Dear Colleague,

I am pleased to share a new paper, "Intellectual Property Rights Protection in China: Trends in Litigation and Economic Damages," http://reaction.nera.com/rs/ct.aspx? ct=24F768199BEA43ECC4D881ABD62D9954A4920990EDA138EA670 written by NERA Senior Consultant Kristina Sepetys and Senior Vice President Dr. Alan Cox. The paper describes the changing role of Intellectual Property Rights (IPR) enforcement in an evolving economy such as China's, as well as the judicial and administrative procedures available for IPR enforcement. Drawing upon a unique dataset compiled by the authors, the paper also examines trends in damage awards in IPR cases in China. The authors conclude that IPR damages in China are generally too low to compensate IPR owners for their losses or to have any meaningful deterrent effect.

However, the paper's findings also suggest that significant damage awards are being awarded and that the frequency of such awards continues to increase. This conclusion is corroborated by recent events. For example, in a recent decision by the Intermediate People's Court of Hangzhou, Korean electronics maker Samsung was ordered to pay 50 million Yuan (approximately US$7.3 million) in compensation to Holley Communications for infringing Holley's handset patent. This patent infringement case decision is the largest ever compensation amount in China's mobile phone industry. In another important development, the Standing Committee of China's National People's Congress recently approved the third Amendment to China's Patent Law. The revised Law will take effect on 1 October 2009 and includes, among other features, a provision to increase the upper limit of statutory damages to 1 million Yuan (about US$150,000).

This paper will also be available in Chinese. Please contact the authors if you would like to receive a copy.

Please visit our website at http://reaction.nera.com/rs/ct.aspx? ct=24F768199BEA43ECC4D881ABD62D9954 AEAD5B90E3A33CEC7E9255565CC9E038FF417 to browse other papers produced by our Intellectual Property Practice.

As always, we welcome your feedback.

Regards,

Phillip A. Beutel Senior Vice President and Chair of Global Intellectual Property Practice +1 914 448 4014 phil.beutel@nera.com www.nera.com

NERA Economic Consulting 50 Main Street White Plains, NY 10606

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If I'd posted this when I thought I did, I'd probably seem prescient now...but better late than never. Today brought bad news for Microsoft, with forecasts of future problems. Bad news for Intel and IBM too...the recession is bad for business all around. But I think it is going to be much worse for Microsoft than people think. They are living off of familiarity, network externalities, and installed base. Vista was a disaster, Windows 7 will probably be a help, but they burned a lot of credibility with Vista. The new versions of Word with the "ribbon" don't seem to have been compelling.

The central thing however is that free software, commoditized software, has caught up to proprietary software in quality, and is likely to increase the lead over time. Nobody is going to tinker or experiment with computer systems when orders are flowing through the door. But in a recession, there isn't much to lose, there tends to be a lot of slack as nobody want to lay off more people than absolutely necessary - so it's a good time to experiment with cheap software. In general innovation picks up a lot during recessions. I expect a lot of businesses will be trying linux and openoffice, and its market share will increase substantially.

Here is the prediction I'm hesitant about. Always in the past when software with substantial installed base has finally been supplanted the fall has not been gradual: Lotus and Wordperfect went from world-beaters to also rans in just a few years. I think Microsoft may surprise us by falling equally fast. There may not be much left in two years time.

Steve Hamm writes in Business Week about another absurd patent link here. IBM has succeeded in getting one on a method to insert hems and haws into artificial voices used in recordings to make them sound more realistic. Most speakers try to kill those habits. The patent is for "generating paralinguistic phenomena via markup in text-to-speech syntheses." Imagine that. Monopoly really encourages meaningful innovation.

HBO got the exclusive right to broadcast Sunday's inaugural concert link here. They are now firing off take-down notices against YouTube posts of clips of the concert, even privately filmed ones--and making them stick. No question of fair use or who made the video.

Where is the outrage?

Dan McCurdy's article on Patent Trolls spawned supportive comments from CATO's Timothy Lee, which in turn attracted the approving notice of Ramesh Ponnuru and Jim Manzi over at National Review.

It's easy to find "inventors" who are enthusiastic about patents. It's not so easy to find actual innovators. This article - which is about innovation, not intellectual property - might give an idea why that is. This team has built a prototype product. It might go to market, it might not - but here is the thing: nobody is going to bring it to market without paying them. They can show it off, everyone can see how it works, but until and unless they get paid what they want, nobody can make it. The devil is in all the details. Even if they go to production, it is not the case the a rival is going to be able to jump right in with an identical product. Intellectual property just isn't part of the picture here.

GREAT post on patents and innovation posted on Mises blog in the comments:

I just finished reading your article A Book that Changes Everything.... Great stuff! I wanted to send along my thoughts on the subject.

First, I should confess that I work for a company that has received more patents than any other - for every single year - the last 15 years. Second confession: I co-own several of those IP patents (well, the company is the real owner - I'm just the "inventor" on some of them. I'm a software engineer.).

I'm going to avoid mentioning the company I work for (more corporate regulations), but given the clues you can figure it out fairly easily.

We are slightly different than some of the corporations you mention: "It is impossible to develop software without running into IP problems, and the largest players are living off IP and not innovation"

We do make great money off our patents (I'll explain what I think is the real benefit though). However, we do innovate, and we make the vast majority of our revenue off of our products - because our product is superior. (Ok, I may be slight biased - but our customers tell us this too)

Anyway, I believe that the real benefit of patents for the company I work for, and other large software firms, is that we trade them - sort of like kids with baseball cards. That is, we'll allow firms to use certain patents in exchange for the rights to some of theirs. As you can probably figure out, this is not a real option for start ups that do not have the IP portfolio to make this attractive.

We have a huge team of IP lawyers, a bonus structure that makes it attractive to try to patent any possible new inventions, and a management that uses your personal patent portfolio as a factor in determining who to promote. We've been told that they'll patent anything new we come up with - even if it is unrelated to the business (i.e. I've seen them patent an exercise device).

We'll often write papers on items that the business decides not to patent - just to show prior discovery should we be challenged by other corporations. We also get a bonus for this - just not as much.

From an employee standpoint, this is attractive. Hey - it's a lot of extra money to us, and we are helping out our company. As an employee who happens to be a libertarian, I honestly have no issue with my company taking advantage of the silly IP laws.

That brings me back to the main issue at hand though: should we have IP laws?

Speaking from my own experience, corporations (such as the one I work for) spend a lot of money to innovate. However, I would "press that button" and get rid of IP law immediately, given the chance. I agree completely with the arguements made in the article - as such, I'll just bring up a few other issues:

I think IP law is incredibly damaging to innovation and competition. In the case of software patents, moreso in that they take resources (primarily money which gets redirected to legal teams) from firms who are forced to research existing patens, and also defend themselves against IP lawsuits.

Many software patents are particularly silly. Many of these are issued for algorithms - the vast majority of the time, these algorithms are only available outside the company via patent! That is, when they are shipped externally, it is in a form that is not readable (object code). Sure - this can be reverse engineered. But for a particularly complex program or operating system, this in itself would be a colossal endeavor. Yet, a patent is issued for it - and the patent describes exactly what the algorithm does!

Another firm could look at the patent and use the invention. In most cases, it would be impossible to tell that they've "stolen" anything. Here they are counterproductive.

I should also mention the obvious - the corporation which holds the patent already has a huge advantage! They will ship a product with these innovations before any other corporation can ship its' product. Quite frankly it will generally be a significant period of time before another product can be shipped which contains these innovations - even if the innovation was immediately obvious and known. This will not generally be the case.

Then you have the patents for user interface - these are just silly. I've seen patents issued (granted, this was a long time ago) for using a particular color on a "dummy" terminal.

Anyway, I hope I do not sound like a hypocrit (because I hold IP patents). As I said, it is a part of my job. I also cannot fault my company for taking advantage of whatever silly laws are created. I simply view this as another case of the state interfering with the market, and the market adjusting to exploit the foolishness of the laws.

From Mises Blog, good quote from Hayek:

From Individualism and Economic Order (ironically under copyright), Chicago, 1948, pp. 113-14.

Where the law of property is concerned, it is not difficult to see that the simple rules which are adequate to ordinary mobile "things" or "chattel" are not suitable for indefinite extension We need only turn to the problems which arise in connection with land, particularly with regard to urban land in modern large towns, in order to realize that a conception of property which is based on the assumption that the use of a particular item of property affects only the interests of its owner breaks down There can be no doubt that a good many, at least, of the problems with which the modern town planner is concerned are genuine problems with which governments or local authorities are bound to concern themselves. Unless we can provide some guidance in fields like this about what are legitimate or necessary government activities and what are its limits, we must not complain if our views are not taken seriously when we oppose other kinds of less justified "planning."

The problem of the prevention of monopoly and the preservation of competition is raised much more acutely in certain other fields to which the concept of property has been extended only in recent times. I am thinking here of the extension of the concept of property to such rights and privileges as patents for inventions, copyright, trade-marks, and the like. It seems to me beyond doubt that in these fields a slavish application of the concept of property as it has been developed for material things has done a great deal to foster the growth of monopoly and that here drastic reforms may be required if competition is to be made to work. In the field of industrial patents in particular we shall have seriously to examine whether the award of a monopoly privilege is really the most appropriate and effective form of reward for the kind of risk-bearing which investment in scientific research involves.

Patents, in particular, are specially interesting from our point of view because they provide so clear an illustration of how it is necessary in all such instances not to apply a ready-made formula but to go back to the rationale of the market system and to decide for each class what the precise rights are to be which the government ought to protect. This is a task at least as much for economists as for lawyers. Perhaps it is not a waste of your time if I illustrate which have in mind by quoting a rather well-known decision in which an American judge argued that "as to the suggestion that competitors were excluded from the use of the patent we answer that such exclusion may be said to have been the very essence of the right conferred by the patent" and adds "as it is the privilege of any owner of property to use it or not to use it without any question of motive." (Continental Bag Co. v. Eastetn Bag Co., 210 U.S. 405 (1909). It is this last statement which seems to me to be significant for the way in which a mechanical extension of the property concept by lawyers has done so much to create undesirable and harmful privilege.

From Mises Blog, an excerpt from Boldrin/Levine's blockbuster book:

Was James Watt's patent of the steam engine a crucial incentive needed to trigger his inventive genius, as the traditional history suggests? Or did his use of the legal system to inhibit competition set back the Industrial Revolution by a decade or two? Here is a case study--by the authors of a wonderful new work on patents and copyrights--in how "intellectual property rights" do grave damage to the market economy. FULL ARTICLE

Over at the Mises Blog Jeffrey Tucker is reviewing and blogging about Michele's and my book Against Intellectual Monopoly. Here's a direct link to his article. As Jeffrey says: the discussion is getting pretty wild...we are being accused of being socialists in favor of some sort of common ownership among other things, presumably by someone who didn't read the book. If you have a few minutes, go take a look. You can also buy it from them link here