Broken Symmetry

When Patents Attack Part Two

2013-06-05T11:18:26-07:00

NPR follows-up on story of two years ago:

Two years ago, we did a program about a mysterious business in Texas that threatens companies with lawsuits for violating its patents. But the world of patent lawsuits is so secretive, there were basic questions we could not answer. Now we can. And we get a glimpse why people say our patent system may be discouraging, not encouraging, innovation.

NPR did a good job here overall, although the story is told from a naive and skeptical view of the patent system. There were a couple of things hinted at in the story, which I really like. First there is the suggestion (made express in a few places) that license terms ought not to be so private. I agree with this, and Nathan Myhrvold and Mark Lemley even suggested that more public disclosure would be necessary for a thicker market in patent rights to develop. Historically, corporate charters and patents have the same origin. Corporate charters that have a wide public impact are subject to also sorts of reporting requirements now (SOX, SEC, etc.). Why shouldn't patents that have such a wide public impact be subject to the same disclosure requirements? It's no answer to say that this would put licensors at a competitive disadvantage so long as the same rules applied to everybody. Too bad IV isn't leading in this regard instead of getting dragged kicking and screaming into more transparency.

Second, there is the suggestion (again made express in a few places, especially in description of the cotton gin) that patents enable dissemination of knowledge in ways beyond simply public disclosure of their specification. Critics of the patent system are after a red herring when they focus attention on the dubious quality of specifications as enabling. The social value of a specification is primarily found in what it provides as evidence of what was known by inventors (and their employer) as of a certain point in time. This aspect of the social value of patents is best understood within the asset partition theory framework advanced by Paul G. Heald (within the larger theory presented by Hansmann and Kraakman).

See also the official public response from IV here.

What's the New Exit for Patents?

2013-05-15T11:13:50-07:00

I'm intrigued by the way crowdsourced funding is upsetting the balance of power in financing new films, and companies. The basic trend is toward less and less friction (or what Coase calls "transaction costs") in obtaining financing. At the limit, we have perfectly efficient financing in which ideas receive funding up to the opportunity cost of capital (i.e., up to the next best startup or film that could have been funded). Five years ago, things looked grim thanks to the costs of SOX and the resulting shift of new listings overseas. Technology to the rescue! Gives warm fuzzies to those who tend to be more pessimistic.

But is there less friction for inventors and patentees? Maybe a little, but not the dramatic shift we've seen in private equity financing. And why not? Here things get murky. Looking at equity financing, we can see that at least part of the reason crowdsourced financing has taken off is because of the new "exit" opportunities it offers. At least in relative terms, people prefer what they get from contributing on kickstarter to watching their money go down the tubes in a Facebook IPO. Are there new exit opportunities for inventors and patentees? Nope. It's the same exit opportunities that have always been there. So is there less friction? Maybe a little less. But without the new exit opportunities, it's unclear whether what appears to be reduced friction for inventors and patentees is, in fact, improved allocative efficiency, or whether instead it's an opportunistic redistribution of wealth. We shall see.

Regardless, it's worth asking: if we could dramatically reduce the friction for inventors and patentees, would the public at large view the patent system as more effective or less effective at its goal of promoting innovation? The answer, I think, depends not on whether friction is reduced, but how. It seems to me that there is simply no (lasting) benefit to any stakeholder in the patent system to reducing the friction in reallocations of ownership until the friction in exits can be reduced even further. Universities avoid the problem by limiting the intake to their pipeline, which is wiser than clogging it up with inventory that goes stale. What's the new exit? That's the billion dollar question to be answered by anybody with an interest in seeing the patent system evolve.

Causal Entropic Forces

2013-04-26T09:12:29-07:00

From A. D. Wissner-Gross and C. E. Freer:

we have explicitly proposed a novel physical connection between adaptive behavior and entropy maximization

They get some pretty interesting results from some parsimonious assumptions. See also this earlier post linking to the work by Kaila and Annila on the Principle of Least Action and the Second Law.

Wolfram on "Facebook World"

2013-04-24T12:48:50-07:00

Very interesting article and graphics here:

I have to say that as I look at the plots above, I’m struck by their similarity to plots for physical processes like chemical reactions. It’s as if all those humans, with all the complexities of their lives, still behave in aggregate a bit like molecules—with certain “reaction rates” to enter into relationships, marry, etc.

Systemic Risk and Stability in Financial Networks

2013-04-06T21:05:56-07:00

by Acemoglu, Ozdaglar, and Tahbaz-Selehi:

This paper provides a tractable theoretical framework for the study of the economic forces shap- ing the relationship between the structure of the financial network and systemic risk. We show that as long as the magnitude (or the number) of negative shocks is below a critical threshold, a more equal distribution of interbank obligations leads to less fragility. In particular, all else equal, the sparsely connected ring financial network (corresponding to a credit chain) is the most fragile of all configura- tions, whereas the highly interconnected complete financial network is the configuration least prone to contagion. In line with the observations made by Allen and Gale (2000), our results establish that, in the more complete networks, the losses of a distressed bank are passed to a larger number of counterparties, guaranteeing a more efficient use of the excess liquidity in the system in forestalling defaults.

We also show that when negative shocks are larger than a certain threshold, the second view on the relationship between the structure of the financial network and the extent of contagion prevails. In particular, completeness is no longer a guarantee for stability. Rather, in the face of large shocks, financial networks in which banks are only weakly connected to one another would be less prone to systemic failures. Such a “phase transition” is due to the fact that, the senior liabilities of banks, as well as the excess liquidity within the financial network, can act as shock absorbers. Weak interconnections guarantee that the more senior creditors of a distressed bank bear most of the losses and hence, protect the rest of the system against cascading defaults.

The model of cash-flow among the banks (see equation 1 at section 2.4) has at least some superficial similarities to a 2-D Ising Model, and the authors could probably capture the dynamics they're modeling with an even more parsimonious model than they've given in this paper. But it's encouraging to see economists moving in this direction. See An Economy Made of Glass.

On a not unrelated-note, they solve for equilibrium here with Brouwer's Fixed Point Theorem. I am aware of a historical explanation for this, but it still surprises me to see models being set up to be solved this way given the instrumental challenge of testing the same models with empirical data. I have an ongoing and unfulfilled wish to see folks like Acemoglu et al. take the time to meet and discuss their models with folks like Jon Kleinberg and Steve Strogatz at Cornell. Economists just don't seem to be getting enough leverage out of the more recent applied math on networks or glass transitions.

Iterated Prisoner’s Dilemma contains strategies that dominate any evolutionary opponent

2012-08-10T10:11:26-07:00

From William H. Press and Freeman J. Dyson

The two-player Iterated Prisoner’s Dilemma game is a model for both sentient and evolutionary behaviors, especially including the emergence of cooperation. It is generally assumed that there exists no simple ultimatum strategy whereby one player can enforce a unilateral claim to an unfair share of rewards. Here, we show that such strategies unexpectedly do exist. In particular, a player X who is witting of these strategies can (i) deterministically set her opponent Y’s score, independently of his strategy or response, or (ii) enforce an extortionate linear relation between her and his scores. Against such a player, an evolutionary player’s best response is to accede to the extortion. Only a player with a theory of mind about his opponent can do better, in which case Iterated Prisoner’s Dilemma is an Ultimatum Game.

Personally, I kind of enjoy living in a world in which a fundamental "truths" about things as abstract and oversimplified as the prisoners' dilemma can turn out to be incorrect for so long. Still trying to understand and wrap my head around these results.

Sichelman and O'Connor on The Guild Origins of Patent Law in the Venetian Republic

2012-08-10T10:06:42-07:00

Presented yesterday at the IP Scholars Conference:

A key assumption of today’s standard account of patents is that, absent patent protection, all products would generally be purchased in a competitive market. However, the first regularized patent system appeared during the Renaissance in the Venetian Republic, which was a highly regulated economy. In the Venetian economy, many types of products - particularly, artisanal or technological products - could typically be produced and sold only by artisan and merchant guilds. One important exception to the guilds’ monopolies were 'patents,' which initially provided non-guild members - particularly foreigners - the privilege of being able to sell products and practice methods that were otherwise within the sole province of the guilds. Directly contrary to the view that patents tend to diminish competition, patents in the Venetian Republic enabled a new kind of competition from outside of the guild system. This article explores the role patents played in promoting competition in the Venetian Republic. This exploration is important for understanding not only the historical genesis of the patent system, but also in gaining a deeper understanding of the patent system today.

SSRN link here.

According to their account, the patent system in Venice was setup initially to give talented foreigners a chance at competing with the entrenched guilds. The same agency responsible for immigration was also responsible for examining and granting patents.

Meanwhile, in Silicon Valley, we're sending talented immigrants home after we're done educating them.

Are Corporate R&D Labs Close Enough to Universities?

2012-06-07T12:46:30-07:00

I have only one comment on the excellent New Yorker piece recently published about Stanford, whose title asks whether Stanford has become too influenced by commercial concerns.

As a culture, why shouldn't we be equally concerned with answering a related question -- i.e., have corporations, and especially their R&D groups, gotten close enough to Universities? I take it nobody would have any concern if corporate R&D groups were to become more open in publishing their results, disseminating their knowledge, and even teaching new engineers and scientists.

The poorly kept secret is that there aren't anymore corporate R&D labs like that. Bell Labs is gone. IBM labs are not what they used to be. So Stanford has stepped in to fill the gap. Should we be mourning the loss of its pure curiosity-driven culture -- a culture that probably never existed at Stanford anyway? No there are other universities that do that better. Note that Gerhard Casper, quoted in a few places in the article, hails from Chicago.

It's not wise to pass judgement on Stanford's culture without considering how it fits within the larger ecosystem.

Inventory Turnover Ratios as a Metric for Innovation

2012-06-01T16:21:42-07:00

Long time readers may recall posts discussing the potential use of inventory turnover ratios in measuring the value of an invention. See How do you measure innovation without reference to patents? and Reigniting the Engine of Growth with the Sparkplug of Invention. Here's a nice article summarizing how that plays out for real companies:

So a typical company in manufacturing might do 8 inventory turns. Samsung does 17. Dell, which practically invented hardcore electronics supply chain management, does 36. Apple is doing 74!

Click through to Gartner to get the full report.

Who owns that patent? Has it been licensed?

2012-03-07T11:13:53-08:00

Non-specialists may be surprised to learn that the answers to these basis questions in many instances remain indeterminate. Susan L. Glovsky provides an excellent post on PatentlyO on the subject:

The time has come to enact national legislation that provides clear record title to patent applications and patents. The value of patents is too great to continue with the present system. Moreover, patents are a federal right and should be addressed at a federal level. A national system would harmonize U.S. law with those of other countries, which generally have a national system for recordation of patent rights. Recently, the Patent Office proposed rules that would require disclosure of any assignee of patent rights. But these rules simply do not go far enough. Legislation is necessary in order to provide a comprehensive internationally recognized system that assures the recordation of patent title, security interests, and other encumbrances through filings solely in the Patent Office.

See also Patent Reform through the Creation of Economic Facts. A few years ago, I suggested here that an econometric analysis of patented features that focused on frequency-averaged measures of sales and manufacturing might be useful as a mechanism for valuing patents. That is way too complicated to be workable right now at least. But with reliable information about ownership and prior licensing of a portfolio available, comparable-based patent valuations would become more feasible for the many market participants who do not come with their own private database of such information.

What Would Hamilton Do?

2012-02-10T09:40:36-08:00

From Michael McConnell:

But here is the irony. All this high‐toned government, the unelected and long‐termed Governors of the Federal Reserve, supported by Senators and Representatives serving for decades these establishment figures are the ones who have created the current mess. They did nothing to curb budget deficits or to reform entitlements when it might have been done less painfully. They wallowed in earmarks and budget gimmickry, set unrealistically low interest rates, borrowed ever‐increasing sums of money to satisfy current expenses, and made promises that are unsustainable but somehow never get contained. And it is the placard‐waving, Jeffersonian common horde flocking to town halls and filling town squares, who have become the champions of Hamiltonian concern for the long run: “Spend less, tax less and borrow less,” they say. Bring back the Hamiltonian dream, where penniless bastards from nowhere can rise by the sheer force of intellect, hard work, and audacity to succeed in an America that prefers opportunity to entitlement, that lets losing businesses fail, and winning businesses make serious money.

How ironic it will be if Hamilton’s dream of a national blessing were restored by the very low‐toned, democratic, unruly politics that he thought incapable of it.

The last bit brings to mind Franklin's reply to the woman who asked him, immediately after the Constitutional Convention adjourned, what kind of government had they had given us. I guess we've done alright by Franklin so far.

Resolving the St. Petersburg Paradox and the Flaws in the Efficient Market Hypothesis Too

2011-10-23T13:49:23-07:00

How much would you pay to play a game in which a coin was flipped, and each time it landed heads the payout was doubled from a starting value of $1? The expected value of this game is not finite, and yet most people are not willing to pay more than a few bucks for it, much less borrow to play.

This is the so-called St. Petersburg Paradox. The earliest solution was proposed by Bernoulli, who suggested that the value people attached to their wealth went as a logarithmic rather than linear function of increasing wealth. Given that assumption, he calculated the amount a person should be willing to wager as log(change in wealth due to payout from lottery) - log (wealth - wager).

But this calculation is not quite correct even though it resolves the paradox by explaining why most people won't wager much: People won't wager much because that logarithm runs off to infinity fast as the wager approaches even a fraction of wealth -- producing a zero in the denominator.

One way to see that this calculation is incorrect is because it treats the wager as a static cost, existing independent of how the payoff increases with increasing flips. Another way to say the same thing is that the wager has time-value in the form of interest. So the expected value and the wager should be treated together in the utility function in successive flips of the coin. What you should wager depends not just on how much, but when the payoff comes.

Ole Peters tells the full story of the St. Petersburg Paradox, including the errors in its analysis later introduced by economist Karl Menger, and propagated by Arrow and Samuelson, in glorious detail here.

I am grateful to Rick Bookstaber for pointing me to the paper.

"So what?" you might ask. Well, if one gets into the habit of treating economic variables as time-series rather than ensemble averages -- as the correction demands -- then one immediately is forced out into the realm of non-equilibrium statistical mechanics and dynamics.

Ole Peters and Alexander Adamou have already proposed a correction to EMH. According to them, it is not prices that are efficient and cannot be arbitraged, but rather the use of leverage to produce larger than logarithmic gains.

I'm completely drowning in patent litigation right now, but eventually I would like to offer some thoughts on what these papers mean for competition and innovation policy. What should be considered analogous to leverage in intellectual property markets?

The potential implications for investors are also interesting and need to be thought through. Do we now have a quantitative insight into how and why so many of the investors who have consistently beat the market over the past few decades have advised against leverage. Buffett, in particular, is famous from eschewing leverage and advising others to do the same.

RIP Steve

2011-10-05T17:16:02-07:00

Steve was a Bob Dylan fan. In his memory:

Highlights of Patent Reform Legislation

2011-09-08T18:09:48-07:00

Section 3. First Inventor to File

Summary

Amends 35 U.S.C. § 102 to redefine prior art as anything patented, published, on sale, or in public use before filing, or any patent application filed by another before the effective filing date of the claimed invention.

Eliminates most interference proceedings. (Derivation proceedings for allegedly copied remain available.)

Effective Date

18-months after the date of enactment, applying to any patent filed or claiming priority to a patent filed thereafter

Practice Notes

Clients have six months after enactment to educate inventors about the elimination of the 1-year grace period, and need to get a patent application on file.

Section 4. INVENTOR'S OATH OR DECLARATION

Summary

Amends 35 U.S.C. § 115 to permit applicants to make a "substitute statement" in lieu of an oath or declaration when an inventor is deceased, under legal incapacity, or cannot be found or reached after diligent effort."

Amends 35 U.S.C. § 118 to permit applicants to apply on behalf of inventors when "the inventor has assigned or is under an obligation to assign." Until now, applicants were permitted to apply on behalf of an inventor only when the inventor could not be found or reached after diligent effort.

Effective Date

One year after the date of enactment, applying to any patent application filed on or after that date

Practice Notes

Section 4 will streamline the process of obtaining oaths or declarations, a process which under the current rules has been a hassle, especially in locating former employees upon the filing of continuations or divisionals of an original application.

Section 5. Prior COMMERCIAL Use DEFENSE

Summary

This section expands the prior user defense under 35 U.S.C. § 173, currently is available only for business method patents, to all patents.

The prior user bears the burden of showing a prior use of the claimed invention more than a year before the priority date of the claimed invention. Such prior uses would be a valid defense even if kept confidential.

The defense is personal to the prior user and non-transferable except for transfers of an entire enterprise or line of business, and then only for prior uses at the same site.

The defense is unavailable to prior users when the invention was owned by or under obligation of assignment to a university at the time the invention was made. There is an exception to this exception for when federal funding was required to reduce the invention to practice.

Effective Date

Date of enactment, applying to any patent issued on or after.

Practice Notes

We expect the prior user defense could be valuable to defendants in software patent litigations, although the defense is available only to patents issuing after the date of enactment, and we have some concerns with how such a defense would fit within overall case strategy.

Section 6. POST-GRANT REVIEW PROCEEDINGS

Summary

Creates a European-style opposition proceeding, whereby third parties may challenge the patentability of an issued patent in an inter partes proceeding before the PTO within one year after a patent issues.

Like inter partes reexaminations, these post-grant review proceedings will have a preclusive effect on the party who brings them — i.e., that party may not assert either in a civil action or ITC action a defense of invalidity on any ground raised or that could have been raised during the post-grant review proceeding.

Effective Date

One-year after date of enactment, applying to any patents issued before, on, or after that date.

Practice Notes

Based on experience with inter partes reexamination proceedings, we do not expect post-grant review to provide much help for defendants in patent litigation. Many venues do not grant stays pending reexamination, and in general the PTO is more friendly to patentees than the district courts. Nonetheless the procedure may be useful in narrow circumstances, such as when a European counterpart has already been rejected in an Opposition proceeding and a U.S. patent issues.

Section 9. VENUE

Summary

Changes venue from appeals of PTO decisions that are now filed in the District of D.C. to the Eastern District of Virginia, which is closer to the new PTO headquarters.

Effective Date

Date of enactment, applying to any civil action filed on or after

Practice Notes

We generally recommend that appeals be made to the Federal Circuit when that alternative is available, and the PTO has recently taken the position that many issues that have been appealed to the D.D.C. (such as appeal of B.P.A.I. decisions in reexamination) are now subject only to appeal in the Federal Circuit.

Section 10. FEE SETTING AUTHORITY

Summary

Gives PTO fee-setting authority and control of fees subject to limited Congressional oversight. Please contact us for additional details if you would like to know more about these provisions.

Also gives universities micro-entity status and hence reduced filing fees.

Effective Date

Date of enactment

Practice Notes

Along with Section 22, this was one of the most contentious sections in the bill, since the House Appropriations Committee has never given plenary authority to an Executive agency to manage its own budget. H.R. 1249 represents a political compromise, which was approved by PTO Director David Kappos and the Obama Administration

Section 14. TAX STRATEGIES DEEMED WITHIN THE PRIOR ART

Summary

Deems tax strategies “insufficient to differentiate a claimed invention from the prior art,” and not indistinguishable from other information available to the public that is relevant to a patent’s claim of originality.

Software that enables individuals to file their income tax returns is specifically excluded from this section — i.e., such software patents would not be deemed invalid merely as a result of this section

H.R. 1249 would also permit the PTO to seek advice and assistance from the Department of Treasury and the Internal Revenue Service to ensure that patents to do not infringe on the ability of others to interpret the tax law and that implementing such interpretations remains in the public domain.

Effective Date

Date of enactment, applying to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date

Practice Notes

Clients should contact us if they have concerns about whether particular claims might be deemed invalid under this provision.

Section 15. BEST MODE REQUIREMENT

Summary

Removes as a defense to patent infringement the patentee’s failure to comply with the best mode requirement. (The “best mode” is currently required in patent applications to describe how an invention should be used)

Effective Date

Date of enactment, applying to proceedings commenced on or after that date.

Practice Notes

Best mode defenses are rarely successful, and this Section merely codifies the practical reality that has existed for some time under Federal Circuit common law.

Section 16. Marking

Summary

Allow a manufacturer to write the word “patent” or “pat.” on a product, along with a reference to an internet website that the public can access free of charge to learn more about the specific patent.

Eliminates most liability for false marking

Effective Date

Date of enactment, applying to all cases, without exception, that are pending on, or commenced on or after, the date of the enactment of this Act

Practice Notes

Gives statutory approval to a practice already common among patent owners. Puts a damper on cottage industry of qui tam litigation for false marking

Section 17. ADVICE OF COUNSEL

Summary

Codifies holding of In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007), which held that failure to obtain advice of counsel may not be used to prove willful infringement.

Effective Date

Not clearly specified

Practice Notes

MWE represented Seagate in the appeal that resulted in this holding. Please contact us if you'd like additional details.

Section 19. JURISDICTION AND PROCEDURAL MATTERS

Summary

Includes general prohibition against joinder of multiple defendants in a single lawsuit for infringement of the same patent by different accused products

Effective Date

Date of enactment, applying to any lawsuits followed on or after that date.

Practice Notes

Could bring end to what is now a common practice by NPEs.

Section 23. SATELLITE OFFICES

Summary

Requires the Director to establish three or more satellite offices within a three-year window, subject to available resources, to carry out the responsibilities of the PTO

Section 26. PRIORITY EXAMINATION

Summary

Requires that the PTO establish regulations that prioritize examination of applications for products, processes, or technologies that are important to the national economy or national competitiveness without recovering the aggregate extra cost of providing such prioritization

Creates a “Track I” fee of $4,800 that would allow an inventor to receive a “prioritized” examination of his or her patent

Paul Graham Offers a Private Solution to Patent Reform

2011-08-31T14:20:27-07:00

Thought provoking as usual:

The patent pledge doesn't fix every problem with patents. It won't stop patent trolls, for example; they're already pariahs. But the problem the patent pledge does fix may be more serious than the problem of patent trolls. Patent trolls are just parasites. A clumsy parasite may occasionally kill the host, but that's not its goal. Whereas companies that sue startups for patent infringement generally do it with explicit goal of keeping their product off the market.

I like the idea of introducing private solutions. I've personally worked on a few. An underlying problem is that the economics of innovation are quite different for different technologies, so even if the law applied the same way (which is doesn't; claim construction is rarely an issue in claims to chemical compounds), the balance between stronger and weaker patent rights would be different.

It's worth noting that the pledge wouldn't affect any of the litigations I currently work on, or even any litigation I have ever worked on. Patent infringement lawsuits against startups (not founded by non-former employees) are a very recent development, which can be linked to the large-scale aggregation of patents by non-practicing entities over the past ten years.

Eddies in Memory

2011-08-01T10:38:17-07:00

Suppose you're allocating computer memory to local variables associated with a host of objects (maybe millions). You need to free up that memory when an object is no longer needed. So you need a way to be able to tell whether the memory still has any local variables still in use pointing to it.

This can be visualized as a directed graph. The set of nodes with only outgoing edges are the variables still in use. The nodes with no incoming edges represent the memory no longer in use.

And it appears that at any given moment, the set of nodes with no incoming edges will always form a cycle -- eddies in the directed graph that represents your memory allocation.

For some reason, I find that aesthetically satisfying.

Harnessing the Power of Feedback Loops

2011-06-28T11:50:16-07:00

From Thomas Goetz at Wired:

The basic premise is simple. Provide people with information about their actions in real time (or something close to it), then give them an opportunity to change those actions, pushing them toward better behaviors. Action, information, reaction. It’s the operating principle behind a home thermostat, which fires the furnace to maintain a specific temperature, or the consumption display in a Toyota Prius, which tends to turn drivers into so-called hypermilers trying to wring every last mile from the gas tank. But the simplicity of feedback loops is deceptive.

Via Farnam Street.

I hadn't heard about Bandura's work in the 1960s, although I find that he was cited in Csikszentmihalyi's Flow in passing. It was unclear from the citation how much of an influence he was on C.'s own theory. Although C. does not emphasize flow as a feedback loop, from a systemic perspective that is pretty much what one observes when people are in a state of flow. The topologies get complicated since many experiences of flow involve other people. Think of a jazz quartet and its audience -- live and for its recordings. Or of Congress and the stock market.

I like how this dovetails neatly in with Dweck's mindset theory also. The fixed mindset interrupts any feedback loop, and hence disrupts learning. But too little self-criticism and introspection and there is no feedback.

One of C.'s observations in Creativity is that creative individuals often lose a parent early in life. It seems to me that one would have to develop a capacity for self-criticism earlier on in that instance. Perhaps such individuals have a better capacity for self-generating feedback than do the rest of us, who are looking to others -- especially family -- for queues as to whether we are doing well at this ambiguous assignment that is our existence.

Bleg to Readers Who Code: Better Way to Claim Software?

2011-06-10T09:59:06-07:00

Mea Vita offers interesting insight into Apple's development procees:

Before writing any production code, we'd write our unit tests. All software engineers should be taught to write their API unit tests first – it's a good discipline to learn. Next, we coded using WebObjects/Java with Eclipse/WOLips and we always ran the app in debug mode with key break points so that we could step through the code. I've frequently seen too many software engineers, elsewhere, who just code away as if they're throwing something against the wall to see what sticks.

Here's what wikipedia says about unit testing:

Each unit test can be seen as a design element specifying classes, methods, and observable behaviour. ... It is true that unit testing lacks some of the accessibility of a diagram, but UML diagrams are now easily generated for most modern languages by free tools (usually available as extensions to IDEs). Free tools, like those based on the xUnit framework, outsource to another system the graphical rendering of a view for human consumption.

Can any BS readers offer a view on whether or not a claim to units would be easier to construe to determine patentability, validity, infringement than a single-English-sentence claim?

More generally, I often wonder how the practice of claiming chemical structures was first adopted and approved by the PTO. What would it take to get the PTO to require software to be claimed in a new way?

Supreme Court Affirms the Priority of Individual Rights under the Patent Act

2011-06-06T10:43:49-07:00

Stanford v. Roche decided today:

Since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor. The question here is whether the University and Small Busi-ness Patent Procedures Act of 1980—commonly referred toas the Bayh-Dole Act—displaces that norm and automati-cally vests title to federally funded inventions in federal contractors. We hold that it does not.

As noted in the Sotomayor concurrence, footnote 2 on page 5 expressly reserved the questions that would have been raised by consideration of the Federal Circuit's precedents regarding interpretation of patent assignments. Thus, the guidance on choice of law that seemed possible after oral arguments have been reserved for future consideration. It is notable, however, that even the dissenters (Breyer and Ginsburg) who addressed the Federal Circuit precedent were silent as to the choice of law question.

Gawande on Systems Theory

2011-05-30T20:29:47-07:00

From a commencement address:

Medical performance tends to follow a bell curve, with a wide gap between the best and the worst results for a given condition, depending on where people go for care. The costs follow a bell curve, as well, varying for similar patients by thirty to fifty per cent. But the interesting thing is: the curves do not match. The places that get the best results are not the most expensive places. Indeed, many are among the least expensive. This means there is hope—for if the best results required the highest costs, then rationing care would be the only choice. Instead, however, we can look to the top performers—the positive deviants—to understand how to provide what society most needs: better care at lower cost. And the pattern seems to be that the places that function most like a system are most successful.

The observations apply to lawyers and law.

Patent Reform through the Creation of Economic Facts

2011-05-26T09:49:29-07:00

This piece by Hernando de Soto on the "Destruction of Economic Facts" caught my eye not long ago:

During the second half of the 19th century, the world's biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

The patent system is an example of one of these "public memory systems," which has facilitated transactions in intangible (exclulsionary) rights.

The focus of de Soto's attention is on the financial services industry, and in particular on how innovation in financial services has destabilized and undermined the consistence of public memory systems. On his view, this is a root cause of our ongoing recession:

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

Go ahead and click through to read the whole piece. His is profound insight. Note one earlier link on BS to a similarly thought provoking piece by de Soto.

What about the patent system? Has the patent system undergone a similar destruction of economic facts over the last twenty years?

Not really. More the opposite seems to be true, in fact. At least since the Federal Circuit was established, and especially lately since patent office records worldwide are now available online, the patent system has never functioned more effectively.

And yet, even with all of these improvements, it seems to me that the patent system has not yet been able to provide enough "economic facts" for the market to transition from litigation to transactional norms in handling the allocation and reallocation of patent rights. In effect, there has been no destruction of economic facts within the patent system because the patent system never created economic facts to begin with.

The production of "economic facts" in the sense that de Soto describes should be the ultimate goal of any patent reform. We have seen many incremental and even discontinuous leaps in that direction over the past few decades. But we are not there yet.

Problems with ascertaining title and encumbrances on title are foundational to any economic facts about patents. The systems for handling these economic facts with respect to real property and even copyright are more highly developed than they are for patents, even though title goes to the very root of how patents are valued now because problems with standing can result in zero returns to enforcement.

All of the issues that have been addressed lately, including Therasense yesterday, will help move us incrementally closer to a world in which patent rights transact without litigation. But a focus on the creation and maintenance of a "public memory system" -- a source of "economic facts" about patent valuation -- will get us there quicker.

At the end of the day, valuing patent portfolios is not more complex than the valuation of collateralized debt obligations, currency derivatives, or interest rate swaps. The difference is that those intangibles have (or at least had) a foundation of "economic facts" to facilitate transactions.

Federal Circuit Upholds District Court Interpretation of Contract Assigning Non-exclusive Licenses

2011-04-18T10:20:12-07:00

The Rembrandt Techs. opinion includes the following diagrams of chain of title and licensing of the asserted patents:

At issue was the question of whether the assignment of the licenses from Old Rockwell to New Rockwell were valid, such the sublicense from New Rockwell to Conexant was sufficient to exhaust the patent rights.

Transferability of licenses presents thorny choice of law issues in many cases because different states have different presumptions when it comes to the validity or enforceability of any kind of restrictions (encumbrances, covenants, or licenses) on personal property. Compare Cadtrak Corp. with Superbrace.

There is nothing in the Opinion to indicate what law was applied in interpreting the relevant contracts.

Split within Federal Circuit on Federal Preemption of State Law in Ownership Disputes

2011-04-11T09:43:42-07:00

[Below is the text of a case note submitted by me to the MWE IP Update Newsletter, which is recommended reading for anybody interested in keeping up with new developments in patent, trademark, copyright, and trade secret law. Eventually, they should have it up in blog format. In the meantime, I'll "crosspost." -MFM]

Last November, a split panel of judges on the U.S. Court of Appeals for the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint. Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Nov. 9, 2010) (Gajarsa, Linn for the Court) (Gajarsa, opinion) (Newman, dissenting). The recent per curiam denial of petition for rehearing by the Court en banc was occasion for the delivery of spirited opinions concurring (Gajarsa, Linn, and Dyk) (Gajarsa, opinion) and dissenting (O'Malley, Newman) (O'Malley opinion). Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011). Although without consequence to the original panel decision, the concurrence and dissent from rehearing en banc expose a subtle, but potentially momentous difference in opinion on the choice of law for interpretation of patent assignments.

The problem with title arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktieboag ("Astra L") and AB Astra. AB Astra then merged into AstraZeneca AB ("AZ-AB"). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca ("AZ-UK"), but not before plaintiff Abraxis had entered (on April 26, 2006) into an Asset Purchase Agreement ("APA") with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP Assignment Agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie v. Tompkins, have been considered state rather than federal. Notwithstanding that history, the panel majority at least have recognized limited federal preemption of state law in interpreting contracts of assignment. Unfortunately for Abraxis, the APA provided only that AZ-UK "shall cause" the assignment of ownership to Abraxis. In accordance with the precedent of DDB v. Techs. (Fed. Cir. 2008), Federal Circuit law applies to the interpretation of such an assignment, and Federal Circuit law holds that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future. The dissent from the panel opinion by Judge Newman, and the dissent from rehearing en banc by Judge O'Malley (joined by Judge Newman), argue that the application of New York state law by the district court (which upheld Abraxis's claim to ownership) was correct, and that the majority was overextending the reach of federal jurisdiction.

Interestingly, the precise rule of law invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche. In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign to Stanford. The Supreme Court agreed to review the decision because of the questions it raised about whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law. The Supreme Court decision in Stanford v. Roche could, therefore, have a substantial impact on the advice given clients in transactions requiring assignment of ownership, even in non-Bayh-Dole settings.

Practice Note: In advising buyers in a merger, lawyers should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights. Stay tuned for the Supreme Court opinion in Stanford v. Roche.

A $900 Million Question of Federal Common Law?

2011-04-04T18:12:49-07:00

Google today announced that it was selected to serve as the stalking horse in the bankruptcy auction of Nortel's patent portfolio. Its stated purpose:

we hope this portfolio will not only create a disincentive for others to sue Google, but also help us, our partners and the open source community—which is integrally involved in projects like Android and Chrome—continue to innovate. In the absence of meaningful reform, we believe it's the best long-term solution for Google, our users and our partners

Not insignificant to this logic, and hence to Google's $900 million bid, is the question of whether any patent licenses to Nortel would be assignable to Google if Google is successful in its bid. (Note: the value of such licenses would be considered separately from the value of any patents owned by Nortel.) Does Google's $900 million expressly include the assignment of licenses to Nortel?

Even if the parties' agreement says yes, the answer is non-trivial. The authority on the question of whether and when non-exclusive licenses should be assignable is split, and even the authority on what authority should apply to the question of whether and when non-exclusive licenses should be assignable is split!

To wit, the Ninth Circuit has ruled that federal common law applies to the question of whether licenses are assignable. See in re CFLC, Inc. v. Everex Sys., Inc.. By contrast, California state courts have applied California law. See Superbrace v. Tidwell and Dopplmaier.

What law applies is kind of, um, important. The Ninth Circuit avoided the transfer of patent licenses to a buyer in bankruptcy after ruling that federal common law applied. If California law had applied, the transfer would have been completed.

Nortel filed for bankruptcy in federal court in Delaware. Have Delaware courts or the Third Circuit ruled on this question? Not yet.

I guess we'll have to see how Nortel's licensors feel about having Google as a licensee before we find out whether the Delaware Bankruptcy Court agrees with the Ninth Circuit on this point of law.

In a pure accident of fate, the Supreme Court is right now in Stanford v. Roche considering how the Federal Circuit's application of federal common law to a question of contract interpretation should be decided. Interestingly, not every Judge on the Federal Circuit agrees that there should be federal common law, or at least that state law should be preempted, on these issues. I wonder whether those judges would change their minds if they took also the federal system of bankruptcy law into consideration.

Balance-Sheet Networks

2011-03-29T09:31:13-07:00

From Robert M. May, Simon A. Levin and George Sugihara:

although the study of payment flows is of immediate interest to central bankers, it may miss an essential aspect of systemic risk, namely the ‘contagion dynamics’ of public perceptions and asset valuation associated with the interaction of balance-sheets (the mutual financial obligations and exposures that link companies). For example, how contagious are inflated valuations of Internet stocks? Are there hidden, mutually dependent risks associated with such high valuations? It could be useful to examine the dynamic network of balance-sheets, and if possible to quantify the inter active effects of valuations, credit policies, hedging and so on among financial institutions, especially investment banks. Such balance-sheet networks could be helpful in studying the effects of asset- pricing bubbles, credit crises and the poorly understood but potentially worrying effects of the current widespread use of derivatives (futures and options) and dynamic hedging by investment banks to manage risk on the fly.

Just discovered Sugihara through a link in an interesting post on O'Reilly Radar.