Broken Symmetry

Resolving the St. Petersburg Paradox and the Flaws in the Efficient Market Hypothesis Too

How much would you pay to play a game in which a coin was flipped, and each time it landed heads the payout was doubled from a starting value of $1? The expected value of this game is not finite, and yet most people are not willing to pay more than a few bucks for it, much less borrow to play.

This is the so-called St. Petersburg Paradox. The earliest solution was proposed by Bernoulli, who suggested that the value people attached to their wealth went as a logarithmic rather than linear function of increasing wealth. Given that assumption, he calculated the amount a person should be willing to wager as log(change in wealth due to payout from lottery) - log (wealth - wager).

But this calculation is not quite correct even though it resolves the paradox by explaining why most people won't wager much: People won't wager much because that logarithm runs off to infinity fast as the wager approaches even a fraction of wealth -- producing a zero in the denominator.

One way to see that this calculation is incorrect is because it treats the wager as a static cost, existing independent of how the payoff increases with increasing flips. Another way to say the same thing is that the wager has time-value in the form of interest. So the expected value and the wager should be treated together in the utility function in successive flips of the coin. What you should wager depends not just on how much, but when the payoff comes.

Ole Peters tells the full story of the St. Petersburg Paradox, including the errors in its analysis later introduced by economist Karl Menger, and propagated by Arrow and Samuelson, in glorious detail here.

I am grateful to Rick Bookstaber for pointing me to the paper.

"So what?" you might ask. Well, if one gets into the habit of treating economic variables as time-series rather than ensemble averages -- as the correction demands -- then one immediately is forced out into the realm of non-equilibrium statistical mechanics and dynamics.

Ole Peters and Alexander Adamou have already proposed a correction to EMH. According to them, it is not prices that are efficient and cannot be arbitraged, but rather the use of leverage to produce larger than logarithmic gains.

I'm completely drowning in patent litigation right now, but eventually I would like to offer some thoughts on what these papers mean for competition and innovation policy. What should be considered analogous to leverage in intellectual property markets?

The potential implications for investors are also interesting and need to be thought through. Do we now have a quantitative insight into how and why so many of the investors who have consistently beat the market over the past few decades have advised against leverage. Buffett, in particular, is famous from eschewing leverage and advising others to do the same.

RIP Steve

Steve was a Bob Dylan fan. In his memory:

Highlights of Patent Reform Legislation

Section 3.  First Inventor to File

Summary

Amends 35 U.S.C. § 102 to redefine prior art as anything patented, published, on sale, or in public use before filing, or any patent application filed by another before the effective filing date of the claimed invention.

Eliminates most interference proceedings.  (Derivation proceedings for allegedly copied remain available.)

Effective Date

18-months after the date of enactment, applying to any patent filed or claiming priority to a patent filed thereafter

Practice Notes

Clients have six months after enactment to educate inventors about the elimination of the 1-year grace period, and need to get a patent application on file.

 

Section 4.  INVENTOR'S OATH OR DECLARATION

Summary

Amends 35 U.S.C. § 115 to permit applicants to make a "substitute statement" in lieu of an oath or declaration when an inventor is deceased, under legal incapacity, or cannot be found or reached after diligent effort."

Amends 35 U.S.C. § 118 to permit applicants to apply on behalf of inventors when "the inventor has assigned or is under an obligation to assign."  Until now, applicants were permitted to apply on behalf of an inventor only when the inventor could not be found or reached after diligent effort.

Effective Date

One year after the date of enactment, applying to any patent application filed on or after that date

Practice Notes

Section 4 will streamline the process of obtaining oaths or declarations, a process which under the current rules has been a hassle, especially in locating former employees upon the filing of continuations or divisionals of an original application.

 

Section 5.  Prior COMMERCIAL Use DEFENSE

Summary

This section expands the prior user defense under 35 U.S.C. § 173, currently is available only for business method patents, to all patents.

The prior user bears the burden of showing a prior use of the claimed invention more than a year before the priority date of the claimed invention.  Such prior uses would be a valid defense even if kept confidential.

The defense is personal to the prior user and non-transferable except for transfers of an entire enterprise or line of business, and then only for prior uses at the same site.

The defense is unavailable to prior users when the invention was owned by or under obligation of assignment to a university at the time the invention was made.  There is an exception to this exception for when federal funding was required to reduce the invention to practice.

Effective Date

Date of enactment, applying to any patent issued on or after.

Practice Notes

We expect the prior user defense could be valuable to  defendants in software patent litigations, although the defense is available only to patents issuing after the date of enactment, and we have some concerns with how such a defense would fit within overall case strategy.

 

Section 6.  POST-GRANT REVIEW PROCEEDINGS

Summary

Creates a European-style opposition proceeding, whereby third parties may challenge the patentability of an issued patent in an inter partes proceeding before the PTO within one year after a patent issues.

Like inter partes reexaminations, these post-grant review proceedings will have a preclusive effect on the party who brings them — i.e., that party may not assert either in a civil action or ITC action a defense of invalidity on any ground raised or that could have been raised during the post-grant review proceeding.

Effective Date

One-year after date of enactment, applying to any patents issued before, on, or after that date.

Practice Notes

Based on experience with inter partes reexamination proceedings, we do not expect post-grant review to provide much help for defendants in patent litigation.  Many venues do not grant stays pending reexamination, and in general the PTO is more friendly to patentees than the district courts.  Nonetheless the procedure may be useful in narrow circumstances, such as when a European counterpart has already been rejected in an Opposition proceeding and a U.S. patent issues.

Section 9.  VENUE

Summary

Changes venue from appeals of PTO decisions that are now filed in the District of D.C. to the Eastern District of Virginia, which is closer to the new PTO headquarters.

Effective Date

Date of enactment, applying to any civil action filed on or after

Practice Notes

We generally recommend that appeals be made to the Federal Circuit when that alternative is available, and the PTO has recently taken the position that many issues that have been appealed to the D.D.C. (such as appeal of B.P.A.I. decisions in reexamination) are now subject only to appeal in the Federal Circuit.

 

Section 10.  FEE SETTING AUTHORITY

Summary

Gives PTO fee-setting authority and control of fees subject to limited Congressional oversight.  Please contact us for additional details if you would like to know more about these provisions.

Also gives universities micro-entity status and hence reduced filing fees.

Effective Date

Date of enactment

Practice Notes

Along with Section 22, this was one of the most contentious sections in the bill, since the House Appropriations Committee has never given plenary authority to an Executive agency to manage its own budget.  H.R. 1249 represents a political compromise, which was approved by PTO Director David Kappos and the Obama Administration

 

Section 14.  TAX STRATEGIES DEEMED WITHIN THE PRIOR ART

Summary

Deems tax strategies “insufficient to differentiate a claimed invention from the prior art,” and not indistinguishable from other information available to the public that is relevant to a patent’s claim of originality.

Software that enables individuals to file their income tax returns is specifically excluded from this section — i.e., such software patents would not be deemed invalid merely as a result of this section

H.R. 1249 would also permit the PTO to seek advice and assistance from the Department of Treasury and the Internal Revenue Service to ensure that patents to do not infringe on the ability of others to interpret the tax law and that implementing such interpretations remains in the public domain.

Effective Date

Date of enactment, applying to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date

Practice Notes

Clients should contact us if they have concerns about whether particular claims might be deemed invalid under this provision.

 

Section 15.  BEST MODE REQUIREMENT

Summary

Removes as a defense to patent infringement the patentee’s failure to comply with the best mode requirement.  (The “best mode” is currently required in patent applications to describe how an invention should be used)

Effective Date

Date of enactment, applying to proceedings commenced on or after that date.

Practice Notes

Best mode defenses are rarely successful, and this Section merely codifies the practical reality that has existed for some time under Federal Circuit common law.

 

Section 16.  Marking

Summary

Allow a manufacturer to write the word “patent” or “pat.” on a product, along with a reference to an internet website that the public can access free of charge to learn more about the specific patent.

Eliminates most liability for false marking

Effective Date

Date of enactment, applying to all cases, without exception, that are pending on, or commenced on or after, the date of the enactment of this Act

Practice Notes

Gives statutory approval to a practice already common among patent owners.  Puts a damper on cottage industry of qui tam litigation for false marking

 

Section 17.  ADVICE OF COUNSEL

Summary

Codifies holding of In re Seagate Technology, LLC, 497 F. 3d 1360 (Fed. Cir. 2007), which held that failure to obtain advice of counsel may not be used to prove willful infringement.

Effective Date

Not clearly specified

Practice Notes

MWE represented Seagate in the appeal that resulted in this holding.  Please contact us if you'd like additional details.

 

Section 19.  JURISDICTION AND PROCEDURAL MATTERS

Summary

Includes general prohibition against joinder of multiple defendants in a single lawsuit for infringement of the same patent by different accused products

Effective Date

Date of enactment, applying to any lawsuits followed on or after that date.

 Practice Notes

Could bring end to what is now a common practice by NPEs.

 

Section 23.  SATELLITE OFFICES

Summary

Requires the Director to establish three or more satellite offices within a three-year window, subject to available resources, to carry out the responsibilities of the PTO

 

Section 26.  PRIORITY EXAMINATION

Summary

Requires that the PTO establish regulations that prioritize examination of applications for products, processes, or technologies that are important to the national economy or national competitiveness without recovering the aggregate extra cost of providing such prioritization

Creates a “Track I” fee of $4,800 that would allow an inventor to receive a “prioritized” examination of his or her patent

 

Paul Graham Offers a Private Solution to Patent Reform

Thought provoking as usual:

The patent pledge doesn't fix every problem with patents. It won't stop patent trolls, for example; they're already pariahs. But the problem the patent pledge does fix may be more serious than the problem of patent trolls. Patent trolls are just parasites. A clumsy parasite may occasionally kill the host, but that's not its goal. Whereas companies that sue startups for patent infringement generally do it with explicit goal of keeping their product off the market.

I like the idea of introducing private solutions. I've personally worked on a few. An underlying problem is that the economics of innovation are quite different for different technologies, so even if the law applied the same way (which is doesn't; claim construction is rarely an issue in claims to chemical compounds), the balance between stronger and weaker patent rights would be different.

It's worth noting that the pledge wouldn't affect any of the litigations I currently work on, or even any litigation I have ever worked on. Patent infringement lawsuits against startups (not founded by non-former employees) are a very recent development, which can be linked to the large-scale aggregation of patents by non-practicing entities over the past ten years.

Eddies in Memory

Suppose you're allocating computer memory to local variables associated with a host of objects (maybe millions). You need to free up that memory when an object is no longer needed. So you need a way to be able to tell whether the memory still has any local variables still in use pointing to it.

This can be visualized as a directed graph. The set of nodes with only outgoing edges are the variables still in use. The nodes with no incoming edges represent the memory no longer in use.

And it appears that at any given moment, the set of nodes with no incoming edges will always form a cycle -- eddies in the directed graph that represents your memory allocation.

For some reason, I find that aesthetically satisfying.

Harnessing the Power of Feedback Loops

From Thomas Goetz at Wired:

The basic premise is simple. Provide people with information about their actions in real time (or something close to it), then give them an opportunity to change those actions, pushing them toward better behaviors. Action, information, reaction. It’s the operating principle behind a home thermostat, which fires the furnace to maintain a specific temperature, or the consumption display in a Toyota Prius, which tends to turn drivers into so-called hypermilers trying to wring every last mile from the gas tank. But the simplicity of feedback loops is deceptive.

Via Farnam Street.

I hadn't heard about Bandura's work in the 1960s, although I find that he was cited in Csikszentmihalyi's Flow in passing. It was unclear from the citation how much of an influence he was on C.'s own theory. Although C. does not emphasize flow as a feedback loop, from a systemic perspective that is pretty much what one observes when people are in a state of flow. The topologies get complicated since many experiences of flow involve other people. Think of a jazz quartet and its audience -- live and for its recordings. Or of Congress and the stock market.

I like how this dovetails neatly in with Dweck's mindset theory also. The fixed mindset interrupts any feedback loop, and hence disrupts learning. But too little self-criticism and introspection and there is no feedback.

One of C.'s observations in Creativity is that creative individuals often lose a parent early in life. It seems to me that one would have to develop a capacity for self-criticism earlier on in that instance. Perhaps such individuals have a better capacity for self-generating feedback than do the rest of us, who are looking to others -- especially family -- for queues as to whether we are doing well at this ambiguous assignment that is our existence.

Bleg to Readers Who Code: Better Way to Claim Software?

Mea Vita offers interesting insight into Apple's development procees:

Before writing any production code, we'd write our unit tests. All software engineers should be taught to write their API unit tests first – it's a good discipline to learn. Next, we coded using WebObjects/Java with Eclipse/WOLips and we always ran the app in debug mode with key break points so that we could step through the code. I've frequently seen too many software engineers, elsewhere, who just code away as if they're throwing something against the wall to see what sticks.

Here's what wikipedia says about unit testing:

Each unit test can be seen as a design element specifying classes, methods, and observable behaviour. ... It is true that unit testing lacks some of the accessibility of a diagram, but UML diagrams are now easily generated for most modern languages by free tools (usually available as extensions to IDEs). Free tools, like those based on the xUnit framework, outsource to another system the graphical rendering of a view for human consumption.

Can any BS readers offer a view on whether or not a claim to units would be easier to construe to determine patentability, validity, infringement than a single-English-sentence claim?

More generally, I often wonder how the practice of claiming chemical structures was first adopted and approved by the PTO. What would it take to get the PTO to require software to be claimed in a new way?

Supreme Court Affirms the Priority of Individual Rights under the Patent Act

Stanford v. Roche decided today:

Since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor. The question here is whether the University and Small Busi-ness Patent Procedures Act of 1980—commonly referred toas the Bayh-Dole Act—displaces that norm and automati-cally vests title to federally funded inventions in federal contractors. We hold that it does not.

As noted in the Sotomayor concurrence, footnote 2 on page 5 expressly reserved the questions that would have been raised by consideration of the Federal Circuit's precedents regarding interpretation of patent assignments. Thus, the guidance on choice of law that seemed possible after oral arguments have been reserved for future consideration. It is notable, however, that even the dissenters (Breyer and Ginsburg) who addressed the Federal Circuit precedent were silent as to the choice of law question.

Gawande on Systems Theory

From a commencement address:

Medical performance tends to follow a bell curve, with a wide gap between the best and the worst results for a given condition, depending on where people go for care. The costs follow a bell curve, as well, varying for similar patients by thirty to fifty per cent. But the interesting thing is: the curves do not match. The places that get the best results are not the most expensive places. Indeed, many are among the least expensive. This means there is hope—for if the best results required the highest costs, then rationing care would be the only choice. Instead, however, we can look to the top performers—the positive deviants—to understand how to provide what society most needs: better care at lower cost. And the pattern seems to be that the places that function most like a system are most successful.

The observations apply to lawyers and law.

Patent Reform through the Creation of Economic Facts

This piece by Hernando de Soto on the "Destruction of Economic Facts" caught my eye not long ago:

During the second half of the 19th century, the world's biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. If you wanted to know who owned land or owed a debt, it was a fact recorded locally—and most likely shielded from outsiders. At the same time, the world was expanding. Travel between cities and countries became more common and global trade increased. The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. Knowledge had to be gathered, organized, standardized, recorded, continually updated, and easily accessible—so that all players in the world's widening markets could, in the words of France's free-banking champion Charles Coquelin, "pick up the thousands of filaments that businesses are creating between themselves."

The result was the invention of the first massive "public memory systems" to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies, and promissory notes), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."

The patent system is an example of one of these "public memory systems," which has facilitated transactions in intangible (exclulsionary) rights.

The focus of de Soto's attention is on the financial services industry, and in particular on how innovation in financial services has destabilized and undermined the consistence of public memory systems. On his view, this is a root cause of our ongoing recession:

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. Mortgages have been granted and recorded with such inattention that homeowners and banks often don't know and can't prove who owns their homes. In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

Go ahead and click through to read the whole piece. His is profound insight. Note one earlier link on BS to a similarly thought provoking piece by de Soto.

What about the patent system? Has the patent system undergone a similar destruction of economic facts over the last twenty years?

Not really. More the opposite seems to be true, in fact. At least since the Federal Circuit was established, and especially lately since patent office records worldwide are now available online, the patent system has never functioned more effectively.

And yet, even with all of these improvements, it seems to me that the patent system has not yet been able to provide enough "economic facts" for the market to transition from litigation to transactional norms in handling the allocation and reallocation of patent rights. In effect, there has been no destruction of economic facts within the patent system because the patent system never created economic facts to begin with.

The production of "economic facts" in the sense that de Soto describes should be the ultimate goal of any patent reform. We have seen many incremental and even discontinuous leaps in that direction over the past few decades. But we are not there yet.

Problems with ascertaining title and encumbrances on title are foundational to any economic facts about patents. The systems for handling these economic facts with respect to real property and even copyright are more highly developed than they are for patents, even though title goes to the very root of how patents are valued now because problems with standing can result in zero returns to enforcement.

All of the issues that have been addressed lately, including Therasense yesterday, will help move us incrementally closer to a world in which patent rights transact without litigation. But a focus on the creation and maintenance of a "public memory system" -- a source of "economic facts" about patent valuation -- will get us there quicker.

At the end of the day, valuing patent portfolios is not more complex than the valuation of collateralized debt obligations, currency derivatives, or interest rate swaps. The difference is that those intangibles have (or at least had) a foundation of "economic facts" to facilitate transactions.

Federal Circuit Upholds District Court Interpretation of Contract Assigning Non-exclusive Licenses

The Rembrandt Techs. opinion includes the following diagrams of chain of title and licensing of the asserted patents:

At issue was the question of whether the assignment of the licenses from Old Rockwell to New Rockwell were valid, such the sublicense from New Rockwell to Conexant was sufficient to exhaust the patent rights.

Transferability of licenses presents thorny choice of law issues in many cases because different states have different presumptions when it comes to the validity or enforceability of any kind of restrictions (encumbrances, covenants, or licenses) on personal property. Compare Cadtrak Corp. with Superbrace.

There is nothing in the Opinion to indicate what law was applied in interpreting the relevant contracts.

Split within Federal Circuit on Federal Preemption of State Law in Ownership Disputes

[Below is the text of a case note submitted by me to the MWE IP Update Newsletter, which is recommended reading for anybody interested in keeping up with new developments in patent, trademark, copyright, and trade secret law. Eventually, they should have it up in blog format. In the meantime, I'll "crosspost." -MFM]

Last November, a split panel of judges on the U.S. Court of Appeals for the Federal Circuit vacated a district court finding of infringement by generic drug maker Navinta on the grounds that the plaintiff Abraxis had not properly transferred ownership of the asserted patents prior to the filing of the complaint. Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Nov. 9, 2010) (Gajarsa, Linn for the Court) (Gajarsa, opinion) (Newman, dissenting). The recent per curiam denial of petition for rehearing by the Court en banc was occasion for the delivery of spirited opinions concurring (Gajarsa, Linn, and Dyk) (Gajarsa, opinion) and dissenting (O'Malley, Newman) (O'Malley opinion). Abraxis Bioscience v. Navinta LLC, Case No. 09-1539 (Fed. Cir., Mar. 14, 2011). Although without consequence to the original panel decision, the concurrence and dissent from rehearing en banc expose a subtle, but potentially momentous difference in opinion on the choice of law for interpretation of patent assignments.

The problem with title arose from a series of mergers and asset acquisitions carried out in relatively quick succession. In chronological order, the inventors assigned ownership to Astra Lakemedel Aktieboag ("Astra L") and AB Astra. AB Astra then merged into AstraZeneca AB ("AZ-AB"). Astra L and AZ-AB later (in late 2007) assigned ownership to their parent, AstraZeneca ("AZ-UK"), but not before plaintiff Abraxis had entered (on April 26, 2006) into an Asset Purchase Agreement ("APA") with AZ-UK. Thus, even at closing on June 28, 2006, when AZ-UK made a present assignment of its ownership to Abraxis in an IP Assignment Agreement included in the closing documents, AZ-UK did not have legal title to the patents, which had not yet been assigned to AZ-UK by its subsidiaries Astra L and AZ-AB. When the oversight was corrected in late 2007, Abraxis had already filed its complaint against Navinta.

Although patent law is often thought to be exclusively federal, in fact many disputes over patent ownership turn on common law rules of contract and property that, at least since Erie v. Tompkins, have been considered state rather than federal. Notwithstanding that history, the panel majority at least have recognized limited federal preemption of state law in interpreting contracts of assignment. Unfortunately for Abraxis, the APA provided only that AZ-UK "shall cause" the assignment of ownership to Abraxis. In accordance with the precedent of DDB v. Techs. (Fed. Cir. 2008), Federal Circuit law applies to the interpretation of such an assignment, and Federal Circuit law holds that such an assignment does not operate as a present assignment of rights, but rather as a promise to assign in the future. The dissent from the panel opinion by Judge Newman, and the dissent from rehearing en banc by Judge O'Malley (joined by Judge Newman), argue that the application of New York state law by the district court (which upheld Abraxis's claim to ownership) was correct, and that the majority was overextending the reach of federal jurisdiction.

Interestingly, the precise rule of law invoked by the panel majority is now under consideration by the Supreme Court in Stanford v. Roche. In that case, the Federal Circuit vacated a judgment against Roche because the inventor had made only a promise to assign to Stanford. The Supreme Court agreed to review the decision because of the questions it raised about whether the Bayh-Dole Act (which permits transfer of title of federally funded inventions to universities) trumped common law rules of property. The Federal Circuit decision applied the rule of DDB without comment on the preemption of state by federal law. The Supreme Court decision in Stanford v. Roche could, therefore, have a substantial impact on the advice given clients in transactions requiring assignment of ownership, even in non-Bayh-Dole settings.

Practice Note: In advising buyers in a merger, lawyers should make closing contingent upon clear documentation of chain of title from any subsidiaries to the seller, so that a present assignment at closing includes all the bargained-for rights. Stay tuned for the Supreme Court opinion in Stanford v. Roche.

A $900 Million Question of Federal Common Law?

Google today announced that it was selected to serve as the stalking horse in the bankruptcy auction of Nortel's patent portfolio. Its stated purpose:

we hope this portfolio will not only create a disincentive for others to sue Google, but also help us, our partners and the open source community—which is integrally involved in projects like Android and Chrome—continue to innovate. In the absence of meaningful reform, we believe it's the best long-term solution for Google, our users and our partners

Not insignificant to this logic, and hence to Google's $900 million bid, is the question of whether any patent licenses to Nortel would be assignable to Google if Google is successful in its bid. (Note: the value of such licenses would be considered separately from the value of any patents owned by Nortel.) Does Google's $900 million expressly include the assignment of licenses to Nortel?

Even if the parties' agreement says yes, the answer is non-trivial. The authority on the question of whether and when non-exclusive licenses should be assignable is split, and even the authority on what authority should apply to the question of whether and when non-exclusive licenses should be assignable is split!

To wit, the Ninth Circuit has ruled that federal common law applies to the question of whether licenses are assignable. See in re CFLC, Inc. v. Everex Sys., Inc.. By contrast, California state courts have applied California law. See Superbrace v. Tidwell and Dopplmaier.

What law applies is kind of, um, important. The Ninth Circuit avoided the transfer of patent licenses to a buyer in bankruptcy after ruling that federal common law applied. If California law had applied, the transfer would have been completed.

Nortel filed for bankruptcy in federal court in Delaware. Have Delaware courts or the Third Circuit ruled on this question? Not yet.

I guess we'll have to see how Nortel's licensors feel about having Google as a licensee before we find out whether the Delaware Bankruptcy Court agrees with the Ninth Circuit on this point of law.

In a pure accident of fate, the Supreme Court is right now in Stanford v. Roche considering how the Federal Circuit's application of federal common law to a question of contract interpretation should be decided. Interestingly, not every Judge on the Federal Circuit agrees that there should be federal common law, or at least that state law should be preempted, on these issues. I wonder whether those judges would change their minds if they took also the federal system of bankruptcy law into consideration.

Balance-Sheet Networks

From Robert M. May, Simon A. Levin and George Sugihara:

although the study of payment flows is of immediate interest to central bankers, it may miss an essential aspect of systemic risk, namely the ‘contagion dynamics’ of public perceptions and asset valuation associated with the interaction of balance-sheets (the mutual financial obligations and exposures that link companies). For example, how contagious are inflated valuations of Internet stocks? Are there hidden, mutually dependent risks associated with such high valuations? It could be useful to examine the dynamic network of balance-sheets, and if possible to quantify the inter active effects of valuations, credit policies, hedging and so on among financial institutions, especially investment banks. Such balance-sheet networks could be helpful in studying the effects of asset- pricing bubbles, credit crises and the poorly understood but potentially worrying effects of the current widespread use of derivatives (futures and options) and dynamic hedging by investment banks to manage risk on the fly.

Just discovered Sugihara through a link in an interesting post on O'Reilly Radar.

Bookstaber Smooths Out Complexity

Interesting as usual:

Finance is often regarded as a game, but by the conventional von Neumann definition it is not. Granted it is ostensibly circumscribed by the rules of law, but so is war circumscribed by the rules of the Geneva Convention (at least conventional war). Adversaries at war do not have to play by the same rules or even play the same game. Indeed, what more is the strategy of war than playing the game that works to your advantage, and doing so while keeping your adversary unaware of that game? What more is the charge of “asymmetric warfare” than having an adversary that is not playing by your rules or your game – and is winning the war in the process?

Tech Transfer "Professional"?

I wish I could say that the author means the whole thing tongue in cheek, but he appears to actually mean it:

It is super easy to spot the overtly "bad" academic inventors: no funding, no data, surly disposition, body odor, etc. Even a brand new technology commercialization professional can spot these jokers their first week on the job.

The overtly bad inventor is also great because no one blames you for not working with him/her. Their chairperson things that he/she is a mediocre scientist --- a true "hiring mistake" --- and wishes they would go away. And, you don't have to worry about them complaining to the upper university administration because they hate the guy/gal too.

...

Even though you won't have any creative control, you should protect their idea because (a) it is a good idea and (b) a technology commercialization person has never lost their job for patenting inventions from well-regarded faculty members who publish is great journals.

One could not fabricate a better piece of evidence that we are wrongly managing the disclosures, patenting, and marketing of university technology. Supreme Court, are you listening?

Mechanisms for Cultural Evolution

From Lesley Newson and Peter J. Richerson:

The basic cultural evolutionary mechanism is a “teaching bias” in the terms of Boyd and Richerson (1985). Most people normally espouse values, norms, and behaviors similar to those held by others in their community. Thus, younger people’s values, norms, and behaviors substantially refl ect those of the previous generation, and culture includes an inertial effect simply by consequence of people learning from each other. However, the same people when communicating with a close relative are slightly more likely to express variants of conventional norms that favor reproductive success, while those communicating with a friend, coworker, or other non-relative are slightly more likely to emphasize other goals. Newson et al. (2007) report role-play experiments that show this effect and also present a theoretical model that indicates how a decrease in the ratio of relatives to non-relatives in a social network can lead to the decline of norms favoring inclusive fi tness derived from the biased teaching effect. The rate of decline depends upon the strength of the teaching bias and on the ratio of kin to non-kin in social networks. But, even if the change in network structure is rapid and the teaching bias is quite strong, it is still likely to take several generations for a population to approximate a new equilibrium in norms related to reproduction.

Via @GarrettJones on Twitter. The paper is interesting throughout.

This Day in History: University Research and the Internet

From the Computer History Museum:

March 16, 1990

Internet Extends Beyond U.S. to Europe

The National Science Foundation announces it will extend its network with a high-speed data link to Europe. Five years earlier, the Internet in its modern form had started to develop rapidly thanks to the formation of the NSFNET, which linked five supercomputer centers in the United States. Later in 1990, Europe contributed to the growth of the Internet when CERN's Tim Berners-Lee developed HTML, the language used for the World Wide Web.

Has any technological development done more to change the world in the same period of time? Why do some folks seem to have forgotten how the Internet got started? There were lots of venture capital funds around in 1990. How many were ponying up to fund a transatlantic link between NSFNET and Europe?

FTC issues Report on the Patent System

From the FTC press release:

A new Federal Trade Commission report recommends improvements to two areas of patent law policies affecting how well a patent gives notice to the public of what technology is protected and remedies for patent infringement. The report, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition, emphasizes that the patent system and competition policy share the goal of promoting innovation that benefits consumers.

Available here. My letter comment posted here was cited in a few places in the report. In general, I like what I'm reading. I'm disappointed that the report wasn't issued sooner given the imminent passage of reform legislation. Kudos to the authors for completing such a formidable task.

The Future of Technology Transfer in the United States

-- hanging in the balance. From yesterday's transcript in Stanford v. Roche:

JUSTICE BREYER: My point is that it's somewhat remarkable because of this new statute, now that happens to only to inventions in those areas that are inventions of the contractor who, by the way, invents nothing. Human beings invent things, not entities like universities.

MR. FLEMING: That's quite so.

Based on the transcript, I am hopeful that the Supreme Court gets what is so important about this case. So much hangs in the balance.

For a good background on the case, see this note by Ronald Mann on the Scotusblog.

Pam Karlan taught me Constitutional Law at Stanford Law School. I spent an uncomfortable amount of time arguing with her in front of the class. I have the highest respect for her advocacy, but evenhandedness was not one of her strengths, at least when I took her class.

Symmetry and Entropy in Market Bubbles and Crashes

From Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam:

Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.

Via Physics arXiv blog.

What I like about this work is how at the conceptual level it fits with other theories of markets making phase transitions between high and low entropy states, with symmetries breaking as the transition begins and picks up steam.

There is a lot of talk about whether Quantitative Easing has done much. Folks like Scott Sumner seem to be arguing that it has not because market expectations were adjusted at the moment QE was announced (or quickly thereafer). I'm more skeptical about that claim because I imagine that it takes more than days or even weeks for organizations to propagate new information about prospective rates through their entire ranks, such that there remains an impedance mismatch between Fed signals and market reactions. But at an even more fundamental level, the market response to Fed signals does not appear to be linear within some regimes, including the one we live in now, which looks to me like a liquidity trap, albeit not homogeneously sticky for all industries and firms. (Consumer internet, in particular, seems to be attracting capital investment at an accelerated pace compared even with hardware and software solutions providers.)

When have undergraduates ever had more privileges than faculty?

From Tusher Rae at the Chronicle of Higher Education:

An iPhone app designed by a team of students for a contest at the University of Missouri at Columbia has helped lead the institution to rewrite its intellectual-property policies.

...

Mr. Brown and his team, made up of fellow students Zhenhua Ma, Dan Wang, and Peng Zhuang, decided to stay in, despite their concerns. When they won the competition with an app called NearBuy, the students decided to contact the university to assert their ownership and to ask the university to waive any intent to assert ownership.

...

Michael F. Nichols, vice president for research and economic development for the Missouri system, led the initiative to rewrite the rules, and he found that his peers at other institutions had little advice on how to deal with student work.

Via AUTM Newsbrief.

Paul Samuelson the Investor

From Economic Principals:

It turns out that the great MIT economist was influential in the creation of one of the earliest and most influential hedge funds. Launched in 1970, Commodities Corp. blazed a trail of extremely high returns throughout the 1970s and early ’80s, before disappearing in various pieces into Bermuda mailboxes and Goldman Sachs. Many of its star traders – Bruce Kovner of Caxton and Paul Tudor Jones, chief among them—formed successful hedge funds of their own. Samuelson thus had a ringside seat at the birth of an influential industry that is still only poorly understood.

About the same time, he invested a substantial amount in shares of Warren Buffet’s Berkshire Hathaway Inc. It was in 1970, too, that he won the Nobel prize in economics, the second to be awarded. Long famous for the fortune that his pioneering textbook earned him after 1948, it turns out that Samuelson may have made more money as an investor than as an author. He was both smarter and richer than is generally understood: as an investor, a bigger winner, perhaps, than the more volatile John Maynard Keynes.

Via Tyler Cowen at MR. More evidence for the Paul-Samuelson-as-Isaac-Newton theory?

Remember MLK Jr.

Evidence of strategic periodicities in collective conflict dynamics

From Simon DeDeo, David C. Krakauer, and Jessica C. Flack:

We analyze the timescales of conflict decision-making in a primate society. We present evidence for multiple, periodic timescales associated with social decision-making and behavioral patterns. We demonstrate the existence of periodicities that are not directly coupled to environmental cycles or known ultraridian mechanisms. Among specific biological and socially-defined demographic classes, periodicities span timescales between hours and days, and many are not driven by exogenous or internal regularities. Our results indicate that they are instead driven by strategic responses to social interaction patterns. Analyses also reveal that a class of individuals, playing a critical functional role, policing, have a signature timescale on the order of one hour. We propose a classification of behavioral timescales analogous to those of the nervous system, with high-frequency, or alpha-scale, behavior occurring on hour-long scales, through to multi-hour, or beta-scale, behavior, and, finally gamma periodicities observed on a timescale of days.

Via Physics arXiv blog.