Archive for September, 2006|Monthly archive page

Campain Finance Reform

Prop. 89 is an interesting effort at campaign finance reform.  Here is a 3 minute video on the subject.  I suspect that the left might be able to make effective use of this sort of technology.…

A Texas Tale of Intellectual Property Litigation (A Watering Hole for Patent Trolls)

The New York Times has a fascinating article about Marshall, Texas, which seems to be a prime location for venue-shopping patent trolls. Your are a couple paragraphs from the article. Then I will make the connection with Texas Instruments, by providing an extract from my book, Steal This Idea.

Creswell, Julie. 2006. “So Small a Town, So Many Patent Suits.” New York Times (24 September).

“In Marshall, an oft-told joke is that the passage of tort reform was when many local lawyers made the trip from P.I. to I.P. — that is, they moved out of personal injury and into intellectual property.”

“The testing of Marshall as a patent battleground began nearly two decades ago, when Texas Instruments, which has its headquarters in Dallas, embarked on an aggressive strategy to make rivals license its patents. If a company would not capitulate or at least negotiate, a Texas Instruments team of lawyers would drag it to court — increasingly, down the road to the uncluttered courtrooms of Marshall.”

“What’s behind the rush to file patent lawsuits here? A combination of quick trials and plaintiff-friendly juries, many lawyers say. Patent cases are heard faster in Marshall than in many other courts [a quirk of a local judge, sort of a speed trap for intellectual property]. And while only a small number of cases make it to trial — roughly 5 percent — patent holders win 78 percent of the time, compared with an average of 59 percent nationwide, according to LegalMetric, a company that tracks patent litigation.”

Here’s the extract. Notice the connection with Texas Instruments:

The history of the semiconductor industry exemplifies this trend toward changing the legal structure to aid firms in gaining a competitive advantage from intellectual property rights rather than from developing an edge in productive capabilities.

As late as 1981, Roger S. Borovoy, vice-president and chief counsel for Intel Corporation, declared, “In the electronics industry, patents are of no value whatsoever in spurring research and development” (Anon. 1981). A recent study published by the Philadelphia branch of the Federal Reserve System describes the dramatic transition that came soon after Mr. Borovoy’s evaluation of the importance of the patent system to his industry:

Within the U.S. semiconductor industry, reverse-engineering was a well-established practice. But by the late 1970s, American firms objected to similar behavior by Japanese firms when they began to increase their market share in the more standardized products, such as computer memory chips. The level of competition eventually became so intense that, by the mid 1980s, most American companies abandoned these segments entirely.

When it became clear they could no longer dominate Japanese firms on the basis of production technology alone, American firms attempted to consolidate their comparative advantage in research and development. To do this, they would have to find ways of reducing their competitors’ ability to reverse-engineer their products. To that end, American companies began to lobby Congress to increase intellectual property protection for their semiconductor designs. In 1984, Congress created a new form of intellectual property right, called mask rights, especially tailored to address the needs articulated by the industry. [Hunt 1999, pp. 19-20]

During this period, both Texas Instruments and National Semiconductor were both tottering on the verge of bankruptcy. Irving Rappaport, former vice-president and associate general counsel for intellectual property at National Semiconductor recalled:

‘I’m not exaggerating when I tell you that National Semiconductor was only weeks away from bankruptcy in late 1990 …. All the papers had been signed before it was decided to continue the business and give licensing a more aggressive push. And without a doubt, patent fees bought us valuable time in which to complete our restructuring process. For a while there, in fact, three-quarters of our revenues came from patent licenses.” [Rivette and Kline 2000, pp. 125-26]

Texas Instruments struck first. Typically license fees ran about 1 percent of revenues. In 1987, Texas Instruments raised its royalties on chips to 5 percent (Dwyer et al 1989, p. 79). The company filed a suit against one Korean and eight Japanese semiconductor companies, accusing them of infringing semiconductor patents. The settlements yielded the company more than $600 million in payments, according to a 1990 report. The company became so aggressive in seeking royalties that by 1992 it earned $391 million in royalties, compared to an operating income of only $274 million (Warshofsky 1994, p. 111).

In effect, these companies are beginning to transform the semiconductor industry from a manufacturing industry to a service industry, just as the postindustrial utopians would have them do it. According to one industry insider, James Koford of LSI Logic, “Silicon Valley and Route 128 are worlds of intellectual property, not capital equipment and production. Most of the employees of U.S. high technology live in southeast Asia” (cited in Kenney and Florida 1990, p. 237).

That ends the extract.

Finally, the article has a statement from the chief patent counsel for Time Warner, complaining about the expense of intellectual property litigation. Yeah. Right. Time Warner wants to cut back on intellectual property litigation.

“Companies spent 32 percent more on outside counsel for intellectual property litigation in 2003 than in the previous year, Chuck Fish, the chief patent counsel for Time Warner, told the House Judiciary Subcommittee on Courts, the Internet and Intellectual Property earlier this year. Spending for all other litigation rose a mere 1 percent during that time, Mr. Fish said.”

Rove Promises October Surprise — Could This Be True?


The right-wing site, Newsmax, says, “Karl Rove has been promising Republican insiders an “October surprise” to help win the November congressional elections.”…

What could it be, an invasion of Iran?

The Hyper-weird Economics of Health Care in the US: Markets Fail Again!

In my new book manuscript, The Great Capitalist Restoration: Seeds of a Catastrophic Depression, I have a brief section on health care, which I reproduce below. Following that discussion, I have some extracts from a recent Busness Week, article saying that health care accounts for all of the growth in private sector jobs since 2001. In effect then, the inefficiency of the health care system is needed to create job, which are destroyed by the inefficiency of the health care system.

Perhaps no sector of the economy illustrates how badly markets work than health care. The United States has the most advanced health care in the world. Unfortunately, such health care is beyond the means of the majority of society. Rising costs are making even barely adequate health care unaffordable for an increasing share of the population. Again, I will concentrate on the economic effects of health care rather than questions of social justice.

By the 1980s, rising health care costs were putting U.S. manufacturers at a serious competitive disadvantage with the rest of the world. More than a decade ago, Chrysler reported that its health care costs in its U.S. factories were already $700 per vehicle, compared to $233 in Canada, where the government provides health care (Wise 1989, p. 6). By 2005, General Motors saw its health care cost per vehicle in the U.S. more than double to $1500 (Murray 2005).

By 1999, Ford’s costs for pharmaceuticals alone reached nearly $2,800 annually for each active hourly worker (Bradsher 2004, p. 90). GM, Ford and the DaimlerChrysler AG’s Chrysler Group estimate that they spent $9.9 billion in 2003 to provide health care to nearly 2 million workers, retirees, and dependents (McCracken 2004). By 2005, the pressure of promised health care and pension costs drove the credit ratings of Ford and General Motors below the threshold for junk bonds.

Already, by the late 1980s, corporate leaders in the United States began calling for the government to step in to contain health care costs (Gordon 1991). Conservative ideologues disagreed, insisting that market forces were better suited to solve the health care problem.

The newly‑elected president, Bill Clinton, promised to deliver an effective health care plan as the centerpiece of his administration, but strong industry pressure coupled with an aggressive public relations campaign derailed his plan. To meet some of the objections that conservatives raised, Clinton compromised his proposal. In the end, he offered a clumsy bureaucratic mish‑mash that pleased no one. Long after the inevitable defeat of the Clinton plan, it remained a powerful symbol of the supposed bureaucratic mess that any government health care plan would inevitably unleash.

Conservatives proposed that efficient corporate health providers could deliver substantial savings by monitoring health care to eliminate unnecessary expenditures. On its face, the idea made some sense. In fact, the Health Maintenance Organizations initially did manage to hold down medical costs, but not for long.

The conservatives’ brand of health care had a fatal flaw: any company whose profits largely depended on keeping medical costs in check also had an incentive to deny as much care as possible ‑‑ even when it is absolutely medically necessary. This emphasis on rationing had three dimensions: first, whenever possible providers would try to avoid responsibility of taking on people most likely to need care; second, they would try to deny needed care to those in need; finally, they would try to minimize the time spent with individual patients. In so far as this last strategy is concerned, Health Maintenance Organizations turned to consultants who recommended that they apply techniques modeled on the Toyota assembly line (Head 2003, p. 125). Patients had little reason to rejoice that doctors were expected to work at a pace comparable to a harried assembly line worker.

Unfortunately, one expense dissipated much or all of these savings from stinting on health care. Once a corporation takes charge of a huge medical insurance fund, nothing can stop the managers from appropriating big chunks of money for themselves in the form of bloated salaries and benefits and payouts for shareholders. Eventually, the excesses of management together with the monopoly profits from pharmaceutical corporations more than ate up the savings from the denial of medical services: health care costs soared once again, saddling the public with both higher costs and less care.

So in the end, commercial interests have trumped health concerns. Today, huge Health Maintenance Organizations work to minimize available health care while siphoning off a shocking 31.0 percent of health care expenditures for administrative costs. In contrast, Canada’s national health insurance program has an overhead of 1.3 percent. The U.S. health care industry continues to devote more and more of its energies to administrative tasks, despite the fact that computers have been reducing the need for tedious paper work. In fact, between 1969 and 1999, the share of administrative workers in the health care labor force grew from 18.2 percent to 27.3 percent (Woolhandler, Campbell, and Himmelstein 2003).

Excessive overhead and bloated corporate salaries do little to improve the delivery of health care. An editorial in the prestigious New England Journal of Medicine sums up the problem of the U.S. health care system:

The American health care system is at once the most expensive and the most inadequate system in the developed world, and it is uniquely complicated. In 1997 we spent about $4,000 per person on health care, as compared with the next most expensive country, Switzerland, which spent some $2,500. Yet 16 percent of our population has no health insurance at all, and many of the rest have only very limited coverage. [Angell 1999]

The corporations that led the movement for market‑driven health care had little reason to cheer. After interviewing the head of General Motors, Alan Murray, a columnist for the Wall Street Journal, expressed their exasperation:

The U.S. spends a fortune on health care ‑‑ 15% of its total output, compared with 10% in Germany and 8% in Japan. But it gets a lousy return on that money. Forty‑five million Americans lack health insurance. And errors are frequent: Recent studies show adults who visit a doctor or a hospital get what experts recommend as the best treatment only about half the time. [Murray 2005]

In the case of the automobile industries, ideology rather rather than commercial interests are trumping common sense.

Even within the United States healthcare system, nonprofit institutions are far more efficient than their commercial counterparts. For‑profit hospitals spend 23 percent more on administration than do comparable private not‑for‑profit hospitals and 34 percent more than public institutions (Woolhandler and Himmelstein 1997).

Despite the fact that the United States lacks a government‑run health care system, the government still pays for more than half of all medical expenditures. Per capita government spending on health care in the United States actually exceeds total health spending (government plus private) in every other country except Switzerland. In effect then, the people of the United States pay the cost of a national health care system without the opportunity to take advantage of its benefits (Woolhandler and Himmelstein 2001).

So, despite the promise of market efficiencies, the inefficient health care system still leaves U.S. corporations at a serious competitive disadvantage when they have to pay for their workers’ health care. The corporate response to the escalating costs of health care problem has been to shift more and more of the burden onto the underfunded government programs or onto the backs of workers through higher premium costs and co‑payments or, even worse, by the elimination of health care benefits altogether. By 2005, 45 million people in the United States lacked health care insurance. This problem is getting more serious by the day.

The proportion of Americans under age 65 covered by employer‑sponsored insurance fell dramatically from 67 percent to 63 percent in the short period between 2001 and 2003. The cost of these policies for both employer and employee generally increased while the coverage narrowed (Strunk and Reschovsky 2004).

The escalating cost of health care spills out into the rest of the economy. Employers attempt to pass their health care costs onto the rest of the public through higher costs.


Here are the extracts:

Mandel, Michael. 2006. “What’s Really Propping Up The Economy.” Business Week (25 September).

“Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.”

“… housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs. Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google and Yahoo!, businesses at the core of the information economy — software, semiconductors, telecom, and the whole gamut of Web companies — have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.”

“Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.”

“If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care.”

A Toxic Stew: Intellectual Property, Embroidering Grannies, Terrorism, and Invasion of Privacy

Searcey, Dionne. 2006. “Sewing and Suing Aren’t a Happy Mix For Embroiderers.” Wall Street Journal (14 September): p. A 1.

“Janet Ebert, a longtime embroidery hobbyist, logged onto the Internet last year and found images of flowers and cuddly animals. Altering them with special software on her home computer, she created versions of the designs that she stitched on quilts for her five grandchildren. She used a computerized Singer embroidery machine, and sold some of the designs online for about $2 each. A few weeks later, a courier appeared on Ms. Ebert’s front porch in House Springs, Mo., with legal papers informing her that she was being sued. The complaint said she had violated copyright law and that some of the designs she had sold belonged to embroidery company Action Tapes Inc., in Dallas.”

“Sewing and design companies are engaging in piracy disputes similar to those waged by the music, movie and fashion businesses. Some buyers and sellers of designs are confused about the copyright issues buzzing around the honey bees and sunsets they stitch on quilts and clothing.”

“Embroiderers used to buy patterns of angels, flowers or other designs published by sewing companies at five-and-dime shops. They would iron the outlines of the designs onto fabric and stitch around them by hand, creating unique, colorful patches on clothing and blankets. Today, many buy digital forms of the designs from sewing company Web sites that offer downloads or disks. The designs are then executed by computerized sewing machines, costing as much as $7,000, that sew the images onto fabric.”

“Fed up with such practices, the Embroidery Software Protection Coalition, a small group of sewing companies including Action Tapes, Great Notions Inc., Pfaff American Sales and others, aggressively began pursuing legal action against hundreds of embroidery buffs. Nearly 1,500 have been sent menacing letters on stationery stamped with the coalition’s logo — a stitched-looking letter “C” with a needle and thread attached — that threaten them with steep fines and court judgments for buying counterfeit embroidery designs. Some of the letters tell the buyers the coalition will back off any legal action if they pay fees for their “past wrongful conduct”.”

“Dozens of embroiderers took to online sewing forums to anonymously complain about the coalition’s efforts, accusing the coalition of shaking down innocent sewers. In turn, the coalition in June sent a subpoena to Yahoo Inc., which hosts one embroidery forum, to find the identities of sewers such as “suelikessewingtoo” and “nanaanniesews” so it can consider suing them for defamation, according to the coalition.”

“In its legal filings, it likened some of the stitchers’ online screeds to “terrorist activities” and accuses them of posting slanderous statements “that marched across the Internet bulletin boards and chat groups similar to Hitler’s march across Europe”.”

“Gary Gardner, president of the coalition, says his group sometimes has no choice but to get tough, even with the little old ladies everyone agrees constitute the largest demographic of embroiderers. “Although they’re a grandma, they’re not a nice grandma,” Mr. Gardner says. “Some of them are outright vicious, even when we point out to them what they’re doing is illegal”.”

“The coalition has a team of investigators who troll online auctioneers such as eBay for obvious counterfeiters offering batches of thousands of designs for low prices.”

“When the companies catch counterfeiters, some hand over names of their buyers as part of a legal settlement. In June, Sue Schultz, an embroiderer in Florida, received a letter from the coalition telling her some designs of trucks and cars her husband purchased for her in December 2005 were counterfeit. “We were shocked,” Ms. Schultz says. “My stomach was completely upset.” When she phoned the coalition, she says, lawyers told her to send a $300 check to make amends. The coalition acknowledges that it sometimes resorts to such demands. Unsure of the legitimacy of the operation, Ms. Schultz did nothing, though she says she now buys designs exclusively from established sellers.”

“Ms. Schultz and others have complained on Internet forums about the letters that they say amount to a shakedown. Two of them have enlisted the help of an Internet privacy group called the Electronic Frontier Foundation to quash the subpoena sent to Yahoo, aiming to protect anonymity online and citing First Amendment concerns.”

“The coalition has since withdrawn the subpoena, but attorney Carole Faulkner says she is working on a new, narrower subpoena and still has plans to sue some forum members for defamation. Corynne McSherry, an attorney for the Electronic Frontier Foundation, says the coalition’s “shotgun approach is aimed not at redressing defamation, but at intimidating those who have sought to raise public awareness of its ham-fisted tactics.” She says she is pleased the subpoena was withdrawn. Yahoo declined to comment.”

Intellectual Property: A License to Blackmail

Joe Nocera wrote a fascinating story about a nasty patent suit between a patent-trolling company, whose board is chaired by none other than Paul Allen, and The story begins:

Nocera, Joe. 2006. “Tired of Trolls, a Feisty Chief Fights Back.” New York Times (16 September).

“Patent disputes have become part of the dark underbelly of American business. So-called patent trolls acquire patents, often from bankrupt companies — and often overly broad patents that should never have been issued by the United States Patent and Trademark Office in the first place. Instead of using them to build a commercial product, they extract licensing fees from companies that are making and selling real products. As The New Jersey Law Journal put it not long ago, “They exist solely to exact a tax”.”

“The deck is stacked against target companies, even when their product is not infringing. Patent litigation is expensive, and the judicial system tends to be sympathetic to the patent holder. So companies usually come to the obvious conclusion: it makes more sense to pay than to fight. For its part, the patent troll often prices the licensing fee below the cost of litigation, to encourage such behavior.”

Abuible refuses to settle, spends a million dollars rather than pay the demanded $300,000, only to find out the troll company does not even have legitimate ownership of the patent.

“After a year of legal wrangling, Digeo dropped its price. A clearly frustrated Mr. Blaisdell wrote an astonishing e-mail message in May 2006 to Audible’s internal lawyers, saying he was “perplexed as to why Audible has not taken Digeo up on its offer to settle for $300K.” After all, he pointed out, that was far less than the “high legal fees” Audible was paying. He added, “Surely you understand that the prospect of convincing a Jury that Audible doesn’t infringe or that the Patent is invalid is an expensive one.” Digeo may or may not be a patent troll, but rarely has the economics of patent trolling been so baldly stated.”

“As it turns out, Digeo did not have the complete ownership of the patent that it thought it had. Documents that had been turned over to Digeo when it bought the patent showed that Edward Chang, one of the four co-inventors, had died, and that another — his brother — had assigned the rights to the patent to the company that later sold the `823 to Digeo.”

“Edward Chang, however, was very much alive, and his brother had never assigned the rights to anyone. The documents had been forged — though it’s not yet known by whom. The forgery was discovered by Mr. Kelber, the Audible lawyer. Audible then went to Mr. Chang and got him to sell it a license for $70,000. Last month, when this new evidence was presented, a judge ruled that Digeo was entitled to no monetary damages from Audible.”

The Moral High Ground of Tax Havens — Very funny.

You know about the grand financial centers, such as the Grand Cayman Islands, where corporations far outnumber the population. Here is a glowing defense of such tax havens. I like Sen. Byron Dorgan’s idea that corporations that choose to incorporate in Bermuda should expect the Bermudan Navy to bear the burden of protecting their interests.

Mitchell, Daniel J. 2006. “The Moral Defense of Tax Havens.” Notes from FEE (Foundation for Economic Education) (July).

He beings: “My job this evening is to present a moral defense of

tax havens.”

“We, as advocates of the free market, argue that tax havens put pressure on governments to lower marginal tax rates, reduce or eliminate double taxation of savings and investment, and stimulate continuous economic growth. But I would go one step further. In the grand scheme of things, the issue of tax havens involves much more than tax competition alone. It involves a moral imperative. Whether providing a refuge from government incompetence and corruption or from persecution and oppression, tax havens play a critical role in protecting life, liberty, and property.”

Bush’s Real State of the Union Address

Bush’s Real State of the Union Address

Environmental chutzpah

Treasury Secretary Henry Paulson has a reputation as a tree hugger, but few people expected him to take a strong stand in favor of the environment. To the surprise of everybody, he did just that — except his target was the Chinese government.

Solomon, Deborah. 2006. “Paulson Takes China to Task Over Its Energy Use, Green Record.” Wall Street Journal (14 September): p. A 6.

Treasury Secretary Henry Paulson’s speech on the global economy yesterday drew notice for its breadth as well as the explicit concern Mr. Paulson expressed about China’s energy consumption and its environmental record.

“China’s severe environmental hazards not only are harming the health of its people and ecosystems, they are also harming China’s long-term economic potential,” he said, a week before heading to China. “Economic development without regard for environmental protection is not sustainable.”

Peak oil and echoes of premature anti-fascism

The idea that the world is fast approaching peak oil production is very controversial, but perhaps nowhere more so than with oil producers. During the run-up World War II, communists who opposed fascism were later labeled premature anti-fascists — an Orwellian sounding term which had ominous consequences for those who bore the label. Now, energy interests concerned about “the premature development of alternatives to oil.”

Bahree, Bhushan and Jeffrey Ball. 2006. “Producers Move to Debunk Gloomy ‘Peak Oil’ Forecasts: Saudis, Exxon Say Supplies Are Ample as Policy Makers Begin to Weigh Substitutes.” New York Times (14 September): p. A 2.

“Saudi Arabia, with a quarter of the world’s proven crude reserves, has an interest in countering developments that would reduce demand. “If you are sitting on the world’s biggest oil deposits, you would want to prevent the premature development of alternatives to oil,” said Herman Franssen, president of International Energy Associates, a consulting firm in Bethesda, Md.”