Libertarian Patent Reform

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Liberty has recently been a forum for discussing copyrights; this brief essay on patents is intended to contribute to the intellectual property conversation. First, I will suggest several legal reforms that could narrow patents — in my opinion, a good thing. Second, I will explain why patents should exist, although in a form more limited than the present one.

Much has been made in the media about “patent trolls,” companies that file or collect patents, not with the intention of ever selling a product, but simply with the desire to litigate against others for patent infringement. Their special target is small businesses that lack the legal resources to fight back. They extort money from these businesses by threatening to sue them. Patent trolls should be repulsive to all libertarians. Even libertarians who devoutly believe in patent law should consider this a blatant example of people gaming the legal system to steal money from innocent, productive businesses.

Twenty years enables a virtual monopoly that may encompass the bulk of a person’s working life, and that’s too long.

What can be done about such trolls? I have some recommendations for changes in the patent laws. I am confident that these changes would satisfy a broad swath of libertarians because, while hurting the trolls, they would provide a healthy limitation to the laws themselves, laws that, according to some libertarians, are too powerful and tend to help patent owners at the expense of the public.

1. Shorten the term of patent protection to ten years. A patent currently lasts for 20 years from its grant date. But the purpose of the patent laws, as spelled out in the United States constitution, is to encourage innovation — “to promote the progress of science and useful arts.” An adequate incentive to invention would be ten years. Twenty years enables a virtual monopoly that may encompass the bulk of a person’s working life, and that’s too long. Ten years of protection rewards and encourages invention but allows a patent to pass into the public domain early enough so that the public can freely make use of inventions while they are still technologically relevant. This is the public’s reward for granting the patent to the inventor. In other words, the public and the inventor enter into a bargain wherein the inventor gets a temporary monopoly and the public gets the useful knowledge embodied in the invention after the monopoly ends. If the technology is out of date by the time the patent ends — and after 20 years most tech is outdated — then the public is not getting its end of the bargain.

2. Require “intent to use.” Currently a person may file and own a patent merely for having invented it, and may assign it to whomever he likes. Trademark law contains a concept called “intent to use,” but this doctrine has not migrated to patent law. If a legal requirement were imposed that to file or own a patent a person must possess a legitimate intent to develop the invention commercially and sell it, then patent trolls would cease to exist. This would not hurt penurious inventors, because the only requirement would be a good faith intent to use the patent at some point, and there would be no requirement of actually being commercially successful, nor of having the financial resources to start manufacturing in the near future.

3. Give teeth to the “obviousness” requirement. The two legal requirements for a patent to issue are, in the words of patent law, “novelty” and “non-obviousness.” Novelty means that no one has done it before. This is strictly enforced by the courts. But as to the invention being non-obvious, the test is enforced very loosely. The best example is the Amazon “one click” patent. Amazon filed a patent that was, really, for nothing more than the process of buying something on a website by means of a single click of a button on the site, where that one click does everything necessary to complete the sale. Apparently it was novel, and the patent issued. But, in my opinion, one click is patently obvious (pun intended). Clicking a button to buy something seems so obvious that a monkey could think of it. Yet this patent still exists, although it was somewhat narrowed by later litigation.

One click is not an isolated exception. For another example, Yahoo! has a patent, which Google licenses, a patent for including ads in search engine results. An idiot could have invented that patent. But patent law deems it “non-obvious.” I advocate, in all seriousness, the creation of a “monkey-or-idiot” test: if a monkey could have designed something or an idiot could have invented it, then it is obvious, and no patent may issue for it. The test used by the courts for “obviousness” right now is merely whether prior art anticipated it, which improperly collapses the obviousness test into the novelty test, and in practice creates one hurdle to clear when the laws explicitly require that a patent must clear two hurdles.

4. Make patents non-assignable. Right now, there is a handful of big corporations that dominate an area of technology and collect patents in order to prevent smaller startup companies from competing against them. For example, in the software realm, Microsoft, IBM, Apple, and Amazon collect patents aggressively and use their patents to stifle competition. This is rightly characterized as the rich exploiting the laws to hurt the poor and the middle class, because the big corporations are owned by the rich while the small startups tend to be ambitious hard-working poor or middle-class entrepreneurs.

If a monkey could have designed something or an idiot could have invented it, then it is obvious, and no patent should be issued for it.

The solution to this problem is to make patents non-assignable: only the inventor of a patent can own it. This will diversify patent ownership so that the rich cannot use patents to suppress the middle class. One of the purposes of a patent is to reward the inventor for his creative contribution to society, and this reform would force corporations to pay inventors what they are due.

5. Make independent creation a defense to the charge of infringement. In the realm of copyrights, independent creation is already a defense to infringement. If Singer A writes a song, and Singer B writes the same song by himself and does not copy A, then B cannot be sued for infringement by A, even if A owns the copyright in the song. This makes sense, because intellectual property infringement is basically a claim for theft, and B did not steal or copy A, despite the two songs being identical. I advocate a similar defense of independent creation to patent infringement. If an inventor creates an invention by himself, and does not copy or steal from the patent’s owner, then he will be free to use it. (We can discuss whether, in addition to freedom of use, he should also have the right to file a patent for it, when a patent already exists.) This makes sense, because the inventor should reap the rewards of his work, and nothing that the patent owner has done makes it just or right to block an inventor from using the invention that he himself created.

Some libertarians suggest that “loser pays” should apply in patent litigation. Recent legislation to apply “loser pays” to patent cases, in an effort to curtail patent trolls, massively failed to elicit voter support and died in Congress. And the trillion dollar technology industry, and its lobbyists, will never allow patents to be eliminated. However, by intelligently advocating selective, sensible, wise reforms, we can nudge patent law in a direction that makes it more responsive to the needs of the public.

Of course, some libertarians will be outraged that I am advocating patent reforms instead of the wholesale abolition of patents. To enable a discussion of this topic, allow me to review the three libertarian arguments for patents. I call these the Randian argument, the Rothbardian argument, and the Nozickian argument.

1. The Randian (Ayn Rand-derived) argument is simply this: assume that John Galt designs a motor that can convert static electricity to usable electric power. This motor will solve the world energy crisis and create clean, cheap, limitless electricity. Should Galt own a patent in the motor? The Randian answer is yes, because Galt created it by using his hard work, intelligence, and genius, and a person deserves to own the results of his labor, as a matter of justice: you should be allowed to reap what you have sown. If you oppose patents, just imagine James Taggart, a principal villain of Rand’s Atlas Shrugged, taking Galt’s motor and using it without his consent in order to make money for Taggart, who gives nothing to Galt. To a libertarian, this should feel shocking and ghastly. In fact, it should feel like the parasites exploiting the geniuses, opposition to which is the whole point of Rand’s philosophy.

2. Many libertarians oppose patents, not because of analysis or thought, but because libertarian theorist Murray Rothbard told them to. Many libertarians obey the Rothbardian party line and do what Rothbard says without any critical inquiry. But a little critical thinking shows why, even if we concede Rothbard's basic economic theory, we can still justify patents.

Why did Rothbard oppose them? My reading of Rothbard is that, for him, property exists in order to prioritize scarce resources. He believed that ideas are not scarce, and that therefore ideas cannot be subject to ownership. My analysis is that Rothbard confused the use of ideas and the creation of ideas. Once an idea is created, it cannot be used up or depleted, and anyone can employ it without taking it away from someone else. An idea is not scarce in its use. But the creation of ideas is scarce. If the design for a motor that could create cleaner, cheaper, more plentiful electricity is not scarce, then where is this idea? If not truly scarce, it should be growing on trees and waiting to be plucked and used, like berries on a bush or air to breathe. But Galt’s motor is nowhere to be found. Indeed, the motor must be created by Galt before we can use it. And, until it is created, it is scarce.

Recent legislation to apply “loser pays” to patent cases, in an effort to curtail patent trolls, massively failed to elicit voter support and died in Congress.

The creation of ideas uses scarce resources, such as Galt’s genius, or funding for research laboratories. Therefore, even according to Rothbard’s basic idea that property exists to prioritize scarce resources, patents should issue to inventors, so that money can be paid to the creators of inventions, to prioritize the resources that go into creating inventions.

3. Robert Nozick, Harvard’s most notable libertarian, once posed a thought experiment about what would happen if people were allowed to sell themselves into slavery. He posited that everyone would buy an interest in everyone else, leading to a communal society grounded in contract law.

Nozick's argument, which comes from the second section of chapter 9 in his book Anarchy State and Utopia, is very complicated and difficult to summarize. The gist of it is that a socialist state could arise from a series of contracts if everyone were allowed to sell to others the right to make the seller's important life decisions, such as the decision of which job to work, what drugs to use, what to do with money, etc., because eventually everyone would own a decision-making interest in everyone else, so the community would then have the contractual right to make each individual's decisions. Nozick's prose is dense enough and meanders so much that it is debatable whether he thought this was an argument against the right to make such contracts, or whether he merely found it a thought experiment colorful enough to elaborate. I have no need to answer this question, because my version of Nozick's argument focuses on other contracts that, in general, most libertarians would agree that a person has the right to make.

Let us assume that in a libertarian utopia a person is free to enter into contracts with other consenting adults, without limits. And let us assume that Galt invents a great motor. Then, as a condition to telling anyone else how his motor works or showing his design to others, he requires that everyone else involved with it, such as the investors who fund it and the consumers who buy it, signs a contract. This contract between Galt and third parties would say that the other person consents not to use, buy, make, or sell a motor similar to Galt’s, without Galt’s permission or without paying Galt a licensing fee, in return for the right to do business with Galt. How would this arrangement differ from a patent?

But, also consider: what in libertarian theory would forbid such a contract? If such contracts were allowed, then de facto patents could exist, although they would be based on contract law and not on patent law. So the Nozickian argument proves that a libertarian utopia would collapse, or develop, into a society where de facto patents exist, even if patent law had been abolished.

For all three reasons, Randian, Rothbardian, and Nozickian, it is worth asking: why should (some) libertarians be so passionate in their hatred of patents? I do not ask for your blind agreement on an answer, but merely ask that you consider whether your position on patents is the result of thoughtful reflection or peer pressure from the libertarian movement to conform to the standard form of Rothbardian dogma.




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Executive Privilege

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Should the Bank's Loss Be the Law's Gain?

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The great thing about laws is that they protect us when we are unwilling and unable to do so on our own. Laws are great because they make sure no harm is done. So when it came to our attention that JP Morgan Chase just lost $2 billion because of risky investments and hedging, it may have seemed that what was needed was more and better laws, not personal responsibility.

Of course this isn't true.

Laws are necessary but not sufficient. Laws will never be able to keep pace with new developments in the financial sector, or anywhere else, which is why laws will never prevent problems but only react to them. And being reactionary instruments, laws cannot prevent the next wave of risky financial instruments or clever schemes to make money off of money.

In addition to not being able to anticipate problems, laws have unintended consequences that are sometimes worse than the problems they were designed to correct. Look at the laws that led to the housing bubble. For a time, the government, through various policies but primarily through Fannie Mae and Freddie Mac, infused more money into the housing sector than the market would have on its own. By making loans easy and affordable for people who would have otherwise not been able to secure home loans the government encouraged a misallocation of resources that drove up home prices.

Making loans available to people who would not have qualified without government interference pumped more money into the housing market than the market demanded. This drove up demand, which in turn drove home prices beyond market levels. Housing prices fell because the market corrected itself. This correction is what we recognize as the bubble bursting. The bubble and the burst were unintended consequences of the government getting involved in the housing industry.

In the banking and finance industry the government also distorts risk assessment, thereby forcing a misallocation of resources. Keeping interest rates low discourages saving and encourages investing. Low interest rates make putting your money in the bank an unattractive option if you want a return on your investment. So if you want your money to make money, you put it in the stock market. The government is essentially affecting the supply and demand of money rather than letting the market set interest rates and therefore determine where capital flows. This forces money into circulation that would otherwise not be there.

The banking laws we have in place encourage risk taking in other ways as well. First, banks the size of JP Morgan Chase know they will get government bailouts when they bet wrong, which means they can take whatever chances they want, and there is no risk involved. Second, the FDIC insures traditional deposit accounts up to $250,000, which means that no matter what kind of investments a bank makes with your money, as long as your account is below the $250,000 threshold, no one loses. Banks can fail in any number of ways without anyone involved failing to make money. The unintended consequence of government interference is an increased willingness of banks and their investment arms to take greater risks, which become no risks at all.

Certainly FDIC insurance has many benefits, as did the Wall Street and automotive bailouts, but there are unintended consequences that may have counteracted the favorable effects, if not encouraged the sort of risky behavior that created the need for the laws in the first place. The only solution is for individuals to take responsibility for their own actions. In view of our attachment to laws, this is an unlikely solution, but it is the only one with any promise.

Laws allow us to relinquish personal responsibility. When we make a bad investment that we did not understand entirely, or get into too much credit card debt because we failed to control our spending habits, it is easier to blame the lack of sufficient laws than to blame ourselves. If we were not motivated to make money we would have no reason to enter the stock market or make risky investments. But if we are motivated to do these things, the least we can do is spend some time understanding what we are getting ourselves into. If we don't understand what others are doing with our money, or understand the risk involved, then we shouldn't get involved. And if we do get involved with something we don't understand, we have only ourselves to blame. Laws can't help this; only we can. More time and energy should be directed toward cultivating character than toward crafting laws.




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