Archive for external fatigue
Dehydrating Innovation in Europe: EFSA and Beverage Innovation
Posted by: | CommentsOne of the hottest areas for innovation globally is in improved foods and beverages that benefit human health. Unfortunately, bureaucrats are among the biggest barriers that innovators face in this field. In the United States, something as uncontroversial as the well-known relationship between citrus fruit and scurvy (that is, citrus fruit can prevent or help cure scurvy) becomes a dangerous proposition in the hands of a bureaucrat. One VP with a major global food company explained to me that selling an orange with the claim that it “may help prevent scurvy” could get you thrown in jail in the U.S. under the strict rules of the FDA, rules which make it exceedingly difficult to pursue innovation in food, no matter how strong the science is. But the innovation barriers from regulations in the U.S. may be dwarfed by those that are metastasizing in Europe, especially under the heavy hand of the EFSA (European Food Standards Authority). The fantasy land of bureaucrat anti-imagination in Europe is so other-worldly that you can become a criminal for claiming that “water may help prevent dehydration.” Incredible? Impossible? Here’s what Victoria Ward and Nick Collins report in The Telegraph, Nov. 18, 2011 (excerpt):
EU bans claim that water can prevent dehydration
Brussels bureaucrats were ridiculed yesterday after banning drink manufacturers from claiming that water can prevent dehydration.EU officials concluded that, following a three-year investigation, there was no evidence to prove the previously undisputed fact.
Producers of bottled water are now forbidden by law from making the claim and will face a two-year jail sentence if they defy the edict, which comes into force in the UK next month.
Last night, critics claimed the EU was at odds with both science and common sense. Conservative MEP Roger Helmer said: “This is stupidity writ large.
“The euro is burning, the EU is falling apart and yet here they are: highly-paid, highly-pensioned officials worrying about the obvious qualities of water and trying to deny us the right to say what is patently true.
“If ever there were an episode which demonstrates the folly of the great European project then this is it.”
NHS health guidelines state clearly that drinking water helps avoid dehydration, and that Britons should drink at least 1.2 litres per day….
German professors Dr Andreas Hahn and Dr Moritz Hagenmeyer, who advise food manufacturers on how to advertise their products, asked the European Commission if the claim could be made on labels.
They compiled what they assumed was an uncontroversial statement in order to test new laws which allow products to claim they can reduce the risk of disease, subject to EU approval.
They applied for the right to state that “regular consumption of significant amounts of water can reduce the risk of development of dehydration” as well as preventing a decrease in performance.
However, last February, the European Food Standards Authority (EFSA) refused to approve the statement.
A meeting of 21 scientists in Parma, Italy, concluded that reduced water content in the body was a symptom of dehydration and not something that drinking water could subsequently control.
Now the EFSA verdict has been turned into an EU directive which was issued on Wednesday.
Ukip MEP Paul Nuttall said the ruling made the “bendy banana law” look “positively sane”.
He said: “I had to read this four or five times before I believed it. It is a perfect example of what Brussels does best. Spend three years, with 20 separate pieces of correspondence before summoning 21 professors to Parma where they decide with great solemnity that drinking water cannot be sold as a way to combat dehydration.
“Then they make this judgment law and make it clear that if anybody dares sell water claiming that it is effective against dehydration they could get into serious legal bother.
EU regulations, which aim to uphold food standards across member states, are frequently criticised.
Rules banning bent bananas and curved cucumbers were scrapped in 2008 after causing international ridicule.
The ruling is more than merely laughable. For those on the cutting edge of advanced foods and beverages, it is an ominous sign of the innovation fatigue from government that is increasingly strangling Europe and much of the Western world. The inability to make reasonable, scientifically-supported claims about the benefits of healthy foods and beverages is one that will stifle innovation and entrepreneurship in Europe. I’d rather have to do my own homework to understand the validity of health claims than to have bureaucrats completely stifle innovation in health-promoting goods. Give me the Wild West of unrestrained innovation, with all the risks and bad claims that might follow, rather than a sterile 1984 society in Oceania which hordes of bureaucrats protect me from myself and everything new. But between those two extremes are many healthy, democratic alternatives in which sound legislation reduces the most egregious crimes while allowing innovators for the most part to move forward.
Here in China, where some of the best beverages in the world are to be found, I’m happy to say that soft-drink entrepreneurs appear to still have the freedom to declare that aqueous beverages reduce thirst and help prevent dehydration. Watch for the world’s epicenter of food and beverage innovation to increasingly shift toward China, if it’s not already firmly rooted here.
On Sept. 16, President Obama signed the Leahy-Smith “America Invents Act” which supposedly will strengthen innovation and improve our patent system. It’s a radical change in our patent system–one that seems to have been drafted by people who don’t fully understand patents or innovation.
Does this bill promote innovation as advertized? What about that 15% rate hike for patent fees–a new 15% tax on the IP that entrepreneurs need. That’s the most immediate and obvious change. Guess which way that increased burden tilts the balance? Economics 101 suggests that making innovation more expensive is not likely to make it more abundant. But Congress may know better.
Congress apparently recognizes that we have a problem with the patent system, where huge backlogs exist that cause enormous delay and expense for inventors. The backlog and efficiency problem they are allegedly fixing, however, does not require all the unintended consequences of revising patent law but simply improving the administration of the PTO. For example, if Congress would refrain from siphoning off many millions of dollars of PTO funds each year, effectively taxing innovation and crushing the ability of the PTO to properly staff itself and keep its systems up to date, then the backlog could be easily resolved, in my opinion. Unfortunately, we seem to have another case of politicians proposing costly solutions that won’t solve the costly problems that they caused. As long as Congress can redirect funds received by the PTO, the administrative problems at the PTO will not be resolved by changes in patent law. (See “Patent Reform–A Tax on Innovation?” and “Let the Patent Office Keep Its Money.“)
While probably not solving the problems it allegedly fixes, the America Invents Act clearly raises a host of new problems that may lead to unpredictable results in costly litigation for years to come. The radical changes involving who gets patents and what is prior art use confusing language that strips the bill of the “certainty” that its proponents allegedly sought to restore in the system. See excellent reviews of the controversies in these sources:
- Joshua D. Sarnoff, “Derivation and Prior Art Problems with the New Patent Act,” 2011 Patently-O Patent Law Journal, http://www.patentlyo.com/files/sarnoff.2011.derivation.pdf.
- Eric Guttag, “Some More Heretical Thoughts on Strategies for Coping with First to File Under the America Invents Act,” IPWathdog.com, Oct. 5, 2011.
- Gene Quinn, “Prior Art Under America Invents: The USPTO Explains First to File,” IPWathdog.com, Oct. 4, 2011.
Harold C. Wegner of the respect form Foley and Lardner has published an analysis of the law (3rd edition, Sept. 29, 2011) which highlights its pervasive ambiguity due to poor drafting. This is a serious issue which will cloud patent law and hinder the quest for patent rights for years to come. Wegner also rules that the new law may increase backlogs because appeal judges will have to continue dealing with their heavy load of existing cases as well as take on added cases of “post-grant reviews” and other new administrative procedures (supplemental examination and transitional examination of business method patents) which are provided in the new law. The backlog is sure to increase and fees will be raised even more to cope. Meanwhile, the new post-grant review process has “dractonian” elements, as Wegner observes, that may further impede the ability of an inventor with a real invention to obtain a patent. Further, there are numerous details Wegner identifies in his 177-page text showing potential harm to “upstream” entities like universities and small inventors while benefiting those downstream entities that want to use the innovations of others for their business as cheaply as possible. I smell innovation fatigue.
In my view, the bill reflects fundamental ignorance about the nature of invention. The perplexing provisions on prior art highlight this. Years of litigation that will be needed to clarify what on earth is meant by the new prior art provisions as patent professionals already express exasperation over issues of derivation, inventorship, and prior art in the new law.
A crucial part of the ignorance here is on the nature of invention itself, amplifying the confusion created by the judiciary regarding what is patentable. Viewing business methods and software as somehow being non-technical, in spite of typically involving highly technical systems and tools, opens many cans of worms. If something is novel, useful, and non-obvious, why should it not be patentable if it involves computers and electronic data? But the judicial backlash against vaguely defined “business method patents” has been institutionalized in this new law, where business method patents dealing with the financial services industry (thank you, Wall Street lobbyists) have been given special treatment, allowing Wall Street to have a special route to invalidate patents that otherwise have survived basic prosecution, reexamination, and prior litigation. Section 18 of the law describes how those being sued by a “covered business method patent” can have a special hearing to invalidate the patent. That section includes this gem to define that key term:
(d) DEFINITION.–
(1) IN GENERAL.–For purposes of this section, the term “covered business method patent” means a patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except that the term does not include patents for technological inventions.
(2) REGULATIONS.–To assist in implementing the transitional proceeding authorized by this subsection, the Director shall issue regulations for determining whether a patent is for a technological invention.
The drafters of this law apparently view “business method” inventions as distinct from “technological inventions.” If science were to rule, it would be clear that one cannot clearly distinguish between “technological inventions” and a claim involving data processing or management of a financial product or service when technology is involved. Why is a new use of a computer to advance financial services not “technological”? Why is it a less worthy invention than a new use of a polymer or of amide chemistry or of coherent photons? This probably relates to the non-scientific but widely held view among judges and politicians that information, data, and electronic signals are somehow not part of the physical universe and should be viewed as abstractions rather than concrete entities that relate to physical measures such as entropy and require tangible matter and real energy to manipulate. Note that “technological” is undefined, perhaps because it cannot reasonably be defined in this unreasonable provision of an fatigue-generating law. I wish the best of luck to the Director of the PTO in clarifying this opaque miasma.
The richest innovations transforming our era involve inventions rooted in the processing and manipulation of information and these innovations must be encouraged and rewarded, not excluded from patent coverage because some failing but well-connected ‘too big to fail” entities don’t want patents from others to stand in their uncreative way. The AIA clearly shows the power of those Wall Street entities in guiding legislation and giving them special breaks, breaks that will do anything but strengthen innovation. Like much of the rest of the law, it’s directed at fixing the wrong things in the wrong way. May wiser heads quickly repeal or massively revise this legislation before backlogs explode and innovation fatigue is further spread across the US system.
Meanwhile, from my vantage point in Shanghai, I see China increasingly strengthening incentives for innovation and strengthening patent rights. This bodes well for the competitiveness of China in the future. America will soon be wondering how to catch up. How about some real patent reform down the road?
For a rather optimistic but definitely helpful overview of the impact of the AIA on patent practice, see PLI’s page, “America Invents Act: How the New Law Impacts Your Clients and Your Patent Practice.”
The Future of Biofuels: Environmental Innovation Fatigue for Environmental Advances?
Posted by: | CommentsThe federal government has set bold and challenging goals for future increases in the production of energy from non-fossil fuel sources. Seeking to curb our dependence on foreign oil as well as fossil fuels in general, our nation is encouraging the development of fuels from biological sources. Biofuels, diesel and gasoline made from renewable sources such as agricultural waste, forest sources, and algae, are a top priority and are the subject of extensive government-funded research and tax credits. Biofuels are a rich source of innovation and show an explosion in patent activity in the past 3 years.
Unfortunately, biofuels are also facing daunting challenges from uncertainty in federal regulations and tax policy that threatens to bring many innovations to a halt as industry puts many developments on hold due. The uncertainty in the environment–the regulatory and tax environment created by the government–is actually hindering many biofuel projects aimed aimed at enhancing the environment in the long run. This was the sentiment from several speakers in the midst of biofuels innovation in sessions at BioPro Expo 2011, a major conference on biofuels and forest bioproducts, being held in Atlanta, Georgia, March 14-16. Concern about government barriers to commercialization of biofuels advances was a repeated theme.
One example is federal regarding the definition of “renewable” for those seeking federal incentives for the use of renewable sources of fuels. Municipal solid waste (MSW) has a large component of plant-based materials such as paper and food waste, and is one of the most available and commercially attractive biofuel sources. The technology is proven, the raw material is available and economically feasible, and projects are ready to roll–except they have largely been put on hold until the federal government rules on whether MSW can be counted as “renewable” or not. Then there are strict new rules on boiler operation (the Industrial Boiler Maximum Achievable Technology, or BI MACT, rule) throwing another wrench and major cost burden on the backs of those with boilers generating energy from biomass sources. There are a host of other rules and conflicting definitions and policies adding to uncertainty, risk, and cost in commercializing biofuels. For the innovator, it is a challenging era with the potential of innovation fatigue from external or environmental factors.
Let’s hope that the rich opportunities being uncovered in biofuels can be commercialized rapidly and that the barriers to innovation can be reduced.
In the United States and many other nations, a question is being asked by many who struggle with the brutal reality of innovation fatigue. In many sectors, it is taking bigger investments, longer times, and much more pain to deliver innovation, and much of what passes for innovation in some sectors ends up being incremental fluff or mere cost-cutting. Some blame it on employee productivity, 
some blame it on short-term thinking in pubic companies driven by the unnecessary compulsion to please stockholders above all others, some blame it on the MBA culture instilled by leading business schools, and others blame it on governments that make every entrepreneurial move a slow trudge across the regulatory mire and a possibly fatal descent into quicksand. Some point to numerous factors including the capital crunch, creating a perfect storm in which even cash-rich companies are afraid to invest in real innovation because of uncertainty and fear.
Innovation fatigue, of course, is not uniform. Individuals and individual companies often buck trends and rise above currents of fatigue, and sometimes entire sectors seem energized and vibrant with innovation. For example, innovation in mobile applications and devices seems vigorous, but even then we have former innovation leaders like Nokia and Motorola feeling the burn of fatigue across many parts of their business.
Where are the real pressure points? What are the next steps that America or other nations need to take to restore a vigorous innovation culture across many sectors and help their nations overcome innovation fatigue? What do corporate leaders need to be doing differently to turn their companies in havens of innovation that can deliver growth and success for the long term? What do our political leaders need to do and understand to let the fire of innovation burn more brightly?
Let me know your thoughts. The five answers I like best will be rewarded with a free copy of Conquering Innovation Fatigue mailed to wherever you are. All submissions will implicitly have your permission to share them, though I will withhold your name if you ask me to. Send your comments to jeff at magicinnovation d0t com.
The Real Beef Behind the Lawsuit: Taco Bell and the Burden of Class Action Lawsuits
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When I eat at Taco Bell, I usually get chicken, steak, or even just a filling bean burrito, but I have tried the seasoned beef and can confirm that it is beef. I love to cook and naturally prefer my own cooking (and tend toward vegetarian fare these days), but being familiar with ground beef, I suggest that you can look at it, feel it, and taste it to recognize that it’s mostly ground beef. The popular chain, though, faces an expensive class action lawsuit because one woman (actually a team of lawyers in the name of one woman) claims that Taco Bell’s “seasoned beef” does not meet US legal standards. This story is making international headlines and generating a lot of buzz–see, for example, the story at CNN and the Washington Post. In some of the news stories I see, I wonder if anyone has actually read the legal complaint to see where the beef really is in this complaint, available in PDF form at http://www.beasleyallen.com/webfiles/Taco-Bell-Complaint.pdf.
News stories typically state that the suit is about Taco Bell’s seasoned beef having just 35% beef, less than the 40% standard for beef filling. (Some stories even put the 35% claim in their headline.) If so, Taco Bell will have no problem because anyone familiar with ground beef can recognize that Taco Bell’s beef filling is obviously mostly beef, and Taco Bell claims that it is manufactured with 88% beef. (What’s the other 12%? A little water, some oat products, spices, etc., as you can read in the lawsuit or hear explained by Taco Bell’s CEO on YouTube.) But the complaint as filed is not about 35% vs. 40% for beef filling, but over the alleged misuse of the term “seasoned beef” instead of more proper terms such as “beef filling” or “taco filling.” A beef “filling” has to be at least 40% beef, but to call something “seasoned beef” or “seasoned ground beef,” so argues the plaintiff, one has to meet the USDA standard for “ground beef” which means that it cannot have added water, binders, or extenders. So the basis for the suit is not whether lab tests show 35% or 40% beef (it’s obviously well over 50%, in my opinion, unless some rogue Taco Bell shop is watering everything down), but whether Taco Bell is incorrectly marketing their product as “seasoned beef” when it should be “beef filling,” “taco meat filling,” or some other less beefy term.
Some news stories even talk about lab results showing that the filling is only 35% beef. Perhaps this is an additional line being pursued by the law firm, but it’s not in the original complaint.
“Beef filling” vs. “seasoned beef”: that is the basis for claiming that Taco Bell is “immoral, unethical, oppressive, and unscrupulous” and “injurious to consumers.” Even if Taco Bell needs to tweak their marketing lingo, the allegations in the lawsuit seem a bit much.
A larger issue here is the inequity of class action lawsuits which enable the fiction of allowing a team of lawyers to claim to represent millions of people in suing companies for minute offenses. Yes, companies need to comply with the law, but when every successful company suddenly must face numerous shakedowns, each of which can cost millions to defend, it adds to the unnecessary burdens of being in business and creating jobs and real products. If Taco Bell needs to improve their terminology, call the USDA and let them issue penalties and corrective orders. Problem solved. But this is going to be a shakedown for millions. It’s hard for me to see how this is worth millions of dollars of penalties to see that justice is done–defining justice, of course, as paying large amounts of money to lawyers.
The complaint, by the way, is signed by attorney Timothy G. Blood. Interesting surname for a class action lawyer.
Update, Jan. 29, 2011: CNBC has an article about Taco Bell’s forceful response. Turns out that the USDA regulation cited in the lawsuit doesn’t even apply to restaurants. “The USDA’s rules apply to meat processors — the companies Taco Bell buys its meat from. Tyson Foods Inc., the company’s largest meat supplier, said it mixes and cooks the meat at three USDA-inspected plants and that the meat is tested daily to make sure it meets requirements.” That makes the lawsuit all the more ridicuous–and one more example of the many costly fatigue factors that businesses face these days.
Children Present: Innovators Beware
Posted by: | CommentsOne of the most challenging areas for innovators, entrepreneurs, and businesses of any kind now is field of children’s products. Innovation fatigue has reached new heights in this area due to “external innovation fatigue”–the kind that comes when outside forces from government and others, often with the best of innovations, deliver hard-to-evade punches to the body of entrepreneurs, including some very low blows.
The problem is especially severe when the governmental forces that can shut down a business or change the playing field unexpectedly arise not from legislators accountable to the voters, but from lone appointed individuals who may not be directly accountable to anybody.
The Consumer Product Safety Improvement Act (CPSIA) in 2008 dealt with, among other things, the problem of lead that had affected some books imported from China. Rather than address the specific issue of Chinese imports, the law sought a broad “fix” by banning lead in children’s products in general. Who could oppose that? But what it means in practice is that millions of toys and children’s books were unnecessarily discarded–wasted–by small businesses around the country because they could not afford to have lead testing done for the products in their inventory. For used products, there weren’t technically required to do testing, but they still had to comply with the law forbidding them from selling products with lead above a certain threshold. In practice, it was test or toss. I know of local entrepreneurs in Wisconsin who had to discard a lot of products.
For inventors and entrepreneurs, the added cost of certifying that your product is lead free can be one more tax that stands between success and failure, even when you have diligently avoided working with companies where lead could possibly be a problem.
At least the lead ban had its roots in law from Congress. The most recent ban affecting children’s products comes from one unelected leaders of an agency who has made tough new regulations on children’s cribs a top priority. In the past decade, 32 children died from defective children’s cribs with drop-down sides. Now drop-down sides will be banned in 2011, making it illegal to make, sell, or distribute them. (See “Baby Asleep in a Drop-Side Crib? Soon They’ll Be Banned” at Time.com.) Any death is regrettable, but 32 deaths from tens of millions of users is remarkably small. Chances are the deaths are not evenly distributed among companies, yet a blanket ban on a product punishes all, including those who had a flawless safety record and had delivered innovations that made their beds more reliable and safer than the competition. Now they are out of luck, as are the millions of parents (myself included) who have found safe and sturdy drop-down beds to be a big help in safely taking care of children and grand-children.
30 deaths across a decade: all tragic, but consider those numbers in light of the risk we face every time we take a step, turn a corner, plug in a product, or take a bite of food. Far more children die each year from salmonella–do we ban chicken and meats? There are about 30,000 deaths a year in the US for accidental poisoning and about 40,000 automobile deaths a year, with thousands of children in both categories. 3.5 million children aged 14 years and under suffer medically treated sports injuries each year, with many more deaths than cribs could ever cause. Do we ban sports? About 50,000 people a year go to the hospital because of skateboards, with many more deaths than cribs. Among useful but dangerous products, consider lawnmowers, where over 150 people die each year (that’s 5 decades worth of deaths from cribs at our current rate). Time for a ban?
There are hidden costs and even injuries for safety measures that are too strict. Alternative products and alternative behaviors have their own set of consequences. Will parents now be tempted to let kids sleep on beds or without the enclosed protection of cribs because the new generation of cribs are too expensive or too inconvenient? Is there any guarantee that children nationwide will be safer because of the ban?
I love kids and want them safe, but am most comfortable when informed parents take responsibility for that. When one person in an unelected position can make broad new rules that wipe out products that millions of people have found to be safe and effective, this changing of the rules midstream is a terrible disincentive for innovation in children’s products and innovation in general. Why bother with making the safest, most innovative drop-down crib when you’re going to be lumped with inferior products and stuck with a blanket ban that wipes our your business? It’s easy to do in the name of the children, but there are a lot of more pressing problems that children face, and better ways to deal with them than having one regulator issue laws without direct accountability to the people. Chalk one up for innovation fatigue.
Anytime is a tough time to be an innovator, but it’s especially tough when government gets overly involved in helping without considering the unintended consequences of the help, or the opportunity cost from helping in areas where help isn’t really needed. The quest to protect children is one area where the temptation to be overzealous can be especially strong. Who could be against protecting children?
More Examples of External Factors Contributing to Innovation Fatigue
Posted by: | CommentsFurther stories in the news illustrate the important issue of external innovation fatigue factors as raised in our book. Recent examples:
- The Feds vs. Fruit Juice: The FTC goes to war against those who promote the health benefits of the pomegranate.
- Small-Scale Regulation May Bring Big-Time Troubles for Wisconsin Nanotech
- Licensing to Kill from today’s Wall Street Journal: A “study to be released this week by the Institute for Justice … has collected dozens of examples of regulations choking economic growth by taxing and over-licensing small businesses. In a survey of eight major cities, the study found that entrepreneurs routinely face obstacles of bureaucracy and red tape that deter them from otherwise promising opportunities.”
- “CSPC Issues Final Rule on Definition of Children’s Products” (My take: let’s make products for children or that could even conceivably be used by children up to age 12 more expensive and riskier than ever, with a huge cloud of uncertainty about what products are covered just to keep innovators nervous and in the dark.)
Here’s an excerpt from the first story about pomegranates by L. Gordon Crovitz:
These days, pomegranates are far down the pecking order of fruits, though some think it was a pomegranate, not an apple, which Eve offered to Adam. Fewer than 4% of Americans had tried the fruit before 2002, when marketing mavens Lynda and Stewart Resnick launched the 100% fruit juice they call POM Wonderful. It’s since become a top seller, in its curvy hourglass-shaped bottle.
The Resnicks, who also owns the Teleflora and FIJI water businesses, invested in orchards in California in the 1980s. They’ve also commissioned research on the anti-oxidant properties of pomegranates—too much research, according to a Federal Trade Commission (FTC) complaint last month alleging deceptive advertising. “Any consumer who sees POM Wonderful products as a silver bullet against all diseases has been misled,” said David Vladeck, who runs the agency’s Bureau of Consumer Protection.
This is hyberbole—no POM ads claim the pomegranate can cure “all diseases.” But the complaint is a stalking horse for the agency’s more radical position: that health-food companies now need to get Food and Drug Administration approval for scientific claims, similar to the process pharmaceutical companies follow for drugs.
Ms. Resnick told me last week that the FTC complaint is “a 20th-century idea in a 21st-century world.” She says that “there is so much information available that consumers can make up their own minds. They are smarter than the FTC gives them credit for.”
I’m a huge fan of healthy food and a lifelong pomegranate eater (decades before POM helped people appreciate how delicious this fruit is). My introduction to pomegranates came from my mother who and her southern Utah roots (my mother was raised in hot “Dixie,” the St. George area in southern Utah, where pomegranates grew in her backyard. In fact, the photo below shows the flowers of a pomegranate tree in my grandmother’s backyard. It’s an amazing tree with beautiful, healthy, delicious fruit. But thanks to the Federal Government’s attitude about such things, one innovative company faces a surprising external “fatigue factor” from bureaucrats who might be happier if we all just drank Kool Aid.
Pomegranate Flowers, St. George, Utah
The Tsunami of External Fatigue
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Innovators and business leaders doing their best to achieve commercial success need to understand the set of innovation fatigue factors that they face. These include personal factors due to the bad behavior of individuals; corporate or organizational fatigue factors reflecting inadequate systems, culture, or flawed judgment; and external fatigue factors due to the burdens of legislation, taxation, and challenges in the patent system, for example. The first two categories are factors where innovators and corporate leaders are in charge. The external category is the most difficult one because the challenges come from outside our sphere of influence, where the best efforts on our part can still face seemingly insurmountable challenges beyond our control.
One of the effects of uncertainty regarding the regulatory climate that business faces is a dangerous reduction in venture capital that is often needed for start-ups to succeed. Consider this ominous news story from Yahoo! about the drop in venture capital funding recently:
Venture capitalists poured less money into U.S. startups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds.
According to a study set to be released Friday, startup investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 startups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.
The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech startups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.
This is a genuine red flag, consistent with many red flags that we are seeing. The co-founder of Home Depot, for example, recently criticized the federal government in an open letter to President Obama in the Wall Street Journal (Oct. 15, 2010), explaining that Home Depot, founded during a past recession and now providing over 300,000 jobs to Americans, could never have been successfully founded in today’s climate where government, in his opinion, seems set on vilifying and punishing business rather than helping it to succeed.
We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.
If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.
Meantime, you seem obsessed with repealing tax cuts for “millionaires and billionaires.” . . . The wealth that was created by my investments wasn’t put into a giant swimming pool as so many elected demagogues seem to imagine. Instead it benefitted our employees, their families and our community at large.
Business leaders and innovators face many new burdens and uncertainties that can crush delicate start-ups and even thriving businesses. Increasing the burdens right now, whether through more regulations, higher taxes, or other measures with unintended anti-business consequences, seems likely to only increase innovation fatigue at this critical time in our nation’s history. I urge our leaders to carefully consider how small companies and start-ups are being affected, and how venture capital will be affected, by the changes that are being proposed and by the actions they’ve already taken.
It’s time for government to listen to the voice of the innovator.
Used Patents: A Potentially Deadly Part of Your Portfolio
Posted by: | CommentsIn Conquering Innovation Fatigue, we explain how “Patent Pain” is one of the external innovation fatigue factors that can slow down innovation. This factor includes actions by courts and lawmakers that add to the difficulty and expense of protecting intellectual property rights. A new aspect of this problem is the recent explosion in risk to patent holders–particularly the holders of “used” patents (patents directed to products that the patent holder markets). This risk stems from a recent Federal Circuit decision, Forest Group, Inc. v Bon Tool Company (link is to the PDF file of the Dec. 28, 2009 decision). The controversial aspect of this decision is that it suddenly changes the way the law has been applied in a way that could severely punish patent holders for what might be an innocent mistake.
The law provides a penalty of up to $500 per offense for false patent marking–inappropriately marking a product with a patent number such as one that has expired. It can be an act of intentional fraud or, in many cases, a simple mistake. That $500 penalty per offense has long been interpreted as $500 per continuous false marking act, not as $500 for every falsely marked product. All that changed a few months ago, thanks to the Federal Circuit Court’s decision. Now if you sell a billion packages of diapers and one of the patents listed happens to have expired a few months ago (oops, clerical error!), you could be sued and face up to $500 billion in penalties. Even if reduced to a mere, say, $50 million, it’s extremely dangerous for a corporation. Naturally, this has drawn in swarms of lawyers and looks like it could create a whole new cottage industry based on sucking capital out of the veins of those who actually use the patents they obtain. Patent holders are rushing to check their patent markings more carefully and to redo packaging (an expensive process, unfortunately) to ensure that expired patents are taken off.
The social harm of listing an expired patent on a product seems virtually negligible. A competitor interested in copying the product will naturally look up the patent and determine if the claims might be a barrier, and in this process can readily see whether it has expired. Yes, it’s a form of false advertising, but not because a real patent wasn’t obtained, only because it eventually expired and the marking wasn’t updated yet. Not as serious as making up a bogus patent number and listing that for honor never earned. $500 for a continuous act of false marking may seem too light a punishment (the law was written back when $500 was worth something), but up to $500 per product strikes me as ridiculous and threatens to only further penalize and discourage producers and innovators.
Here’s hoping that Congress will correct the abusive application of the law by the Federal Circuit and make owning a used patent less dangerous.
Related story from the Wall Street Journal: “New Breed of Patent Claim Bedevils Product Makers” by Dionne Searcey. This story discusses a more recent ruling that overturned a decision saying an attorney suing Brooks Brothers for expired patents had no legal standing to sue. Now lawyers everywhere can join in the feeding frenzy.
Update, Sept. 3: One of my favorite IP strategists asked what constructive steps we could be taking to help clients deal with this threat, apart from diligently checking every marking. Tough question. What if products were marked with codes—could be simple six-character strings that you plug into tinyrul.com or some other website–to bring up a page with the current patents applicable to a product? The page could be automated so it is tied in to patent databases so that only current patents are displayed, and/or status information was displayed for the patent. Thus, if a product does have a patent associated with it when packaging is designed, instead of listing the patent number(s), why not list something like: “For related patents, see PatentMarking.com/14Zq2″.
Could this indirect approach fully meet the demands of patent marking and provide sufficient notice? Perhaps not without a tweak of the law, but I’d be happy to see an electronic solution.
When I gave the example with PatentMarking.com, I hadn’t yet checked out that URL and was just throwing out what sounded like a good domain name for such a tool. Turns out that OceanTomo owns it and is using it for a related purpose. Cool! Glad to see that they are advocating online marking of patents.
So why not print each product or its packaging with a code that links the product to a website for automatically updated information, with disclaimers and means for flagging corrections to reduce corporate liability if something goes wrong with the automated process? Could this help reduce the future threat of patent marking sharks trying to shake down companies for millions of dollars for innocent and hard-to-eliminate marking errors?
Another update: Greg Aharonian’s latest PATNEWS newsletter mentions the WSJ article, rejects the outrageous notion that false marking of patents is a serious evil, and contends that Congress should make these lawsuits illegal that seek to shake down companies for millions due to a marking mistake. May that happen swiftly! Thanks, Greg.
Ramping Up External Innovation Fatigue
Posted by: | CommentsWithout wishing to be political, I have to say that I am worried about the future of innovation in light of “external innovation fatigue factors” that arise when government creates imposing barriers for innovators, especially for small businesses and lone entrepreneurs. As we note in Conquering Innovation Fatigue, the problem is often one of unintended consequences from well-intended actions. In the past several years, there has been an acceleration in regulatory burdens, tax burdens, and litigation risks that make starting or running an innovative business riskier than ever. Mounds of cash have been taken from the private sector and given to government agencies and large institutions for so-called stimulus or bailouts, but the real cost of such “help” is rarely considered. We see failed organizations on life support and may be happy to hear of thousands of jobs in these firms that appear to be saved, but we don’t get to see and consider the small businesses that dry up due to the money that was channeled elsewhere or that face the burden of unfair competition from failing institutions shielded from the consequences of their less competitive business models.
We see many leaders calling for even higher taxes on those who are (or would have been) most likely to create jobs and launch businesses. We see government making it more difficult and costly to obtain the energy that is literally and figuratively the fuel of our economy. We see US corporations facing burgeoning regulations regarding environmental issues, hiring practices, benefits, etc., that are not found in the nations we import from, with the natural consequence of punishing those who wish to produce in the US and motivating them to close shop here and go elsewhere. We see increased government intervention at all levels of the private sector, often favoring the large and well connected while leaving the lone innovators and start-ups in the dust, strangled with red tape and choking with uncertainty about the future. Meanwhile, property rights, including intellectual property, are increasingly in jeopardy. This is the stuff of “external innovation fatigue.” It’s been bad for years, and it’s accelerating now at a dangerous pace.
Those who wish to launch new businesses and reap the rewards of their innovation can still succeed, but need additional help and caution in moving forward and finding the right partners, business models, and approaches to reduce the risks and create lasting competitive advantage that can survive the billowing waves of external fatigue factors. We offer guidance in the book on these issues, including the need to be more holistic in pursuit of intellectual property, taking the path that we call 360-degree intellectual assets. Thinking about patents exclusively can lead to excessive costs and disappointments. I suggest reading carefully our recommendations on holistic intellectual assets and giving us a call for further guidance. Innovationedge can be reached at 920-967-0466.