A different SCOTUS decision – touching on intangibles

In the middle of all the historical Supreme Court decisions this week there was this interesting case that touches upon intangible assets: Sekhar v. United States. In this case, SCOTUS ruled that threatening a person to make a recommendation on an investment is not extortion because a recommendation is not “property” under the Hobbs Act. In that ruling, the Court overturned the Court of Appeals for the Second Circuit, which ruled that there was “a property right in rendering sound legal advice.” However, SCOTUS determined that “property” must meet the following test: “The property extorted must therefore be transferable–that is, capable of passing from one person to another. The alleged property here lacks that defining feature.” In this case, the Court was following on an earlier case Cleveland v. United States, 531 U. S. 12 (2000) that held that a application for a video poker license is not “property.”
Interestingly, the Justices split slightly in the reasoning. In his concurring opinion, Justice Alito argued that a recommendation is not property. In a note in the majority opinion, Justice Scalia stated:

The concurrence contends that the “right to make [a] recommendation” is not property. Post, at 4 (ALITO, J., concurring in judgment). We are not sure of that. If one defines property to include anything of value, surely some rights to make recommendations would qualify–for example, a member of the Pulitzer Prize Committee’s right to recommend the recipient of the prize. I suppose that a prominent journalist would not give up that right (he cannot, of course, transfer it) for a significant sum of money–so it must be valuable. But the point relevant to the present case is that it cannot be transferred, so it cannot be the object of extortion under the statute.

Justice Alito went on to state that “If Congress had wanted to classify internal recommendations pertaining to government decisions as property, I think it would have spoken more clearly than it did in the Hobbs Act.” Given that the Hobbs Act was passed in 1951, this supposed lack of clarity not surprise me. At that time, the importance of intangible assets was not recognized; property was clearly tangible, end of story.
The Court might be right in the technical legal definition of “property” in the 18th, 19th and 20th Century use of the term. But it make common sense that the purpose of the Hobbs Act in prosecuting extortion was to punish attempts to gain something of value through the coercion of others. And, as the note quoted above indicates, intangible assets – including recommendations at affect decisions — are something of value. But it was clear from the decision that the Court was not willing to go there. So, it’s up to the Congress to bring the laws into the 21st Century for the Intangible Economy.

That shrinking GDP number

This morning, BEA released its third estimate for 1st quarter 2013 GDP. And the number is 1.8% (the growth in the size of the economy) — down from both the first estimate of 2.5% and economists’ original prediction of 3.2% (see earlier posting). So, what happened? According to BEA “real GDP primarily reflected downward revisions to personal consumption expenditures, to exports, and to nonresidential fixed investment that were partly offset by a downward revision to imports.” The Wall Street Journal elaborates, “downward revision came from services, with spending on legal services, personal care and health care weaker than previously estimated.” In other words, earlier projections on some key areas, such as trade and services, were off.
This illustrates the standard problem in any data collection effort: timeliness versus completeness. There is a reason why BEA now calls the series of report the first, second and third estimates — as opposed to using the term “final estimate” as in the past. These numbers are based on incomplete data. For example, the first estimate comes out before the trade data for the entire quarter is available. Other key piece of data are subject to revisions as well as new data becomes available.
Keep this especially in mind next month. Next month BEA is making a major revision in the GDP calculations. Two of the big changes will help make the GDP data more accurate: capitalization of research and development (R&D)and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.) Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns. As part of this shift, investments in these items will be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. These changes will occur on July 31 with the release of the first estimate of GDP for the 2nd quarter of 2013 and will include revisions going back a number of years (in some cases to 1929).
While this should allow us to get a better picture of the I-Cubed Economy, there will be those who will shout “Obama Administration is fiddling with the numbers.” Untrue and unfair. As the revisions show, these numbers are not set in stone and handed down from on high. They are estimates based on best available data — and therefore changeable.
And for those who decry the changes in GDP to better account for intangibles, I have one simple question: do you really think ignoring the largest part of the economy (i.e. intangibles) give us a better picture of what is going on? Really? If you want to spend your time glued to a rear view mirror that shows you where you were 50 years ago, fine. Just don’t expect that view to correspond to any version of current reality.

New CAP study on economic growth

The Center for American Progress (CAP) has issued a new comprehensive study on restoring U.S. economic growth: 300 Million Engines of Growth. The report is a good compilation of ideas for previous CAP studies and reports. I agree with much that is in the report. My critiques are mostly about what is missing.
The plan focuses on long term growth and the importance of the middle class, rather than short term stimulus. Having said that, they give nod to the role of demand by pointing out that a strong middle class is important to sustaining demand. And they outline six areas for spending that they estimate will create 2.5 million jobs: housing, infrastructure, energy efficiency, work-based training and skills development, pre-K education, and rehiring state & local workers.
The long term recommendations in report take two tracks: people (the “300 million engines”) and the economic ecosystem/environment. On the people side, there is the now standard discussions of education and immigration. [Side note: it is interesting to see how immigration has become a routine part of any discussion of U.S. policies on human capital.] I was disappointed to see the education pat of the report cover only “formal” education and subsume worker training into that formal (i.e. certification-driven and class room based) system. The training section was focused on the need to help worker obtain the skills they need to get jobs — not on the skills they need to keep and improve their jobs. Much more attention needs to be paid to on-the-job training and the continual upgrading of skills and knowledge (what we used to call lifelong learning).
More controversial (and possibly more important) are the report’s recommendations on raising workplace standards: “Weak wage and benefit policies and low workplace safeguards threaten the quality of U.S. jobs.”

To make more jobs good jobs and to strengthen and grow the middle class while substantially reducing poverty, we propose guaranteed paid leave and sick days, better protection in the event of layoffs, a higher minimum wage, better forms of retirement savings, and protection of workers’ right to join a union. Such policies improve productivity, reduce turnover, and provide the middle class with the stability needed for risk taking and increased growth.

I was glad to see this broader view of labor policy included in the report. However, the discussion fell short of how to improve the jobs themselves. There was a nod to the “high road” strategy in government contracting. But, again, more attention needs to be focused on how policy can foster the adoption of high-performance work systems that take seriously the notion that people really are the company’s most important asset. [For more, see my earlier paper Time to Get Serious About Workplace Change.]
The second track of the report is on “strengthening the economic environment.” As one can guess, for CAP this does not mean cutting taxed and getting rid of regulations. Rather, it means a number of proactive government actions that are need to harness that improved human capital:

even a car with a superior engine needs good roads to drive on. What we haven’t addressed yet is the market environment in which our 300 million engines of growth operate. After all, we can educate and train ourselves to be the most productive workers in the world but still underperform as an economy if our tax system creates incentives to move jobs overseas; if our country neglects the basic research that underpins innovation; if the playing field for international trade is tilted against us; if we cede the industries of the future to other countries; if existing industries fall behind because we ignore market failures; if our transportation system is crumbling; and if our energy is dirty and expensive and the supply unsustainable.

Recommendations fall into the following areas:
 •  Create the mechanisms for an adaptive national economic strategy
 •  Lead in clean and efficient energy
 •  Promote science and technology research and development
 •  Balance trade
 •  Rebuild our infrastructure
 •  Restore the housing cornerstone
 •  Ensure capital is available for growth
 •  Construct a responsible, pro-growth tax and budget policy
I won’t go into all of the recommendations in these areas. There are a number of standard ideas (e.g. doubling the Federal R&D budget and creating a National Infrastructure Bank) interwoven with a number of controversial ones (e.g. imposing a carbon tax, creating a currency misalignment trigger, and curbing high-frequency stock trading with a financial transactions tax). I was disappointed to see the report raises the issue of the transfer of intangible assets to low-tax countries but punts on any solutions to the problem.
I would like to comment, however, on the first item: Create the mechanisms for an adaptive national economic strategy. Like most of the recommendations in the report, this is an item CAP has raised before. The recommendation is 1) to reorganize the federal trade and business agencies into a single department focused on business and competitiveness and 2) conduct regular strategic economic assessments based on improved industry and sector data. [The report also lays out the circumstances where government intervention at the industry or company level is justified.]
As I commented before on these proposals, I strongly support the idea of a National Economic Strategic Assessment and improving our statistical system. Concerning re-organization, I am wary of this idea. As a scarred veteran of the last attempt to reorganize Commerce during the 1980’s, I can attest that such a action will not be easy. There are many permutation to the new structure — although some are better than others. There is no way to completely pull all the competitiveness related programs into one Department (e.g. should worker training programs be in Labor or Education). And there is a lot of vested interests in keeping the familiar structures in place.
On the merits of the proposal itself, my sense is that such consolidations aren’t necessarily that helpful. I would support a re-look at the structure of the Commerce Department and the statistical agencies. But there will always be programs and policies that are important to economic competitiveness that will be part of other policy arena’s (such as defense or housing). Thus, I don’t believe a single overarching competitiveness agency is possible. Coordination – rather than consolidation – seems to be the better course of action.
I would suggest another organizational idea: the creation of “competitiveness” agency outside the government. Specifically, we should establishment of National Foundation for Science, Technology, and Creativity patterned after the United Kingdom’s National Endowment for Science, Technology and the Arts (NESTA). As I’ve noted before, NESTA takes a broad view of innovation unlike many other technology and innovation programs. Its portfolio of programs covers a variety of areas, including science awareness, early stage investments in technology companies, open innovation projects, design, and arts and cultural fellowships. NESTA is an independent organization; it complements but does not replace government funding of science, technology, and innovation. A United States version of the endowment could be seeded as a public-private partnership, with initial funding from both sources. It would then use income from the endowment and returns from strategic investments to support most of its activities. Creating a US version of NESTA would complement the assessment process outlined in the CAP proposal.
In sum, the report is a good starting point for a whole series of debate about fostering long term growth in the U.S. economy. Let us hope that we can have that debate – and not either continue to ignore the issue or focus on non-consequential parts of the issue.

Status quo employment data for May

This morning’s employment numbers are roughly at status quo: unemployment rate at 7.6% and 175,000 net new jobs. One of the items I am tracking is the involuntary underemployed (part-time for economic reasons). This represents a waste of human capital, as does the long term unemployed. The number of involuntary underemployed spiked at the onset of the Great Recession and has stayed at a historically high rate with only a slight downward trend (as the cart below shows). Is this part of the “new normal”?
Involuntary underemployed May 2013.png

White House proposal on patents

For a minute, let’s lay aside all the rhetoric about who and what a “troll” is. Let’s look at the Administration’s actual proposals. According to the Fact Sheet: White House Task Force on High-Tech Patent Issues, there are seven legislative recommendations and five Executive actions. Here they are one by one, with my annotated comments:

Legislative recommendations:
1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance. [Comment: Is anyone against transparency? Not that I can tell — at least not in public.]
2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases). [Comment: Is there something wrong with the copyright legal standards that would preclude their adoption in patent cases? If not, this sounds fine.]
3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB). [Comment: OK, this might be controversial if the intent is to restrict software patents.]
4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer. [Comment: This goes after the recent tactic of targeting downstream end users, which is what I define as an example of abusive litigation.]
5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts. [Comment: The argument against this seems to be that it takes away the litigators work-around the eBay decision. From my point of view, shutting down the dual system is a good thing. We need to change how ITC deals with IPR violations as an unfair trade practice.]
6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public. [Comment: Again, transparency good.]
7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges. [Comment: so, what’s the criticism? We should hire unqualified Administrative Law Judges?]
Executive actions:
1. Making “Real Party-in-Interest” the New Default. Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements. This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls. The PTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application. [Comment: Again, is anyone against transparency?]
2. Tightening Functional Claiming. The AIA made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims — particularly in the context of software. The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field. [Comment: Are we against better training and guidance on claim clarity for examiners? Or is the concern that the examiners might make it harder to get software patents?]
3. Empowering Downstream Users. Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology — for instance, for using point-of-sale software or a particular business method. End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement. The PTO will publish new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll. [Comment: Is anyone against providing educational information?]
4. Expanding Dedicated Outreach and Study. Challenges to U.S. innovation using tools available in the patent space are particularly dynamic, and require both dedicated attention and meaningful data. Engagement with stakeholders — including patent holders, research institutions, consumer advocates, public interest groups, and the general public — is also an important part of our work moving forward. Roundtables and workshops that the PTO, DOJ, and FTC have held in 2012 have offered invaluable input to this process. We are announcing an expansion of our outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws. We are also announcing an expansion of the PTO Edison Scholars Program, which will bring distinguished academic experts to the PTO to develop — and make available to the public — more robust data and research on the issues bearing on abusive litigation. [Comment: When in doubt about how to strongly confront a problem, call for more studies.]
5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient. [Comment: Is the real criticism of this proposal that the interagency review might find that limited exclusion (rather than the current blanket “nothing comes in” order) is more appropriate?]

So, what is the bottom line? When I look at all the proposals, I come away the same conclusion as others (for example, see here and here): probably a step forward but doesn’t get at the heart of the problem. The heart of the problem is patent quality.
That is not to say that litigation isn’t an issue (see “How patent trolling went mainstream” and “Tactical Shift Put Patent Firms on Political Radar.” But some have argued that the solution is already in place. According to a recent op-ed in the New York Times (“Make Patent Trolls Pay in Court“): “Section 285 of the Patent Act, as well as Rule 11 of the Federal Rules of Civil Procedure, give judges the authority they need to shift the cost burden of litigation abuse from the defendant to the troll.” Using these tools and the Administration’s proposals will alleviate some of the problem.
But the real key comes back to the patents themselves. We need to make sure that we have the IP equivalent of South Beach waterfront property rather than Everglades swampland.

Annual trade in intangible – revised

This morning’s trade data (see earlier posting) included revisions to the data going back to 1992. For more information, see BEA’s description of the revisions. Below are the revised annual charts for the annual trade in intangibles.
Annual - intangibles 2012  after April 2013 revision.png
Annual - intangibles v goods 2012  after April 2013 revision.png

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

April trade in intangibles

This morning’s trade data from the BEA came in a little better than expected but is still a not-so-good news story. The trade deficit widened by $3.2 billion to $40.3 billion in April. Exports were up by $2.2 billion but imports grew by $5.4 billion. Economist had expected a deficit of $41.0 to $41.5 billion. The story was one of increased US demand for consumer goods and cars offsetting a small increase in foreign demand. The trade deficit in petroleum goods actually declined.
For intangibles the story was the other way around: exports of business services rose slightly more than imports and royalty receipts (exports) rose slightly more than royalty payments (imports). As a result, the intangibles surplus grew slightly by $211 million in April. [Note that last month’s report indicated that the surplus also grew in March. Today’s revised data shows that the intangible surplus actually declined in January, February and March.]
On the other hand, April was a disaster for our trade in Advanced Technology goods. The deficit skyrocketed from $3.4 billion in March to almost $7.9 billion in April. Every category except nuclear technology saw a worsening of its trade position. The biggest growth was in the deficit in information and communications technology (ICT). The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Intangibles trade-Apr13.png
Intangibles and goods-Apr13.png
Oil good intangibles-Apr13.png

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.