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The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

The New Renaissance HatJeffrey A. Tucker
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Who has the right to make a “hoverboard”?

Shane Chen of Portland, Oregon, owns the patent to one of the hottest holiday gifts this season. It is a kind of hoverboard, a small item that keeps its user upright using infrared sensors, gyroscopes, and motors. You have probably seen them all over your city. You might even have been approached by a street seller.

The authorized version — licensed by Chen himself — is being made and distributed by Razor USA. Prices started at $1,000 and up, but competition from cheap knockoffs, selling for as low as $200, has brought the price for the authorized version to $600. Still, there are places online where you can get them for $200. If experience in new products in a guide to the future, in a year, they will be available for less than $100.

And truly, these knockoffs are everywhere. Small entrepreneurs are importing them from small manufacturers by the thousands and selling them on the streets. They are making and selling so fast that quality control has been… lax. There are anecdotal reports of explosions and sudden acceleration (parodies on this Saturday night live skit). Amazon has refused to sell many brands.

The patent has proven difficult to enforce. Razor is spending up to $1 million per week to sue unauthorized manufactures. It’s a reminder: it’s never enough just own the government-granted monopoly rights to produce something. It always costs money to enforce it. You have to investigate. You have to litigate. You have to win. And by the time that day comes, you might have lost vast market share.

If the product is popular enough, the task is essentially hopeless. The resources and time expended on patent enforcement might instead of gone to innovation and marketing toward actually making profits. Enforcing a monopoly isn’t necessarily the same as making money. Indeed, it is the opposite.

The Case of Eli Whitney
The hoverboard saga brings to mind the history of one of the 19th-century’s most famous inventions: the cotton gin. The holder of the patent was Eli Whitney. A year after his graduation from Yale, he designed and constructed an improvement in the cotton gin — a technology that had existed since the ancient world. He obtained the patent on a single feature, a brush-like extension that improved the way the seeds were extracted from the cotton.

According to Boldrin and Levine, Eli and his partner Phineas Miller has dreams of getting rich with a monopoly pricing scheme. They would install their machines throughout the South and ask a royalty of two fifths, payable in ginned cotton. This prospect seriously annoyed farmers throughout the region, understandably.

So it became a common practice for farmers to reverse engineer the innovation — not a difficult thing to do. Rather than lease the Whitney machine, they would just make their own. Does this violate anyone’s rights? Of course not. A design of a contraption is made scarce and “owned” only by legislation. To forcibly prevent farmers from making their own machines is actually an invasion of their rights.

Still, with the prospect of riches dancing in his head, Eli and Phineas set out to sue every farmer who reverse engineered their design. “Whitney and Miller spent a lot of time and money trying to enforce their patent on the cotton gin, but with little success,” write Boldrin and Levine. “Between 1794 and 1807 they went around the South bringing to court everyone in sight, yet received little compensation for their strenuous efforts.”

Meanwhile, the gin led to vast increases in productivity. The cotton industry boomed. But the holders of the patent became ever poorer.

Fortunately, the story ends well. Whitney learned that suing people is less profitable than actually marketing products. His next project was to invent a machine that created interchangeable parts for muskets. Having learned his lesson, he did not seek a patent for his innovation. He just got busy right away and began selling. (His main customer, as it turns out, became the US Army.)

He finally did strike it big. As Boldrin and Levine summarize the lesson: “It was not as a monopolist of the cotton gin, but rather as the competitive manufacturer of muskets that Whitney finally became rich.”

Will Shane Chen Learn the Lesson?
The hoverboard, like the cotton gin, is in enormous demand. All the government power is the world will not prevent hundreds of manufacturers from making them, driving the price down and down until everyone can afford one. That one million per week that Razor is spending on trying to stop copycats is probably better spent on marketing and innovation — actually selling stuff rather than trying to prevent others from selling stuff.

Absent the government regulation, how can innovators make money? They have the first-mover advantage. This is what provides a period of high profitability before others get in on the act. This is the competitive market at work, inspiring everyone to serve the customer ever more faithfully through lower prices and better products.

Another factor that gives advantage to the innovators is trust. Even now, you can go to the drug store and see name-brand products living alongside store-branded products. Both make money. Both appeal to certain market segments. One producer’s gain does not necessarily come at the expense of other producers, unless the government intervenes.

It is common wisdom to say that the patent system is broken. But what is broken about it? It’s not that the system is abused. It is that it is used at all. Industrial monopolies achieved through government grants of special privileges create waste — and the ongoing lawsuits concerning the hoverboard are a case in point.

Whether it is ginning cotton or zipping around on city sidewalks, a true innovative society encourages as much production and innovation as possible, in service of the masses who love the newest and coolest thing.

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook. 

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

The Patent Bubble and Its End – Article by Jeffrey A. Tucker

The Patent Bubble and Its End – Article by Jeffrey A. Tucker

The New Renaissance Hat
Jeffrey A. Tucker
February 3, 2013
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“Then they pop up and say, ‘Hello, surprise! Give us your money or we will shut you down!’ Screw them. Seriously, screw them. You can quote me on that.”

Those are the words of Newegg.com’s chief legal officer, Lee Cheng. He was speaking to Arstechnica.com following a landmark ruling that sided with a great business against a wicked patent troll company called Soverain.

What is a patent troll? It is a company that has acquired patents (usually through purchases on the open market) but does not use them for any productive purpose. Instead, it lives off looting good companies by blackmailing people. The trolls say, “Pay us now or get raked over the coals in court.”

Soverain is one such company. Most companies it has sued have paid the ransom. Soverain has collected untold hundreds of millions in fines from the likes of Bloomingdale’s, J.C. Penney, J. Crew, Victoria’s Secret, Amazon, and Nordstrom.

It sounds like a criminal operation worthy of the old world of, say, southern Italy (no offense, guys!). Indeed, but this is how it works in the U.S. these days. The looting is legal. The blackmail is approved. The graft is in the open. The expropriation operates under the cover of the law. The backup penalties are inflicted by the official courts.

To be sure, the trolls may not be as bad as conventional patent practice. At least the trolls don’t try to shut you down and cartelize the economy. They just want to get their beak wet. Once that happens, you are free to go about your business. This is one reason they have been so successful.

Soverain’s plan was to loot every online company in existence for a percentage of their revenue, citing the existence of just two patents. Thousands of companies have given in, causing an unnatural and even insane increase in the price of patent bundles. Free enterprise lives in fear.

Let me add a point that Stefan Molyneux made concerning this case. The large companies are annoyed by the patent-troll pests but not entirely unhappy with their activities. The large companies can afford to pay them off. Smaller companies cannot. In this way, the trolls serve to reduce competition.

[Stefan made his comments on an edition of Adam v. The Man, in which we were both guests. you can watch the entire show here.]

When Soverain came after Newegg’s online shopping cart demanding $34 million, a lower court decided against Newegg, but only imposed a fine of $2.5 million. Newegg examined the opinion and found enough holes in the case to appeal. It was a gutsy decision, given the trends. But as Cheng told Ars Technica:

“We basically took a look at this situation and said, ‘This is bull****.’ We saw that if we paid off this patent holder, we’d have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now nobody has to pay Soverain jack squat for these patents.”

It’s true. The case not only shuts down the Soverain racket. It might have dealt a devastating blow to the whole patent hysteria and the vicious trolling that has fueled it all along.

And truly, the patent mania has become crazy. No one 10 years ago would have imagined that it would go this far.

“It’s a sign of something gone awry, not a healthy market,” attorney Neil Wilkof told Gigaom.com, with reference to the utterly insane amounts that well-heeled tech giants have been paying for patents. “I think we’re in a patent bubble in a very specific industry. It’s a distorted market and misallocation of resources.”

[Note: This entire racket is anticipated and debunked in the pioneering work on the topic. The new edition of Stephan Kinsella’s Against Intellectual Property is now available for free to Club members.]

Earlier this year, Google shelled out $12.5 billion for the acquisition of Motorola Mobility. Facebook threw down $550 million for AOL’s patents. Apple and Google spent more last year on patent purchases and litigation than on actual research and development. The smartphone industry coughed up $20 billion last year on the patent racket. A lawsuit last year against Samsung awarded Apple $1 billion in a ridiculous infringement case.

These are astronomical numbers — figures that would have been inconceivable in the past. Everyone seems to agree that the system is radically broken. What people don’t always understand is that every penny of this is unnecessary and pointless. This market is a creation of legislation, and nothing more. The companies aren’t really buying anything but the right to produce and the right not to be sued, and that is not always secure.

Let’s back up. Why are there markets in anything at all? They exist because goods have to be allocated some way. There are not enough cars, carrots, and coffee to meet all existing conceivable demand. We can fight over them or find ways to cooperate through trade. Prices are a way to settle the struggle over goods that people grow or make, or services people provide, in a peaceful way. They allow people to engage to their mutual benefit, rather than club or shoot each other.

But what is being exchanged in the patent market? It’s not real goods or services. These are government creations of a bureaucracy — an exclusive right to make something. They are tickets that make production legal. If you own one, there is no broad market for it. It has only a handful of possible buyers, and the price of your good is based entirely on how much money you think you can extract from deep pockets. Sometimes, you actually force people to buy with the threat that you will sue if they don’t.

That’s not how normal markets operate. There was a time when patents didn’t even apply to software at all. The whole industry was built by sharing ideas and the spirit of old-fashioned competition. Companies would work together when it was to their mutual advantage and hoard competitive reasons when it was not. It seemed to work fine, until legislation intervened.

Today the entire fake market for patents is sustained by the perception that courts will favor the patent holders over the victims. The Newegg case changes that perception, which is why it has been the most closely watched case in the industry. This might signal the end of the reign of terror, at least one form of it.

But, you say, don’t creators deserve compensation? My answer: If they create something people are willing to pay for, great. But that’s not what’s happening. Soverain’s bread and butter was a handful of patents that had been on the open market, changing hands through three different companies over the course of 10 years, until they landed in the laps of some extremely unscrupulous wheeler-dealers.

In other words, patents these days have little to nothing to do with the creators — any more than mortgage-backed securities at the height of the boom had anything to do with the initial lender and its risk assessments. Once a patent is issued — and they are not automatically valid, but rather have to be tested in litigation — it enters into the market and can land anywhere. The idea that the patent has anything to do with inspiring innovation is total myth. It is all about establishing and protecting monopolistic weapons with which to beat people.

Many people have been hoping for patent reform. It probably won’t happen and might not even need to happen. If this case is as significant as tech observers say, a sizeable portion of this fake industry could be smashed via a dramatic price deflation. When something is no longer worth much, people stop wanting it.

Patents date from a time when a great industrial innovation made the headlines just because it was so rare. That’s not our world. Government has no business allocating and centrally planning ideas. Here’s to Newegg: Take a bow. Someone had the guts to say no. This time, for once, it worked.

Yours,
Jeffrey Tucker

Jeffrey Tucker is the publisher and executive editor of Laissez-Faire Books, the Primus inter pares of the Laissez Faire Club, and the author of Bourbon for Breakfast: Living Outside the Statist Quo It’s a Jetsons World: Private Miracles and Public Crimes, and A Beautiful Anarchy: How to Build Your Own Civilization in the Digital Age, among thousands of articles. Click to sign up for his free daily letter. Email him: tucker@lfb.org | Facebook | Twitter | Google.

This article has been republished pursuant to a Creative Commons Attribution 3.0 License.