Transcript of speech given by Dr David Martin at the November 2004 FFII Conference

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Transcript: Real economic consequences of the non-accountability of the patent establishment


I'll be brief, I was just trying to convince a bunch of Parliamentarians at the other side of town to take another look at what they want to blindly endorse, and I think that I made a bit of progress today. So I apologise for being late, but I think I did at least another few neurons for the cause.

Let me actually flash way forward in time, and way forward in time is drawing from our experience and looking at the financial and economic risks posed by intellectual property systems that have long been out of sync with the actual practical intent of the patent law.

The goal of the patent system

And I want to begin my comment by making sure that we understand a very clear distinction and the distinction is extremely important in the context of software patents. It is the distinction between invention, innovation and incremental change. You put those three in your mind: invention, innovation and incremental change.

We have seen a patent system over the last 20 years that has entirely blurred those lines. The patent system was actually a social contract, and it was the exchange of a monopoly right. And the exchange of the monopoly right was actually saying to society that it was economically viable to change the dynamics of fair and free markets, in consideration --and bear this in mind-- in consideration for a disclosure of something that ultimately advances the cause of science, technology or industry. That's what patents were supposed to be.

Now we saw that over a period of about 15 years, the patent system inverted. Now the patent system is not a social contract in exchange for whatsoever. We haven't bothered to fix the laws yet, so the law unfortunately still says that it is.

In practice what it is, is a means by which you create such a great obfuscation around what it is you think you're doing and what it is you think your competitors are doing, that you have mutually assured destruction should anyone ever peel back the layers of the patents to actually sort out who's doing what.

That's what we have. And unfortunately that's the elephant in the room that no one is willing to talk about. Because the elephant in the room that no one is willing to talk about is the fact that we are perfectly content in defending, ad nausum, our own muons (?), but we've long forgotten the social contract that said it was worth granting a monopoly once upon a time, for something that really advanced the cause of science, technology or industry.

The Chinese connection

And fundamentally don't lose sight of that, because let me tell you what happens at the logical extension that we now see unfolding before us in China. And let me take you to China because it's a very fast-moving debate and I piss off everyone in the United States Commerce Department for what I'm about to say.

For the last five years, the United States has had a very active policy of actually alleging the Chinese steal things. They steal things, they're bad people because they steal things. That's a very funny position, and it's couched in the "you don't respect intellectual property".

So what you have is, you know Chinese don't respect intellectual property, therefore they steal things, therefore because MPAA and RIAA say that they steal things, we have to all tell the masses "yes, in fact, they steal things".

There's a funny reality unfolding. The funny reality is that the Chinese are actually saying "I wonder if you can pull the pin out of the grenade and throw it back". And by that I mean this: what if the patents that are being asserted to be stolen or copied or infringed aren't actually worth the paper they're being printed on and what if the Chinese using their sovereign rights actually challenge those patents?

What would happen then? Well let's play that tape for a little bit more because I think at last calculation 43% of the US currency is actually owned by the Chinese, because we are very fond of debt. We're extremely fond of debt, so much so that we've sold our currency to the Chinese and they currently own our debt.

Now add to that the fact that they also have a lot of people and a lot of resources to call into question the due process of all bad patents. Guess what happens. Who wins? I'm gonna submit to you that everybody loses.

Dupe ...

The economic consequence of bad patents is not provincial, and as much as people wish it was provincial, they are unfortunately losing the argument around the tree and letting the forest burn. Because let me tell you in practical terms what is happening.

The Chinese government right now, through the National Development Reforms Committee or NDRC, has actually commissioned a study to look at the enforceability of US and European patents. And they're diddling around a very interesting moral argument.

Approximately seven years ago, the Chinese Central Committee and the People's Congress authorised in a contract form, when the State purchases technology from a foreign interest --and that was anyone non-Chinese-- that they actually mandated that there was a technology transfer agreement that included transferring all enabling technologies and all enabling know-how that actually support the technology that was purchased for 1.2 billion dollars from ABB, or from Siemens, or from GE, or from anybody else.

Well, the funny thing is that the companies --and they've gone on public record to saying this-- they figured the Chinese weren't smart enough to figure out what patents they really had, so they sold the Chinese second rate goods.

And lo and behold, if you look at the patents that they transfered --in the rare instances where they actually complied with their contractual obligations-- the patents that they transfered weren't very good. And they went on public record saying that.

... and be duped

Well, the funny thing is the Chinese aren't very fond of being duped. And these are billion dollar a piece contracts: this is maglev trains out of a series of train consortiums in France and Belgium and Germany, these are big patents on energy systems that are also from France and Germany and all kinds of neighbouring places around here.

And while I'm not going to name names of companies, go online and type in "Chinese technology transfer" and you'll find on Google or any other search engine all of the companies I'm referring to. Well here's the nasty little secret: guess who's target number one for the Chinese to look at the integrity of their patent portfolios?

The very people who failed to transfer what they were contractually obligated to transfer in technology transfer. Now what's the economic consequence of this? Cancellation of billion dollar contracts. Failure to be able to bid on the Three Gorges Dam projects.

Does this have economic consequences, Ladies and Gentlemen? Is this an esoteric dialog that we should just sit there and casually let happen? Or does it actually matter? And the fact of the matter is: it matters.

And the best part of all is the Beijing embassy recently, when interacting with a certain very large corporation that's a multinational that goes by a two-letter acronym but I can't mention their name --one of the letters is a consonant, one is a vowel, in that order, but I can't mention their name--, when that certain company was bidding on a very large Nepalese train project, they actually ran into a very informed Chinese government, that actually said

What happens if the balance of power actually leverages the very broken system that we currently have? Well, the answer is very clear. I told you this is the future, but I'm telling you the future because it already happened. What already happened is that a very large multinational corporation that wins every time, lost.

Economic consequences

Now, why do I say this in a conference about software patents? I say it for very clear reason: the integrity of this debate, loses considerable integrity, when it fails to call for an accountability standard that is universally applied.

Let me say that again. The integrity of this debate, loses its own integrity when it fails to call for accountability in the system. I was just told by members of Parliament that they had never heard in the software debate discussion talk about the chilling economic consequences.

Now you know what? I think they're lying to me. But you know what else? They don't hear it often enough. And they don't hear it articulated in real data terms, with real substantive information. What they hear is the hearsay of "My poor little friend, or my poor little nephew or brother or sister or whoever else, is sitting at his computer and he's very afraid that Microsoft is gonna crush his business".

Well the fact of the matter is, that's not the economic consequence that we should be discussing. Because that economic consequence is something that no administration in any government is gonna get. What they will get, is real economic data that is really substantive.

If this organisation, or the organisations that support the initiatives about making sure that software patents are actually reigned in appropriately, wants to succeed, you succeed where the money is. And you succeed by presenting the economically compelling case that suggests that this is not by inference.

That the overall system overhaul is something that is going to benefit the software interpretations, but it will also benefit the general system of encouraging the use of applicability of invention standards that will be uniformly applied across the border.

The ethernet plug

Now where does all this take us? Where this takes is us is where my business intersects with patents quite often. We deal with the universe of trying to deconstruct and demystify what is the delightful ambiguity in the patent context and let me just give you one very short example: the patent for the ethernet plug.

Some of you are familiar with what I talk about when I mean the ethernet plug. That wonderful little thing that actually looks like a phone plug, just a few extra more little spiky things on them. There currently are 683 patents in force covering... the ethernet plug. Not the use of it, the plug.

That means every time any of you actually plugs that thing into the wall, there's an outside chance that you're actually infringing when you even plug your computer into the ethernet plug, much less do a goddamn thing with your ethernet once you get it hooked up.

You actually don't have a place to start. You can't plug a computer in without infringing a series of patents on plugging your computer in. Now, the funny thing about a plug is how did the plug patent get issued? Well, the Taiwanese company that figured out they wanted to knock off the plug patent first, called a plug --and I'm quoting out of the patent text--

That was patentable. The second plagiarism of the patent actually was this

Still the plug. And the final piece --this really dawns right here in our own Brussels--, the patent for the plug here that actually is globally in force, is

Now, we're debating the merits of software patents when we live in a world where "hermaphroditic matable insertable tongs longitudinally upstanding ribbs" constitute a plug? The degrees of freedom in a plug, Ladies and Gentlemen, are two. You've got the insulative surface, you've got the prongs. That's two degrees of freedom. The third degree of freedom is where you shove it.

(Non-)accountability of the patent establishment

And until we can inform the debate around the substantive issues that we should be calling for, which is accountability at a certain location not too distant up the rail line from here in a place called The Hague, or if you want to go to Reykjavik or if you want to go to Munich, I don't care.

If we are not willing to look at 3286 nautical miles from here in Washington DC and if we're not willing to go 8937 miles to Tokyo, and actually confront the integrity problem, which says that we are incentivised to issue garbage, oddly enough, the floor to which I will now yield, to Ian Lewis (ed: from Miller Insurance Ltd), is a floor that will never achieve efficiency.

Because the one thing that the financial markets and the one thing that the insurance markets and the one thing that public policy cannot tollerate, is the sovereign immunity from accountability that exists in our patent system. Our patent systems have sovereign immunity from any economic consequence and until that reform happens, Ladies and Gentlemen, we're rearranging deck chairs on the Titanic.


!about whether/how it's possible to assess the risk of someone getting sued over a patent infringement

The IEEE, which is a fairly well-known publication and organisation, commissioned a study 4 years ago to look at the risk of being sued over a patent and it serves as the core of the now growing debate within the US about whether patents actually can be legally defined as assets or legally defined as liabilities.

And what we're able to do in that particular study with the IEEE is to actually show that within 86% clarity of forward projection on a three year longitudinal study, we could actually predict based on patenting behaviour, companies that were going to be named as defendants in a lawsuit.

Listen very carefully to what I said: based on patenting behaviour, we can actually correctly at 86% correct classification, correctly identify the companies that will be named as defendants in IP-infringement suits.

The way you do that is by looking at the fact that the patent procurement strategies that have been largely promoted by IP-attorneys which are these defensive strategies, is a conveniently and politically correct way of calling it plagiarism. And if you need to soften that for an MEP because they don't like words like "plagiarism" and "extortion", you can actually use the term "conceptualisation", which is a politically correct way to say "theft of an idea".

But oddly enough if you actually look at the fact that companies whose behaviour is to actually procure IP in this kind of defensive-only strategy, what you actually find is rather than creating a defence they are actually painting targets on themselves. And we have correctly classified that and we're going forward: this is now the fifth year of the study, and the correct classification is actually going up.

So, yes, you can classify but it's not on a patent specific. And that's a very important point, it's not on a patent, it's on a organisational behaviour of how people handle intellectual property and that is what is correctly rated.

So I want to be careful to make sure that you hear the answer: it's not about looking at a patent in isolation and saying "Is this patent a good or bad patent?". It is "Is the patent behaviour behind this patent resulting in a increased on decreased risk?".

So that's an empirical point and the first three-year data is published, I can get you a reference for that.

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