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School of Nursing ​so effectively every week the government says these are all the things that American citizens can't do for about the next 20 years I am Nick Gillespie for Reason TV and today we're talking with Derek Khanna he's a lawyer and an intellectual property specialists who has great paper out from Lincoln labs called how to fix patents economic Liberty requires patent reform Derek thanks for joining me okay talk about a patent define it for us what does it do and what did the founders who put patent law in the Constitution of the idea what did they want out of it so a patent is a government-granted monopoly and it's legally defined as the right to exclude so the government gives you this monopoly and says only you can do this invention and no one else can so effectively every week the government says these are all the things that American citizens can't do for about the next 20 years and they were really supposed to be kept for inventions things that required a tremendous amount of research and development to allow you to recoup upon that investment and also had a second reason which is they wanted people to come forward and to share their discoveries in the form of a public disclosure so others could learn from it I don't pose to keeping it as a trade secret and keeping it internal so this is the difference between a trade secret or something like the coca-cola formula which is hidden in a vault somewhere in Atlanta we believe in a patent it's like the electric light bulb the Edison light bulb where you actually write down everything so people can see from it yes yeah and and a patent term lasts for about 20 years so talk about the abuse of the patent the patent process right now where is it the most absurd so in the founding era patents were reserved for things they were really novel they're about 600 of them granted the first 10 years required the Secretary of State to personally sign off and the reason was is because they didn't consider this to be part of the free market they saw this as an improvement upon the free market and you really wanted to be careful but when you actually did this but today they're being granted across the board and they're being granted in some cases for technologists moving so quickly that by the time the patent expires there's almost no purpose to it anymore what's an example of that so in window in 1995 you know Microsoft got a whole bunch of patents for you know their upcoming operating system Windows 95 well was there a big party of January this year when you had hundreds of patents expiring and programmers able to create their own versions of Windows 95 it's just an illogical premise in the modern age yeah and you talk about I mean one of the examples in the paper you have an illustration from the successful application for a patent on exercising a cat with a laser pointer yes I wanted to be on your show today to admit that I have violated this path you know Isis but all of us with cats or laser pointers have done this so that I mean this is clearly something has gone well off the rails when that happens now other patents or or at least the processes that they that are patented are useful after the patent expires so talk a little bit about that in the context of pharmaceuticals because this is a place where drug makers make a very strong case that they need that monopoly on profits on revenue in order to pay for or incentivize them to bring new new drugs to market so our report is in favor of patents but I want to go back to kind of constitutional principles reserving them for when it's really necessary and pharmaceuticals are a pretty strong argument for when they are necessary and the reason is because it costs several hundred million or up to a billion dollars to bring a product to market to pharmaceutical a long time to get it through FDA testing and there's a lot of things that can be done there along the way but if it cost about a billion dollars to get the drug to market you know the economic data seems to indicate that if they didn't have a period to recoup that investment through something like a patent then they may not do so so pharmaceuticals are a very good example of where patents are in my opinion rightfully granted not the least of which because I'm not going to accidentally violate somebody's patents I can actually look up in a directory and say hey this actual formula has already been patented so we all know people talk a lot about patent trolls you know particularly in software situations how does that affect and what what has happened in recently to kind of rein in patent trolls a little bit but clearly not enough so patent trolls are effectively where you have a person or an entity and they they usually are sitting on several legitimate patents or a bunch of them and they go out in the market and they find a startup or usually it's a smaller company that's doing something that they consider to be a little bit similar and then they usually send them a demand letter knowing that it will cost about four million dollars to bring their product to market and so they asked for you know $50,000 so

they're asking for an amount of money substantially cheaper than bringing their product to market and they're able to use usually these very low-quality patents that should never have been granted to begin with to shake down these companies when they usually had no intention of actually bringing that patent to market so talk a little bit though about you know you talk about pharmaceuticals and it's like yeah if it cost you a billion dollars to bring a market drug to market you're gonna want to you you're gonna want some assurance to get investors to say don't worry we're gonna have you know we're gonna get all the money generated by this for twenty years or the rest of the term but then there are also industries where there are no intellectual property guarantees at all that are very innovative what are some of those and what's going on with oh sure so you look at the fashion industry which is just thriving in the United States and we've chosen the United States to not allow for any form of intellectual property protection and when the fashion industry cried to create their own cartel to create a de facto IP protection that was struck down by the US Supreme Court but in France and other countries I have a rich history of fashion right they've gone the other way and actually you've seen a lot of that you know shift to the United States and so we have a thriving fashion sector without IP and something in I mean I guess cuisine or menus sure that happens all the time it's same with you know you know football plays you know whatever the football team comes up with a new play other football teams you know copy it and in database database protections another example which is in the United States a database can't receive a patent protection or a copyright protection but in Europe they can and what's actually happened is the database market is actually shifted to the United States there's a you know in copyright it's probably because the in copyright the term of the copyright keeps getting extended whenever Mickey Mouse is about to go in the public domain or a couple of other major kind of entertainment powers can like muscle Congress to do their bidding it has that same type of thing been happening in patent or is a it hasn't been more constrained and if so why it's a good question and patent started off at 14 years just like copyright whereas copyright has gone to 130 135 years patents has only gone to 20 years so it's stayed relatively similar to you know the prescriptions of the founding era except for what is being granted for the founding era would only be granted for inventions they would have never believed that you could patent design right or or a business practice that yeah so we should particularly pernicious if you think about it because that's how the free market really operates is you know McDonald's has the idea of coming up with a fast-food burger joint and then Wendy's comes along and all these other companies and that's what competition is do we get rid of do we throw out hundreds of thousands of useless patents or do we just stopped issuing dumb new patents or what talk a little bit about what has to happen in the reform process so there you know the 90s they're giving out patents like crazy for software and then they started to kind of rein that back in realizing that this is really bad in the software context because often times there's only one way to do something in the software world and so that started to be corrected by the courts but there's a lot more work to be done but the good news is that you know these things expire so if Congress acts today a lot of these kind of bad patents already in the books begin to expire relatively quickly what are what are your your basic reforms so one would be kind of you know really changing the the ease with which patents get issued what are the other necessary reforms yeah I mean first of all you want these things to be granted quickly er which is that if we want patents you probably want patents that come to you and quicker than two years you can't wait two years to find out if you have a patent or not but the second one is it used to be that you had to really teach the world what your invention was but today I've never met an engineer in my life who says you know when I want to learn how to do this I look up the patent filing they're deliberately written to be opaque so they're I mean you're saying in the 19th century and when you're talking about an invention you could go look at you know the cotton gins patent thing and you could figure out how to build it from that yes yeah and so that's actually in the law already right the law says that it has to be you know readable and explanatory all we have to do is enforce that law but if they need to be strengthened by Congress because they're not following right this goes to your earlier point about patents and copyrights are government-granted monopolies or government granted rights and they're not natural rights that you know come to us from God or the Creator but rather the idea is that they advance what is it the practical and useful arts or whatever I mean that they progress the sciences yes lawyers yes so that you know they should be useful in some way as opposed to a way of dodging people figuring out how you're doing your business exactly and one interesting thing is when the founders were considering this this language in the Constitution Madison actually had a whole host of other things he wanted to add and he thought also could lead to the promotion of the sciences and useful arts things like allowing for universities or in in that was the context that they were talking about it was just so important that this instrument of regulatory power had to push science forward you're talking about this in the context of economic Liberty because things like copyright certainly patent is a restriction on economic Liberty so there's a cost benefit the government is supposed to be making to say okay yeah the cost here to economic Liberty will be outweighed by the benefits how do you how do you or how does Lincoln labs kind of conceive that economic Liberty

as a fundamental right or a fundamental aspect of the American experience sure so I actually believe economic Liberty is a natural right I don't think that copyrights or patents are but the founders are very clear if you have an idea or a business you should be able to bring that to market and you're not guaranteed success but you're gonna succeed or fail on the merits of how that performs in the marketplace and so so the default is that we should have maximum economic Liberty and then the government or whatever authority really has to make a very strong case to say except in this area in this small narrow and that's what the founders intended both in the you know the privileges and immunities Clause and the privileges or immunities clause there are several provisions of the Constitution where the founders really try to protect this right do you find that the kind of Appeal or I mean I I think it really flushes out the context of why we have IP and whatnot but the appeals to the founders or the you know does that resonate with people in contemporary business settings or are they kind of like look you know that's you know that what the Constitution is like over twenty year sold you know it's like in a totally different world well I think it should resonate with them because we're talking about here is really basic free-market principles and the interesting thing about you know the regulation stuff is you know conservatives and libertarians often have a lot of trouble with this mounting level of regulation but at least with regulations the agency's proposed to look at pros and cons we may disagree with their conclusions but what we see is that the you know patents being granted are 10 20 30 times more page length than the regulations and there's no pro and cons being waived and they're being given out every single year kind of willy-nilly and it's really the regulatory state run them up we're in an age now which I think is one of the benefits of the financial crisis is that there's a really kind of transportus an interest in crony capitalism and rooting it out and this you make a strong case in the in the paper that you know it is big companies powerful companies are often trolls their cronies explain how that works well basically what I want is I want to market where you know there are very low barriers to entry for new market participants because I believe that's where innovation comes from Joseph Schumpeter has this whole theory called creative destruction which is new guys come in and old guys either adapt or die and oftentimes you have a lot of these incumbents that really patent obvious things that stifle that process I'll give you an example let's say you and I decide to go into business my idea is a cell phone that uses Wi-Fi to keep recharging the battery now this is technically possible and so it would be a cell phone that never turns off and so you know we're working on this idea I'm about to we're about to bring it to market launch a Kickstarter Austin you give me a call and he said hey that cell phone we were working on it has rounded rectangles doesn't it well Apple has a patent on that we're gonna get sued I say oh this is ridiculous okay so we scrap that plan let's go back to the drawing board let's look up how many patents apply a smartphone so that way we really don't infringe anybody's patent and you call me up and you say well it's about 300 to 400 thousand patents that apply to smartphones I say well how much does a patent lawyer cost that gives you an example of what it's like for an innovator today that's one reason why we haven't had you know new startups offering new smartphones in the market and we want most markets to such that anybody can bring an idea like that they're not guaranteed to succeed but they lose because the consumer doesn't like their product not because you know all this thicket of patents and patents or you can buy and sell them so if you're a big company you can buy up a lot of patents and hang on to them and then kind of trot them out when you think you might be able to use that to crush competition and with the smartphone market in particular actually what we're seeing is you have Samsung and Apple and a few other companies and they're basically all infringing on each other's patents and they have this you know noncom you chew assured destruction policy I won't see you if you don't sue me for the most part until it goes so it's a cartel effectively among a few producers who the one thing that they all agree on is to keep out little guys who might actually come up with something truly innovative and transform yes and that's the worst of all worlds is that you know that may work for Apple and it may work for Samsung but if you and I have this new idea for a cell phone you know Apple is probably not gonna license it to us unless they don't think we're a threat and that's you mean you know you don't want to have to ask permission from the incumbent in order to innovate right well we will leave it there the the paper is how to fix patents economic Liberty requires patent reform the author is Derek Khanna it's out from Lincoln labs Derek thanks for talking to us examine for reason TV I'm Nick Gillespie Genesee Community College.