Archive for regulations

In 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 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”.

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, 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.

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Ramping Up External Innovation Fatigue

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Without 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.

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The lifeblood of innovation is capital. Investment of capital is the primary difference between great ideas and great teams that go nowhere and those that change the world. From the airplane to the iPod, from wonder drugs to wonder software, innovation requires invested capital to bring concepts to commercial reality. Angel investors play a crucial role in the ecosystem of invention, but they may soon be shut down by Congress in their efforts to “protect” Americans from financial risk.

Risk is a dirty word for those who don’t understand business. Wouldn’t it be nice if government could just protect us from the risk of failure and ensure that we are always safe? But this kind of thinking means stagnation, captivity, and the death of innovation, for the opportunity to succeed inevitably is shadowed by the risk of failure. If success is guaranteed, why put forth the effort to create and innovate? If a venture is protected from failure, we are also protected from the kind of success that inspires innovators and their backers to undergo risk.

Tom Still of the Wisconsin Technology Council has boldly and bravely weighed in on Congressional plans to protect us from risk, plans that would give them even more control over the things they seem to understand least while making it more difficult than ever for innovators to succeed. Tom Still challenges the financial reform legislation proposed by Senator Dodd and points out that his efforts to protect us will crush angel investing, which in turn will stop many innovators from having a shot at success. Ultimately, Dodd seeks to “protect” people from investing their own money the way they want to, and the unintended consequence will be a painful blow to innovation. Tom Still’s article is “Angels on the head of a sharp pin: Financial reform bill poses threat,” published April 21, 2010 at Inside Wisconsin by the Wisconsin Technology Council. Here is an excerpt:

The financial sector reform bill being pushed by U.S. Sen. Christopher Dodd, D-Conn., takes direct aim at the wings of angel investors for reasons that defy explanation. If passed, this “Washington-knows-best” attempt to regulate some of the nation’s most productive risk-takers could destroy the entrepreneurial economy.

Angel investors are often entrepreneurs who hit a home run in their own start-up businesses and who want to reinvest in other young companies. Angel investors are generally strong business executives with an eye for innovation, and they’re not afraid to take a calculated gamble on companies that are too new to get financing from venture capitalists or too risky for banks.

They usually invest close to home and most often as individuals or within a family, but increasingly angels invest as members of angel networks or angel funds that offer some safety in numbers and more partners to screen potential deals.

In Wisconsin, angel investors have been in the vanguard of fostering the state’s early stage economy. Five years ago, there were only a handful of angel networks in Wisconsin. Today, there are nearly two-dozen networks and funds – and they’re not shy about rolling the dice on Wisconsin companies in sectors such as biotechnology, information technology, medical device, advanced manufacturing and “cleantech.” …

But if Dodd has his way, these individualistic investors will be regulated out of existence.

The Restoring American Financial Stability Act, of which Dodd is the chief sponsor, would tighten regulation of the nation’s financial system in ways large and small. It contains three provisions that would effectively kill angel investing in the United States:

  1. It would require start-up companies to register with the federal Securities and Exchange Commission, and wait at least 120 days for SEC review, before trying to raise money. Currently, fledgling companies can raise money from accredited investors without regulatory approval. Four months is an eternity in the life of a start-up company, and most would die in the vine before they ever get a chance to grow.
  2. It would redefine who is an angel. Accredited investors, who are people deemed wealthy enough to invest in start-ups, would be limited to those individuals with more than $2.5 million in assets (up from $1 million today) or a personal income of $450,000 per year (up from $250,000). This will dramatically decrease the supply of angels, which the University of New Hampshire’s Center for Venture Research estimated at 259,000 in 2009. Those angels invested $17.6 billion in about 57,000 deals.
  3. It would subject investors and start-up companies to state-by-state rules versus a single set of SEC standards. Along with the new SEC filing requirement, that would add red tape, time and cost to the investment process.

In its frenzy to clamp down on Wall Street, Congress is threatening an investment community that fosters innovation, mentors young companies and generally cares about how the economy is faring where they live. Angels have helped to create some of today’s biggest companies – Apple, Amazon, Google and many more – usually without putting anyone’s money at risk other than their own.

Angel investing isn’t perfect; the average return on investment proves that. But it’s precisely the kind of bottom-up, largely self-regulated economic activity the nation needs as it struggles to create new companies and jobs. Only those federal lawmakers intent on a top-down, command-and-control economy would think otherwise.

We have enough innovation fatigue factors on our backs already. Clamping down on one of the major arteries that provides capital to start-ups and entrepreneurs is not going to enhance circulation in the atrophying limbs of this economy. We need to back down and let the private sector thrive on its own, taking on both risk and failure, and when we fail, let us fail instead of taking from those who succeed to prop up failures deemed “too big” to fail. The free market offers powerful solutions to some of the problems we face and powerful incentives for innovation, if we can stay out of the way.

Kudos to Tom Still for his insights into the risks Dodd’s bill poses.


Beware Unintended Innovation Killers from Laws, Regulations, and Corporate Policies

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In the game of chess, experienced players know that a move that looks tempting can often open up fatal weaknesses that deliver swift defeat later in the game. With experience, discipline, and solid strategic skills, good players can look several moves ahead and be aware of broad patterns and principles that can give one an improved position with options for success in endgames too far away to calculate in advance. Novices look for easy fixes to threats and quick attacks based on looking just a few moves ahead. Many times they are surprised at how their moves to solve a problem or gain an advantage make them easy prey. Their style of playing is fraught with moves that bring unintended consequences later in the game.

One of the great tragedies of human decision making is the pernicious inability to consider far-reaching implications of an action. To avoid harmful unintended consequences of a decision, there are two possible solutions: 1) get assistance from experts providing guidance from many difference perspectives and do the best to consider new areas and issues that were previously overlooked, and 2) follow proven principles and strategies that increase the odds of success in spite of the impossibility of calculating everything. Both of these principles can be and probably should be used.

Innovation, for all the voices hyping it, is one of the least considered factors when policy makers start shaking things up. Whether it’s a new law, a tax policy, a regulation, or corporate policies, decision makers easily overlook innovation–real innovation, not just money spent in the name of innovation–because they tend to overlook the individuals who are the source of innovation. Real innovation begins in the minds of individuals with a vision and must be nurtured to succeed. The voice of innovators, including the voice of entrepreneurs, inventors, university professors post-docs, corporate R&D staff, etc., is rarely heard. The voices of CEOs or other top leaders from big companies may be heard. The voices of direct reports to a CEO may be heard. The voices of celebrities and activists may be heard, but who actually seeks out and listens to the real innovators or prospective innovators in our economy? Who considers what impact a law or policy will have on those individuals and their incentives to innovate or their ability to succeed? They are among the voices that should be carefully considered when making policies to avoid unintended consequences that might crush innovation and economic growth.

There are several general principles that should also be considered by policy makers. Innovation at the personal level, which is one of the themes of Conquering Innovation Fatigue, requires personal liberty. It requires a system in which individuals and companies are motivated to take on the high risks of innovation because there are incentives to succeed. These incentives for many require a form of government in which intellectual property rights are respected as well as property rights in general. When property can be seized capriciously, or when the fruits of one’s innovative labors can be taken on a whim or taxed to death, why bother innovating?

Every law, every policy, every act of government should be constrained by general principles, such as those espoused in the US Constitution, and done with care to avoid harming the economy with unintended consequences that trample on the delicate flower of innovation.

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Beware the Unintended Innovation-Killing Consequences of Laws and Policies

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The road to innovation fatigue is paved with good intentions embodied in laws, regulations, and even corporate policies. Leaders at all levels must be aware of uninteded innovation-killing consequences that may follow from their good intentions. Staying in touch with the “voice of the innovator,” as we advocate in Conquering Innovation Fatigue, is vital in avoiding such pitfals.

The Wall Street Journal from Dec. 4 offers two columns with examples of innovation fatigue factors that can be introduced by well-intended actions. The first article I wish to mention is “Near-Zero Rates are Hurting the Economy,” an opinion column from David Malpass, president of Encima Global, LLC. He argues that the artificially low interest rates created by the Federal Reserve Bank in the name of rescuing the US economy have actually been driving capital overseas and starving small companies–the leading sources of most innovation, economic growth and job creation, as studies from the Kaufmann Foundation and others have shown. Here is an excerpt:

[M]ore than a year after the heart of the panic, the Fed is still promising near-zero interest rates for an extended period and buying over $3 billion per day of expensive mortgage securities as part of a $1.25 trillion purchase plan. Capital is being rationed not on price but on availability and connections. The government gets the most, foreigners second, Wall Street and big companies third, with not much left over.

The irony of the zero-rate policy, coupled with Washington’s preference for a weak dollar, is a glut of American capital in Asia (as corporations and investors shun the weakening U.S. currency) and a shortage at home. For gold and oil, the low-rate policy works, weakening the dollar so commodity prices go up and providing traders with ample funds to buy into the expanding bubble. Those markets are almost daring the Fed to try to break out of its zero-rate box.

But for small businesses and new workers, capital rationing is devastating, spelling business failures and painful layoffs. Thousands of start-ups won’t launch due to credit shortages, in part because the government and corporations took more credit than they needed (because it was so cheap).

Already countries with higher interest rates, Australia for one, are viewed as less risky because they have room to cut rates if there’s another emergency. This wins them capital and jobs that might otherwise be ours.

According to International Monetary Fund data, U.S. GDP has fallen to 24% of world GDP from 32% in 2001. And as U.S. capital escapes the weak dollar and high tax rates, the U.S. share of world equity market capitalization has fallen to 30% from 45%. This leaves the U.S. alone with Japan at the bottom of the monetary heap, with rate expectations so low they repel investment.

When single individuals or organizations make policies that affect millions, it is far too easy for good intentions to translate into new problems, unless the decision maker is essentially omniscience. Failing ominiscience, perhaps market forces should be given a try, allowing the invisible hand mediated by the mechanism of price to determine the right allocation of resources. But even with a reluctance to use market forces to set interest rates and allocate capital, wiser decisions could be made by policy makers if they understood the personal side of innovation and the barriers faced by the innovators seeking to propel our economy forward. Unfortunately, the real innovation engines of the future aren’t likely to be powerful, highly connected people today, but may be a lone entrepreneur or president of a small company today that could grow and create many thousands of jobs, if only given a chance. Giving credit and bailouts to well-connected dinosaurs can be based on good intentions, but it may be a misallocation of resources that only makes things worse for the most important prospective innovators and job creators out there.

A second article in the Dec. 4 Journal is “Sarbanes-Oxley on Trial” (p. A24), an op-ed piece that briefly mentions the economic burdens this 2002 law has imposed, and urges government to modify its implementation to be more accountable. There is much more that could be said, some of which we discuss in our book. Sarbanex-Oxley is especially burdensome on small, innovative companies and has driven many innovators to look outside the United States in launching a start-up. Intended to make businesses safer and more accontable, it has slowed job creation and economic growth, in the eyes of some experts. Unintended consequences. It’s something every policy maker and business leader needs to be worried about. Are you listening to the voice of the innovators who have to live with your decisions? That could be the difference between success and innovation fatigue.

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Innovation Fatigue from Excessive Regulation: Ford’s CEO Speaks Out

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One of the top nine “innovation fatigue factors” that we address in the book involves the challenges that stem from governmental policies and regulations. Chapter 14 explores this in detail, and urges government leaders and policy makers to listen to the “voice of the innovator” before they pass new laws or add new burdens that may have unintended consequences on innovation.

Our arguments have been buttressed by the CEO of Ford, who recently made a bold statement on innovation and regulation, as reported by the Associated Press:

Ford Motor Co. CEO Alan Mulally said government regulation in many ways has hurt innovation among businesses and manufacturers in the United States.

“We’ve become so stymied with regulation,” said Mulally Wednesday during a panel discussion on innovation in manufacturing at The National Summit in Detroit. “We have to say enough is enough and get back to freeing people up.”

One hears this a lot from small business owners–it’s refreshing to find a CEO of a large company willing to hint that there might be problems. “Freeing people up” to innovate and to grow their business makes a lot of sense in many areas, where one can argue that innovation is hindered by excessive or overly burdensome regulations or taxation policies. Getting the balance right is tough work, we admit, but somewhere in the process, we hope that policy makers will go the extra mile to consider the potential impact on innovation, and not just from the perspective of a few Fortune 100 CEOs, but also from the perspectives of the innovators and entrepreneurs themselves who create the technologies and business models that drive so much of the economy.

Innovation is a plant that, once wilted, can be difficult to revive. The culture of innovation needs to be nourished carefully and kept vibrant for an economy to thrive.

Categories : government, regulations
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Cheerios: Another Drug to Regulate?

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Icon for Regulatory Fatigue Factors

The Food and Drug Administration is taking aim at Cheerios, as Advertising Age reports. After two years of advertising the health benefits of the oats in Cheerios, General Mills now faces the wrath of the FDA. By claiming that it can lower cholesterol, no matter how many studies support that claim, General Mills is allegedly transforming its product into a drug. We can understand the concerns that regulators may have with health benefits that may sound like the medicinal benefits of drug, but surely there is a place to let people know about the well-established effects of certain foods. As knowledge of nutrition grows, there are many natural foods that may be helpful in dealing with a wide variety of health issues. To stifle that information will only discourage innovation in the way we eat and in the products that companies market.

Companies seeking innovation in foods have struggled with the anti-innovation impact of product labeling. When it’s a federal crime for citrus labeling to inform people that lemons may help cure scurvy, perhaps it’s time to reconsider the costs and benefits of food-related regulations. There are numerous potential innovations in food that could benefit millions if only information could be shared without the threat of FDA penalties. There are costs and benefits to be weighed, certainly, and sound food regulation is important. However, the impact on innovation is often overlooked, as are the hidden costs on consumers.

Something to think about the next time you enjoy a bowl of crunchy oat-based drugs.

General Mills’ response is at

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