patent and Copyright clause of the Constitution.  We know this is a red herring, because the Court and other proponents of this theory never discuss that a trashy novel which does not “promote the Progress of Science and useful Arts” should not receive Copyright protection.  In addition, the same argument is made with respect to the second amendment and the Court clearly rejected this interpretation.  It is Intellectual Fraud to suggest that the Preamble is meant to limit the “rights” of inventors and authors.  For more information see  Levine & Boldrin Argue the U.S. Should End the Patent System .

The Court repeats well known myths about the economics of patents.  For instance, the Court writes patents

can discourage research by impeding the free exchange of information, for example, by forcing people to avoid the use of potentially patented ideas, by leading them to conduct costly and time-consuming searches of existing or pending patents, by requiring complex licensing arrangements, and by raising the costs of using the patented methods. Although [e]very patent is the grant of a privilege of exacting tolls from the public. p. 43.

The Court does not understand that inventions are the only method of increasing real per capita income and are property rights not monopolies. By forcing people to invent instead of copy or perform redundant research we increase our wealth and protect property rights.  For more information see Source of Economic Growth.


Nonetheless, not every new invention or discovery may be patented. Certain things are free for all to use. “Bonito Boats, Inc. v. Thunder Craft Boats, Inc.

Really, the Constitution states that Congress is to secure “for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”  What part of “Right” do the Justices not understand? The Constitution does not allow Congress or the Supreme Court to decide which inventions ought to receive patent protection.  This complete disregard for the Constitution shows that this Supreme Court is hostile to patents and has no intention of doing their Constitutional duty of securing the Rights of inventors.

Why Investors Need to Pay Attention to the Bilski Decision

A significant portion of the value of stocks is represented by intangible assets.  According to Ocean Tomo, Patent Attribution to Equity Returns , 75% of the value of the S&P 500 is intangible assets.  The Bilski case in front of the Supreme Court could significantly affect the value of these intangible assets.

Bilski is a case about whether certain types of technology are patentable subject matter.  The patent in this case was directed to a financial system for hedging commodities risk.  However, the Supreme Court may use this case to undermine patents related to software and business methods.  If the Court does significantly limit the patentability of software based inventions, the value of the intangible assets of many of these companies will be significantly reduced.  (For more information on the Bilski case see, Bilski, Financial Patents, and the Financial Crisis , and Bilski, Software Patents and Business Method Patents .

The most important intangible asset of most companies is their patents.  The nadir in this country’s legal atmosphere for patents occurred in the 1970s.  It is not surprising that the chart above shows 1975 as the year when companies had the lowest percentage of their value represented by intangible assets.   According to the book, The Invisible Edge , the FTC & DOJ used antitrust law to force US companies to give away the technology associated with over 50,000 patents.  The result was the U.S. transferred its cutting edge technology to Japan and many U.S. companies found themselves unable to compete with the Japanese.  The book cites a MITI study that substantiates that most Japanese companies took advantage of this traitorous policy by the U.S. government to catch up with U.S. companies technologically.  This policy also resulted in reduced research and development spending. 


Based on the reports in the post “Bilski Case Provokes Skepticism from Justices” it is clear that the Supremes do not understand patent laws or innovation economics.

It is unfortunate that the Supreme Court justices are so ignorant of patent law and innovation economics.  Justice Sotomayor’s comment that patents in fact “limit the free flow of information” is complete nonsense.  First, the information in the patent would not exist if the inventor had not created it.  Second, patents trade the disclosure of information for a limited term property right.  As a result, patents foster the creation and dissemination of information.  Justice Breyer’s comment if everything that “helps a businessman succeed” is patent-eligible, it would “stop the wheels of progress” shows a complete ignorance of the history of patents and technological progress.  Before the advent of the modern patent system in the US, technological progress was so slow that per capita incomes had not changed in over 2000 years.  Since the advent of the modern patent system, we have had an unprecedented explosion in technological innovation.


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