Archive for business models
Among the many barriers to innovation success, one of the most painful and dangerous is rapidly gaining momentum in the United States due to an almost perfect storm of challenges to patent value. I speak of the blight of “efficient infringers,” the many companies, often large and politically influential, who make the cruel calculation that it’s more efficient to blatantly steal intellectual property from small opponents rather than pay for the property they want to use. The victims are the usual suspects, small companies, startups, and lone inventors. I use the word “suspects” deliberately for these victims, for they are suspects in an economic and media climate that increasingly views innovators as a key problem (e.g., “trolls”) for daring to own and perhaps even assert intellectual property against the benevolent titans of Silicon Valley and others who feel they are too big and too entitled to pay for what they take.
In the ruthless calculations of the efficient infringers, they recognize that if their infringing actions are detected, many patent owners won’t have the resources to challenge them in a long, costly battle. They recognize that if they are sued, the abundant new tools they have helped Congress create to kill patents may prevail and eliminate the problem in the USPTO’s Patent Trial and Appeal Board (PTAB), where one keep filing new attacks against the same patent over and over until the judges declare a patent to be abstract or otherwise invalid. The rules are stacked against the patent owner there, and just in case, it’s even possible for judges there to make rulings that favor companies with whom they have obvious connections, as in a former Apple employee making rulings in favor of Apple, with no apparent requirement to recuse themselves for conflict of interest.
If by some chance the patent owner prevails, the owner probably won’t be able to get a permanent injunction against the infringer due to a horrific Supreme Court ruling, Ebay, that removes one of the most important tools a patent owner should have to shut down an infringer. They will just have to pay some reasonable royalties and can avoid the real pain that deliberate infringement ought to bring. So in light of the slight risk of having to pay something to the occasional patent victor, many companies decide they can just do what they wish and treat potential patent losses as the relatively low cost of doing business. Efficient, but ruthless.
Gene Quinn of IPWatchdog.com accurately describes the dire situation in his latest post, “The Great Escape: Efficient Infringers Increasingly Seek to Abuse Antitrust Law.” Read the article and subscribe, for IPWatchdog is one of the most important voices daring to stand up against the anti-patent forces that are causing so much harm to our economy and such ongoing innovation fatigue for those who had the courage to invest in innovation. Efficient theft of the fruits of that innovation will hurt all of us in the end as innovation grows weary.
A small start-up company fighting one of the great giants of all time: it’s a classic story of David vs. Goliath, or in this case, David vs. Googleliath (a.k.a. VSL vs. Google).
Many small companies have claimed that Google misappropriated trade secrets or other IP, but rarely has Google graciously (and accidentally) cooperated in providing smoking-gun evidence the way they apparently did for Vedanti Systems, Ltd. (VSL). In this case, they allegedly left sticky notes on VSL’s trade secret materials showing their questionable intentions to take Vedanti’s technology. If VSL prevails against this giant, it may be more a case of Googleliath falling on its own sword than David being great with a sling.
VSL and their partners are now suing Googleliath for infringement of patents and theft of trade secrets in two courts. The suits are against Google (here also known as “Googleliath”) and their subsidiairies, YouTube and On2 Technologies. London-based Vedanti Systems Limited and their U.S.-based parent, VSL Communications, Inc., have turned to Max Sound for help in enforcing IP rights. The patent suit was filed in U.S. District Court for the District of Delaware, while the trade secret suit was filed in Superior Court of California, County of Santa Clara.
The complaints claim that Google executives met with Vedanti Systems in 2010 to discuss the possibility of acquiring Vedanti’s patented digital video streaming techniques and other trade secrets. Vedanti’s compression technology for streaming audio and video files is far superior to what Google had, Google’s own standards for streaming video t the time led to “jittery, low-quality video and sound for large-sized video files,” according to the patent complaint.
As part of the talks with VSL,Â Google had access to trade secrets such as VSL’s proprietary codec for encoding and decoding a digital data stream.Â That codex has proprietary techniques for “key frame positioning, slicing and analyzing pixel selection of video content to significantly reduce the volume of digital video files, while minimizing any resulting loss of video quality.”
Shortly after the negotiations began, Google allegedly began implementing VSL technology into its WebM/VP8 video codec, applying what they had learned from VSL but not letting VSL know. The WebM/VP8 video codec is extremely important for Google. It is used in many of their services and websites including YouTube.com, Google TV, the Android operating system, and Chrome web browser. They had inferior technology, but by allegedly stealing Vedanti’s, they were able to quickly advance their business at virtually no cost.
There’s just two pesky little problems for Google:
1. Vedanti has patents for its technology and is not afraid to sue. Now you might see why Google seems to really hate software patents (rather, other people’s software patents). They have been a leading force in some of the patent reform measures and related steps that have made protecting IP rights harder than ever for little guys like Vedanti. This giant, with its easy access to the White House and many other influencers, has also been an important voice against software patents, and may have helped influence popular opinion and the courts into recent devastating attacks on software patents. But Vedanti’s patents are still alive for now, so Google has cause for concern.
2. Google seems to have assisted VSL’s case by returning VSL’s trade secret materials with tell-tale sticky notes all over them showing their intent. Huh? This is really an amazing part of this story.
When the VSL Google talks ended, VSL demanded the return of its files. The returned documents were covered with incriminating Post-it notes that had apparently been left behind by Google employees. Attorney Adam Levitt claims that the notes said, among other things, that Google might possibly be infringing VSLâ€™s then-pending patent and that Google should â€œkeep an eyeâ€ on VSLâ€™s technology and sweep it into a Google patent. In addition, notes warned Google engineers not to be caught â€œdigging deepâ€ and to â€œclose eyes to existing IP.â€
The complaint alleges that Google began to amend its preexisting patent applications and file new applications using VSLâ€™s technology. Then in early 2012, VSL noticed that there were significant improvements to the video quality of Googleâ€™s Android operating system as well as other Google software. In June, the staff at VSL analyzed Googleâ€™s publicly available code only to discover that the code contained VSL trade secrets. Levitt asserts that the â€œDefendantsâ€™ theft of VSLâ€™s trade secrets pervades virtually every website and product offered by defendants.â€
“The use of new technology by established companies should be based on original creation and innovation,” said Adam Levitt, head of Grant & Eisenhofer’s Consumer Protection practice, who is representing the plaintiffs. “Vedanti Systems created groundbreaking digital video technologyÂ — technology that has forever changed the way that video content is streamed and displayed over the Internet.”
The lawsuits allege that Google willfully infringed Vedanti Systems’ patent and did so deliberately and knowingly, while recognizing the serious shortcomings of their own video streaming capabilities prior to the infusion of stolen IP.
Whether the suit will succeed or not remains to be seen, but I find Google’s lapse in leaving sticky notes on the borrowed materials to be rather hilarious, if it is true. One thing is for sure: If Vedanti’s allegations are factual, their chances of seeing some degree of justice are vastly greater by virtue of having a patent than if they did not. Software patents are essential for protecting innovations in the hugely important arena of information technology. This is the Knowledge Economy, folks, not the Iron Age. Economic growth and progress is more likely to come from advanced software and IT innovations than from hammering out better cogs and gears, and we need an IP system that understands this. Most judges and politicians ranting against software patents or patents in general do not understand this. Recent ruling that make many software innovations not even eligible for patents show that we have judges and influencers very ignorant of the physical nature of information and computer systems. Innovations like those of Vedenati are not tantamount to mere abstraction and mental exercises. They should have just as much right to be considered for a patent (provided they are novel, nonobvious, and useful) as any tool wielded by or widget hammered out by an innovative blacksmith.
Software patents matter, and they are vitally important for the best innovators of our day if they are to stand against the anti-patent giants that want anything but a level playing field. VSL vs. Google, or David vs. Googleliath, is a compelling reminder of that.
VSL’s patents in Europe are already causing pain for Google. Here is an excerpt from “Court Seizes Google’s Infringing Android Devices in Germany at IFA,” Stockhouse.com, Sept. 11, 2014:
SANTA MONICA, CA–(Marketwired – September 11, 2014) – VSL Communications, creators of Optimized Data Transmission technology and Max Sound CorporationÂ (OTCQB: MAXD)Â (MAXD) creators of MAX-D HD Audio solutions, have been granted multiple preliminary injunctions from the District Court Berlin against OEM’s (Original Equipment Manufacturers) to stop the sale of certain Google Android devices in the Federal Republic of Germany at the Premier show IFA in Berlin (Internationale Funkausstellung, http://www.ifa-berlin.de/en), the world’s leading fair for Consumer Electronics and Home Appliances).
Max Sound, under agreement with VSL Communications, is enforcing intellectual property rights on VSL’s behalf and has obtained preliminary injunctions against Shenzhen KTC Technology Co. Ltd and Pact Informatique S.A., France. German Customs authorities further inspected several other exhibitors of smartphones and tablet PC’s with Android operating system. Shenzhen KTC Technology Co. Ltd. is one of the largest Chinese electronics groups operating worldwide, and Pact Informatique is a French electronics company operating in many European countries under the brand Storex. Max Sound’s actions were based on infringement of VSL’s European Patent EP 2 026 277 concerning an Optimized Data Transmission System Method. The Infringement was found on the basis that Google’s Android OS implements the H.264-Standard for video encoding, which is protected by VSL’s patent. A bailiff seized all smartphones and tablets of KTC and Pact at the trade fair IFA in Berlin on September 10, 2014. The injunctions have no automatic time limit, and opponents can file an opposition.
So what will Google do? For starters, I’m predicting we’ll see VSL and their allies soon being called some kind of “troll.” I also think we can rely on Google’s friends at the USPTO and beyond to find all sorts of reasons why Vedanti’s patents aren’t even drawn to patent eligible subject matter, regardless of how novel they may be. But the trade secret case is where I think tiny Vedanti might have a fighting chance, thanks to Googleliath’s cooperation with the sticky notes. Who said IP law wasn’t entertaining? Weird Al could have a lot of fun with this story. Suggestions for what tune to use in his spoof?
Note: The US cases referred to are captioned as: Vedanti Systems Ltd. and Max Sound Corp. v. Google, Inc., YouTube, LLC, and On2 Technologies, Inc., No. 1:14-cv-01029 (D. Del., filed Aug. 9, 2014) and Max Sound Corp., VSL Communications Ltd., et al. v. Google, Inc., et al.,Â No. 114-cv-269231 (Cal. Sup Ct.).
- Max Sound Corp. Files Two Lawsuits Against Google, Accusing Search Giant of Misappropriating Proprietary Digital Video Streaming Technology (PRNewswire.com)
- Story at Yahoo! News
- Android Devices Seized in Europe (Stockhouse.com)
- Originally posted at JeffLindsay.com
At the Marcus Evans Innovate 2014 Conference in Shanghai today, I met Rosalie Wu, the head of marketing in China for the rapidly growing startup, Uber. Rosalie was Uber’s first hire in China and exemplifies the energetic, entrepreneurial spirit that is driving Uber to global success. She spoke about the development of Uber’s innovative business model and the many innovations they continue to add in their unique approach to “glocalization,” wherein a company going global adapts its products and business model to the unique constraints and opportunities of each local market. I see Uber at the poster child for sound and innovative glocalization.
Uber began when one of its founders and first CEO,Â Travis Kalanick, attended Le Web in Paris in 2008 and struggled to get a cab in snowy weather. He realized there had to be a better way to use the free market to solve the basic problem of getting a ride. His passion for solving this problem resulted in forming a San Francisco start-up that began in 2010 with a mobile app for ride sharing in San Francisco. Today they offer a refined and clever business model with services in over 200 cities. Beijing was #200, and Uber is marching rapidly across China and other parts of the world. Rosalie’s enthusiasm for Uber is contagious and really stirred the audience here at the Hongqiao Marriott Hotel.
Uber’s business model innovation includes systems for registering, insuring, and rating drivers. It offers flexible pricing that helps tap the power of the free market much better than conventional taxi pricing and taxi systems can. With Uber you can select quality drivers and have simple, positive experiences getting to where you need to go when you want to be there. The business model is being extended with many other innovations such as delivery of products and even services (in China, they have even offered the service of having a traditional Chinese lion dance sent to be performed in your office). The innovate their offerings to meet local needs and adapt to local regulations and customs, while finding clever ways to continually make people’s lives better. This will inspire the competition to do more and bring ongoing innovation that will benefit us all. Amazing what a bad snowy night can do when an innovator is around.
Less than a year ago, Uber was valued at over US$3.5 billion.Â A few months ago in 2014, Uber was valued at around $17 billion. This is the power of doing something that brings people together in new ways.
Uber has faced and overcome a host of innovation barriers. Funding challenges, regulatory burdens, and stiff competition. But they have forged ahead with a relentless focus on making life better for its customers with green, energy saving, disruptive innovation . May the path before them remain wide open. Kudos, Uber!
The hysteria against software patents continues around the globe, threatening to hinder the most important aspects of the knowledge economy in favor of clinging to old industrial age paradigms. The real problem with software patents has been the large number of poor quality patents issued by the US Patent and Trademark Office due to bad searches, poor training, and poor quality examination in general. These problems are not solved by banning certain classes of patents, but by improving the Office and correcting the huge siphoning of funds from USPTO coffers that Congress has done to fund their endless spending sprees. But in backlash to the few outrageous examples of overly broad patents that have been issued, ill-informed mobs have been stirred up to condemn software patents, business method patents, and sometimes patents in general, not recognizing that intellectual property rights are essential for providing the incentives required for inventors to make the sacrifices and investments required to bring inventions to life.
A recent development comes from New Zealand, where anti-patent zeal has resulted in a law that outright bans computer-related patents altogether, or so it seems. Here is the text of the law:
(1) A computer program is not an invention and not a manner of manufacture
for the purposes of this Act.
(2) Subsection (1) prevents anything from being an invention or a manner of
manufacture for the purposes of this Act only to the extent that a claim in
a patent or an application relates to a computer program as such.
(3) A claim in a patent or an application relates to a computer program as such
if the actual contribution made by the alleged invention lies solely in it
being a computer program.
In this, the Knowledge Economy, where innovation increasingly depends on how information and data are applied, managed, and created, eradicating computer-related patents is almost as logical as banning patents on anything using electricity. It is an expression of a Luddite mentality that will slow progress in some of the most promising areas of the economy.
Greg Aharonian of the Internet Patent News Service, a keen observer of patent trends and government follies in the IP world, in email to his subscribers sent Aug. 29, 2013, readily pointed out the hopeless defects in this law, arguing that it is “meaningless without a definition of ‘computer’ and ‘computer program.'” He illustrates this with some examples:
Take a computer program written in C, with a listing of the C source code. Clearly that is a computer program. Now, run the C code through a hardware/software co-design tool and create an Application Specific Integrated Circuit that performs the C code. Is the ASIC a computer program? Of course not, it is hardware, a chip, not programmable … but a computer program to anyone who isn’t brain dead.
Or, convert the C code into a burn pattern for a Field Programmable Gate Array? Is this FPGA a computer program? Well, it is pure hardware, a chip, but it is more programmable like a microprocessor executive now-banned computer programs. Computer program or hardware? Finally, using the same co-design tool, just compile the C code and distribute it on a CDROM for execution on a PC or Mac. Clearly that is a computer program. But its all the same thing. It is the same algorithm in different embodiments.
Yet none of these subtleties are reflected in the law for lack of a definition of “computer” and “computer program”. This is the same patent law terrorism seen in not defining “abstract”, “obvious”, and “as such”.
This law, like many of the utterances of justices in the U.S., reflects profound ignorance about the digital world and the nature of computers, computer chips, software, hardware, smart appliances, automation, and electronic technology in general. Reacting to backlash over low quality patents in this manner does nothing to address the quality problems and only adds to the expense and difficulty for those seeking to protect their inventions. It’s another recipe for innovation fatigue.
For big business, life would be simpler without patents. Then success would be determined by factors related to size such as lobbying budget, marketing prowess, and the combined power of your legal team. Upstarts could be squashed and cleared out of the way or acquired for a pittance. That’s not how our economic system is supposed to work. Patents can and should be a great equalizer, allowing a small company with a valuable product and valid patent to protect itself and prevail, even against a giant. The big guys, especially in the technology sectors, hate the risk of outside patents and are much happier stirring up wrath against so-called “patent trolls” to vilify those with patents.
The assault against patents has been especially forceful in the so-called “business method” area. These vaguely defined patents generally involve processing information and using computers in new ways. While there have been some terrible business method patents issue due to the failure of the USPTO to perform serious prior art searches, the problem is not with business method patents per se, but with the office that issues them with underfunded examiners faced with absurd quotas that limit the time they can spend on a case.
The area of computer-related and software-related innovation is not something where intellectual property should be feared, but celebrated. We have moved from the industrial age, where innovation was largely with physical gadgets and chemical compounds, to the information age or knowledge economy, where unlimited progress is possible through advances in how we manage and process information. Information is every bit as real as a mousetrap, a wheel, or a new drug, and while it is intangible to our physical senses, it is tied to physical processes such as entropy and material transformation of memory and signals as data is processed. It is impossible to implement a practical business method of any kind without physical interaction with reality, but our judges, lacking a basic understanding of science and especially information science, have conjured up the concept that information and its manipulation is “abstract” and this not patentable. This ungrounded believe is based in ignorance and is a tragic departure from reality. Failure to encourage advances in IT, in software, and in knowledge management in general with fair IP will hinder our progress and limit economic growth.
The latest potentially fatal blow to business method patents comes from a Federal Circuit Court case, CLS Bank International v. Alice Corporation. Robins, Kaplan, Miller and Ciresi, a highly regarded law firm, published a somewhat humorous overview of this macabre case. The article predicts that this case will recent in many more patents coming under attack for being inelgible subject matter (this is called a Section 101 rejection) and, worse yet, creating vast new uncertainty for inventors and investors. This weakens our economy and contributes greatly to innovation fatigue in a very broad area with some of the greatest promise for the future.
The recent America Invents Act also struck a blow against business method patents, adding a severe new route for invalidating patents more easily that have some financial component to them. Why give one particular area of patents such unfair treatment? It’s an indication of the lobbying prowess of certain companies that dislike patents in this area. Congress, recognizing the harm that this special invalidity treatment can do to that particular class of patents, is thinking of taking action–to extend this easier invalidation route to even broader classes, thereby further weakening patent protection in some of the most vital sectors of the economy. Innovation fatigue squared–at a time when our economy needs to strengthen innovation and give it ample encouragement with sound IP protection and increased, not decreased, certainty if we are ever going to get this economy off the ground.
At Tissue World 2012 in Shanghai this week, a conference related to the booming business of producing tissue paper, I had a sobering conversation with a former employee from one of the world’s great equipment companies. I overheard a current employee at this company state that things were slow, in spite of the global surge in tissue production. In fact, if I heard correctly, this leading company “had no orders” for their machines. A disaster. Hundreds of employees may lose their jobs in coming months, as far as I can tell, in spite of this segment of the industry being healthy and active.
The former employee explained the disaster to me. From what I can gather, the problem stems from the decision by management to perfect their processes and standardize their offerings for ultimate efficiency. That sounds like good business, right? It’s what any good MBA would want to do, right? Sure. But what it did was take the focus of the company away from meeting the diverse needs of their customers and instead tried to force customers to conform to the needs and desires of the supplier. Customized orders were given punitive pricing, and pricing of standardized products was made completely inflexible. The company developed highly efficient, nearly perfect systems, and lost their customers. Disaster.Â When massive cost reduction becomes massive customer reduction, you’re toast.
We live in an iTunes world. People are increasingly expecting the products they buy to be tailored to their needs. They expect offerings to be flexible, customizable, adapted to their needs. If you can’t build flexibility into your product line and into the service you offer your customers, if you can’t understand and meet their individual needs, your relationship, though decades long, can suddenly evaporate. They can close your web page and in moments find a different vendor that they can work with. You must adapt the way you do business and have ways of customizing what you do and how you do it without adding exorbitant fees.
You may need to rethink your business model to do this. You may need to consider adding some new partners in your supply chain, and perhaps retooling your apps and website to provide a more customized feel for those placing orders or learning about your products. You may need training of your sales staff and marketing teams. But you can’t ignore that we are in an iTunes world with flexible competition everywhere. You must innovate and adapt to better meet the needs of your customers and keep your business, even a very mature business, alive.
There’s an anti-patent sentiment in some parts of the public that argues that they are destroying the economy rather than helping. There is particular resentment against non-practicing entities (NPEs), often called trolls, for owning (and typically acquiring large numbers of) patents for products and processes that they don’t actually use themselves. That sentiment, naturally, is most likely to be held by large companies who want to make a lot of money by making and selling whatever they want without some little guy’s patent getting in the way. Trolls with their patents are, we are told, sucking the lifeblood out of the economy. They are especially deadly in the areas of greatest innovation such as software. The related field of business methods is one where the whole concept of patenting is viewed by some as especially dangerous and destructive.
A healthy perspective is now offered by Jeff Wild in his post for IAM Magazine’s blog, “If trolls are destroying US jobs, why is the apps sector booming?” Here is an excerpt:
Last week a shocking report was produced by an organisation called TechNet. Based in the US, it describes itself as â€œthe preeminent bipartisan political network of CEOs and senior executives that promotes the growth of technology-led innovationâ€. Where the Jobs Are: The App Economy claims that more than 450,000 app-related jobs have been created in the US during the last five years and that the app economy could now be generating annual revenues of up to $20 billion. Whatâ€™s more, there seems to be no sign of a let-up in the good news. â€œIn the year ending December 2011, the average number of tech want ads containing the word â€˜appâ€™ was still 45% higher than the previous year. Thatâ€™s rapid expansion by anyoneâ€™s standards,â€ the report states.
As I say, itâ€™s shocking stuff. For those of us who remember the multiple news stories and blog pieces during 2011 that focused on NPEs such as Lodsys taking action against app developers in the US, the idea that the sector is actually booming and creating jobs at breakneck speed is hard to comprehend. Werenâ€™t the â€œtrollsâ€ supposed to be destroying a nascent industry and driving jobs and dollars away from the US? How can it possibly be that the reverse seems to be happening? Indeed, how can a serious report on the American app sector not mention NPEs or trolls at all?
Surely, it must be an amazing oversight. Or perhaps not. Maybe all the outrage and doom-mongering last year was overhyped hysteria. Maybe the reality is that NPEs, or â€œtrollsâ€, or whatever you want to call them, are really not a decisive issue in the app economy at all. And maybe that applies to NPEs and trolls generally: in the great scheme of things, they are not a big deal.
In a piece published by Forbes last week, Ken Lustig, head of strategic acquisitions at Intellectual Ventures, points out that the number of patent suits initiated in the US has remained relatively flat for the last 10 years and that only around 100 actually go to trial. Whatâ€™s more, there is much less patent litigation now than there was in the 19th century, supposedly a golden age of American innovation. Indeed, says Lustig, revered names such as Thomas Edison used the NPE model to diffuse their inventions and grow rich. What is being reported today in such dramatic and negative terms is what has always happened in the US when new technologies appear:
Every major technological and industrial breakthrough in U.S. historyâ€”from the Industrial Revolution to the birth of the automobile and aircraft industries and on up to todayâ€™s Internet and mobile communications revolutionsâ€”has been accompanied by exactly the same surge in patenting, patent trading, and patent litigation that we see today in the smartphone business. This is how the rights to new breakthrough technologies have always been distributed to those best positioned to commercialize themâ€”to the benefit of the whole nation in terms of new jobs, new medical advances, and new products and services.
He also summarizes the important research compiled by Michael Risch of the Villanova University School of Law. The bottom line is that both sides in the debate about NPEs have made mountains of molehills, though the defenders of NPEs do have a valid point in one particular area: “the evidence does support one defense of NPEs: they provide a better way for individual inventors to enforce their patents than bringing lawsuits themselves.”
NPEs don’t just include patent aggregators like Intellectual Ventures or Acacia. Universities and numerous lone inventors are often not (yet) in the business of producing and marketing goods but have significant inventions to market. Based on the research about the impact of NPEs and their patents, there is no need for alarm and no need to revise patent laws to stamp them out. Doing so could stamp out the fires of innovation that have brought us out of the stone age into the booming knowledge economy. IP needs to be protected and nurtured, not vilified and weakened. And certainly not discouraged with much higher fees at the USPTO, which the current Administration is proposing. Taxing innovation and other steps that discourage inventors by making it harder to protect their inventions are far more likely to suck the lifeblood from the economy than the existence of NPEs. More innovation fatigue is not what this economy needs.
As we discuss in Conquering Innovation Fatigue, the profit motive can be important for inventors but is often not the real incentive behind the quest to invent. Steps that eliminate the opportunity to profit from invention, though, can be serious barriers to a nation’s innovation potential. The profit motive can be important for prospective innovators. However, a focus on profits can be utterly destructive to innovation within a corporation, where the incentives to those who lead other would-be innovators can create new barriers that kill the innovation future of the company. Ironically, what can be a helpful incentive for innovation to an individual can easily become a disincentive once distorted by the internal workings of a corporation. This is illustrated in recent analysis from Clayton Christensen. See an overview in the article “Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy” at Forbes.com. Christensen argues that ratio-based metrics for profitability distort corporate thinking and reward behavior that ultimately destroys the future of the corporation by creating short-term benefits in apparent profitability. We illustrate a related problem in the book with the Apple Tree Analogy, in which metrics for short-term profitability for an apple harvester get a dramatic boost when the apple trees are toppled, making it much faster to harvest the fruit. The future, though, becomes barren.
Corporations need to carefully consider the metrics they use for profitability, as Christensen teaches, and unlearn some of the sacred concepts they were given in business schools. They should also go one step further an consider the impact of their metrics on not just the long-term growth of the company as a whole, but also the individual innovator and the innovation culture within the company. Listening to the voice of the innovator inside the corporation should be an important exercise for its top leaders.
Contests can be one of the most interesting innovation tools. With the right challenge and incentives, creative groups from across the world can help invent and innovate rapidly. The creativity of crowds fueled by a content was just demonstrated in the Shredder Challenge contest that was launched October 2011 by the U.S. government’s DARPA (the Defense Advanced Research Projects Agency). DARPA wanted to know what could be achieved with computer tools in reassembling shredded documents to recover the originals. Since many different approaches were possible, this was an excellent candidate for crowdsourcing. Rather than hire a huge team for a short while to pursue many different paths, or use a small team pursuing many paths over a long period of time, just throw this one out to the crowds for healthy competition. The objective in this competition was to create a system for reconstructing shredded documents. The system would have to demonstrate success by reassembling the shreds from five documents whose shredded remains were posted on a website. As reported at Gizmag, the “All Your Shreds Are Belong to U.S.” team won the $50,000 prize for this contest by assembling all five documents two days before the Dec. 4 deadline. Given the hours that the winning team put into this competition, $50,000 was a very good deal for DARPA (and the American taxpayers) and not such a good deal for the winning team. If you consider all the thousands of additional hours put in by many other teams working on the competition, DARPA got quite a lot for a small investment.
Companies can and do this kind of thing as well, with varying degrees of success. Capturing the imagination of people with the skills needed for the problem is the key. Prizes help, along with fame and bragging rights. Intellectual property issues can get in the way for some companies. I’ll point to Local Motors as one of the leading examples of for-profit crowdsourcing. Their business model is sophisticated and highly refined, something I’ve written about here previously.
As for the hilarious title of the winning group, you might enjoy reviewing the history of the classic phrase, “All your base are belong to us.”
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:
(1) IN GENERAL.–For purposes of this section, the term â€œcovered business method patentâ€ 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.”