The Times editorializes today on the urgent need for patent reform, but it is only likely to make the problems worse link here . Its issues with patents include award to the first to file rather than first to invent to bring us into line with the rest of world, the slowness in issuance, the amount and costs of litigation, and the large and growing backlog of applications. The Times seems to feel that the problems will be solved by allowing the Patent Office to keep all the fees it charges and to allow small businesses and inventors to file a low cost preliminary application in order to get a place in the queue.

There is no real discussion of the constitutional grounds for patents being their encouragement to innovation or the product of patents in the creation of more large monopolistic businesses.

As it stands, these measures may go through because business wants them, and its interests are reflected in the views of both parties. Too bad.

But the fact that the Times peddles propaganda like this shows how badly the media have been brainwashed by the self-serving big business propaganda that patents promote innovation, contrary to much evidence.

Felix Salmon poses the question, "Can you patent financial innovations?" And answers, "no"---link here and link here.

His timely example of such a patent application is a company which makes deals with housebuyers to pay a 10% bonus on the value of the loan when it is paid off if the borrower has met all his obligations on time. Time magazine put the model on its list of the 50 Best Inventions of 2010 link here. Salmon thinks this is a neat idea because it would create an additional incentive not to walk away from an underwater mortgage.

But there is that problem of trying to patent a business model. Moreover, it is not clear to me how this model would work. The company making the offer would have to add its margin on to the market interest rate and who would borrow on those terms? In short, this story needs a lot more explanation to be credible. Moreover, the company pushing the idea has invested a lot in promoting it, raising more questions.

In an otherwise interesting article, the Economist ended a story on the Chinese government's campaign to produce more innovations and resulting patents with this, "If ideas are protected, Chinese people will produce more of them" link here.

Yet the rest of the article doesn't really support that conclusion. People are obtaining lots of patents, issued only since 1985, but whether they are innovations worthy of a patent remains open to question. It turns out there are two kinds of patent, a sort that requires a determination of novelty and is good for 20 years and the other, a finding of utility and good for only 10 years. The latter are far more numerous.

The other part of the story is that the government is pushing hard for more patents, offering incentives like academic tenure, residence permits in desirable cities, company bonuses, etc. The incentive effect has been obvious, in the rise of patent creating companies that sell their products on the basis of such collateral rewards. But I wouldn't sell the Chinese short over the longer run. They do respond to market incentives.

China's patent system is likely to be a problem for foreign companies which want to sell or invest there. From experience in other countries which were sticky about honoring foreign patents, until they have a substantial portfolio of their own IP, that of other countries tends to honored only sporadically and minimally.

Matt Mitchell draws our attention to

Stevens "concurring" opinion in Bilski, especially part VI. It is a pretty good summary of why patents are bad, generally. He confines his argument to business method patents, but they are easily extended in most cases.

The relevant part starts on page 41, after he makes a fairly unspecific defense of patents generally. In many sentences in the rest of VI you can just delete "business" or "business method" and reach the same conclusion as Stevens.

For instance, on the disclosure case for business method patents, I have replaced the specific use of terms realating to business methods with the general word "innovations." It is remarkably still a fairly lucid case, using only a find/replace on Stevens' argument:

"Nor, in many cases, would patents on (innovations) promote progress by encouraging 'public disclosure.' Many (innovations) are practiced in public, and therefore a patent does not necessarily encourage the dissemination of anything not already known. And for the (innovations) practiced in private, the benefits of disclosure may be small: Many such (innovations) are distributive, not productive - that is, they do not generate any efficiency but only provide a means for competitors to one-up each other in a battle for pieces of the pie. And as the Court has explained, 'it is hard to see how the public would be benefited by disclosure' of certain (innovations), since the nondisclosure of these (innovations) 'encourages businesses to initiate new and individualized (innovations),' which 'in turn, leads to a greater variety of (innovations).'"

There are lots of other examples in the "concurring" opinion.

Decision is kind of bad news, though. Thought they would end a lot of goofy patents.

The Supreme Court handed down this term's final four decisions today: Christian Legal Society Chapter v. Martinez, on public university limitations on a Christian student group's rights of association; the McDonald v. Chicago case incorporating the Heller gun decision against the states (Huebert's discusssion); Free Enterprise Fund v. Public Co. Oversight Bd. (a Sarbanes-Oxley decision); and Bilski v. Doll, a much-anticipated patent case.

Patent law is mind numbingly arcane, technical, and boring, so let me simplify as much as possible. This case was about what the legal test should be to determine whether certain processes can be possibly eligible for patent protection. For typical practical technical or industrial processes, it's not a difficult question. But for "business-related" methods, such as the one here--which had to do a way for commodities buyers and sellers in the energy market to hedge against the risk of price changes by following a certain mathematical formula--the question gets trickier. Courts are leery of opening the door all the way because then we'd be swamped in even more ridiculous patents than we are now (such as the attempt by Dustin Stamper, President Bush's Top Economist, to secure a patent regarding an application for a System And Method For Multi-State Tax Analysis, which claims "a method, comprising: creating one or more alternate entity structures based on a base entity structure, the base entity structure comprising one or more entities; determining a tax liability for each alternate entity structure and the base entity structure; and generating a result based on comparing each of the determined tax liabilities").

The Court of Appeals for the Federal Circuit (CAFC) tried to do this by adopting a more rigid test than had been used before. They said that a process could be patented only if it (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing--this is the "machine-or-transformation test." Based on this test, the claimed business method was rejected. The problem is, this test is not in the Patent Act. So the Supremes had to take a crack at it. Now I have mentioned this case before, in The Arbitrariness of Patent Law; Supreme Skepticism Toward Method Patents; and Radical Patent Reform Is Not on the Way. This is one of these cases that had patent lawyers crying crocodile tears, gnashing their teeth, acting as if this was just part of the terrible and radical--radical!--movement to scale back patent rights. Anyway, I predicted:"I suspect the Court will choke back a bit on software and business method patents-but not too much." It was obvious from the oral arguments that the Court saw how ridiculous it would be to have an open test that allowed a lot more types of processes be eligible for protection. You could have patents on anything. So they want to choke back on this, and so did the CAFC. Unfortunately, the patent law is there. And the judges have to interpret this mess. It's not their fault, really. I don't blame them for this impossible task. As I noted in a recent post,

As I noted in Another Problem with Legislation: James Carter v. the Field Codes, there is a fascinating paper published in 1884 by James C. Carter, The Proposed Codification of Our Common Law: A Paper Prepared at the Request of The Committee of the Bar Association of the City of New York, Appointed to Oppose the Measure. This paper was an attack on David Dudley Field's attempt to (legislatively) codify New York's common law. Carter opposed replacing case law with centralized legislation. Carter notes that caselaw precedents are flexible and allow the judge to do justice (see also John Hasnas's classic The Myth of the Rule of Law), while statutes are applied literally, even where injustice is done or the legislator did not contemplate this result. Thus, Carter argues, one of the worst effects of legislatively codifying law-replacing organically developed law with artificial statutes-is that it changes the role of courts and judges from one in which the judge searches for justice into mere squabbles over definitions of words found in statutes. As he said at pp. 86-86:

At present, when any doubt arises in any particular case as to what the true rule of the unwritten [i.e., judge-found, common-law developed] law is, it is at once assumed that the rule most in accordance with justice and sound policy is the one which must be declared to be the law. The search is for that rule. The appeal is squarely made to the highest considerations of morality and justice. These are the rallying points of the struggle. The contention is ennobling and beneficial to the advocates, to the judges, to the parties, to the auditors, and so indirectly to the whole community. The decision then made records another step in the advance of human reason towards that perfection after which it forever aspires. But when the law is conceded to be written down in a statute, and the only question is what the statute means, a contention unspeakably inferior is substituted. The dispute is about words. The question of what is right or wrong, just or unjust, is irrelevant and out of place. The only question is what has been written. What a wretched exchange for the manly encounter upon the elevated plane of principle!

Or, as I note in "Legislation and the Discovery of Law in a Free Society," Journal of Libertarian Studies 11 (Summer 1995), "Thus, previously, law was thought of as a body of true principles ripe for discovery by judges, not as whatever the legislator decreed. Nowadays, however, legislation has become such a ubiquitous way of making law that ‘the very idea that the law might not be identical with legislation seems odd both to students of law and to laymen.'" [Bruno Leoni, Freedom and the Law]

The point is, the judges here are merely interpreting arbitrary words of an artificial law, a statute--a written down edict of the legislature, a bunch of words that have no inner harmony, no guarantee of consistency, no relationship to justice. So you can't really criticize the courts too much for how they construe these legal abominations.

Back to Bilski. So the Court rejected the CAFC's holding that the "machine-or-transformation test" was the sole test for determining patent eligibility. They said that while this test "may be a useful and important clue or investigative tool, it is not the sole test for deciding whether an invention is a patent-eligible 'process.'"But they had to find a way to strike down this patent, so they did so based on an older test, one that just said you can't patent "abstract ideas." So, the Court was able to reject the narrow test of the CAFC, without having to allow this business method patent. But they wanted to encourage the CAFC that they could try to find yet other ways to limit questionable method patents: "In disapproving an exclusive machine-or-transformation test, we by no means foreclose the Federal Circuit's development of other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text." I.e., they punted: you guys figure out a better way to shut the doors a bit more, consistent with this statute.

So what do we have: we have a very slight narrowing of patent eligibility by re-use of an old "abstract idea" test; a rejection of the more bright-line, narrower but unstatutory test of the CAFC; and more legal uncertainty. And while the patent bar will use the slightest modification of patent law to cry that the sky is falling, it's not. Unfortunately.

(H/t Anita Acavalos for suggestions re the title.)

Writing in the Washington Post, Kari Lydersen has a short and quite good summary on the pros and cons of gene patents link here. In the case under examination, a woman thinks she might have a gene that predisposes her to breast and ovarian cancer in which case she can decide on preemptive surgery. But, she can't afford the expensive test and it is not covered by her state's Medicaid (other states' Medicaid programs do cover the test). Her story ends up well enough--for her, but probably not for many people.

The article covers the pros and cons of gene patents and the dilemma they present. It doesn't, however, discuss how the applicable patent system might be modified, for example, by having the government pay for the research and development, probably through contracting with the private sector, and then making the test widely available at an affordable price.

This story does make the point, though by inference, that we have a busted health care system as well of a dysfunctional patent system which violates our generally accepted sense of what is right.

Price Waterhouse Cooper has compiled a study of the costs of non-performing entities in patents (otherwise known as trolls) link here

No surprises: the trolls make more from suing than performing entities (manufacturers) do from suing (shorter time to trial, higher success rate, higher damages).

More evidence of a sick system. And the trolls have learned how (jury trial) and where (Eastern Virginia and Eastern Texas federal district courts).

As I note in my article "Radical Patent Reform Is Not on the Way," Mises Daily (Oct. 1, 2009), there is a growing clamor for reform of patent (and copyright) law, due to the increasingly obvious injustices resulting from these intellectual property (IP) laws. However, the various recent proposals for reform merely tinker with details and leave the essential features of the patent system intact. Patent scope, terms, and penalties would still be essentially the same. In the second article of this two-part series, "Reducing the Cost of IP Law," Mises Daily (Jan. 20, 2010), I propose various reforms to the existing patent system--short of abolition--that would significantly reduce the costs and harm imposed by the patent system while not appreciably, or as significantly, reducing the innovation incentives and other purported benefits of the patent system. I list these changes below in generally descending order of importance, without elaboration, as they are discussed further in "Reducing the Cost of IP Law":

Patent Law

• Reduce the Patent Term
• Remove Patent Injunctions/Provide Compulsory Royalties
• Add a Royalty Cap/Safe Harbor
• Reduce the Scope of Patentable Subject Matter
• Provide for Prior-Use and Independent-Inventor Defenses
• Instantly Publish All Patent Applications
• Eliminate Enhanced Damages
• Add a Working/Reduction to Practice Requirement
• Provide for Advisory Opinion Panels
• Losing Patentee Pays
• Expand Right to Seek Declaratory Judgments
• Exclude IP from Trade Negotiations
• Other Changes
  • Increase the threshold for obtaining a patent
  • Increase patent filing fees to make it more difficult to obtain a patent
  • Make it easier to challenge a patent's validity at all stages
  • Require patent applicants to specify exactly what part of their claimed invention is new and what part is "old" (e.g., by the use of European-style "characterized in that "claims)
  • Require patent applicants to do a search and provide an analysis showing why their claimed invention is new and nonobvious (patent attorneys really hate this one)
  • Limit the number of claims
  • Limit the number of continuation applications
  • Remove the presumption of validity that issued patents enjoy
  • Apportion damages to be proportional to the value of the patent

Copyright

• Radically reduce the term, from life plus 70 years to, say, 10 years
• Remove software from copyright coverage (it's functional, not expressive)
• Require active registration and periodic re-registration (for a modest fee) and copyright notice to maintain copyright (today it is automatic, and it is often impossible to determine, much less locate, the owner), or otherwise make it easier to use "orphaned works"
• Provide an easy way to dedicate works to the public domain to abandon the copyright the state grants authors
• Eliminate manifestly unjust provisions of the Digital Millennium Copyright Act (DMCA), such as its criminalization of technology that can be used to circumvent digital protection systems
• Expand the "fair use" defense and clarify it to remove ambiguity
• Provide that incidental use (e.g., buildings or sculptures appearing in the background of films) is fair use
• Reduce statutory damages

Trademark

• Raise the bar for proving "consumer confusion"
• Abolish "antidilution" protection
• In fact, abolish the entire federal trademark law, as it is unconstitutional (the Constitution authorizes Congress to enact copyright and patent laws, but not trademark law)

[Mises; SK]

From my comment on Jeff Tucker's post, A Theory of Open:

Jeff: "Mainly, I think, this comes from an exaggerated reliance on IP and a belief that it is the key to success."

MIchael: "Do IP advocates understand that the system may very well make it a better bet to produce patents than products? Why go through the hassle of producing products for finicky customers when you can wait for someone to go through the trouble of making a successful product and threaten to sue them?"

I am not sure if non-practitioners realize exactly what goes on in patenting. Quite often medium to large sized companies hold "patent mining" sessions. They are usually not trying to come up with ideas that they might use in their business. What you do is you get 5-10 engineers to sit around a coffee table, and they are led by a "facilitor" (often a patent attorney). They talk about what they've been working on, and try to find little twists or aspects of a design that they can file a patent on. Or, they'll sift thru a bunch of patents in an area that competitors are practicing in, and just brainstorm, thinking of things they can file patents on. Not because they intend to use these ideas. But just to build up a thicket of patents that they can use against another company, either defensively (i.e., a countersuit if the competitor sues them); or to extract royalties or to squelch competition.

For example, the attorney shows a powerpoint with diagrams from a bunch of patents or product designs. The engineers throw ideas out there. Most of them are ridiculous. Someone is taking notes. One of them might say, "How about if we had two channels of information there, in parallel, instead of one? Do you think competitor B might some day do that? After all, dual-channels are becoming popular right now; they'll probably have to do this some day." The patent attorney says, "Say that sounds alright. What's your name? Bob? Okay, you're 'an inventor'. Anyone else contribute to this? Jim, didn't I hear you say something like, 'yeah, that might work?' Okay, you're the second inventor. Let's file a patent on this puppy. You each get a $3,000 bonus."

So, for about 3 minutes of brainstorming, a patent emerges. Maybe a dozen patent applications are filed from that meeting. These are not flashes of genius. They are not sweat of the brow. It's just a bunch of engineers torn away from their actual design work to brainstorm ways to hamper their competition. So maybe half the patents are abandoned half-way through "prosecution," a couple years later, after it's clear even to the bumbling patent office that they are sh*t. Of course about $20-30k was spent on each of the now-abandoned applications, or about $150k. No matter. PTO employees and patent lawyers have to put food on the table.

The other half might finally issue as patents. Most or all of them are probably sh*t too, but now they are issued, and have a "presumption of validity." Now we're up to $30-40k or so per issued patent. Got to recoup those expenses and justify the patent budget, eh? And say, it sure looks like company B's products are ... kinda close to the claims in 2 or 3 of the patents. Let's send them a friendly cease and desist letter.

Company B's patent attorney is then called into action. He's hired to draft 3 or 4 "non-infringement opinions" for, say, $30k each. Why? Just in case B is sued, and loses... so that they can at least plead that the infringement was not "wilful". They still have to pay damages (or stop selling the accused product), but it won't be trebled... if the judge believes the opinions were "sincere" and "relied on" by the defendant so that, although they were infringing, it was not "wilful" since they were after all following a lawyer's advice.. .the lawyer they paid $120k to tell them that ... they are not infringing ... even though it later turned out that they were. No matter, The $6 million B has to pay in damages is at least not trebled $18 million, so that the measly $120k spent on the patent opinions, plus the $1 million spent on patent litigators, was well worth the $12 million saved! B is better off (well, except for the $6 million verdict), its patent attorneys are better off. As for the patentee company, well, their few hundred grand in patent acquisition fees yielded them $6 million, and reduced competition! A win for everyone... right?

This abomination is what pro-patent libertarians thing is just? They think this is compatible with rights and liberty? They think this is productive, innovative behavior? Give me a break.

[SK]

At least that seems to be Apple's strategy against Nokia.

Read about it: link here

Notice how these latest developments come only as Apple "overtook Nokia last quarter as the cellphone maker generating the highest total operating profit."

I guess that's how it usually works in today's so-called "free market" system.