Defending an intangible

You probably know that the credit rating agencies are under attack for their role in the current credit problem (see for example How Rating Firms’ Calls Fueled Subprime Mess – WSJ.com). Now the agencies are fighting back. As this oped in the Wall Street Journal by Vickie Tillman, executive vice president of Credit Market Services for Standard & Poor’s, (Don’t Blame the Rating Agencies) recognizes, the agencies live or die by an intangible:

Most important: Reputation and integrity are our most valuable long-term assets, which would make it imprudent for S&P to provide anything other than fair, objective and independent ratings opinions.

Recognizing the importance of an intangible asset is one thing; managing it is another. As the sage unfolds, we will witness a prime case study in reputation management. Should be interesting.

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Bernanke and the history of housing

The press attention on this morning’s speech by Fed Chairman Ben Bernanke is focused, rightly so, on reading the tea leaves as to the direction of monetary policy and interest rates (see Wall Street Journal, Reuters via washingtonpost.com, Associated Press via washingtonpost.com, the New York Times — which split somewhat in their assessment of the possibility of a future rate cut).
However, the bulk of the speech is a history lesson, as befits a former professor. In this case, the lesson is on the development of the housing and home mortgage industries. Bernanke describes the role of the government and other institutional factors in the development of these markets and of public policy, especially monetary, in this area. For those interested in the long term direction of the Fed (rather than just the next interest rate cut), I would suggest paying close attention to his conclusion:

I hope this exploration of the history of housing finance has persuaded you that institutional factors can matter quite a bit in determining the influence of monetary policy on housing and the role of housing in the business cycle. Certainly, recent developments have added yet further evidence in support of that proposition. The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments.

Looking at the evolution of these institutional factors will be critical as we bring our policies in line with what is already happening in financing the I-Cubed Economy.

Mike Huckabee gets it

From Candidate: Former Arkansas Governor Mike Huckabee Proposal: Focus on Arts and Music Education – washingtonpost.com:

To hear Huckabee tell it, expanding arts and music instruction is not only a cure-all for much that ails America’s schools, but also key to keeping the country competitive. The economy of the future, he says, will place a premium on creativity, and even scientists and engineers will need to be able to be inventive, in addition to knowing the periodic table of elements.
“I call it a weapon of mass instruction. It’s a critical part of education,” Huckabee said during a visit to Northern Virginia last weekend. “A lot of education today has become left-brain only. All we’re doing is . . . nothing more than data download: taking data from the teacher and downloading it to kids. And we wonder why 6,000 kids drop out of school every day and why so many millions more kids sleep through the day with their heads down on the desk, taking the most expensive nap in America. The reason they’re doing it is not that they’re dumb but that they’re bored.”
He added: “If you don’t stimulate both sides of a human’s brain, you’re simply generating half the capacity. This whole idea that music and art are great programs if you can afford them and have room for them — that’s utter nonsense. It’s the stupidest thing we’ve done to education in the last two generations.”
. . .
As governor, he pushed through a 2005 law requiring elementary schools to offer 40 minutes per week of music and art and requiring high school students to take at least a half-year of art, music or dance to graduate.

Now the tough questions: would President Huckabee do the same as Governor Huckabee and change the No Child Left Behind law to require more art and music? Would he increase funding for arts and music education? Apparently not, as Huckabee is a strong believer in leaving education most up to state and local governments.
However, he would not be the first President to change his tune on the role of the Federal government once inside the White House (the most famous being “small-government” advocate Thomas Jefferson’s extraordinary use of Presidential powers to buy the Louisiana Territory).
At least Mike Huckabee understands the importance of stimulating all forms of creativity in the I-Cubed Economy.

New patent infringement case

From Information Week — Amazon, Google, Yahoo, And Others Sued For Automating Their E-mail:

Six major Internet companies have been sued for using computers to process their e-mail.
AOL, Amazon, Borders, Google, IAC, and Yahoo stand accused of violating a patent on automatic message routing held by Texas-based Polaris IP.
Attorneys representing Polaris IP filed a claim of patent infringement on Monday in U.S. District Court of the Eastern District of Texas in Marshall, Texas.
The lawsuit charges the companies with implementing systems that “comprise interpreting electronic messages with rule base and case base knowledge engines” as described in the patent held by the plaintiff, “Automatic message interpretation and routing system.”
The lawsuit seeks an injunction against continued infringement. If granted — a remote prospect at best — the injunction would have a significant impact on the defending companies.
A more likely scenario appears to be a payday for the plaintiff. “It looks like Polaris IP is in the business of licensing patent rights and has no desire to enforce its requested injunction,” said Dennis Crouch, associate professor of law at University of Missouri School of Law and the author of the law blog Patently-O, in an e-mail. “I expect that Polaris IP will be willing to settle these cases for what it believes is a reasonable six- or seven-digit figure.”
Crouch pointed out that the message routing patent at issue has been involved in litigation many times. “There are no published opinions associated with these cases and they have all been settled,” he said.
Polaris IP, Crouch observed, “appears to be part of a web of IP-related companies associated with attorney David Pridham.” These companies include Orion IP, Constellation IP, IP Navigation Group, Cushion Technologies, CT IP Holdings, Triton, Circinus IP, and Firepond.
Pridham did not respond to a request for comment.
The method and system detailed in the patent describes a way “for automatically interpreting an electronic message including the steps of (a) receiving an electronic message from a source; (b) interpreting the electronic message using a rule base and case base knowledge engine; and (c) retrieving one or more predetermined responses corresponding to the interpretation of the electronic message from a repository for automatic delivery to the source.”
The Eastern District of Texas has become a favored venue for filing patent lawsuits. Polaris IP has launched three other patent cases there in the past two years against numerous technology companies, including Art Technology Group, Oracle, and Sirius Satellite Radio. All three of these cases have involved the same patent, which has a long legal history.
“The Eastern District of Texas has seen a flood of patent litigation in recent years based on its reputation as a patent-friendly court,” said Crouch. “Interestingly, that reputation is rapidly changing as the court invalidates more patents.”

Legitimate licensing or patent troll? Without knowing the validity of the patent (whether it is overly broad, etc.) it is impossible to say. The patent has a “long legal history” but that could mean almost anything. And since the cases have all been settled, no court has ever ruled on the validity. One can presume that since the defendants settled, they thought the patent valid. But there is a history of cases being settled because the settlement is cheaper than the cost of winning the lawsuit, not even figuring in the possibility of losing.
To me, the case points out one big flaw in the current system — the necessity of a lawsuit. Yes, I know there are lots of lawsuits on numerous frivolous ground (remember I live in DC, home of the infamous drycleaner pants suit). But it seems to me that there are an extraordinary number of patent suits, where the cases should be straight forward: either a patent is valid or it isn’t. After all, there doesn’t seem to be a number of lawsuits over the standard land claim. Unless there are unusual circumstances, it is pretty clear whether I own my home or not.
There is a lot of strum und drang over the pending patent legislation. I can’t comment on each and every specific provision of the bill. I do know that the patent system needs to restore some sense of certainty to the process. Right now, it is coming to resemble “Lets Make a Deal.”

Update:
The patent complaint is available on the New York Times website. Here is what the Time’s technology blog has to say on the case:

Maybe they haven’t sued the whole Internet, just a good chunk of it. Polaris IP, a patent firm, has filed a patent infringement suit against Google, Yahoo, Amazon.com, A9.com, Borders, AOL and IAC/InterActiveCorp, which owns Ask.com.
Polaris is the owner of United States Patent No. 6,411,947, for an “Automatic Message Interpretation and Routing System.” It is not entirely clear what the patent covers or how Google, Yahoo, et. al. infringed on it. We’ve contacted the lawyers for Polaris for details.
The patent appears to cover a customer service system that can analyze incoming customer e-mail messages and decide whether they can be handled automatically or need review by a human. According to the complaint, Polaris claims that Google’s advertising systems, including AdWords and AdSense, which analyze electronic messages to determine which ads to place next to them, infringes on its patent. Yahoo and others similarly infringe on the patent, according to the complaint.
Patent claims, of course, are a dime a dozen. And this case was filed in the United States District Court for the Eastern District of Texas, Marshall Division, the nation’s preferred venue for patent plaintiffs.
But last year Polaris filed a suit against Kana Software alleging that it had infringed the same patent. Kana settled the case in March and agreed to license the technology from Polaris, though terms of the settlement were not disclosed.

The comments on the Times blog are very interesting.

Financial innovation

When we think of innovation, the first thing that usually comes to mind are the “high-tech” industries — IT, biotech, nanotech,etc. But one of the most innovative industries in the United States is financial services. Some of those innovations are turning out to be not so good, such as collateralized debt obligations (CDOs) backed by subprime mortgages. But, in the spirit of every cloud having a silver lining, other innovations are popping up because of the credit meltdown. Take, for example, this item from a Washington Post story Home Buyers Forced to Change Tactics about a woman whose nonconforming jumbo loan fell through:

Her loan officer advised her to apply for a piggyback mortgage, meaning two loans. She made a $350,000 down payment, as planned. Then she split the remaining $600,000 between a first loan for $417,000 and a second at a higher interest rate for the balance.
The combined rate of the two, 6.875 percent, was about half a percentage point lower than the jumbo loan would have been, the mortgage company said.

Not everyone qualifies for such a loan package, as the story points out. The woman needed to put up a large down payment and had a good credit rating which allowed her to get the second mortgage at an acceptable rate.
But the story does make the point. Financial services continues to be very innovative — even when it is part of cleaning up their own mess.

Chinese patents

In one of yesterday’s postings, I made reference to possible use of patent laws by Chinese companies against US companies. Today’s entrepreneurship column in the Wall Street Journal – “Small Talk” by Kelly Spors – tells the following story about Chinese patents:

The big risk: If another company patents your idea first, it can turn around and sue you for infringement. It isn’t as much about “getting a patent in China as preventing other people from getting one,” says Siva Yam, president of the U.S.-China Chamber of Commerce, a Chicago-based organization that helps businesses navigate China. Mr. Yam says the Chinese government is trying to better enforce patents, so having a Chinese patent may be worth more in the future.
Mr. Yam recalls a few years back when a Pennsylvania company decided not to seek a patent in China since it was already selling the technology there. But a Chinese company later sought and received a patent on a similar technology and then sued the U.S. company, along with writing letters to its customers threatening to sue if they continued doing business with the firm. The Chinese company eventually backed down, but not before the U.S. company had spent ample time and money fending off the claims.

Oh, you say, but that is all about patents in China – not US patents law. True, but it illustrates my point that the Chinese clearly understand how to use patents as a defensive weapon.
And there is this Financial Times story, which ran last October – China asserts patent rights in US courts:

Chinese companies have begun to defend their patent rights increasingly aggressively in US courts, legal experts say.
“Within the past year or two, the Chinese have begun standing up for themselves and testing the limits of intellectual property rights that are asserted against them,” says Mark Hogge, a patent attorney at the law firm Greenberg Traurig. “They are learning the rules of engagement in the US marketplace and that includes intellectual property litigation.”
Some Chinese companies are even going on the offensive in the US for the first time, and filing their own patent lawsuits against US competitors.
This year, Netac, a manufacturer of computer flash memory products based in Shenzhen, China, brought a patent suit against a New Jersey rival in a federal court in Texas, in what is believed to be the first time that a mainland Chinese company has sued an American one for patent infringement.
“This could be a harbinger of things to come,” says Tony Chen, a US-trained patent attorney in the Shanghai office of the US law firm, Jones Day. “Chinese companies are treating intellectual property lawsuits as an effective competition tool in the marketplace.”

As a March 2007 story in EuroBiz Magazine – “Home and Way” put it:

As for the Netac case, it is uncertain how and when it will be resolved, but it does represent an important shift in the IP debate. With Chinese firms making more an effort to stand for their brainwork, multinationals will need to keep their guard up.

So, tell me once again how defending the current patent system (which is set up to encourage defensive patenting and litigation as a business strategy) is going to help US competitiveness?
Don’t say you haven’t been warned.

Patent reform snag?

According to this morning’s Wall Street Journal:

A bipartisan effort in Congress to overhaul the patent system — a priority for some of the nation’s biggest technology companies — is hitting resistance because of concerns the U.S. might be exposed to greater foreign competition.
Patent overhaul appeared to be on a fast track earlier this summer. But plans for a quick vote got derailed last month after the AFL-CIO entered the debate, warning that innovation — and union-backed manufacturing jobs — might be at risk if the changes were adopted. The union has considerable clout in the Democratic Congress and expressed concerns with provisions that would expose patents to expanded challenges and might limit damages for infringement.
“At a time when the Chinese government is constantly being challenged to live up to its intellectual-property obligations, we do not want to take actions that may weaken ours,” the AFL-CIO’s legislative director, William Samuel, said in the pointed missive that was circulated on Capitol Hill.

I normally tend to agree with the AFL-CIO on a lot of issues. But on this one they are wrong, wrong, wrong. It seems they have fallen under the spell of the “more-is-better” “lock-it-up-tight” crowd of patents. And they have confused cracking down on counterfeiting with encouraging innovation. As far as I can tell, there is nothing in the patent reform legislation that will hinder attempts to crack down on illegal activities in China.
We made this mistake back in the 1980’s with respect to Japan. In order to fight their tactic of patent thickets (the process of defensively patenting everything under the sun to surround a product with a wall of patents), we proceeded to create our own patent thickets. As a result, the culture of defensive patents grew to a point where it is now putting the culture of innovation at risk.
Going down the same path with the Chinese will only make matters worse.
And what does the AFL propose when the Chinese start filing a bunch of questionable infringement cases here in the US? We know that the Chinese strategy is to move up market in the innovation process. What will happen when they start using our own patent system against us? The answer is simple — companies will move their innovative processes to China (or worse yet, be forced to license their technology) in order to get out from under the threat.
Is that really what we want to have happen?