Supreme Court weakens U.S. patents?

The United States Supreme Court in eBay v. MercExchange has held that, instead of applying a general rule that patent infringement leads to an injunction barring the infringer from using the patent, courts instead should, as in most other areas of law, apply the four-factor equity test used for deciding whether to order permanent injunctions. In other words, the plaintiff must show that:

(1) it has suffered irreparable injury from the infringement,
(2) monetary damages are inadequate to compensate for the injury,
(3) the balance of the hardships warrants a remedy in equity (roughly speaking, that the plaintiff will be hurt more by lack of injuntion than the defendant will by the injunction), and
(4) the public interest would not be disserved by a permanent injunction.

This holding overturns that of the U.S. Federal Circuit favoring the general rule that, subject to a few exceptions, injunctions should issue when there is infringement. The Federal Circuit generally hears all appeals in U.S. patent infringement cases. It has been a de facto supreme court of patents, since, at least until this year, the actual Supreme Court accepted patent appeals quite infrequently. If past history is any indication, the Federal Circuit will probably try to liberally interpret the Supreme Court's opinion to maintain the rules that it has championed. Here, it may try to read its rule of general injunctions into the four-factor test.

There are a number of clever arguments the Federal Circuit might accept in order to effectively revert to the general rule. It might favor the plaintiff with presumptions that each of the four factors are generally found in patent cases, or reason by analogy that where injunctions were issued in a similar case in the past, the four factors impliedly must have been found, and thus should also be found in the present case. This would allow the Federal Circuit to distinguish eBay as involving a particularly problematic variety of patents (business methods), or even just a particularly problematic instance such patents, and in effect keep applying the general rule to other kinds of patents.

Thus, given the structure of U.S. federal courts, where generally all patent appeals go through the Federal Circuit, the U.S. Supreme Court may have to take several more injunction cases involving different circumstances than eBay before it effectively overturns the ubiquitous use or threat of injunctions in U.S. patent cases.

The concurring opinions also suggest that Justices Thomas and Alito may be the swing votes in the Court's upcoming decision in Metabolite. Chief Justice Roberts will recuse himself. Stay tuned.

USPTO to re-examine Amazon "one-click" patent

The USPTO has agreed, per Peter Calveley's request. to re-examine claim #11, the most notorious portion of Amazon's "one-click" patent.

Medical bureaucrats must respect life and liberty, says court

Alex Taberrok writes about a wonderful decision out of the D.C. Circuit. The court basically held that the FDA is violating the Fifth Amendment (and I'd add, natural and common law) rights to life and liberty of terminally ill patients by preventing them from getting drugs for their purpose of saving their lives unless the FDA has a compelling interest in doing so that outweighs these rights. Amazingly enough, up until this court's decision one had a Fifth and Fourteenth Amendment right to terminate the life of a fetus (a right with which I agree) by getting an abortion (or taking an abortion pill) without the government placing an "undue burden" on these medical procedures, but no such right under United States law to try to save one's own life with relatively safe medication.

Here's the court's opinion. I find the court's argument quite compelling, as it's based on both liberty and life, rather than just pitting one against the other as in the abortion debate. Alas, despite the compelling argument this doctrine may have a tough time surviving our current legal positivist (statutory language can do no wrong, and neither can regulation...) Supreme Court, not to mention a political environment where most of the planet thinks that medicine should be centrally planned by state bureaucrats, the patients be damned.

Security and the burden of lawsuit

The need to sue can be an expensive burden. A plaintiff often needs to go through a very long and expensive legal process, the results of which may be little or nothing due to the insolvency of the party sued.

Because of this problem, large chunks of commercial law and practice -- and especially the areas of mortgages involving real property, secured transactions involving goods, and negotiable instruments -- deal with allocating the burden of lawsuit. Generally, the burden of lawsuit over a transaction should be shifted to the partie(s) who are more likely to breach the legal obligations created by the transaction, or more likely to become insolvent, or both.

Creditors often use collateral to shift the burden of lawsuit to debtors. Instead of having to sue to get their money, creditors simply repossess the collateral, shifting the burden of lawsuit to the debtor. Creditors sometimes also use a surety (e.g. a co-signer) to reduce the burden of lawsuit by adding a target who is more solvent.

Another way creditors shift at most of the burden of lawsuit is by having the debtor sign a promissory note. The creditor can then sell the note to a third party who is entitled to collect the note as a holder in due course, free of most defenses to payment on the original contract. Freedom from most defenses (such as fraud, failure to perform, etc.) to the original transaction makes the debt owed by the debtor to the holder in due course very clear-cut, thus greatly lowering the burden of lawsuit for the new creditor. The original creditor benefited because it could sell this unburdened debt at a higher price than a debt burdened by legal problems with the original transaction. If the original creditor breached a contract with the debtor (for example by failing to deliver promised goods), the burden of lawsuit is now on the debtor to sue the original creditor: the debtor must pay the note regardless. (In the United States, there are some recent consumer protection exceptions to this general rule). If the debtor fails to pay the note, this is a very straightforward lawsuit compared to the usual breach of contract, and thus likely to be settled at little cost. Thus, the promissory note has shifted most of the burden of lawsuit from the creditor to the debtor.

At a more basic level, the burden of lawsuit is shifted by shifting actual control as well as legal possession over objects of value. "Possession is 9/10 of the law." To this end, security technology and in particular smart contracts will likely become very useful devices for shifting the burden of lawsuit in commercial transactions.

The Bellamies, nationalism, and socialism

The American cousins Edward and Francis Bellamy had a rather baleful influence here in the States and elsewhere. The first is more infamous for his socialism, and the latter for his nationalism, but the duo were both essentially national socialists and we suffer under their legacy to this day.

Smart contracts reduce mental transaction costs

In my old essay on micropayments and mental transaction costs, besides pointing out that mental transaction costs were a far more important barrier to Internet micropayments than computational transaction costs, I sketched some ideas for tools to lower mental transaction costs. Lowering mental transaction costs enables pricing at finer granularity, which increases price-sensitive behavior and thus the efficient allocation of scarce resources. I also used electricity conservation as a practical example of how mental transaction costs pose a barrier to price flexibility and thus to conservation. It turns out that electricity conservation is among the first areas to benefit from smart contracts that lower mental transaction costs.

This paper I presented at the Second Berlin Internet Economics Workshop in 1999 provides more detail on the economic theory behind mental transaction costs. Basically, mental transaction costs are the "hassle factor" one experiences when spending money: the costs of translating one's own knowledge and preferences into buying decisions. Mental transaction costs pose a severe limit on the efficiency of markets in general and on useful price granularity in particular; they are the main reason consumers generally prefer flat-rate pricing and why high price granularity (and thus micropayment) is usually useless.

Tools to lower mental transaction costs have vast potential but present many problems, especially "determining what the parties want in the first place." The most promising tools are smart contracts -- computerized devices that respond to the environment according to price signals or other contractual terms, customer preferences, and other states or events that are encoded in them or that they are encoded to respond to. Many smart contracts in the future may be programmed using a contract drafting language for specifying their event-driven behavior.

(I have also emphasized making smart contracts securely self-enforcing or self-verifying, but that is a different topic from this post, which deals with the role of smart contracts in lowering mental transaction costs).

Mental transaction costs pose a barrier to any scheme to go from flat rate to variable pricing in order to conserve resources. Such a scheme may be made possible only by technological or institutional breakthroughs which lower mental transaction costs. Faruqui and Earle[1]'s description of California's Demand Response scheme for peak-demand pricing of electricity is generally a good description of a successful and promising program that increases conservation and reduces the danger of blackouts by going from flat pricing to three price tiers (off-peak, peak, and critical peak). But the article fails to recognize the important role of mental transaction costs when increasing the number of price tiers. The authors do, however, recognize two important success factors. The importance of these factors provides strong evidence that mental transaction costs and tools that save on these costs will crucial in determining the scope and success of California's demand-sensitive pricing scheme. The authors observed that "[o]n average, residential customers reduced peak loads on critical days by 13.1 percent." The reduction was much larger for customers with central air conditioning. More interesting still, customers with "automatic price-sensitive thermostats" saved twice as much energy as customers that did not have these smart contract devices.[2]

The first effect comes about because on average each central air unit consumes far more power than each window unit; correspondingly the same mental transaction costs expended in controlling the thermostat of the former saves far more energy and thus money than controlling the latter. The second effect comes because the price-sensitive thermostat is a specialized smart contract that allows for simple input preferences (a simple table of preferred temperature at each of three to five price levels depending on the contract) and then runs automatically. It thus fulfills (for this particular function) my hopes of using simple user interfaces to input preferences into smart contracts which then make purchases automatically, thereby reducing the the mental transaction costs otherwise imposed by multi-tier pricing.

In its most general form, a smart contract will have a market translator that specifies a purchasing or selling action based on a function of current budget, environmental variables, and current and predicted (e.g. according to rational expectations models) prices:

transaction_decision = f(preferences, budget, environment, prices, price model)

That general description makes it all rather complicated; in practice there will be quite simplified versions based on simple versions of a subset of these variables that work in particular niches where those variables dominate preferences. An example of this simplicity is the "automatic price-sensitive thermostats" mentioned above. Programming this thermostat is only a bit more complicated than a normal thermostat: one programs in multiple temperatures each corresponding to a price level. For example, at an off-peak charge of 9 cents/kilowatt*hour, the summer air conditioning thermostat might be set to 72 degrees, while the normal peak price of 22 cents might be set to 74 degrees and the critical peak price (the hottest days when California would without substantial conservation otherwise be in danger of blackout) of 60 cents set to 77 degrees. So you input three settings instead of one. Presumably when you want to change the settings you can do it one at a time or change all three at a time by the same amount. That takes substantially more effort than a normal thermostat, but the California experiment showed that where the overall use controlled by that thermostat is great enough and the price differential high enough, it's worth the effort.

A bit more generally, a preference for physical state of the world can be specified by specifying a function

preferred_state = f(current price)

The thermostat then, like any thermostat, purchases electricity based on the function

if actual_state > preferred_state then purchase (turn on consumption)
else don't purchase (turn off consumption)

(Reverse to "<" when heating rather than cooling and analogously for other kinds of physical states). The most typical example is the thermostat where the desired state has one dimension (temperature), but one can think of other desired states such as illumination patterns (also tied to current electricity prices), high network bandwidth and low latency applications such as video on demand, and so on which are multidimensional. Where price granularity is small and discontinuous (as in the three-tier price scheme described above) a simple table is probably the lowest mental transaction cost way of inputting the preferences. Where the price changes continuously, a simple graphical interface with a touch-sensitive cursor to define the price/state curve may be the best option, but realize that the transaction costs for the latter may be far larger than the former for the typical user, and so justified only when the value of resources conserved by price is much greater.

Offline References:

[1] Ahmad Faruqui and Robert Earle, "Demand Response and Advanced Metering," Regulation v. 29 n. 1 (Spring 2006).

[2] Id. at pg. 25.

Water from a comet

When my old employer the Jet Propulsion Laboratory slammed a 370 kilogram projectile into comet Tempel 1, it caused the release of at least 250,000,000 kilograms of water from the comet over a period of two weeks, according to the BBC. The peak rate occurred at 5 days, and it's a reasonably continuous flow. This suggests a variation on my ice rocket manufacturing technique: instead of going to all that work to extract, liquify, distill, and then freeze water from the frozen mudball, just make this kind of coma (something like a vapor geyser) and put the slowly rotating and shaded cylinder forms in the path of the coma. One probably has to tether the cylinders to the comet to keep them from blowing away, and I haven't worked out what the best distance from the comet surface is, or indeed if the deposition rate on the forms will be fast enough at a safe distance (deposition from gas is a different regime from the freezing spheres I proposed in 1992). Also the comet throws off carbon dioxide, methane, and other gases with the water, and the vapor carries some dust, so it's unknown whether the purity of the deposited ice will be sufficient to avoid overly rapid corrosion of the thermal ("steam") rocket. But the economics are potentially quite attractive so it's worth looking into. The basic economic advantage of rockets using native ice as the propellant source is that (once we've moved the ice to the starting orbits of our desired journeys) they save not only on the expensive launch of propellant from earth, but also on most of the remaining mass one must now launch out of earth's vast gravity well, namely propellant tanks. The BBC Tempel 1 story comes via Emergent Chaos.

Off-the-record conversations for the Internet

There are many great ideas that have been worked on in the cryptographic theory community that I've long wanted to see implemented in practical tools. Two of these, mathematically deniable authentication and forward secrecy, have now been implemented along with encryption by Ian Goldberg and Nikita Borisov to create the off-the-record messaging software OTR. Now you can have a conversation on the Internet as if it was just you and your buddy on a golf course. You do have to trust that your buddy on the golf course is not wearing a wire, and here Alice has to trust that Bob is not recording the conversation and vice versa.

With mathematical deniability, even if your chat buddy records the conversation, third parties cannot mathematically prove that it was you doing the chatting. This is of limited practicality for legal purposes unless you use OTR via an onion router or similar: otherwise there is enough associated log data to prove Bob's identity in court even if mathematically it could be forged. Even an onion router won't save you if you leave identifying information in the actual conversation and your chat buddy records the conversation. This is because the laws of evidence typically put the burden of proving that such recorded data was forged on the person it is being used against. Nevertheless, in the normal course of operations presumably OTR lives up to its name and does not record the conversation, and your chat buddy would have to go way out of his way to make it do so.

Of more practical use is the forward secrecy, which means that if your chat today is recorded by a third party in the encrypted form over which it is sent across the Internet, and that third party discovers your chat key in the future, that key can't be used to compromise the recorded but encrypted message. "Forward secrecy" means the key you used was destroyed after use, (like on Mission Impossible but automatically instead of with the self-destruct sequence drama), and even if future key(s) are compromised they can't be used to reconstruct the current key, and thus can't be used to decipher the current chat session.

This presentation gives a good overview of the messaging software's rationale and the basics of how mathematically deniable authentication and forward secrecy work. It points out that the law endorses off-the-record phone conversations: normally and in most jurisdictions recording phone conversations without consent is illegal. Cryptography, for the limited problems it actually solves, is far more secure than the law.

Shared key generation using quasars

This article at The Register is the best layman's description I've seen. The basic idea is that Alice and Bob start by sharing a "key" that is a location and time interval for measuring radio transmissions from the same quasar. The couple (you didn't know that Alice and Bob are an item now?) can then use the voluminous "truly random" data generated by the quasar to generate secret cryptographic keys. Presumably the visible universe has so many quasars that it's sufficiently improbable that the adversary could guess and sufficiently difficult for the adversary to constantly observe all the quasars in order to observe and identify the transmission being observed by Alice and Bob.

There is an interesting discussion about the idea at Bruce Schneier's blog. However, while this discussion addressed several smaller problems that must be solved before this technique can become practical and widespread, the discussion failed to address one issue that should be glaring.

The biggest problem, which must be addressed with any physics-based "truly random" number scheme, is how do we know that these signals are "truly random"? On what physical theories and assumptions is this claim based? How do we know that scientists won't in the future learn more about how quasars work or discover new scientific laws that demonstrate regularity in the data once deemed random? Of course, as any good cryptographer knows, the fact that such data has passed all the statistical tests that we've so far devised is merely suggestive and hardly proves that the data is truly random, any more than it proves that a pseudorandom data stream is secure. There has to be a more basic argument to prove randomness, such as implausibility of >>c communications with respect to causality that would occur if certain quantum phenomena were not truly random.

This is a problem that needs to be addressed for any "truly random" source, but some physical randomness assumptions and arguments are better than others. This is certainly not something we should take on faith or leave to physicists who by "randomness" merely refer to standard statistical tests rather than cryptographic criteria.

See my articles on "true randomness" and the use of statistical tests in cryptography for more about this problem.

Corporate origins of the United States

When looking at the legal and political history that led up to the formation of the United States of America, judges and historians typically look to English royal and Parliamentary edicts as explanations and precedents for the American government. This is too limited a view. Usually neglected are the unheralded, deep, and indeed often dominant influences on the United States government from medieval, Renaissance, and Baroque-era era corporations.

During these eras corporations took a wide variety of forms. Abbeys, monasteries and dioceses were ecclesiastical corporations; boroughs and cities were municipal corporations, and a wide variety of other corporations existed including merchant and trade guilds, universities, and hospitals. Royal law did not make a strong distinction between these different kinds of corporations as our law makes today between, for example, commercial corporations and municipal corporations. They were all "corporations and bodies politick" whose charters used the same basic form and language and which often were granted various degrees of judicial and police powers as property rights appurtenant to or held by the corporation.


The Grand Union Flag of the American Revolution and of the United States as of July 4, 1776

For example, the Physician's College in London, a medical guild, was a corporation that had the power (up until the famous case of Dr. Bonham) to imprison anybody practicing medicine without a license within seven miles of the City of London (itself a large political corporation). Nine of the original American colonies were colonial corporations whose charters granted them broad governmental powers subject to retention of "English liberties" by the residents therein and the king's right to collect customs on merchant shipping. "...one Body corporate and politique in Fact and Name, by the Name of the Governor and Company of the Mattachusetts Bay..." was typical language in these charters. These corporations were even sometimes (as in this case) sold from one set of investors to another: the modern legal distinction between commercial and political (e.g. municipal) corporations was not yet common.

One indicator of the importance of the corporate form are its influences on the titles and symbols adopted by the United States.

"Citizen" is shorthand for the denizen of a city: a member of a municipal corporation. Members of a king's realm in contrast are called "subjects." "Governors" were groups in charge of corporations (usually corresponding to what in modern U.S. commercial corporations are called "directors," but sometimes, as in many American colonies, singular), while "presidents" were chief corporate executives who presided over meetings of the governors. The head of the London College of Physicians for example was its President, and each of the three centers of the East India Company was headed by a President. "Secretaries" (as in Secretary of State, Treasury, Defense, etc.) were corporate managers.

The corporate influence went far beyond style to the very structure of our government. Medieval republics usually operated under corporate charters, and English boroughs invariably did so. These charters were at the same time grants by the king (or treaties with neighboring lord(s)) and agreements among at least a majority of at least one of the "classes" or "houses" of the city. Thus, majority voting (among members of some class, not necessarily all residents), "houses" (often two) which must both agree by majority, and related aspects of our republican government, while often cloaked in classical republican terms, more directly derived from medieval municipal corporations. The idea that a majority can "consent" for other members their class also comes from medieval corporate law (it certainly does not come from contract or tort law). "Constitution" was often used as a synonym for "charter." The United States Constitution can be profitably viewed as a corporate charter, ratified by a majority of delegates to conventions in each State but shorn of royal imprimatur. "The Queen...grants..." became "We the people of the United States...do ordain and establish." "We the People" granted rights to ourselves, in some vague collective way. This makes no sense in legal terms outside the context of corporate charters.


Flag of the East India Company, 1707-1802

Of course, many titles and symbols did not necessarily have a corporate origin. "Senators" were an oligarchic body from ancient Rome that also existed in some medieval republics. "Congress" is simply derived from the word meaning a gathering, and "legislature" is derived from the Latin "leges" or statutory law. Nevertheless, the United States almost completely eschewed titles from the royal bureaucracy apart from the judicial branch, with its "judges," "justices," and many other titles and symbols, as well as procedural and substantive common law largely derived from the royal common law of England. Other important substantive areas of our constitutional law (e.g. the Bill of Rights) have diverse sources that include Parliamentary statutes and English common law.

Even some of our judicial law is however derived from non-royal sources: equity comes from the law exercised by ecclesiastical corporations (canon law), and much of our commercial law derives from the law merchant which developed in franchise merchant courts separately from the royal common law.

U.S. judges, justices, and historians thus make a grave mistake when they, to take a currently quite important example, identify the vague "executive power" of Article II with the old prerogatives of the King. The abuse of these prerogatives were one of the major reasons we fought a revolution and gained our independence from the United Kingdom. Given the corporate language and substance of the United States Constitution, it is more accurate to identify the powers of the President, where the Constitution itself is vague on the subject, with those (a) of the President and the Commander-in-Chief under the Articles of Confederation, and (b) if that is still vague, to those powers granted and reserved by charter to the heads of colonial corporations, in particular the corporate charters of the nine American colonies, (c) if the issue is still uncertain, to corporate law from the Norman Conquest to the Stuarts, and only if all those fail to give an answer to (d) the King whom we rebelled against, and only then if said powers were not one of the stated causes of the rebellion.

Metabolite prediction

Based on yesterday's oral arguments in LabCorp v. Metabolite, Harold Wegner predicts the likelihood that Justice Stevens will write the majority opinion and that this opinion will reverse and remand the case to the Federal Circuit. That court had held that the patent claim combining a scientific discovery with a prior art blood test was patentable.

My observation is that if Stevens,who wrote the old anti-software-patent opinion in Parker v. Flook, keeps to his old (and the Supreme Court's old) philosophy regarding subject matter patentability, and extends his comments beyond "laws of nature" to other expressly forbidden categories (one of which is "algorithms"), there will be fireworks for business method patents and even software patents. Even if the Court applies a Flook-type methodology without expressly excluding algorithms from the scope of its argument, this could set a very big precedent that could be used to attack software and business method patents.

I have previously written about the connection between Metabolite's controversy over patenting "laws of nature" and the origin of software and business method patents. In the paper "Elemental Subject Matter" I further describe how software came to be patentable despite the express prohibition against patenting "algorithms," and highlight the differences between the Federal Circuit's software-patent-friendly philosophy and Justice Steven's software-patent-hostile philosophy -- a difference of philosophy that easily extends to the "law of nature" at issue in Metabolite, raising the possibility that Metabolite will set a precedent redounding back onto software and business method patents.

If Flook is applied in this way to reverse Metabolite, thus creating uncertainty about the validity of software and business method patents, expect a hue and cry among corporate lobbyists here on K Street, resulting in legislation to expressly designate software, business methods, or both as patentable categories of subject matter.

There are, however, several other possible rationales for invalidating the patent in Metabolite, so Stevens may have a hard time gathering five votes to apply the Flook methodology here. Expect the Court's decision in June.