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[Lightly edited transcript of speech given at the 2010 Annual Meeting of the Property and Freedom Society, June 6, 2010.]



In addition to defense, security, education, money and banking, scientific research, providing for the poor, space exploration, food and drug safety, roads and transportation, the definition of marriage, immigration and border control, unemployment insurance, and healthcare — all of which have been monopolized, co-opted, or corrupted by the state — the state also monopolizes dispute resolution, the court system, and the production of law, both by government courts and, primarily, by state legislation and rules promulgated by state agencies. And the state's legal system, and thus most aspects of economic life, is permeated by what is called intellectual-property law.

Intellectual-property law consists primarily of patent, copyright, trade-secret, and trademark law, and also more modern innovations such as semiconductor maskworks, databases, moral rights, boat hull designs, and reputation rights such as defamation, libel, and slander law.

To take one example of a modern patent system, out of all the patent systems of the roughly 200 countries in the world, consider the US patent system. US patents are granted by the United States Patent and Trademark Agency Office (the USPTO). It is an agency of the US Department of Commerce. It has about 10,000 employees; most of them are called patent examiners.

In 2008, about 485,000 patents were filed in the United States; about 185,000 were issued or granted or approved. As of the end of 2008, there were about 1.2 million patent applications pending for examination at the Patent Office. There are about 2.5 million live US patents right now — patents that are enforced, that can be infringed. IBM, for example, one of the largest patent procurers, was awarded over 4,000 US patents in 2008. They hold about 40,000-50,000 live patents at present.

Patents are classified by group, class, and subclass. They're divided into four main groups: for instance, group number one is chemical and related arts, two is communications and radiant energy, and so on. There are about 1000 classes and several thousand sub- and sub-subclasses.

The PTO grants issued patents after reviewing patent applications filed by individuals and corporations. Corporations have invention-disclosure programs. They tell their engineers, "Submit an idea to us. We'll pay you $5,000."

A patent committee usually reviews these ideas and decides which ones to file. A patent attorney files the application. The cost is $10,000–$20,000, for example.

The end result is a patent that is issued after a couple years of what is called "prosecution" with the Patent Office. Prosecution is the going back and forth between the patent attorney and the USPTO. The end result is called a "red-ribbon copy." I brought one with me. I'm holding pure evil in my hands [laughter]. In fact, I'll pass this around if anyone wants to take a look. I just need it back because it's my employer's [laughter].

So that becomes part of a company's patent portfolio, which can be used to sue, to countersue, or to license for profit.

Now, what are the results of the patent system itself? The results are distorted research, protectionism, wealth transfers, and enrichment of the patent bar. Large companies, such as IBM, amass giant patent portfolios. And they license them — IBM, for example, makes hundreds of millions of dollars every year off of licensing.

It's also used for cross-licensing. Larger companies engage in cross-licensing agreements, which makes it difficult for smaller companies to enter; so this practice sets up barriers to entry.

Let me give some examples of some patents:

There's Amazon's One Click patent, which is a patent on clicking once to purchase something instead of twice. They used it to sue Barnes & Noble at the dawn of e-commerce.

There was a company called Cendant that asserted Amazon had violated patent monopoly on recommending books to customers.

There was an attempt by Dustin Stamper, who was President Bush's top economist, to get a patent on a system and method for a multistate tax analysis.

Apple has filed a patent application for digital karaoke.

Facebook was sued by someone who had a patent on a "system for creating a community of users with common interests to interact in."

There was an absurdly broad patent issued to a company called Blackboard for the common use of technology that is employed in education and in online encyclopedias.

Carfax has a patent on "a method for perusing selected vehicles having a clean title history."

And then there is the fun patent covering swinging on the swing sideways [laughter]. That's a method patent.

Another result of the patent system is patent lawsuits. Many patents are granted that are ridiculous, such as some of the ones I read. But the problem with the patent system is not ridiculous patents. It's valid patents. They can be used for suing.

Kodak, for example, first sued Apple for violating their imaging patents. Now Apple countersues Kodak, before the US International Trade Commission, over its digital-camera technology.

There are some Android-related patent lawsuits going on right now in the smart-phone industry. Apple suing HTC suing Kodak suing Nokia. This is just an example — this is the patent battle in the smart-phone industry right now. All these suits went back and forth. This is what these companies deal with and engage in.

HTC signed an agreement with Microsoft providing rights to use Microsoft software on mobile phones, related to one of their patents. What happened was Microsoft got a royalty on every Android phone that is made by HTC. Microsoft might prefer to make its own phones, but if they can get a royalty from every Android phone sold, that's pretty good too.

This, right here, is called the "smart-phone nuclear war" in the patent industry. There are lawsuits going back and forth. One patent litigator was quoted as saying,

We've seen this in the tech industry, with the LCD industry, and it goes all the way back to semiconductors. Patents aren't a barrier to entry so much as patent holders want people to pay. If you can tax your competitors with your royalty then you have set yourself up for profits. In a low-margin business, that's important.

Just for examples, here are some more recent patent suits:

In a stent case, Boston Scientific agreed to pay Johnson & Johnson $1.7 billion to settle three patent cases.

There was a $1.6 billion patent infringement verdict found in favor of Johnson & Johnson against Abbott.

A $400 million settlement paid to Abbott by Medtronics, again regarding stents.

Qualcomm has been enjoined against importing chips that help conserve power in cell phones.

One New Jersey doctor was awarded $432 million against Boston Scientific as a "reasonable royalty" for infringing his "method and apparatus for managing macromolecular distribution."

Even though the practice of saving seeds after a harvest to plant the next season is as old as farming itself, patents prevent farmers from saving their patented seeds.

Apple was sued over a caller ID idea on the iPhone.

Blackberry's manufacturer, RIM, was forced to pay $612 million after the patents of NTP were asserted against them and threatened to shut down the Blackberry.

Microsoft was on the receiving end of a $1.5 billion jury verdict for infringing an mp3 patent held by Alcatel-Lucent.

It's also used in connection with IPOs (initial private offerings) of companies. Quite often one competitor will hold on to its patent, wait until their competitor files their S-1 to go public, and then they'll hit them with a patent lawsuit because this has to be disclosed in the IPO, and it can damage or scuttle the IPO.

For example, a company called Optium went public in late 2006 and the company Emcore sued them for patent infringement as soon as they filed their S-1.

In another very recent case, which is ongoing now, a company called Neophotonics, which has recently filed its S-1 — they're not public yet — has been sued along with three other defendants by Finisar for patent infringement. What's interesting about this is that one of the patent claims — I've reviewed these — that is being asserted covers "a system and method for protecting eye safety during operation of a fiber optic transceiver." So, in other words, so that the engineers working on the lasers don't get their eyes burned, there's an alarm set if you have too much power going to it. It's something that has been used for years; it's a common idea. Patents are supposed to be "nonobvious," by the way. This is not.

And, of course, each of these defendants has countersued Finisar with their own patents. Now you have literally millions of dollars being spent by these five companies on legal fees because of this patent suit.

Now what about copyright? Copyright is also bad. It lasts a lot longer than patents, usually over a hundred years. It can even lead quite literally to censorship and thought control.

There is a case where the seminal German silent film Nosferatu was deemed a derivative work of Dracula and the courts ordered all copies destroyed.

Shortly after the death of the author J.D. Salinger, author of Catcher in the Rye — courts banned the publication of a novel called Sixty Years Later: Coming Through the Rye. Banned it. Based on copyright.

Some get lucky though, and they say the work was a fair use. There was a parody called The Wind Done Gone which is an unauthorized rewrite of Gone With the Wind from another character's point of view.

In another interesting case, fantasy author Mary Zimmer Bradley, who actually encouraged and allowed a lot of her fans to write fantasy without suing them for copyright infringement, came across an idea that fans had submitted to her that was similar to one she was using herself in a novel she was writing. So she wrote to the fan to tell her what was going on and even offered to pay her a little bit of money and to acknowledge in the book that they had come up with the same idea. But the fan replied she wanted full coauthorship of the book and half the money or she would sue. So Mary Zimmer Bradley scrapped the novel rather than risk a lawsuit; it was never written.

Sometimes lawyers who send cease and desist letters claim copyright in the letter and threaten to sue you if you republish it on the web [laughter].

The Australian band, Men at Work, was recently found guilty of plagiarizing "Kookaburra Bird" on their 1980 CD, Down Under. The judge held that a flute rift in Down Under bore an unmistakable resemblance to "Kookaburra Bird Sits in the Old Gum Tree," a folk tune taught to Australian school children for 75 years [laughter].

RIAA wants a law passed that would impose a penalty of $1.5 million per CD copied.

Ford Motor Company has attacked Ford enthusiasts, claiming that they hold those rights to any image of a Ford vehicle, even if it is a picture that you took of your own car.

The NFL has prohibited churches from holding Superbowl parties on TV sets larger than 55 inches.

And, of course, there are recent extensions of copyright such as the Digital Millennium Copyright Act, or DMCA, which criminalizes even the mere possession of technology that can be used to circumvent digital-protection systems. But I say DVD ripping devices don't steal; people do.

Trademark is also bad:

Subway has claimed a trademark on the term "foot-long" to describe their sandwich. They threatened a hotdog seller who has been selling foot-longs for decades.

A court has said the University of Southern California is the only one who can use "USC." Sorry, University of South Carolina [laughter].

"Who dat?" The National Football League has stewed over this expression being put on t-shirts.

There are modern extensions of trademark law that are even worse, such as rights against cybersquatting and rights against trademark dilution; the latter don't even require consumer confusion, which is required in normal trade lawsuits.

Even trade secret, which is the least objectionable of the four main types of IP, has been corrupted by the state. For example, when information about the then-secret iPad was leaked back in January of this year, Apple's law firm used trade-secret law to threaten new publications such as Valleywag and Gawker to make them stop publishing information, even though Valleywag and Gawker had never signed a non-disclosure agreement or contract with Apple.

Now, Western IP laws are bad enough, but the US-led Western countries have long tried to extend the reach of their mercantilist IP laws to countries like Russia, India, and China. They use the World Trade Organization, the WTO, to twist the arms of other countries.

And now we have the dreaded ACTA, the Anti-Counterfeiting Trade Agreement, coming down the pipe and I suspect it will be ratified. It is a worldwide treaty that will impose draconian Western-style patent and copyright protection, including DMCA-type anticircumvention rules, on every country. It will also provide the legal authority for surveillance of Internet file transfers and searches of personal property. As science-fiction author Corey Doctorow notes, "ACTA is a radical re-writing of the world's internet laws, taking place in secret without public input."

Now these IP laws are, quite obviously, unlibertarian. They're nothing but grants of privilege by the state, leading to protectionism, market distortion and inefficiencies, wealth transfer from consumers and smaller companies to big media, big pharma, and so on, with the state taking a handsome handling charge. In our statist world we have taxation, we have regulation, we have incarceration for victimless crimes, and we have war. So the existence of IP law should come as no surprise. The question is not why we have IP law. We have IP law because we have the state. The question is why in the world would any libertarian support IP? But some of them do support it.

There are, of course, utilitarian arguments in favor of IP law, but these are hardly worth mentioning. First of all, there is no evidence at all that IP creates net worth. There are incoherent standards even in determining this. It leads to crazy schemes, advocated even by some libertarians and people such as Joseph Stiglitz and Forbes who openly endorse the idea of, say, a $30 or $80 billion tax-funded medical innovation prize fund or innovation contracts, either to replace the patent system or supplement it. On a debate on Cato's website, one Dean Baker argued that copyright and patent should be abolished and replaced with such a tax-funded innovation prize.

Cato's Tim Lee opposed this idea. He says,

I can't agree with Baker that all copyright and patent protection monopolies are illegitimate. Copyright and patent protections have existed since the beginning of the Republic and, if properly calibrated, they can promote the progress of science and the useful arts. Like any government intervention in the economy, they need to be carefully constrained, but if they are so limited, they can be a positive force in the American economy.

That's really a relief. We just need to "calibrate" [laughter].

Galambos believed that man has property rights in his own life, which he called "primordial property," and thus in all nonprocreative derivatives of his life. (You don't own your children, I guess.) The first derivatives of a man's life are his thoughts and ideas, according to Galambos. These are primary property. Since action is based on primary property, you own your actions too. This is liberty.

Second derivatives, such as land, televisions, and other tangible goods, are produced by ideas and actions. So, in other words, in Galambos's hierarchy, primary property is your thoughts, ideas, and actions. Secondary property are lowly things like this.

Now, sometimes I start a speech with a joke. I didn't do so today. I couldn't think of a good IP lawyer joke. But I have one now. Ayn Rand incredibly said, "Patents are the heart and core of property rights."

That's a joke [laughter].

It's so positivist, for Ayn Rand. I suppose we had no property rights in existence until 1790, the first Patent Act, or perhaps in 1624 with England's Statute of Monopolies. (By the way, many libertarian advocates of the patent system deny that patents are monopolies even though they originated in the Statute of Monopolies.)

Statists used to be much more honest. We used to have the Department of War. In 1949, it was changed to the Department of Defense. Advocates of patents used to call them monopolies. Now they deny that they're monopolies.

Recently, I was relistening to a 1991 lecture by an Objectivist IP attorney, Murray Franck. I'm going to play a little bit here:

In the words of Forvald Solberg, a former register of copyrights, "When we come to weigh the rights of the several sorts of property which can be held by man, and in this judgment take into consideration only the absolute question of justice, leaving out the limitations of expediency and prejudice, it will be clearly seen that intellectual property is after all the only absolute possession in the world. The man who brings out of the nothingness some child of his thoughts has rights therein which cannot belong to any other sort of property. Land or chattels are pre-existing in some form, and the rights therein are limited in many ways, and are held in the great service of the world, but the inventor of a book or other contrivance of thought holds his property, as a god holds it, by right of creation."

So this is how the Objectivists look at it. We're gods. We create things and we own these things that we create. In fact, Franck recounts that when he met Ayn Rand, and she learned he was an IP lawyer, she said, "Intellectual property is the most important field of law."

Now what about the fact that IP is necessarily based upon legislation? No problem, according to Murray Franck.

Just as the common law evolved to recognize trespass by barbecue smoke, you would have evolved to recognize property in intellectual creations. But even if it could somehow be established that common law would never recognize IP rights, this would not be an argument against these rights. The common law often required legislation to correct it; for example, recognizing the rights of women. Indeed, it is a myth that the common law evolved to reflect and that legislation is always in conflict with the requirements of human nature. The same minds that employ induction and deduction to decide a particular case, as judges in making the common law, can employ those methods to legislate universal law.

Some of the arguments for IP made by defenders of the system are so unbelievable they seem like they must be made in jest. For example, in a recent online debate, antipatent philosopher and ontologist — if there is such a term — David Koepsell, had mentioned that in the 19th and early 20th centuries two of the most innovative countries on the earth, the Netherlands and Switzerland, had no patent systems at all.

In response, a patent attorney who was defending the system, says, "Thank goodness the Swiss did have a patent office. That is where Albert Einstein worked and, during his time as a patent examiner, came up with his Theory of Relativity."

Free-market economist William Shughart, a senior fellow with The Independent Institute, recently argued, "It is true that other means exist for creative people to profit from their effort. In the case of copyright, authors can charge fees for reading their works to paying audiences. Charles Dickens did this, but his heavy work schedule of public performances in the United States, where his works were not protected by copyright, arguably contributed to his untimely death."

So, in other words, we need IP law because Charles Dickens died early.

Support for IP rights even leads some libertarian thinkers, such as Cato's Doug Bandow, Richard Epstein, and Michael Kraus to oppose free trade and, in particular, to oppose reimportation because this permits consumers to partially evade the patent-monopoly tax.

Now what is the reason these libertarians make this mistake? I think it can be traced to three big causes: Locke, America, and Ayn Rand (plus two minor causes: legislation and utilitarianism.)

John Locke unnecessarily assumed the ownership of labor in his theory of homesteading. You don't need to assume that we own our labor to have the best claim to a homesteaded resource. You have the best claim to a homesteaded resource because you have a better connection to it, because you were the first user of it. There is no need to assume the ownership of labor, but this assumption has transformed into the Randian and other libertarian idea that we own our creation because we mix our labor with creations such as intellectual ideas as well.

America is also part of the problem. America instituted a patent system on utilitarian grounds in the beginning. And since the modern libertarian movement arose in America, and because early America is naively seen as a total libertarian paradise, state patent and copyright laws get a pass. And this is compounded with the influence of Ayn Rand who, in her desire to adopt the values of the superior United States over the communist Russia that she escaped and despised, she became too pro-American. I've even been told that Murray Rothbard's correspondence indicates that around 1954 someone convinced Ayn Rand to oppose eminent domain, which is the state's ability to take property. She had previously favored eminent domain because the Constitution endorses it. So, she is giving too much credence to the American Constitution.

I think there are two other contributing causes related to the others. One is the rise of legislation as a means of law-making. Recall Objectivist Murray Franck's approval of legislation as a means of making law. But, of course, legislation requires a state.

The second contributing cause is rise of utilitarianism and wealth mechanization as justifications for law. Now the founders may be forgiven for their hubris and assumptions, but not today's econometricians. The evidence is against them, but like the left-liberal do-gooders of Thomas Sowell's The Vision of the Anointed — the "Humanitarians with a Guillotine" — they persevere in claiming IP law generates net wealth without a shred of proof. Some claim that the success of the United States shows that IP law generates wealth. They forget that correlation is not causation. If they're right, we can also attribute Western prosperity to the income tax, antitrust laws, and war. So I guess we should export these policies to other nations, too. Oh, wait.

At least Jefferson had the decency not to pretend that the temporary, artificial, state-granted patent and copyright privileges were natural rights, unlike modern pro-IP libertarians.

So what is the right way to view this?

Let's think about property rights in the context of the nature of human action.

There are various ways to explain what is wrong with IP. You can explain that IP requires a state and legislation, which are both necessarily illegitimate. You can point out that there is no proof that IP generates net wealth. You can explain that IP grants rights in nonscarce things, which are necessarily enforced with physical force against tangible property, thus supplanting already-existing rights and scarce resources.

Another way, I believe, to seeing the error in treating information, ideas, and patterns as ownable property is to consider IP in the context of a structure of human action. Mises explains in The Ultimate Foundation of Economic Science that "To act means: to strive after ends, that is, to choose a goal and to resort to means in order to attain the goal sought." Obviously, the means have to be causally efficacious to obtain the desired end. So as Mises has observed, if there was not causality, men "could not contrive any means for the attainment of any ends." Knowledge and information, of course, play a key role in action as well. They guide action. The actor is guided by his knowledge and information. Bad information results in unsuccessful action or loss. As Mises puts it, "Action is purposive conduct. It is not simply behavior, but behavior begot by judgments of value, aiming at a definite end and guided by ideas concerning the suitability or unsuitability of definite means" (emphasis added).

So all action employs means and all action is guided by knowledge and information. As Mises says, means are necessarily scarce resources. He said, "Means are necessarily always limited, i.e. scarce, with regard to the services for which man wants to use them."

So, in other words, to have successful action, you have to have knowledge about causal laws to know which means to employ. You have to have the ability to employ these means suitable for the goal that you are seeking. So the scarce resources that you need to use as means need to be owned by you. This is why there are property rights in these things. The nature of a scarce resource is that use by one person excludes use by another; but you don't need to own the information that guides your action in order to have successful action. For example, two people can make a cake at the same time. They each have to have their own ingredients, but they can use the same recipe at the same time.

Material progress is made over time in human society because information is not scarce. It can be infinitely multiplied, learned, taught, and built on. The more patterns, recipes, causal laws that are known add to the stock of knowledge available to all actors and act as a greater and greater wealth multiplier by allowing actors to engage in ever-more efficient and productive actions. It is a good thing that ideas are infinitely reproducible, not a bad thing. There is no need to impose artificial scarcity on these things to make them more like scarce resources, which, unfortunately, are scarce. As Bastiat said,

All innovation goes through three stages. One possesses unique knowledge and profits from it. Others imitate and share profits. Finally, the knowledge is widely shared and no longer profitable on its own which thereby inspires new knowledge.

What patents do is artificially prolong the first stage at the expense of the others. For example, a recent news story reports that Acer is the latest PC maker to jump into the tablet PC market, which has been gaining increasing attention since Apple launched its iPad in January. With more than one million units sold so far, the iPad's success has sent other PC makers scrambling to come up with similar devices. This competition to make similar devices is not a bad thing, but IP advocates have to have mixed feelings about this imitation.

Granting copyrights to scarce resources, but not to ideas, is precisely what is needed to promote successful action as well as societal progress and prosperity. So we can see that an essential defect of IP is that it seeks to impede learning and the spread of ideas and knowledge. Honest (or naive) IP advocates even admit this. Recall that above I quoted the comment from William Shughart. He says, "To paraphrase the late economist John Robinson, patents and copyrights slow down the diffusion of new ideas for a reason, to assure there will be more new ideas to diffuse."

So they admit this. By the way, Professor Hoppe realized this as far back as 1988. At a panel discussion on ethics with Hoppe, Rothbard, David Gordon, and Leland Yeager, there was the following exchange, and I'll conclude with it:

AUDIENCE QUESTION: I have a question for Professor Hoppe. Does the idea of personal sovereignty extend to knowledge? Am I sovereign over my thoughts, ideas, and theories? … HOPPE: … in order to have a thought you must have property rights over your body. That doesn't imply that you own your thoughts. The thoughts can be used by anybody who is capable of understanding them.