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Source link: http://archive.mises.org/10212/centocor-v-abbott-biggest-patent-verdict-ever/

Centocor v. Abbott: Biggest Patent Verdict Ever.

July 1, 2009 by

From a post by Joe Mullin: Centocor v. Abbott: Biggest Patent Verdict Ever.:

This afternoon, a jury in Marshall, Texas, awarded the largest patent verdict in history: Abbott Laboratories must pay $1.67 billion to Centocor, a subsidiary of Johnson & Johnson, because its Humira arthritis treatment infringes U.S. Patent No. 7,070,775. … The jury deliberated for five hours before issuing the verdict, which specifies $1.17 billion for lost profits and $504 million as a reasonable royalty.

As I noted here, referring to a $1.92 million verdict against Jammie Thomas for “illegally” sharing 24 songs, “The pro-IP libertarians ought to hang their heads in shame. If they support this result, it’s unthinkably evil. If they oppose it-well, they really can’t, can they, since this is the result of having a state-run IP system-of having a state at all.”

{ 47 comments }

Martin July 1, 2009 at 10:28 am

You state in your post that you linked to that “Every IP advocate is a minarchist”. However, it’s not true the other way around. I myself am a minarchist, yet I’d like to see the IP system abolished as much as the next guy.

I agree that to support IP is very un-libertarian, though.

Curt Howland July 1, 2009 at 10:37 am

In a Linux forum, I got into an argument with someone who was all for sharing music files, thought that the RIAA was crazy for prosecuting people who had done no harm, but also thinks that the “government monopoly grants of copyright and patent” are absolutely essential for civilization.

My opposition to IP was so repugnant to her that she ended up supporting the prosecution of people for filesharing rather than give up her irrational belief in IP.

Something like, “Your constant railing against copyright has convinced me that the RIAA is actually right to prosecute those people!”

…almost as if, when she thought filesharing was just fine, she didn’t realize it was “against the law”.

Having copyright/patent extended and expanded to the extremes they have, has caused the problems that having such monopoly grants to be so obvious that no one can ignore them.

But to choose the abuse just to avoid repealing the laws themselves? How irrational can people be?

J Cortez July 1, 2009 at 11:14 am

This is disappointing. It’s a case that affects me a little more directly than any of the cases I read about. Abbott Labs owns EAS, which markets nutritional supplements that I use on a regular basis. I wonder how this will affect their subsidiary companies?

I keep seeing Marshall, Texas mentioned in patent lawsuit stories. What is happening with the people of Marshall?

JB July 1, 2009 at 12:26 pm

Let us say that there is no IP system in place (for patents specifically in this example). There is no “trade-system” in place that allows one to trade “full disclosure” of ones idea/invention for the “limited monopoly” known as a patent.

As a business owner, I can see great advantages here to keep my idea “locked up” for even longer than a patent would allow.

I have capital. I take 10 million dollars and develop a machine in my garage. Use your imagination here – maybe it’s a machine that cures cancer, desalinates thousands of gallons of salt-water for pennies a day, allows for human levitation via technology that fits in a coke-can, etc., etc.

I do not get any IP on my invention. I disclose nothing about it to anyone. I have added intricate and realistic “false pieces” that will further hinder any attempts at replication.

Upon sale of this item, I have every purchaser sign a contract. The contract specifically spells out the limitations/terms of use/”ownership”. Number One: No ownership – all rented/leased. Number Two: no lease transfers. Number Three: no reverse engineering. Etc., etc.

I believe (and, fully admit I may be incorrect, but from business experience and patent experience, seem correct as of now) that removing the patent system would invite alternative methods to attempt monopoly.

With a patent, I have to disclose in a way that allows anyone “skilled in the art” to be able to reproduce what I have come up with. Legally, they can do it after 20 years. More importantly, they can read FULL DISCLOSURE (meaning just that – drawings, full and complex descriptions, etc.) to see if they can use a little piece of what I am disclosing to come up with something new, better, similar, inter-related, etc. – this feature/benefit (“progress” via sharing knowledge) of the patent system seems to be heavily discounted.

For example, I do not believe an engineer from Honda could go get the specs and methodology on a competitors turbo charger (without reverse engineering and potential contract violations, and the cost that goes with them) by simply accessing the knowledge from a centralized data base if there were no patent system. That knowledge would be proprietary – it could not have been traded for temporary monopoly, and would not be shared.

Without a patent I have to disclose nothing to anyone, and can prevent future disclosure (or at least the ability to act on any disclosure) by utilizing contract law during the “sale”.

With a patent, I have a limited time monopoly that, in many cases, can be gotten around by simply removing 1 single step in the claims. If that can’t be accomplished by a competitor, then my monopoly is limited by the patent office, and may be obscured by technology before that.

Without a patent, and by utilizing contract law, I could, potentially, extend the “monopoly” beyond 20 years.

If I have invented something extremely complex/specialized, or maybe something that just goes beyond the bounds of known science, it may be a very long time before other individuals become aware of the mechanics of such an idea – in particularly, if they are not fully disclosed, limited by contract, and I am engaged in adding pieces to my inventions that really don’t do anything but prevent understanding and competition.

It is taken on faith that a lack of a patent/IP system will provide more public disclosure and access to new ideas – that resources will be allocated more efficiently without such a system. I see exactly the opposite – the “carrot” to get disclosure is the “temporary monopoly” that is only granted IF disclosure is made. No disclosure, no temporary monopoly via IP.

Would full public disclosure exist (prominently) in a system that did not offer something in trade for full public disclosure? I do not believe so. Would a lack of public disclosure create an environment that allocates resources more efficiently than an environment that encourages full disclosure? I do not believe so.

Finally, I believe there are two different issues regarding IP. One is whether it should exist or not and if it causes correct allocation, mis-allocation, or static allocation of resources.

The other is the courts – how they interpret patent law is subjective. Different courts hold different opinions – they change over time. “Bad” awards and interpretation of law do not necessarily invalidate any system.

Ken July 1, 2009 at 1:21 pm

JB wrote in part: “If I have invented something extremely complex/specialized, or maybe something that just goes beyond the bounds of known science, it may be a very long time before other individuals become aware of the mechanics of such an idea – in particularly, if they are not fully disclosed, limited by contract, and I am engaged in adding pieces to my inventions that really don’t do anything but prevent understanding and competition.”

You could do that. It would be interesting to see how the cost to you of the non-value-adding components compares to the economic rent you presumably enable by rendering imitation more difficult. (Really clever engineers might — in fact, probably would — figure out fairly quickly what isn’t value-adding, though.)

Curt Howland July 1, 2009 at 1:33 pm

JB,

You’ve described Microsoft’s business model. “Licensing” only compiled code certainly is obfuscation to delay reverse engineering.

filc July 1, 2009 at 1:48 pm

Without the patent (Without IP laws) if your product sold well enough other entrepreneurship would see the heavy demand in the market and engineer their own widget which would compete with yours.

Thereby not creating a monopoly regardless of your contract and by not stifling creativity and invention. Additionally more of the widgets would hit the market, price would drop, and people would then become more wealthy. Very simple scenario.

BioTube July 1, 2009 at 2:19 pm

You fail to consider the extra cost per unit of obfuscation mechanisms good enough to fool most engineers.

Mark July 1, 2009 at 2:24 pm

Talk about overly dramatic. Of course no small government libertarian would support that verdict. Punishments are supposed to fit the crime and for every wrong there’s a remedy. That verdict fits neither of these principles.

Andras July 1, 2009 at 2:35 pm

On the other hand without patents i.e., ownership of ideas, there is no way to have division of labor in R&D: The moment you disclose your idea to a potential co-operator this person becomes a potential competitor. (Unless, of course, you lock them up in “research cities” like the Russians used to do. Anyway, if socialism, go back and imitate the masters, they had so many “great” ideas.)

Have you observed how easy was to come to the pricing of that idea? It took only 5 hours to decide and put an initial bid on it. How would you replace this pricing mechanism in a non-IP system? (Where you can not even disclose your idea)

Matthew July 1, 2009 at 3:01 pm

Despite all of the potential dilemmas facing inventors without IP, people advocating IP need to explain how to combine it with physical property rights to produce some kind of logically coherent system. Whether a system of law including IP is helpful or harmful, if it lacks internal consistency, then it’s not even up to the “bad idea” level yet. In fact, it’s not even a system of law if its assignment of property rights is contradictory.

Peter Surda July 1, 2009 at 3:18 pm

@Andras:
Same old stories:
> On the other hand without patents i.e., ownership
> of ideas,
Patents are not ownership of ideas. To whatever extent ideas can be owned, (classical) property provides that.

> there is no way to have division of labor in R&D:
Merely you are deaf and blind to existing models that provide such, and unable to leave your own, not-market-viable, one.

> The moment you disclose your idea to a potential
> co-operator this person becomes a potential
> competitor.
Ever heard of NDAs? I mean, have you ever been outside of your lab or wherever you spend your time?

Cheers,
Peter

Peter Surda July 1, 2009 at 3:55 pm

@JB
First of all let me thank you for providing a coherent and logical argument. I don’t hear that very often from IP proponents and this is a rare opportunity to move the discussion further.

That being said, I am still an IP opponent.

Full disclosure is a very noble aim and indeed a requirement for the scientific method. We can interpret IP as an attempt to promote full disclosure. I am not aware of comparative research done in this area, but there is plentiful anectodal evidence showing that:

1. even with IP in place, companies still try to avoid full disclosure. Closed source software has been mentioned. The patent claims are often obfuscated themselves or do not provide sufficient information. Coca Cola prefers a non-IP approach too for protection of the formula. The reason for this is obvious, avoiding full disclosure decreases pressure from competition and allows for higher prices.

2. some patents are so self evident that full disclosure can only be avoided if you never market the underlying good or service.

3. inventions are often parallel, and seem to naturally follow once the technology reaches a certain level. (source: B&L)

When considered from a utilitarian economic view, IP over time increases the market price of goods that are somehow related to the IP in question. This goes both for the price of outputs and the price of inputs. There is no way to foresee how exactly would structure of goods, services and business models be different, precisely because IP affects both the input and the output. Just as one can say that, without IP, a theoretical machine might never be manufactured, because the potential revenue would be too low, one can also argue that with IP, a theoretical machine might never be manufactured because the costs would be too high. This is a highly speculative argument not leading anywhere.

However, it is logical that with IP in the long run, prices are higher and business models tend to be more oriented towards a monopoly rent. Assuming utilitarian perspective, how is this beneficial?

Cheers,
Peter

Henry Miller July 1, 2009 at 4:54 pm

JB

Andras July 1, 2009 at 4:54 pm

@Peter Surda,

You are again invoking misconceptions and wishes to offer an incoherent alternative. Would you ever answer my questions?

-”Patents are not ownership of ideas. To whatever extent ideas can be owned, (classical) property provides that.”
-It is valid only in your private quarters. As far as I know society instructs differently.

“Merely you are deaf and blind to existing models that provide such, and unable to leave your own, not-market-viable, one.”
Where are the existing models? Where are the market-viability in them? By the way, by definition, there can not be market-viability in the internalization of external ideas/things, etc. Market only comes after internalization.
Again, I understand your point when it concerns old ideas. But what about new ones? How do you handle the transition of scarcity from infinite to non?

-”Ever heard of NDAs? I mean, have you ever been outside of your lab or wherever you spend your time?”
-NDAs only work in a patent environment! How could you expect people to respect NDAs when some of them does not even want to respect patents? And even if they would the potential for infringement is still present. How do you enforce NDAs then? I guess they will be the next boogeyman.

Henry Miller July 1, 2009 at 5:02 pm

JB

Patents are still worthless. They are written by lawyers, for lawyers. I’ve seem some patents, and the engieering behind them. The two have almost nothing in common. Because of this an engineer can clone you magical widget from scratch just as fast as he can copy it from the patent.

Engineers are constantly told to not look at patents. (The ones I’ve seen were filed by the company I work for). We gain nothing from patent.

You also fail to realize how useless NDAs are. There are many legal ways of getting access to something under a NDA. You cannot go after the engineer, onle the person who allowed that access, and even then it is tricky. Most juries will not enforce the NDA if the engineer (working with a lawyer) gets tricky about getting access.

Gus July 1, 2009 at 5:10 pm

I have a patent application pending and it has been a very, very expensive process. I really couldn’t afford my patent attorney, and I still can’t. It has cost me over $40,000 so far and I still have no guarantee that the patent will issue. Despite it all, I never would have launched my business in the first place if I didn’t feel like I could protect my idea from competitors. I knew I had good idea, and I knew that as soon as I entered the marketplace with my product, competitors with more money would copy me and invariably run me out of business. People with little money simply cannot compete with rich corporations in the marketplace if they don’t have the peace of mind that their idea won’t be stolen. I appreciate your theoretical positions, but in practice, thousands of small business across America would simply not exist if their owners didn’t have the IP system to provide a barrier to entry against wealthy companies who could easily bully them out of existence. Without IP, you prop up corporations and discourage the little guy. That’s not what the American dream is all about.

FTG July 1, 2009 at 5:22 pm

JB,

As a business owner, I can see great advantages here to keep my idea “locked up” for even longer than a patent would allow.

This would be despite your time preference?

Peter Surda July 1, 2009 at 6:17 pm

@Andras:
> You are again invoking misconceptions and
> wishes to offer an incoherent alternative
Yet you fail to provide any proof of this, on the contrary, you evoke emotions and evade logical argumentation.

> Would you ever answer my questions?
Pardon me, have not noticed any.

> It is valid only in your private quarters. As far as I
> know society instructs differently.
I fail to see anything intelligible in these two sentences. What does it refer to? Nowhere in the legal system you will find the term “intellectual property” defined, or a claim that copyrights or patents actually represent property. Just because someone made up the term is not a good enough argument. Where is the source of your claims? How is it anything else than an ex post justification for the practice by which a ruler grants preferential treatment to select groups?

> Where are the existing models?
Number one: me. Number two, B&L’s book (is freely downloadable but they still make money off it). Number three, the examples B&L mention.

The models are present especially in areas where IP has not spread yet, either due to local legal system or due to the novelty of the area.

> Where are the market-viability in them?
I make money. B&L make money. The companies B&L mention make money.

> By the way, by definition, there can not be
> market-viability in the internalization of external
> ideas/things, etc.
As I said before, you neglect to mention bundling, so I’ll repeat. B&L demonstrate that it is impossible to unbundle pure IP from rival goods. The rest is a question of cost accounting methods in order to turn it into a profit.

> How do you handle the transition of scarcity from
> infinite to non?
By utilising (classical) property directly. Failing that, you can still make a profit by utilising the following (non-exhaustive list in no particular order) targeted against your competition: deception, dumping, competition oriented cost accounting, product lifecycle management, marketing, bundling, vendor lock-in, vapourware, trusts, …

Not all of them are what one would call “nice”, but they are all a part of normal market behaviour.

> NDAs only work in a patent environment!
There is no legal relationship between NDA and patents. Precisely because NDA is (classical) property, whereas patents are IP. If you do not agree, kindly quote an example from a legal system.

> How could you expect people to respect NDAs
> when some of them does not even want to respect
> patents?
I expect them to respect it for the same reason and to the same extent as they respect other (classical) property rights.

> How do you enforce NDAs then?
NDAs are enforced by the (classical) property rights system. We both seem to agree (for simplicity, I’ll omit corner cases) that (classical) property is a good thing and can be defined and enforced without a state monopoly.

I am sorry, but the longer our debate continues, the more I am inclined to think that your knowledge of IP is far lower than you present.

Have a nice evening,
Peter

JB July 1, 2009 at 6:20 pm

@ Peter Surda

Thank you for the compliment – I really appreciate that. Also, let me say that I am not advocating for any position in particular. I am trying to figure out which position allocates resources most efficiently.

You state:

“1. even with IP in place, companies still try to avoid full disclosure. Closed source software has been mentioned. The patent claims are often obfuscated themselves or do not provide sufficient information. Coca Cola prefers a non-IP approach too for protection of the formula. The reason for this is obvious, avoiding full disclosure decreases pressure from competition and allows for higher prices.”

I would agree – even though there is already a system in place that trades full disclosure for a temporally limited monopoly, there are still many companies that won’t disclose – they don’t have to have an IP system to not disclose. They value (right or wrong) non-disclosure and what may come with it (good or bad) more highly than a fixed contract agreement of trading full disclosure for a 20 year monopoly.

If non-disclosure, “decreases pressure from competition and allows for higher prices”, how can non-disclosure or lack of full disclosure represent an efficient allocation of resources?

The patent system (please note that I do not include copyright and trademark – only referring to patents) allows one to trade full disclosure for temporary monopoly. If non-disclosure allows for higher prices, then doesn’t full disclosure in a patent system allow for lower prices? Not even necessarily on the same product – I can review patents on a product that only utilizes one component/aspect of my invention (from last year, or 40 years ago, or whenever) and then try to make it a little smaller, bigger, faster, slower, etc. to fit MY invention.

“2. some patents are so self evident that full disclosure can only be avoided if you never market the underlying good or service.”

Agreed, but, from experience, if you try to apply for a patent that is that obvious, the patent office will turn it down on grounds of being “obvious” (literally, they will tell you this was “obvious”).

“This goes both for the price of outputs and the price of inputs. There is no way to foresee how exactly would structure of goods, services and business models be different, precisely because IP affects both the input and the output. Just as one can say that, without IP, a theoretical machine might never be manufactured, because the potential revenue would be too low, one can also argue that with IP, a theoretical machine might never be manufactured because the costs would be too high. This is a highly speculative argument not leading anywhere.”

I’m with you – this line of thought is why I am here and posting. Answers are not easy to find, and as you say, many lines of thought are speculative and really don’t help with finding “answers”.

“However, it is logical that with IP in the long run, prices are higher and business models tend to be more oriented towards a monopoly rent.”

OK – this is an assertion. I don’t necessarily think it’s wrong, but I will ask the most important question: Why?

Thanks again for your post. Mises and the posters are always full of respect and courtesy even if they are not in agreement. That is to be applauded.

Henry Miller –

I will try to address your comments later this evening from home.

newson July 1, 2009 at 7:20 pm

ip, like frb, has an internal fragility (ideas being ethereal) that must encourage national governments to align their relevant legislation, and apply equal policing efforts to have it respected (america squeals, and china demolishes the pirate-cd factory to indulge her).

uniformity in nations’ law codes and enforcement is a retrograde step for those who don’t like anything about centralization of power (all libertarians, i’d imagine).

Eric July 1, 2009 at 7:46 pm

Andras

If there were no IP laws, then there’d be a rich incentive for inventors to come up with a way to solve problems without using guns and government to enforce idea ownership. Just because YOU can’t see how this would be done, doesn’t make it impossible.

And how much of that 1.7 Billion is going to people whose job is to file lawsuits? Consider the amount of r/d that could be performed if people could ignore the consequences of IP law.

If, as you believe, people will shy away from inventing, then this will allow those that do invent to become very famous and likely turn a nice profit giving talks or doing consultations.

And some people invent because they enjoy it. Look at all the free software available. If only IP laws could lead to innovation then how do you account for so much freeware and open source software?

And finally, there’s the reality of IP law, most of which actually hampers innovation. A much better way would be to offer prizes for innovation that was fully disclosed. This is, after all, how it came to be that ships figured out longitude at sea.

newson July 1, 2009 at 8:25 pm

…as long as the prizes don’t come from government!

JB July 1, 2009 at 11:35 pm

@ Henry Miller

I can appreciate your assertions regarding the value of patents, who they are written for, and the link between patents and engineering showing that engineering triumphs heartily. They do not match the experiences I have had though.

“Engineers are constantly told to not look at patents. (The ones I’ve seen were filed by the company I work for). We gain nothing from patent.”

Can you provide data to back this up these further assertions? I have found that the engineers we have utilized here and in China will utilize patents for more than checking for infringement. Perhaps different fields (maybe different individuals?) place different value on what can be found in the “library” of patents.

I am familiar with the difficulty of enforcing NDA’s. NDA’s are just one form of contract. Licenses and leases and their terms of use and breach of contract sections are some of the others that can be utilized to maintain non-disclosure. A GOOD lawyer (and no, most aren’t GOOD – I have dealt with about 20+; 2 were GOOD. I mean really smart to the point you could tell by talking to them for 2 minutes – they were walking encyclopedias with high IQ’s to boot; they understood law. One was the first ever to get a stay from the ITC, not to be confused with the ICT) can write up a contract that is downright “draconian” and still write it so it’s enforceable as long as it was not coerced and a non-fraudulent trade was accomplished.

One of my points was that the general assumption seems to be that by removing one “boot” of the State (the IP system) while, at the same time, leaving other State “boots” in place (like other parts of the legal system like contract law, courts and enforcement) there will be more efficient allocation of resources.

I am not sure if this is correct – I question this assumption, but make no claim to have the intelligence/tme to prove or disprove it.

averros July 2, 2009 at 2:03 am

I find it ironic that real inventors tend to hate patents and everything associated with patenting. The idea that a patent provides “full disclosure” is totally laughable – and merely shows that the person expressing this belief never wrote a patent application himself. They are deliberately obscure and overbroad and designed to cover as much territory as possible while giving away as little of possible. Most of them are pure junk made up by the employees of companies which pay cash bonuses to “inventors”.

The second logical fallacy in JB’s argument is the assumption that inventions are unique. In fact, if somebody didn’t invent some apparatus, another person will do that shortly. Inventions come from exchange of half-baked ideas and overall industry buzz, not from hermits working in secrecy (this image is just as far from the reality as the image of mad dishelved scientists in the labs cooking up the monsters). In fact, most patents are written by people who weren’t the first to come with the idea – others thought of it before, but for some reasons decided not to waste time.

There is absolutely no reason to give monopoly priveleges to people who were the first to pay homage to the bureaucracy.

Nuke Gray July 2, 2009 at 2:29 am

If America repealed IP laws today, inventors would leave America tomorrow. Us Australians would welcome them, even if our patent system seems clumsy compared to yours. So, thanking you in advance! XXXXX

newson July 2, 2009 at 3:58 am

to nuke gray, this is from the australian government, parliamentary library:

“On 8 February 2004 Trade Minister, Mark Vaile announced that Australia and the US had agreed to the Australia United States Free Trade Agreement (AUSFTA).(1) The full text was released on 4 March 2004.(2) An important part of the agreement is chapter 17 on intellectual property rights (IPRs), which covers copyright, trademarks, patents and industrial design. (3)
From Australias perspective some of the main developments in chapter 17 are:
* commitments to reduce differences in law and practice and participate in international harmonisation efforts with respect to trademarks (article 17.2.11)
* an increase in the duration of copyright protection, for individuals to the life of the author, plus 70 years (currently 50 years), with similar increases for corporations (17.4.4)
* strengthened protection and remedies against the circumvention of technological measures used by authors and others to restrict access to their work (17.4.7), such as coding of CDs to restrict how and where they might be used
* protection of encrypted program-carrying satellite signals, thereby extending the present regime to include foreign and other transmissions not now covered by the Broadcasting Services Act 1992 (17.7) and to criminalise end-users of unauthorised decryptions, and
* additional remedies for copyright infringements.
Generally the agreement aims to strengthen the protection given to holders of IPRs.”
Research Paper No. 14 2003-04

bottom line, we’re increasingly moving in lockstep with the us, unless we want to suffer penalties for breaching our “free-trade” pact.

Peter Surda July 2, 2009 at 5:34 am

@JB
Thank you for your reply, I really enjoy this constructive debate.

> If non-disclosure, “decreases pressure from
> competition and allows for higher prices”, how can
> non-disclosure or lack of full disclosure represent an
> efficient allocation of resources?
First let us take a look at the problem of competition from a more general view and then at the individual questions you provide.

One one hand, competition is good, because it it is an effective method for satisfying customers, who get lower prices and wider choice of products. However, if we had the theoretical situation of perfect competition (homogenous goods, symmetric information, …), noone would be able to make profit and nothing would be produced. This demonstrates that the optimum is somewhere between the extremes (monopoly vs. perfect competition). Where should it be? I don’t think this can be answered from a utilitarian perspective, so I approach it normatively as an anarchocapitalist: it is ok to make competition more difficult, as long as you don’t initiate force.

Now back to full disclosure: even full disclosure is a theoretical construct, because you can’t competely unbundle IP from rival goods. B&L mention the formula “E=mc^2″. Almost anyone knows it, it is fully disclosed. However, only few people can make use of it, others can only use products and services that others created by utilising this formula.

> If non-disclosure allows for higher prices, then doesn’t
> full disclosure in a patent system allow for lower prices?
This assumption is only valid if competition is not tempered with. If competition is regulated, you have two cost hierarchies to compare: the decreased costs as a benefit of full disclosure versus the increased costs that you need to pay to a monopolist, plus the costs associated with dealing with the patent system per se (research, patent office, court costs). Again, it can’t be determined in advance which one is higher, this is an empirical problem. I assume that in some cases, one is higher and in others, the other one.

> Not even necessarily on the same product – I can review
> patents on a product that only utilizes one
> component/aspect of my invention (from last year, or 40
> years ago, or whenever) and then try to make it a little
> smaller, bigger, faster, slower, etc. to fit MY invention.
The basic assumption you make is correct. But you need to take into account all the costs associated with the system. Even if you ignore the costs of externalities, you still can walk into a patent minefield or be stopped by a patent troll if you try to market a product. The more patents there are, the higher the chance that your product will infringe on someone’s patent and the higher the costs associated with patent research in order to avoid that.

> Agreed, but, from experience, if you try to apply for a
> patent that is that obvious, the patent office will turn it
> down on grounds of being “obvious” (literally, they will
> tell you this was “obvious”).
I can provide anecdotal evidence to the contrary, such as the infamous amazon one click patent. The patent applications are sometimes obfuscated, so that the obvious doesn’t look obvious.

>> “However, it is logical that with IP in the long run,
>> prices are higher and business models tend to be
>> more oriented towards a monopoly rent.”
> OK – this is an assertion. I don’t necessarily think it’s
> wrong, but I will ask the most important question: Why?
Well, IP gives (additional) legal protection to business models based on a monopoly rent. Intended or not, this encourages such models and the associated rent. Businesses do what makes them more profit.

> Thanks again for your post. Mises and the posters are
> always full of respect and courtesy even if they are not
> in agreement. That is to be applauded.
Thank you for your kind words, I try to remain professional, it doesn’t always work out though :-).

Have a nice day,
Peter

rog July 2, 2009 at 6:01 am

One example of IP making good returns is the cervical cancer vaccine, the immunologist Ian Frazer claims that R&D cost $1B and without patent protection this investment would not be made.

Having some association with patents my knowledge is that for the process from pending to approval to be successful full disclosure is required.

Peter Surda July 2, 2009 at 6:22 am

@rog
What you provide is anecdotal evidence. I don’t say it’s incorrect, but it is not an argument for IP.

B&L argue that the largest part of drug costs are associated with testing and approval process. I think they mention something like 2/3 of the total costs. There is no necessity for the manufacturer to bear the full costs of this. B&L mention financing this part from public income (as much as I oppose taxation, at least this is a genuine attempt to provide an alternative). But there are market alternatives too, such as: prize system, manufacturer pools, consumer protection organisations.

A further problem with this line of arguing is what Austrian economists call the impossibility of interpersonal utility comparisons. I can for example say that, in second world war, neurosurgery made huge advancements which would not have been possible without having the “material” (injured/dead people). This is a fact. However, I cannot use this as a justification for the war. There is no unit by which to measure and compare these two.

Cheers,
Peter

Shay July 2, 2009 at 6:33 am

A company which doesn’t care to seek patent protection for its designs risks having another company reverse-engineer his product and then patent it. Thus the existence of patents essentially requires that companies patent their designs.

Also, the practical question isn’t whether the elimination of patents would eliminate many big and small companies, as it most surely would. The question is whether a similar (or greater) number would replace them. For absolutely any kind of law one can imagine, there will always be some businesses that it brings into existence, that would be unable to exist without it; this fact alone isn’t sufficient justification for the particular law.

Stephan Kinsella July 2, 2009 at 7:24 am

Shay: “A company which doesn’t care to seek patent protection for its designs risks having another company reverse-engineer his product and then patent it.”

This is not quite right. To obtain a patent the applicant has to be the inventor. It’s a huge no-no to copy someone else’s idea and pretend he is the inventor. So if you reverse-engineer someone’s unpatented design, you are free to use it yourself, and either keep it secret too, or promulgate it; but you may not patent it. (See MPEP Sec. 2137.01; here (“only the inventor may apply for a patent …. If a person who is not the inventor should apply for a patent, the patent, if it were obtained, would be invalid. The person applying in such a case who falsely states that he/she is the inventor would also be subject to criminal penalties.”; 37 CFR 11.18(b) (on criminal penalties); 35 U.S.C. 102(f) (“A person shall be entitled to a patent unless – … (f) he did not himself invent the subject matter sought to be patented”).

The real risk is that if you keep an invention trade secret, then someone else might independently invent–not reverse engineer–it, and then patent it. As there is no general “prior user right” or “independent inventor” defense (as there would be for copyright), the first inventor can actually be enjoined by courts from using his own secret process that he may have been using for decades.

JB July 2, 2009 at 9:58 am

@ Averros

“I find it ironic that real inventors tend to hate patents and everything associated with patenting. The idea that a patent provides “full disclosure” is totally laughable – and merely shows that the person expressing this belief never wrote a patent application himself.”

Do you have data to show that “real inventors (as opposed to “fake” inventors?) tend to hate patents and everything associated with patenting”. That is a really strong assertion and shows your emotional passion with regards to patents, but that does not make it fact. I’m from Missouri – SHOW ME. I believe someone like Dean Kamen would be considered a “real inventor” – does he have patents? Yes. Does it follow then that “all ‘real inventors’ tend to love patents and everything associated with patenting”? No. The same applies to your statement.

Also, your assumption is incorrect – I have over a dozen patents and have worked with the attorney on each one to write something that I am comfortable with. I have also participated in a patent case that went all the way to DC court of Appeals – I understand patents and patent law even though I am not an attorney. I don’t think this makes me biased, but it does make me knowledgeable about the patent system and how it works (perhaps not to the level of an attorney, but far more than the vast majority of the population). Before I was dragged into the system over 12 years ago, I expressed the same attitudes and beliefs that you do in an unconditional fashion. Once I went through the process more than once, and really understood what was being attempted (not necessarily succeeding) by employing a patent system, gray areas started to develop for me. One of those is listed above and regards the assumption that removing one “State boot” (IP System) while leaving others in place (legal, judicial, enforcement) will automatically improve allocation efficiencies. I question that assumption.

You are correct about writing the claims sections of a patent in the most vague way possible to cover as much as possible. Attempting to get more benefit for cost is not inherently bad or evil.

You are incorrect about the rest of the patent being vague. Detailed drawings and descriptions have to be included so that “anyone skilled in the art” can reproduce the idea by studying/employing the patent. That does not mean I can look at any patent and understand it or reproduce it exactly – even if I am “skilled in the art”. If you take a look at some utility patents, claims are generally 1-3 pages and description, drawings, and background are usually 10′s of pages or more. The only thing that really matters for enforcement is the Claims. For learning purposes though, the claims are pretty much irrelevant – the descriptions and drawings have value.

“The second logical fallacy in JB’s argument is the assumption that inventions are unique.”

I do not believe I make any such assumption. A patent system does not suggest that inventions are unique. It suggests that there will be a reward for trading certain “half-baked” ideas for a TEMPORARY monopoly based on “first-come-first-serve”. The idea is that a “race” makes for a good catalyst. A catalyst on the entrepreneurial process is seen as a good thing even though it is an “intervention” into the market.

The rest of your last paragraph is all assertions. I can appreciate your feelings, but just because you assert it’s true doesn’t make it so.

You can say all day that no patent system would allocate resources more efficiently, and I will say, “WHY” and “SHOW ME HOW” and refer you to my question regarding this assumption that I laid out above.

Andras July 2, 2009 at 10:07 am

Kinsella: “The real risk is that if you keep an invention trade secret, then someone else might independently invent–not reverse engineer–it, and then patent it. As there is no general “prior user right” or “independent inventor” defense (as there would be for copyright), the first inventor can actually be enjoined by courts from using his own secret process that he may have been using for decades.”

The moment you market your idea it is “Prior Arted” and prevented from being patented.
Even if you don’t market it proper documentation can defend effectively your priority in courts during the provisional stage.

Andras July 2, 2009 at 10:18 am

@Peter Surda,
You already acquired the arrogance of a social engineer now go and acquire the knowledge.
You always refer to B&L as your bible. However, its pharmaceutical claims are predominantly lies, decision based evidence makings.
Check your facts, read scientific history and consult Chemical Abstracts and Beilstein yourself to learn the truth!

Stephan Kinsella July 2, 2009 at 11:23 am

Andras:

Kinsella: “The real risk is that if you keep an invention trade secret, then someone else might independently invent–not reverse engineer–it, and then patent it. As there is no general “prior user right” or “independent inventor” defense (as there would be for copyright), the first inventor can actually be enjoined by courts from using his own secret process that he may have been using for decades.”

The moment you market your idea it is “Prior Arted” and prevented from being patented. Even if you don’t market it proper documentation can defend effectively your priority in courts during the provisional stage.

Andras, I’m not sure you know the law very well. First, it is true that if I publicly sell a product embodying my invention, this can create a statutory bar. However, there are two things to note here. First, there is a one-year grace period. (See J.A. LaPorte, Inc. v. Norfolk Dredging Co., 787 F.2d 1577 (Fed. Cir. 1986); In Re Epstein, 32 F.3d 1559 (Fed. Cir. 1994).)

Second, a secret use of an innovative process that makes products such that the public cannot learn of the process by examining the product does not trigger the statutory bar. See W.L. Gore & Assoc. v. Garlock, Inc., 721 F.2d 1540 (Fed. Cir, 1983).

I think it would be prudent for laymen with an opinion on IP policy not to based their arguments on technical details of a system unless they are very sure of them. This is one thing that is very frustrating when dealing with IP advocates: they are almost all utterly ignorant of how the IP system works. So when you start pointing out innumerable problems with the patent system, for example, they will agree with you, “Oh, I’m not in favor of that.” Finally they will retreat to something like “Oh, well, I am not in favor of the existing patent system–but rather a better IP system compatible with libertarianism that recognizes natural rights to one’s intellectual crations.” So then you say, “Okayyy, then what is the nature of this ideal IP regime you favor?” They reply: “Oh, I don’t know, I’m not a specialist!”

In other words, they have no idea what they are even in favor of, yet they opine on it anyway. They are so ignorant they seem not to realize that all the concessions they make to the obvious injustices we point out basically eviscerate the IP system they (apparently falsey) think they favor. As an example, if you point out the unjust results from derivative rights being part of copyright, they will say, oh, I’m not in favor of that–blissfully unaware that if you take derivative rights away, you are left with very little “copyright” left (this is the reason why Congress added derivative rights!). And if you point out how unjust it is that patent law has no prior user rights or independent inventor rights, the libertarian IP proponent wil usually say, “Well, there ought to be! I’m not in favor of that part of the IP system!” But then, if you were to modify patent law in this way, it would be very weak and frail–which is why the IP lobby would fight tooth and nail to keep this.

Andras July 2, 2009 at 1:46 pm

Kinsella,
In the case of pharmaceuticals marketing a product means that the public can learn of the “composition of matter” (in a few minutes) and that is what counts. So your second point is also mute.

As I said before internalization of everything, not just IP, is based on conventions. Codification is just a reflection of the view of the society on this internalization process. The fact that it is a mess truly reflects the current view. However, going to one extreme will not generate any better consensus. In a truly Misesian spirit, I hold that social engineers should know their limitations and strive for consensus in this case instead of obfuscating the matter. Due to the fact that internalization is being based on conventions, consensus should be crucial for acceptance and for subsequent co-operation.

I think the point is that you can apply your non-IP approach under the existing system if you wish. (You can even publish your idea to be even safer.) So systems can compete already even under the existing regime. Let the participants decide.
However, pro-IP can not exist under your regime. Besides, all the unintended consequences come to surface if non-IP were to be introduced.
So who forces who?

Stephan Kinsella July 2, 2009 at 2:28 pm

Andras

“Kinsella,
In the case of pharmaceuticals marketing a product means that the public can learn of the “composition of matter” (in a few minutes) and that is what counts. So your second point is also mute.”

Yes, but not all patents are on compositions. Some are on methods of making something. I corrrected Shay above who misstated the law, and corretly explained: “The real risk is that if you keep an invention trade secret, then someone else might independently invent–not reverse engineer–it, and then patent it.”

You seem to think this is not a real risk, based on yet another misunderstanding of the law. You are wrong.

“As I said before internalization of everything, not just IP, is based on conventions. Codification is just a reflection of the view of the society on this internalization process. [more babble]
So who forces who?”

The state uses aggression on private property owners when it takes their property and gives it to IP plaintiffs. Any more questions?

JB July 2, 2009 at 5:02 pm

@ Stephan Kinsella

“Yes, but not all patents are on compositions. Some are on methods of making something. I corrrected Shay above who misstated the law, and corretly explained: “The real risk is that if you keep an invention trade secret, then someone else might independently invent–not reverse engineer–it, and then patent it.”

Correct me if I am wrong here Stephan…

First, a Patent does not give one the right to make something or utilize a certain process. It gives the right to tell others they can’t. I can hold a patent and not have the right to manufacture the product I hold the patent on.

However, it is my understanding that if I can show that I was using a certain method, engineering, etc. that is claimed in a patent before the application was filed (or is it before the issue date?) then I can continue using the method that someone else has now patented – they cannot say I do not have the right to utilize it under their patent. I will be the only other entity that can utilize the idea/method without paying royalty unless another party can prove that they also were utilizing the now-patented method/idea.

In the case above then, if someone else invented and patented a method/invention that you had already come up with and were keeping secret, all you would have to do is show that you had been utilizing the method earlier, and they have no action against you. You can continue utilizing the method/idea previously as well.

The only “downside” is now you have to share the market with one other competitor and that competitor controls the price of royalty and how many will be allowed to become licensees.

I agree that there is a real risk there, but the risk (if my understanding is correct) does not contain the ability to prevent you from continuing your use of the method/invention – it only prevents you from controlling the method/invention from a licensor/licensee perspective because you will not be the patent holder.

Stephan Kinsella July 2, 2009 at 5:18 pm

JB:

“First, a Patent does not give one the right to make something or utilize a certain process. It gives the right to tell others they can’t. I can hold a patent and not have the right to manufacture the product I hold the patent on.”

Correct. Because other patents may cover this.

“However, it is my understanding that if I can show that I was using a certain method, engineering, etc. that is claimed in a patent before the application was filed (or is it before the issue date?) then I can continue using the method that someone else has now patented – they cannot say I do not have the right to utilize it under their patent.”

This is too confused. It’s a technical qustion that muddies the water. It has no bearing on the policy issue.

But the long-short: it does not matter what is *claimed* in another patent for prior art purposes; but only what is described (it can be a magazine article say). The patent has a presumption of validity so you can still be sued. You have to prove it should not have been granted. One way to do it is to show that the idea was already described in a printed publication more than a year before the patent application was filed.

If it’s in another patent, that patent may, or may not itself cover your product–depends on whether it’s still in force (it could be old) and what the claim say, and whether *it* is valid.

Quite often you may be infringing both patents. They can overlap.

“In the case above then, if someone else invented and patented a method/invention that you had already come up with and were keeping secret, all you would have to do is show that you had been utilizing the method earlier, and they have no action against you. You can continue utilizing the method/idea previously as well.”

I am not sure what scenario you are describing, but no, in general, there is no prior user defense (there are a couple of narrow ones obtained by special interest lobbying).

“The only “downside” is now you have to share the market with one other competitor and that competitor controls the price of royalty and how many will be allowed to become licensees.”

I this is confused and inaccurate.

JB July 2, 2009 at 8:39 pm

@ Stephan Kinsella

Thanks for taking your time to respond. I appreciate it.

I guess the scenario that I was trying to describe is one that happened to me. Around 2000 Kodak came to me and said my company was infringing a utility patent on single use cameras. We checked dates and found that the machines we created (which we believed were infringing on several claims in the Kodak patent once notified) were put into use long before Kodak filed for their patent.

In the end, I was led to believe that because we had been using what was claimed (but not necessarily intentionally keeping it “secret”) BEFORE the patent issued we could continue “infringing” and that this line of thought was coming from the law.

Perhaps I misinterpreted what was going on. Maybe we were “allowed” to just keep doing what we were doing because I could have invalidated the patent by showing that I used what was claimed prior to filing?

My last point was that IF my interpretation was correct then the “downside”, for someone who held their method/invention secret and which was then invented and patented by someone else independent of knowledge of the one being kept secret, was minimal. The downside that I see in that scenario (again, IF correct) is that there will be another competitor (one with a patent that now controls royalty flows and who gets a license). That is a “downside”, but even though there is another competitor you can continue “infringing” IF you can prove you were utilizing that idea/method before the filing date. That would make the downside minimal and may be a good “risk” to take when considering keeping a method/invention “secret”.

Peter Surda July 3, 2009 at 7:15 am

> In the end, I was led to believe that because we had
> been using what was claimed (but not necessarily
> intentionally keeping it “secret”) BEFORE the patent
> issued we could continue “infringing” and that this line of
> thought was coming from the law.
I think prior art actually allows the patent to be revoked. See http://en.wikipedia.org/wiki/Novelty_(patent) .

Cheers,
Peter

Peter Surda July 3, 2009 at 7:38 am

@Stephan
I think your observations about some IP proponents, esp. libertarian ones, are correct. Judging from some discussion, it appears to me that these IP proponents
- do not understand the current legal system with respect to contract law and various “IP laws”
- do not have a clear concept of an alternative hypothetical IP system that allegedly fixes the problems of the current one

A very frequent mistake is to use the term “IP” when describing various arrangements and business transactions that are governed by other laws and have nothing to do with IP at all. Not that I am a law expert but at least I had a couple of law courses at the university.

Stephan Kinsella July 3, 2009 at 7:42 am

Peter, re prior art: this is a highly technical, convoluted, and complicated (and frankly, irrelevant here) area of the law. It is not so simple. Yes, prior art can be used–maybe–to “invalidate” a patent … if one can afford to do this in court…. if the art is dead on enough to overcome the presumption of validity (which is even higher if that same art was already considered by the PTO during examination); etc. But not all art is “prior art”; certain secret uses are not public enough to count, for example, such as the case I gave earlier.

Dale Halling July 11, 2009 at 9:20 am

The Myth that Patents are a Monopoly

A patent gives the holder the right to exclude others from making, using or selling their invention. 35 USC 154. It does not give the holder the right to make, use or sell their invention. A monopoly is an exclusive right to a market, such as an electric utility company. An electric utility company has the exclusive right to sell electricity in a certain territory. Since a patent does not even given the holder the right to sell their invention, let alone an exclusive right to a market, it is clearly not a monopoly.

When a person describes a patent as a monopoly to be consistent they should also state that they have a monopoly over their car or over their house. In fact, they have more rights in their car and house than a patent gives the inventor over their invention, since you have a right to use and sell your car or house. A patent does not give these rights to an inventor over his invention. All invention are built upon existing elements (conservation of matter) and if the elements that the invention uses are patented, then the inventor will not have the right to sell their invention without a license.

Some economists argue that a patent is designed to give the holder monopoly power. Those economists who are consistent also state that all property rights give some monopoly power. The property rights are monopolies thesis shows how confused economic thought is on this subject. The only logically consistent definition of a monopoly is an exclusive right to a market.

People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.

For more information on patents and innovation see http://www.hallingblog.com.

Stephan Kinsella July 13, 2009 at 1:15 pm

Dale Halling writes about: “The Myth that Patents are a Monopoly”, stating: “People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.”

I have replied to this in detail in Are Patents “Monopolies”?

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