(I just can’t write a simple blog entry, can I?)

I find our nation’s relationship with intellectual property
troubling. So, when I hear or read news coverage about the issue, my
ire is frequently raised. This happened this evening when I heard this quote (which you too can hear) from Vergil Daugherty on *Marketplace*:

>If you’re a capitalist, if you believe in free markets, then the [US
>Patent] system is working fine, and I don’t see anything broken with
>it at all.

Mr. Daugherty is the CEO of Economic Inventions LLC, and he holds
[this
patent](http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/search-bool.html&r=1&f=G&l=50&co1=AND&d=ptxt&s1=5884286.WKU.&OS=PN/5884286&RS=PN/5884286)
on a trading idea that some people are calling XPOs — expirationless
options.

(I had a hard time finding that patent (I hope the [US Patent
and Trademark Office’s website](http://www.uspto.gov) doesn’t get
nominated for any usability awards), mostly because I didn’t know how
to spell the guy’s name. I still can’t find anything about the other
inventor they interviewed, whose name sounded to me like “Judd
Bowman”, but must be something else, because they said he held a
patent and the uspto.gov site showed no patents by that name.
Definitely a weakness of radio.)

I’m sure not an expert on these things, and reading the actual patent
application wasn’t very enlightening to me. But I did find three
other references to his patent on the web. First I found [this
one](http://www.hbs.edu/research/facpubs/workingpapers/papers2/0001/01-005.pdf),
which is an academic paper that suggests that Mr. Daugherty’s
invention offered practically nothing new beyond ideas that had been
presented in the academic literature of economics decades ago. That
idea was echoed in the [second article that I
found](http://www.siliconinvestor.com/readmsg.aspx?msgid=21479513),
although it certainly saw it a bit more favorably. The [third
article](http://www.inc.com/magazine/20031201/rcringely.html) was by
far the most informative, and also the most favorable to
Mr. Daugherty’s patent.

I am skeptical (at best) of software patents, business practice
patents, and other “soft” patents that aren’t actual hardware
inventions. Actually, I’m skeptical of almost all patents, especially
those issued in the Internet era. This one is certainly no exception.
There seems to be reasonable doubt as to whether Mr. Daugherty’s idea
should have qualified for a patent under current US law. But, I
personally am in no position to assert anything about that.

What interests me more is the underlying philosophical issue relating
to intellectual property and economics. What upset me about
Mr. Daugherty’s comment was equating belief in free markets and
patents. Patents are clearly government interference in the
marketplace. At risk of exposing my lack of understanding of
Mr. Daugherty’s invention, I’ll use it to illustrate why:

Suppose I need some cash, but for some
reason I don’t want to sell some stock I own in Acme, Inc. right now (maybe I
want to attend Acme’s annual shareholder meeting…). So, I
offer to sell an option to buy it at a given price, at ANY time in the
future (no expiration date). If anyone buys that from me, I believe I
would owe a royalty to Mr. Daugherty. If I don’t pay it, he could sue
me. If I don’t comply with the suit, I’ll eventually get the police
after me (for contempt of court, or something).

This type of contract sure doesn’t seem very complicated. It’s
probably been done before. It’s certainly been written about before.
And yet, now, because of our intellectual property laws, the coercive
power of the government is behind the idea that I should have to pay a
patent holder just for carrying out this transaction. That is not a
free market.

Mr. Daugherty could have taken a more free market approach. He could
have just started a business specializing in such transactions,
written computer software that would have enabled such transactions,
and otherwise consulted with people on the value of this kind of
transaction. If the idea has merit, he should have had little trouble
making money this way. He would have saved the undoubtedly huge
amounts of money and energy he spent securing the patent. And the
idea would have been available in the marketplace much sooner.
However, his potential earnings are *much* greater with the patent,
which of course is why he took the trouble of getting it. By bringing
the government into the equation, his potential for getting rich
skyrockets.

So, my point (like my orginal vision of this post) is actually simple:
patents are government interventions in markets. A case can be made
that they are worthwhile interventions, and there might even be some
extent to which I would agree with that. But in his statement,
Mr. Daugherty, in my opinion, is confusing “free market” with “good
for entrepeneurs”. They are not the same thing.

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