What about the small inventor

Yesterday’s posting mentioned the concerns of the small inventor in the patent reform legislation. I still don’t understand why the small inventors think the status quo is so great. It appears their biggest fear is that the large companies have the resources to overwhelm them when it come to patent enforcement litigation. But the status quo system is one that facilitates that litigation where big companies have the upper hand in resources. Right now, patents have become another form of trade secrets, where it is really is not a patent until a court says it is. (In the case of trade secrets, this is part of the law since trade secrets are a form of tort law. In the case of patents, it as just devolved that way). One defender of the status quo even pointed to the fact that half of the patents that are litigated are upheld. I hardly think that this is a strong defense. In other words, half of the patents are thrown out in court. So, the small inventor has a 50-50 chance under the current system of losing, after spending millions of dollars. This is a system worth defending?
The point is made by independent inventors that investors will not fund bad patents. And that a post-grant review system will add to uncertainty. For example, Steven Frank, in IEEE Spectrum: Patent Reform Cacophony, argues that:

A post-grant opposition system, no matter how finely tuned, would suddenly make patents a far dicer proposition. Even if European statistics give a patent a 92 percent chance of escaping opposition, all eyes would lock onto that vulnerable 8 percent.
It only makes sense: recent studies confirm that the more valuable the patent, the more likely it will face opposition. Because investors assume they are investing in the winners—that is, in research likely to be profitable and therefore to invite patent oppositions—values placed on technology companies will probably fall as perceived risk, expense, and delay increase. Inventors, for their part, may fear that the visibility of professional investment can turn otherwise unobtrusive patents into targets.

I would argue just the opposite. Investors really have no way of knowing whether are investing in a good patent or not. They assume. And that assumption is more and more under attack. They can get an independent patent evaluation company. But until an infringement action is taken, the patent is just an assertion. The investor has to be based on weighting the risk of having an invalid patent with the possible rewards from licensing (or infringement damages). A legal system that rewards me with triple-damages and the ability to shut down a company through injunctions skews the risk/reward calculation toward the decision to invest in a bad patent (potentially low cost/high reward). That calculation is also skewed toward overly broad patents. A narrow patent has a better chance of being upheld, but have much lower licensing potential. A broad patent might be thrown out, but if it is upheld it can go after a much larger income base.
So, unless you are actively in the business of licensing and/or suing, there is little incentive to invest in patents. An investment in a CDO backed by subprime mortgages look more certain that an investment in a patent portfolio. As a result, the nascent market in securitizing patents could be still-born. Securitization would be a big step forward for independent investors, opening up a whole new avenue of financing. But unless there is more certainty on patent validity, the door to that market will remained closed.
From the point of view of the inventor, as Abril and Plant, point out in “The Patent Holder’s Dilemma: Buy, Sell or Troll,” (available by subscription only) the options are build, license or troll. The pressure, they argue, is to troll:

Imagine being a recent graduate in computer science, having invented a new and improved method for displaying browser plug-ins. With help from some generous friends and the last bit of your life savings, you are successful in patenting your invention. You’re on top of the world. Now what? You consider starting up a corporation to commercialize your innovation—except that you are hoping for an academic career, not an entrepreneurial one, and do not have the $2 million in capital funds necessary to start the business. Since the innovation necessitates being embedded in other components to go to market, you consider licensing or selling your patent to Big Tech Co.—except you don’t think you have much leverage and will probably get sold short. Exhausted by the proactive approach, you consider selling it to an attorney who promises to find and litigate any infringement suits on a contingency basis. What’s an innovator to do to reap the rewards of the patent?

The key to this argument is the part about “Since the innovation necessitates being embedded in other components to go to market.” Herein is the gist of the differences in industries. In IT industries, there are very few stand- alone patents. Embedding is the norm. So licensing is key. In some other areas, there is a greater possibility for small entrepreneur to actually make the product. The folks who have a possibility of making have a different mindset and business model from the folks who have to license or sell.
One of the other arguments used in the debate is about strengthening US manufacturing — and how the small manufacturers are put at a disadvantage. But even if you decide to make, that doesn’t mean that you are going to be contributing to the US manufacturing base. The Licensing Executive Society’s guide, The Licensing Decision, suggests that you consider make the product abroad:

If you decide to start your own business or take on a new product line based on your invention, production can be a very expensive undertaking. Many companies look to foreign manufacturing as a way to reduce costs. Countries and regions that have been active in this type of outsourcing include China, India, Pakistan, Mexico, Lain American, Asia and Eastern Europe.

Given that advice, I’m not sure that the competitiveness and US manufacture argument holds much weight.
And then, as I discussed in an earlier posting, there is the whole issue of what happens when non-US manufacturers start using our patent system against us.
All in all, I think the evidence is that the patent system is seriously flawed — and that everyone, including the independent inventor and small business, would be best served by fixing the problem. The status quo is a continuing drag on US competitiveness and innovation.

Patent bill — House amendments

For those of you who like to watch the legislative sausage machine in action, the House Rules Committee has posted the list and text of the amendments that will be allowed when the Patent Reform Act comes to the House floor — see COMMITTEE ON RULES – H.R. 1908 – Patent Reform Act of 2007. This includes a substantial manager’s amendment.

Politics of patent reform

Ever since the story came out last week about the AFL-CIO opposing the patent reform bill (they really aren’t opposing the entire bill, just two provisions – but I’m getting ahead of myself), I’ve been looking more closely at the politics of the issue. And it is fascinating. While Washington normally slumbers in August, opponents of the legislation have been marshalling a blitz. Part of this has been a demonization of the legislation as anti-small inventor and US manufacturers and pro-multinational corporation (an interesting tactic since big pharma is a leading opponent of the bill). Hence the opposition of anti-corporation groups like the labor unions.
The anti-bill group is an interesting coalition (as most coalitions are) of groups with different agendas. There are the hard core that want to kill the bill and any other changes. They think the status quo is just fine. (For good articulation of this point of see the thoughtful comment by Steve Wren in Techdirt: Unions Make Ridiculous Arguments Against Patent Reform.)
The other part of the coalition are groups like big manufacturers (and the industrial labor unions) and big phrama. It appears that they don’t want to kill the bill – just gain enough leverage to change it more to suit their interests. For example, the AFL-CIO letter raised two objections about post-patent review process and apportionment of damages. The letter doesn’t seek to kill the bill, just amend it: “We urge you to take the concerns of the manufacturing sectors of these issues into account in developing the final version of the Patent Reform Act of2007, H.R. 1908.”
For a scorecard of who is on what side, see Tech vs. Tech: The Patent War – Chris Frates – Politico.com.
This coalition could come apart on some issues, such as international harmonization – which means switching from our current system of “first-to-invest” to the “first-to-file” system the rest of the world uses. First to invent is a sacred principle for the small inventor. The rest of the coalition actually wants to change. For example, see the letter from James Greenwood of the Biotechnology Industry Organization – In Rebuttal: The U.S. patent system works

The Patent Reform Act includes provisions that would improve patent quality and harmonize U.S. patent law with international patent law — worthy goals everyone can support.
. . .
The truth is, despite the legitimate concerns raised by the biotech industry and other stakeholders, we are close to meaningful reform of our nation’s patent system. We can agree across industries on many basic principles and can negotiate many of the remaining complex issues.

So there are three ways that this could go – 1) the pro-bill forces are strong enough that the bill goes through, 2) enough changes could be made to defuse the concerns – specifically big manufacturers and big pharma – that the bill passes or 3) the anti coalition kills the bill.
My guess is that it will be either 2) or 3). My hope is that it is 1) or 2) – if this bill dies, then I think we will not see legislation for probably a decade. The status quo prevail – as modified by the Supreme Court.
So, we will see. The House Rules Committee is scheduled to meet this afternoon to consider what amendments will be allowed to the bill. The key lies in that middle group seeking leverage. Are they willing to live with the status quo for a long time or are they willing to compromise? And how far is the pro-side willing to go? As the old saying goes, be careful what you wish for, you may get it.

Snippets from the I-Cubed Economy

Two stories from this week’s Christian Science Monitor that illustrate the shifts taking place as the I-Cubed (Information-Innovation-Intangibles) Economy evolves. The first is about the rise of China as an innovative economy — China ready to leap from industrial to information-age economy:

After 30 years of securing China’s role as the cut-rate factory to the world, its central planners are pouring money and political will into becoming an innovation economy.
But like other Asian tigers before it, China is finding making the shift from textile mills to Silicon Valley isn’t easy. The biggest challenge is nurturing technological creativity in a society run from the top down, says a chorus of foreign and local experts.

I think the story is too pessimistic about China’s shift. By focusing on the top-down view of China, they (and other observers) may be missing the bubbling entrepreneurial activity coming from below. Remember, we said the same thing about the Japanese economy — before they took over the consumer electronics industry.
The second story is about the Great global shift to service jobs:

For the first time in human history, more people are laboring in service trades than in food production, according to data gathered by the International Labor Organization (ILO), an agency affiliated with the United Nations.
As recently as 1996, agriculture accounted for 42 percent of world employment, with another 21 percent of workers in goods-producing industries and 37 percent in services. By last year, the ILO says in a report released over the weekend, 42 percent were in services, 37 percent in agriculture, and 22 percent in industry.

Most of the story talks about the opportunity this shift presents for developing countries. On this, I think they may be too optimistic. India has been able to capitalize on the offshoring of services, but that is because of a large English-speaking, well-educated, technically trained set of workers (large by industry standards, but still a small percentage of the Indian population). Other countries may not be able to repeat that success (Singapore and Ireland as special cases). Offshoring of services will remain a challenge for US competitiveness, but not necessarily a huge breakthrough for most developing countries.
By the way, the ILO report – “Key Indicators of the Labour Market (KILM), fifth Edition” shows that the US is the world leader in productivity.

What’s more, the report also shows that the productivity gap between the US and most other developed economies continued to widen. The acceleration of productivity growth in the US has outpaced that of many other developed economies: With US$ 63,885 of value added per person employed in 2006, the United States was followed at a considerable distance by Ireland (US$ 55,986), Luxembourg (US$ 55,641), Belgium (US$ 55,235) and France (US$ 54,609).
However, Americans work more hours per year than workers in most other developed economies. This is why, measured as value added per hour worked, Norway has the highest labour productivity level (US$ 37.99), followed by the United States (US$ 35.63) and France (US$ 35.08).

So, the French are almost as productive as the Irish – home of the Celtic Miracle. And on an hour by hour basis, the French are almost as productive as the Americans. Interesting.

Copying designer fashion

Should knock-off fashion designs be illegal? That is the latest intellectual property issue, as the New York Times relates in Before Models Can Turn Around, Knockoffs Fly:

A debate is raging in the American fashion industry over such designs. Copying, which has always existed in fashion, has become so pervasive in the Internet era it is now the No. 1 priority of the Council of Fashion Designers of America, which is lobbying Congress to extend copyright protection to clothing. Nine senators introduced a bill last month to support the designers. An expert working with the designers’ trade group estimates that knockoffs represent a minimum of 5 percent of the $181 billion American apparel market.
Outlawing them is certainly an uphill battle, since many shoppers see nothing wrong with knockoffs, especially as prices for designer goods skyrocket. Critics of the designers’ group even argue that copies are good for fashion because they encourage designers to continuously invent new wares to stay ahead.
. . .
The designers seek to outlaw clothing that looks very similar to their originals but is sold under someone else’s label. They want to extend laws that already ban counterfeit handbags and sunglasses with designer logos, which reportedly account for as much as $12 billion of sales. A reliable estimate of knockoffs cannot be determined because designers and retailers disagree on which clothes are copies and which are merely “inspired” by a trend, a normal part of the fashion food chain.

Unfair counterfeiting or healthy competition? Stifling creativity or encouraging it? Good for consumers or bad for consumers?
All tough questions in the I-Cubed Economy.

Ed McGaffigan

It is with great sadness that I post the following obituary from this weekend – Nuclear Regulatory Commissioner Edward McGaffigan Jr.. I worked with Ed during the competitiveness debates of the 1980’s when we were both on the staff of Senator Jeff Bingaman. That including working together on the creation of Sematech and watching Ed steer a successful course for the creation of many DoD technology programs while I looked after the civilian side. While much has been said about Ed’s work in the NRC, his time on Senate staff was extremely productive and of great benefit to the nation, even while he was living out is own personal tragedy of his wife’s illness. He was an exemplary public servant – as an earlier story from last year about his staying on illustrates – A Public Servant to the Last. He will be missed.