The Decline and Fall of the American Entrepreneur

By Dale B. Halling
September 14, 2009

I want to thank Mr. Quinn for graciously inviting me to write a post on my forthcoming book The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, which should be available on Amazon.com in December 2009.

This book started as a project based on my observations. I deal with technology start-up entrepreneurs everyday as a patent attorney. I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the previous decade. Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary. The underlying technologies of these companies often held the potential to completely redefine a market. This energy was infectious and the potential implications of their work was mesmerizing. However, the technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans. I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world.

I am still waiting. Most of the start-up companies I have come into contact with are looking for narrow niche markets. Instead of trying to change a whole area of a technology and go public, these companies are looking to develop incremental changes and be bought out by an existing company as soon as possible. I started wondering if other people in the technology world were seeing similar trends. My informal surveys centered around the question of whether this decade (2000-2009) was as innovative as the 90s. While I would say that most people I surveyed felt this decade was not as innovative as the 90s, there were people who disagreed.

Some dissenters pointed to were the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry. While certainly innovative, these innovations did not drive the whole economy like the Internet of the 90s. The Internet affected almost every business in the U.S. The personal computer revolution of the 80s had a similar, although somewhat less pronounced effect. The iPod is clever, but hardly effects the whole economy. In fact, it doesn’t even drive the electronics or software industries. The same can be said of Intel’s gigantic investment in a new microprocessor or social media web sites.

I began to wonder about the reasons for the differences in the 90s and this decade. What were the causes and implications for these differences? My investigation centers around differences in the level of innovation, so I began to explore some the structural drivers effecting innovation. As well I began to explore in depth what the implications of innovation were for the U.S. economy.

The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. These three pillars have been under attack since 2000. Our patent laws have weakened, reducing the value of intellectual capital. Sarbanes Oxley has made it virtually impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital.

How important is innovation to the economy? Modern economists have studied this issue and found that increases in capital goods are not nearly as likely to result in economic growth as innovation. (See Clark, Gregory, A Farwell to Alms: A Brief Economic History of the World, Princeton University Press, 2007, p. 197.) Robert Solow won the Nobel Prize in Economics because of his work on the causes of economic growth. His model suggests that fourth-fifths of the economic growth of the U.S. is the result of technological progress. Real per capita increases in income can only result from innovation.

While a number experts are pointing out that the U.S. in not innovating and this is hurting the economy, the usual solutions offered are large government projects such as returning to the moon. Patents are the free market process for encouraging innovation. The evidence is clear that a strong patent system does more to encourage innovation than any NASA-like program at less than 1% of the cost. A strong patent system mobilizes the private sector to focus on innovation in ways that dwarf projects undertaken by the government both in the quantity of innovation and resources devoted to innovation.

People who follow IPWatchdog are certainly aware of the changes in patent law that have affect technology entrepreneurs, however the scope of the changes may not be clear – it has been a death by a thousand cuts. Here, a short list of some of these changes;

1) Patent Publication: While it is possible to opt out of publication in the U.S., the publication rule betrays the fundamental social contract underlying patents. With the publication rule, the public receives the benefit of the patent system – disclosure, even if the inventor receives nothing in return. The U.S. has traded away its traditional system of keeping patent applications secret until they issue in return for vague promises from other countries to speed up their patent process. A poor trade, even if other countries had lived up to their side of the bargain.

2) PTO Rejection=Quality: This policy has bankrupted the Patent Office, significantly increased pendency times and the backlog of patent applications, and most importantly destroyed dreams of thousands of entrepreneurs. Recently we have heard positive signs that this policy has been rejected, but even if completely reversed today, it will take several years to undo the damage.

3) The eBay Decision: A patent is a legal right to exclude, 35 USC 154, others from making, using, selling (offering for sale), or importing the invention. The Supreme Court’s eBay decision denies a patent holder’s right to exclude others and substitutes monetary damages even if the patent holder prefers to enforce their right to exclude. The Supreme Court’s eBay decision overturned 20-25 years of jurisprudence, which recognized an injunction was the only relief the court could provide against an infringer that was consistent with a patent holder’s “right to exclude.”

4) The KSR Decision: The Supreme Court overturned 20 years of jurisprudence associated with an objective test of obviousness and substituted a subjective test. This subjective test increases the uncertainty that an inventor will receive a patent and increases the risk that their patent will be held invalid if they have to enforce their patent against an infringer. Now there are increased costs associated with obtaining a patent and in enforcing a patent.

The Supreme Court in the last 100 years has a sad history of supporting technology thieves and throwing U.S. inventors to the wolves. From the “flash of genius test” to a Supreme Court justice statement that the only valid patent is “one that this court has not seen”, to its complete lack of understanding that a patent is a “right to exclude.”

A thriving technology community is key to economic growth, real per capita income growth, and a better future for our children. The laws and regulations killing innovation in the U.S. fall below the radar screen for most Americans. The technology community must advocate for policies that are necessary to a thriving entrepreneurial economy, because no one else will.

The Author

Dale B. Halling

Dale B. Halling

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 14 Comments comments.

  1. Adam September 14, 2009 5:22 pm

    I’m skeptical of Mr. Halling’s description of the 90’s as a time of “disruptive and revolutionary” innovations. Perhaps his book makes the case more convincingly, but I find this brief article lacking.

    Surely the Internet itself, that jewel of 1970’s computer innovation, really started changing the world in the 90’s. The rules of communication were changed and a lot of money was made. However, there’s a reason we call it the tech bubble of the 90’s. A lot of the energy, money, and press surrounding those heady times were based on empty optimism. Especially at the end of the decade, it was the bubble itself that drove the economic boom, not game-changing innovation. Otherwise, it wouldn’t have burst so hard when it did. Instead, we would have fallen back on the solid foundation of the newly-created markets of the revolutionary innovation of the 90’s.

    How were the markets actually disrupted and redefined in the 90’s? Lots of things moved online, but apart from that basic shift, where are the remnants of the great innovators of the 90’s?

  2. Dale B. Halling September 14, 2009 6:26 pm

    Adam, you are looking at one of those innovation right here. Clearly, the book discusses the premise that innovation was greater in the 90s than the present decade in more detail. However, imagine performing legal or technical research before the 90s, image trying to communicate with people around the world before the 90s, image trying to bid on an airline ticket, hotel, etc. No industry was unaffected by the Internet revolution. This decade was dominated by house building are remodeling. None of which will have any impact on the economy moving forward.

    The recession associated with the tech bubble was one of the mildest in the post war period, while the present recession is one of the most severe. This is because real long term economic growth is based on innovation, such as that found in the 90s, while the present decade was built on cheap money that did not spur hardly any innovation.

  3. Gene Quinn September 14, 2009 6:34 pm

    Adam-

    Lets try and keep it real, OK? What do you want in an article about a full length book? Do you expect a brief description of the hypothesis to prove everything? That is unrealistic, and if you are honest with yourself you know that to be the case.

    In terms of the 1990s, all you have to do is look at the Internet and the growth of computer technologies, networking and the dawn of a new age in communication. The tech bubble is not at all related to a bursting of the innovation bubble, but rather a bursting of unrealistic, unsupported and ridiculous valuations based only on wild-eyed and unfounded optimism. That doesn’t change the reality though that the 1990s were far more innovative. You simply cannot conclude that a stock market bubble says anything about the underlying innovation. That is like comparing apples and elephants.

    -Gene

  4. Adam September 15, 2009 1:15 am

    Gene, I understand that this was merely an essay, not a full treatise. But since I don’t have a copy of the book, I’m addressing the essay, the only thing you’ve posted to your website. Is that not “keeping it real,” whatever that means?

    We can all agree there was a lot of growth of the Internet in the 90’s, but neither the Internet nor the web are technologies invented in the 90’s. The Internet boom was a widespread adoption of technologies that had been around for 10-20 years already. I just want to know where the innovation was, not where the consumer adoption was. As important as consumer adoption is, the topic of the above essay is the level of innovation. Research databases, email, and online shopping all existed before the 1990’s. Just because your mom hadn’t used them until 1998, doesn’t mean they were invented then.

    Gene, fully I agree with you that it was the unrealistic market bubble that drove much of the economic boom of the 90’s. It was Dale who suggested it was underpinned by innovation, and that the subsequent economic situation was a result of changes in the level of innovation.

  5. OldTimer September 15, 2009 6:04 pm

    It’s important to point out that the decline in businesses centered around disruptive technology breakthroughs preceded the various court decisions which have weakened our patent system. This suggests that other factors were responsible for the demise, namely Sarbanes Oxley. Ask anybody on the finance side of the technology economy and they’ll tell you that Sarbanes Oxley killed the IPO, or more accurately moved it to London. Without access to public capital markets, start-up companies can only go so far–Google can’t buy everything.

    Nevertheless, the author is correct about the long-term effect of weakened patent laws. Between KSR, EBay, Seagate, and Bilsky, I see little reason for hope in the future of patent law. If you are being candid with an inventor these days you have to tell him/her that at best the patent process is a crapshoot.

  6. Gene Quinn September 16, 2009 11:21 am

    Adam-

    The Internet as we know it did not exist before the 1990s. Yes, the beginnings of a global telecommunications network existing dating back at least into the 1960s, but the World Wide Web, which was what brought it all together and enabled the beginnings of what we all enjoy now, came about in the mid 1990s. So you are missing the bigger picture. It is EXACTLY because my mom COULDN’T use the Internet prior to the mid 1990s that the technological revolution spawned by the WWW was so meaningful and widespread. With the dawn of the Internet Age, which is really the dawn of the WWW, all kinds of communications and technology innovations became possible.

    You can choose to think that the Internet boom was widespread adoption of technology that existed for 10 to 20 years, but the facts and history are squarely against you. You seem to be making the reverse mistake of most. So many point to the WWW as the invention of the Internet, and while a popularly held belief it is incorrect. Similarly, it is incorrect to say that those who made advances in the 50s, 60s, 70s and 80s invented the WWW, they did not. There is no singular inventor of what we know today as the Internet, there were critical inventions along the way, and the match and gasoline was making the WWW accessible to the masses and exploitable by the masses in the mid 1990s.

    In terms of “keeping it real,” you said “I find this brief article lacking.” Of course the article is lacking in the details that you seem to have wanted. It would have needed to be approximately the length of the book, so you are critical of a snapshot expecting it to be a feature film. I get that a lot, not from you, but from others and it irritates me. I write practically every day and people will comment, “well this article is obviously flawed because it didn’t address .” These comments drive me nuts, because almost universally I have written about that and provide a link to where I explore it more in the article. You cannot expect an essay to be a thesis. The book is not in print yet, and Dale gave way more specifics than I thought he would. If his book delivers the proof it is going to be an awesome read, and potentially a book that could lead to policy and law changes. I am definitely looking forward to reading it, as I hope you are.

    -Gene

  7. Adam September 16, 2009 4:44 pm

    Gene,

    We can agree that the WWW was incredibly important. However, its construction was a combination of a few existing technologies into a well-marketed consumer product. It was more like the creation of the Interstate Highway System than the invention of asphalt roads. ARPANET, TCP/IP, BBSes, dial-up networking, SGML, and hypertext browsers all existed for years by the time 1990 rolled around. Obviously, the combination of existing ideas into something new is innovation, just as the Interstate System was innovation. But it seems to me that the primary drivers for the spread of the WWW were not advances in technology, but rather changes in business, infrastructure, and politics.

    Whether or not my version of the history of the Internet and the web is correct, I don’t think the invention of the web and a bunch of people selling stuff online is sufficient to call the 1990’s a decade of great innovation. My intention with this observation is not to call Dale’s essay worthless, but to point out a weakness in its argument, offer an alternate viewpoint, and bring up some work the book will have to do to be convincing. I believe this is an appropriate response to a promotional teaser for an upcoming book, but feel free to correct me if I’m wrong.

  8. Dale B. Halling September 17, 2009 3:14 pm

    Adam, you seemed to be confused about what constitutes innovation. Every innovation is a combination of known or existing items, since you cannot create something from nothing because of “conservation of matter” (matter and energy). For more information see http://hallingblog.com/2009/08/12/understanding-the-non-obviousness-35-usc-103-patent-requirement/

  9. Adam September 18, 2009 4:32 pm

    Dale, I’m not sure what you’re correcting. I wrote, “the combination of existing ideas into something new is innovation.” That doesn’t mean the invention of radio transmission is equally innovative as the first time someone combined blue ink with a cotton shirt.

  10. Gene Quinn September 19, 2009 10:31 am

    Adam-

    Are you saying that dying a shirt is more innovative than radio transmission of signals?

    -Gene

  11. Gena777 September 19, 2009 7:44 pm

    If you haven’t seen it already, you may be interested this item from Donald Zuhn on http://www.patentdocs.org:
    “Last month, the Milwaukee Journal Sentinel published two articles documenting the current state of the U.S. patent system … The authors of those pieces … have now compiled an interactive graphic that shows how the U.S. patent system has shaped American history and innovation.  The graphic contains a number of elements, including a timeline of key patents and significant events in American history, a comparison of domestic and foreign patents issued between 1790 and 2009, and charts showing the top countries and states in which U.S. patents originated, the number of pending applications between 1981 and 2009 and average application pendency between 1983 and 2008, fee diversion between 1992 and 2004, and rapid growth of the Chinese patent system between 1999 and 2008.”
    Still, I wonder whether this is a bit of a chicken-and-egg question, since economic growth is also key to a thriving technology community — not just the other way around. Don’t you think that perhaps the lack of innovation we are seeing resulted partly from the high-tech economic bubble bursting, in addition to other economic factors? I also believe there are multiple other causes contributing to the current downturn in innovation — including the political atmosphere and the general cyclical nature of huge leaps forward in innovation. In this sense, new patent law changes may not be the only culprits in the “death by a thousand cuts.” It might be interesting to look at other countries that have not made similar changes in their patent laws and analyze where they stand in innovation, as compared to America.
    GeneralPatent.com

  12. Adam September 21, 2009 10:51 am

    Gene,

    The opposite, actually. I think the invention of the blue shirt involved significantly less innovation than the invention of radio transmission of signals.

  13. Gene Quinn September 21, 2009 11:37 am

    Adam-

    Then I guess I don’t understand what you were trying to say. It read to me like you were saying that the blue shirt was far more innovative.

    -Gene

  14. Adam September 21, 2009 5:24 pm

    Gene,

    Sorry if my example was confusing. I was simply saying that some inventions are more innovative than others, despite the fact that every invention builds on what came before, and trying to use an obvious example to prove my point. This is obvious and I only made the point because I couldn’t figure out what Dale was trying to say to me.