Shocked, Shocked To Learn The Patent Office Is Structurally Designed To Approve Shit Patents

from the and-to-create-problems-for-innovators dept

The book Innovation and Its Discontents, by Adam Jaffe and Josh Lerner, was first published in 2004. We've cited the book frequently around here, as it did a bang up job describing structural problems with our patent system (and the judicial review of patents). There were a few big points that it made about why our patent system was so fucked up, and a big one was the incentive structure that heavily incentivized approving patents rather than rejecting them.

Specifically, there were two big ideas mentioned in the book about the US Patent & Trademark Office: (1) that because Congress forced the USPTO to fund itself from fees, it had the direct financial incentive to encourage more patent applications, and a good way to do that is to approve a lot more patents and (2) individual examiners were rated and reviewed based on productivity scores on how many patent applications they completed -- and it is much faster and less time consuming to approve a patent, rather than reject one. That's because once you approve a patent it's completed and gone from your desk (and into the productivity metrics as "completed"). But, if you "reject" a patent, it's not done. Even though the USPTO issues what it calls "Final Rejections" there's nothing final about it. The patent applicant can keep going back to the well over and over again, making minor tweaks on the application, requiring the examiner to go through it again. And each time they do, that hurts their productivity ratings. As an additional "bonus" -- the USPTO actually makes significantly more money when it grants a patent, because in addition to application fees, there are also issuance fees and renewal fees.

In the years after that book came out, the USPTO actually seemed to pay attention. It changed how it measured examiners' work and, magically, fewer patents were approved. For a bit. When President Obama appointed David Kappos to head the Patent Office, he decided that the number one problem that the Patent Office had was its huge backlog of patent applications. And, there's no denying that was a problem -- but it was a problem the USPTO created itself by spending the previous dozen years or so agreeing to issue patents on all sorts of crazy things, leading to more applications and more filers hoping to get their own golden patent trolling lottery ticket. So, it was little surprise when soon after Kappos took over, the USPTO started approving patents much more quickly, and a study from 2013 found that (surprise, surprise) it did so by drastically lowering the standards for approving patents.

Now there's a new study with even more empirical evidence showing how the Patent Office's entire structure is designed to incentivize the approval of crap patents (first highlighted by Tim Lee over at Ars Technica). The paper is by professors Michael Frakes and Melissa Wasserman, and they used FOIA (yay!) to get data on millions of patent applications between 1983 and 2010. The key point with that date range is that Congress only switch the USPTO over to funding itself off of fees in 1991 -- so the researchers could look at before and after data. It also allowed them to look at different cross sections within the data.

So, for example, the researchers looked at whether or not there was evidence that the USPTO approved more patent applications when there was a big backlog. The answer: hell yes!

Specifically, we compared the Agency’s patent grant rate across different groups of applicants based on the tendency of their associated technologies to file repeat applications; importantly, we performed this across technology comparison for two groups—defined by their average tendency to file repeat applications—before and after periods of budgetary shortfall and increases in application backlog. Our findings suggested that when the Patent Office begins to face mounting backlogs, it appears to act on its incentive to grant patents at higher rates for technologies that are associated with higher rates of repeat application.11 In figure 1, we replicate a figure from Frakes and Wasserman (2015), demonstrating that the Patent Office indeed began to grant at differentially higher rates for high repeat-filing technologies during the mid-1990s, a moment in time when the Patent Office’s application backlog began to increase considerably year-by-year. Again, this analysis is alarming because it suggests that factors other than the underlying quality of applications are affecting the Patent Office’s decision to allow patents.

Then there's a separate question of whether or not the USPTO has a higher approval rate for "profit-maximizing" patents. That is: not all patent fees are the same. Smaller entities get to pay reduced fees. Big companies pay full freight. If the USPTO is being incentivized by fees... then it's likely to approve big company patents faster. And... that's what happened. The study also looked at whether or not the USPTO more readily approved patents in categories where there were higher renewal rates -- meaning a much higher likelihood of generating future fees from renewals. Take a wild guess what they found in both of those studies?

As theory predicts, the Patent Office does indeed grant patents at notably higher rates to large entities and applicants from high renewal rate technologies when it finds itself in a position of insufficient fee revenue.9 More broadly, the parameters of its fee schedule appear to affect the way in which the Patent Office applies the legal patentability requirements. This is concerning, given that the granting decision should be based solely on whether the application meets the legal patentability standards. If the fee structure were to encourage more patent grants overall (or more grants during times of budgetary shortfalls), the result could be the issuance of patents lacking legal validity, potentially leading to substantial social harms.

Of course, patent system (and patent troll) supporters will cry foul at this for all the usual reasons -- insisting that this is all a conspiracy to take away their patents. But that's ridiculous. Everyone should agree that we're all better off if the Patent Office is not approving low quality patents. I guess everyone... except those with low quality patents. Basically if people are complaining about the results of this study, there's a half decent chance that it's because they hold crap patents.

The report suggests some ways to try to fix these incentives -- or at least to minimize the social cost of them. One is to stop making the PTO so reliant on fees. You can understand why it was appealing for Congress to make the PTO funded by fees in the first place: not having to allocate taxpayer money to an agency seems like a good thing. But it's important to pay attention to what kinds of incentives that can create -- and how it could create serious problems, as it has here. The report suggests raising patent filing fees -- such that they cover the costs of the actual examination, thus making it less likely for there to be budgetary shortfalls that create these warped incentives.

Because the actual fees paid to the Patent Office for the examination of a patent application are a fraction of the overall cost of securing a patent (which includes attorney fees), there is reason to believe that even a two-fold or three-fold increase in examination fees will not substantially impede access to the U.S. patent system. As a bonus, increasing examination fees will likely also result in raising the quality of patent applications filed with the Patent Office, as applicants become more judicious in selecting those inventions for which they choose to pursue patent rights.

While that increase in filing fee may feel unfair to some, they also propose doing away with the issuance fee -- so there won't be additional expense for actually getting the patent upfront (there are still renewal fees, but that's much further down the road). As for renewal fees:

Instead of eliminating renewal fees, we recommend that Congress decouple the renewal fee income from the revenue stream that the Patent Office can immediately access for funding. While this decoupling goal could be achieved in various ways, we propose the most straightforward approach: Congress would abolish the requirement that the Agency’s aggregate fee income not exceed its operational costs. Renewal fees would then be allocated to a separate fund, similar to the Patent and Trademark Fee Reserve Fund, and earmarked for Patent Office use only. This fund would then be used to provide rebates to small and micro-entities. As a replacement for the guaranteed fee discount for any given small- or micro-entity application, the Agency’s excess renewal fee income would be used to subsidize the small- and micro-entity examination fee.

Perhaps an even more important modification -- and one that's been obvious for many, many years -- is to actually have final rejections of bad patent applications, so people and companies can't just keep refiling over and over again without end. As the paper notes, it's not at all clear what societal benefits allowing repeat filings creates. It overburdens the system, creates incentives for bad patents to get approved, and provides no benefit to anyone other than the entity applying for bad patents. The specific proposal in the paper is that filers can get just one chance to refile the application.

It's good to see more research being done on all of this -- and to see more empirical evidence. What's troubling is that almost all of this was clearly shown more than a dozen years ago, and Congress still hasn't done a damn thing to fix any of it.

Filed Under: bad patents, incentives, patents, uspto

There Is An Easy Answer To Whether Machines Should Get Copyright Rights And It Comes Down To Copyright's Purpose

from the promote-the-progress dept

As the march of progress of robotics and artificial intelligence continues on, it seems that questions of the effects of this progress will only increase in number and intensity. Some of these questions are very good. What effect will AI have on employment? What safeguards should be put in place to neuter AI and robotics and keep humankind the masters in this relationship? These are questions soon to break through the topsoil of science fiction and into the sunlight of reality and we should all be prepared with answers to them.

Other questions are less useful and, honestly, far easier to answer. One that continues to pop up every now and again is whether machines and AI that manage some simulacrum of creativity should be afforded copyright rights. It's a question we've answered before, but which keeps being asked aloud with far too much sincerity.

This isn't just an academic question. AI is already being used to generate works in music, journalism and gaming, and these works could in theory be deemed free of copyright because they are not created by a human author. This would mean they could be freely used and reused by anyone and that would be bad news for the companies selling them. Imagine you invest millions in a system that generates music for video games, only to find that music isn't protected by law and can be used without payment by anyone in the world.

Unlike with earlier computer-generated works of art, machine learning software generates truly creative works without human input or intervention. AI is not just a tool. While humans program the algorithms, the decision making – the creative spark – comes almost entirely from the machine.

Let's get the easy part out of the way: the culminating sentence in the quote above is not true. The creative spark is not the artistic output. Rather, the creative spark has always been known as the need to create in the first place. This isn't a trivial quibble, either, as it factors into the simple but important reasoning for why AI and machines should certainly not receive copyright rights on their output.

That reasoning is the purpose of copyright law itself. Far too many see copyright as a reward system for those that create art rather than what it actually was meant to be: a boon to an artist to compensate for that artist to create more art for the benefit of the public as a whole. Artificial intelligence, however far progressed, desires only what it is programmed to desire. In whatever hierarchy of needs an AI might have, profit via copyright would factor either laughably low or not at all into its future actions. Future actions of the artist, conversely, are the only item on the agenda for copyright's purpose. If receiving a copyright wouldn't spur AI to create more art beneficial to the public, then copyright ought not to be granted.

To be fair to the Phys.org link above, it ultimately reaches the same conclusion.

The most sensible move seems to follow those countries that grant copyright to the person who made the AI's operation possible, with the UK's model looking like the most efficient. This will ensure companies keep investing in the technology, safe in the knowledge they will reap the benefits. What happens when we start seriously debating whether computers should be given the status and rights of people is a whole other story.

Except for two things. First, seriously debating the rights of computers compared with people is exactly what the post is doing by giving oxygen to the question of whether computers ought to get one of those rights in copyright benefits. Second, the EU's method isn't without flaw, either. Again, we're talking about the purpose being the ultimate benefit to the public in the form of more artistic output, but the EU's way of doing things divorces artistic creation from copyright. Instead, it awards copyright to the creator of the creator, which might spur more output of more AI creators, but how diverse of an artistic output is the public going to receive from an army of AI? We might be able to have a legitimate argument here, but there is a far simpler solution.

Machines don't get copyright, nor do their creators. Art made by enslaved AI is art to be enjoyed by all.

Filed Under: ai, copyright, incentives, machine learning

Copyright Has A Real & Serious Free Speech Problem

from the something-needs-to-be-done dept

This week has been Copyright Week, put together each year by the EFF and others, giving lots of people and organizations a chance to weigh in on a variety of copyright issues. Each day has its own theme, and in the past, I've tried to participate each day -- as (not surprisingly) I have thoughts about each of the topics. This year, unfortunately, I've been a bit busier than usual, meaning I haven't had as much time to write. But, still, if you check out the Copyright Week site, you can see lots of great articles by others on various topics. This being the last day of Copyright Week, it hits on a topic that I think is the most important of all: copyright and free speech. Last fall, I gave a talk at Wikimedia in which I noted that copyright has a serious free speech problem, and we're never going to fix what ails copyright until we address that simple fact.

What's most striking to me is how many people try to completely deny that copyright could ever be used to stifle free expression. It seems intellectually dishonest to make such a claim. There are tons and tons of examples of copyright being used to stifle different forms of expression -- from blocking derivative works to sending bogus takedowns and more. Copyright can be and is frequently used to stifle expression. That should be a concern.

On the flip side, many (including, at times, the Supreme Court) have argued that copyright itself is also an engine of free expression. This may also be true. Copyright can both be an engine of expression and stifle expression at the same time. The challenge, then, is to figure out how we can increase the engines of expression while minimizing the ability to stifle expression. And to do that, we need to break down a few different components to explore the competing factors. The first is to look at the question of whether or not copyright is necessary to accomplish the goals of promoting this kind of new speech. In many cases, it very well may be. But I find it difficult to believe that it is the only, or even the most important, tool for doing so. Yet, that is how it is mostly structured today. With copyright automatically applying to any new work created by a person, it doesn't make much sense. Copyright should only make sense when it is the copyright itself that is the incentive for creation. If the work would be created no matter what, even absent the copyright, why is the copyright needed? Why, for example, do I need to get a copyright in every email I write? I can tell you that I have never been incentivized by the copyright system to write an email (other than, perhaps, to email with others about problems of the copyright system).

On top of that, what we've seen over the last few years, is that copyright is often not the best incentive for creating new creative content. In an age where we're seeing lots of new business models develop, very few of them are actually dependent on copyright. It raises a serious question of why, by law, we naturally assume that copyright must be the grounding of every content business model, when time has shown it is quite frequently not the best nor the most efficient business model -- and one that is often saddled with downsides and limitations.

Given that, it seems quite reasonable to ask why we don't scale back the copyright system to cases where it clearly (or at least likely) is a key part of the incentive for that creation. Doing that wouldn't (by definition!) harm any new creations, but it would take away the ability to abuse the excessive copyrights to stifle freedom of expression in other areas.

Similarly, we should look at the situations in which copyright is regularly abused to stifle free expression, and see how to minimize that. A major area for abuse (though hardly the only one) is in bogus DMCA takedowns. That is not to suggest all (or even most) DMCA takedowns are bogus. Many are perfectly legit and do exactly what they're supposed to do. But an unfortunately large number of DMCA notices are used to try to take down content that someone just doesn't like, but which is not in any way infringing. Here, there are a number of possible answers. I probably lean towards moving to a notice-and-notice system, rather than a notice-and-takedown, because that keeps the content up while the receiving party has a chance to counterclaim. Thus, you avoid even the temporary suppression of free speech. Others prefer a solution that puts real meat on punishing those who file bogus DMCA takedowns, which isn't necessarily a bad idea, but could lead to other problems as well.

In short, we've designed our copyright system in a dangerous way: it's one that actively encourages the use of copyright to stifle free expression, rather than to encourage it. And that's not just unfortunate for free expression and the free exchange of ideas, it's unfortunate for copyright as well. It's that structure, so open to abuse, that leads people to not respect copyright at all, and to naturally assume it must be all bad, rather than just partially rotten. If the copyright system supporters were serious about bringing respect back to copyright, one area where they should start, and where we could all agree, would be to make these kinds of fixes to copyright law, that would align copyright's incentives properly with encouraging new works, and to move away from the elements of copyright that make it such an easy tool for censorship and stifling freedom of expression.

Filed Under: censorship, copyright, copyright week, free speech, incentives

Imbalanced 'Incentives' Hurt Creativity More Than They Help

from the copyright-and-creativitiy dept

Are lawyers the driving force behind artistic freedom? Astonishingly, that's the impression you get when you read the Copyright Alliance's account of a recent panel on music copyright hosted at George Mason University. To be clear, they note the importance of creators, in the sense that:

Intellectual property drives economic and artistic freedom, thereby supporting a professional class of musicians and innovations that continue to fuel the creation of music.

But this emphasis aims to privilege the copyright lawyers, as if copyright enforcement were the primary source of artistic creativity. Certainly, copyright plays an important role in securing incentives for creators. But it's absurd to suggest that regulatory monopolies are the only source of artistic creation and freedom or that stronger intellectual-property laws are always in the best interest of artists. Rather, the history of intellectual-property laws have often been a double-edged sword for creators.

There are numerous examples of overly broad intellectual-property laws being used to limit free expression. Just take a look at EFF's Takedown Hall of Shame. Or, in the music industry, the recent judgment against Pharrell and Robin Thicke (presumably, to provide further incentive for the creativity of the late, lamented Marvin Gaye). Or the video game maker who was sued for using the likeness of Gen. George S. Patton. The absurdities go on and on.

While intellectual property is an important legal protection that helps encourage creation, it has its limits. Where intellectual-property laws are too weak, there may be insufficient incentive to create. But where they are too strong, they impose costly restrictions on other creative freedoms and distort the market to transfer unearned wealth from consumers to rights holders. The latter, it should be noted, aren't always artists. This is especially true in the music industry, where entrenched middlemen armed with large legal teams extract most of the revenues.

Our nation's founders took steps to achieve the proper balance. Indeed, we must not forget that the constitutional basis of our intellectual property system is a utilitarian one. The Progress Clause grants Congress power to "promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." The clause doesn't create a "property right," as such, any more than Article I's grant of war-declaration powers to Congress creates a property right in declarations of war. The Progress Clause creates a legislative power, with instructions to use it as an incentive for creation. Where such exercises of power provide appropriate incentives -- or, worse, undermine other incentives -- they ought to be constrained.

Human nature being what it is, it's not surprising that the copyright industries have succeeded, over the years, in ratcheting up copyright protections with less attention to the underlying theory of the Progress Clause. Thus, copyright terms today are nearly 580 percent longer than at the time of the founders, and extend to works far beyond the maps, charts and books that originally were covered.

But why should we think copyright that lasts decades after an author's death serves to promote creation, particularly for all those retroactive term extensions?

Chart lifted from Tom W. Bell's blog. Check out his excellent book on copyright, published by the Mercatus Center.

Even Ayn Rand (who otherwise strongly supported intellectual property) expressed great concern about excessively long terms:

If [intellectual property] were held in perpetuity, it would lead to the opposite of the very principle on which it is based: it would lead, not to the earned reward of achievement, but to the unearned support of parasitism. It would become a cumulative lien on the production of unborn generations, which would ultimately paralyze them.

That doesn't stop advocates of "more is better" copyright maximalism from pushing the myth that stronger intellectual property promotes free markets. Remember, we are talking about regulatory monopolies. Just because something has property-like qualities doesn't mean it's equivalent to tangible property. As my former Cato colleague Brink Lindsey writes:

Many people might find it puzzling to see copyright and patent laws listed as examples of growth-inhibiting regulatory excess…[But] the case of taxi medallions should make clear that regulatory policies don't necessarily support free markets simply because they feature tradable property rights.

Artists ought to be able to make a living where there's a robust market for their work. But just because you produce something doesn't guarantee people want to buy it. You don't have a right to ask the government come guarantee you a living wage. Another fine excerpt from the Copyright Alliance blog:

Marc Beeson, staff songwriter at Downtown Music Publishing, gave the final presentation. For his presentation, Beeson gave a sobering look at the state of songwriting, both as an industry and an art, due to the loss in physical album sales. For instance, while physical sales used to account for 50 percent of his income as a songwriter, streaming, which has almost completely replaced physical sales, has failed to pay even a basic living wage.

It's true: people don't buy physical records anymore. The issue extends far beyond Downtown Music. The whole industry has seen sharp declines in mechanical royalties, as analog-era business models continue to decline. But the music industry as a whole has been adjusting and will continue to adjust its business model in response to those changes. According to a study by Midia Research, global music-publisher revenue has shown strong growth thanks to diversified revenue streams.

Even if the music industry were tanking because of falling record sales, or if people started listening to podcasts instead of music, or whatever other market shift you could imagine, it wouldn't be a problem our legal system needs to fix. If millennials stop buying cars, the proper role of the government isn't to come in and make Uber more expensive so General Motors can get a subsidy. We don't need to protect buggy-whip manufacturers any more than we need to protect people selling physical records (despite protestations from Bushwick hipsters).

As I've discussed, there's great merit to having a system that provides legal protection for their creative products. But this must be carefully balanced against the limitations that system inevitably imposes on other forms of creative expression, as well as other uses of tangible property.

The Copyright Alliance is a nonprofit organization which claims to represent "artists, creators and innovators" (despite being run by a mix of trade associations, mega-corporations and labor unions). Is that really what they're doing by pushing copyright maximalism? Or, as with taxi medallion owners, are they protecting the rents they receive off the ones doing the real work, while doing their best to put up barriers to keep everyone else out of the market?

Republished from R Street Institute

Filed Under: artists, copyright, incentives, lawyers

DailyDirt: Ingredients For Creative Environments

from the urls-we-dig-up dept

There are many, many studies on creativity and possible ways to improve the creative output of a group. Monetary incentives are often presented as a way to get people to produce more ideas, but some studies show that money isn't actually a great motivator. Obviously, there are a lot of factors that can influence how creative people are, but it would be nice to isolate a few and see if we can eliminate some practices that are downright detrimental to creativity. It would be great if we found out what really could inspire people, but maybe we shouldn't put too much pressure on the researchers... because that might dampen their productivity.

• Do "politically correct" rules in a workplace stifle creativity? An experiment asked people to brainstorm in groups, with some groups doing a politically correct exercise (and control groups that did not), and mixed gender groups with politically correct training seemed to be more creative. [url]
• If you think alcohol gives you a little creative boost, there's some research that says a blood alcohol level of 0.075% is the sweet spot. You could self-medicate with any alcoholic beverage, but there's a beer brand that has figured out some of the math already -- so you can just drink its "Problem Solver" beer and get to your creative peak with less hassle. [url]
• Will a culture that is more individualistic produce more creative people than a society that favors collectivism? Another brainstorming experiment showed that individualists might come up with more ideas, but collectivists came up with higher quality ideas. [url]

If you'd like to read more awesome and interesting stuff, check out this unrelated (but not entirely random!) Techdirt post via StumbleUpon.

Filed Under: alcohol, beer, brainstorm, creativity, culture, ideas, incentives, insights, inspiration, politically correct, problem solver, productivity, workplace

For 10 Years Everyone's Been Using 'The Streisand Effect' Without Paying; Now I'm Going To Start Issuing Takedowns

from the watch-it-get-even-bigger dept

I have to admit that I had no idea that it had been 10 years since I coined the term "The Streisand Effect" until the SkepticHistory Twitter feed called my attention to it earlier this week. I had thought about saving this for the weekend "this week in history" post, but it seems worth delving into today -- especially with folks like the thieves at Gawker Media putting up a whole story about it and stealing all the attention and whatnot.

So, yeah, ten years ago this week, I coined "the Streisand Effect," which was actually on a story about how the Marco Beach Ocean Resort was all offended by the fact that Urinal.net (a site that, yes, still exists and is still being updated) had posted a photo of a urinal from the resort, and the resort insisted that it was illegal to use its name. As we pointed out, this stupid takedown request would only draw more attention, and then we wrote:

How long is it going to take before lawyers realize that the simple act of trying to repress something they don't like online is likely to make it so that something that most people would never, ever see (like a photo of a urinal in some random beach resort) is now seen by many more people? Let's call it the Streisand Effect.

That last link then went back to a 2003 story about how Barbra Streisand had sued photographer Kenneth Adelman for photographing her house from a helicopter. Adelman had been photographing the entire California coastline, hoping to use it to document coastal erosion, and posted all the photographs online. Streisand got upset that her coastal home was shown, and sued. But, of course, before this, no one knew (or cared) that it was Streisand's home. The image had been viewed six times (including twice by Streisand's lawyers), but following the news of the lawsuit, hundreds of thousands of people went to see the photo. It was a story that stuck with me, and seemed to be repeated every few months in some form or another. So when I saw that Urinal.net threat, I just jokingly said we should call such things "The Streisand Effect."

I didn't think much about it until I saw it mentioned in a few other places a year or two later, including showing up in articles n Forbes and eventually leading to an interview on All Things Considered on NPR.

But, anyway, it's been ten years of this and you've all had your fun, getting to use my personal creation, my sweat and tears and labor, and all of it for free. So I'm going to start issuing cease & desist letters to anyone who uses The Streisand Effect and doesn't pay my royalties. We've set up a simple site where you can go and see the royalty rates, as well as make an easy payment. We even will offer amnesty for past usage if you pay a one time fee. We've also hired some of the best Spanish lawyers to explore ways to demand payments from additional sites as well.

Obviously, this is necessary or else how would I have had the incentive to create the term in the first place? All these people benefiting off of my hard work, my labor, the sweat of my brow are freeloading off of my property. And it has to stop now. "The Streisand Effect" is a valuable concept and I'm sick of all the freeloaders. It will stop and we should start to see it disappearing from unpaid use soon, thanks to my auto-C&D sender system.*

* Because this is the internet and because there are still some satire-impaired people out there, yes, this is a joke (and yes, that includes the bit up top about Gawker being thieves). I mean, other than the fact that issuing a bunch of cease & desist letters should, in theory, lead to a purposeful "Streisand Effect" purposely generating more attention for the term, which would be pretty neat. On a more serious level, it really was an off-hand joke made a decade ago, and I'm still amazed that it caught on and became such a big deal. I'm happy that it's a useful shorthand and hope that it actually served its key purpose in succinctly getting the point across about the stupidity of trying to take down content....

Filed Under: barbra streisand, copyright, incentives, intellectual property, kenneth adelman, royalties, streisand effect, takedowns, the streisand effect

Utah Wants To Kill Zenefits For Giving Away HR Software For Free

from the no-disruption-allowed dept

Another day, another example of regulators protecting legacy businesses and trying to shut down quite useful disruptive innovations. Zenefits is an incredibly fast growing company that has become the rather de facto standard for HR software for startups in Silicon Valley. Part of the key? It gives away the software for free -- software that, from competitors, costs quite a lot (to the point that many startups don't adopt HR software until much later in their lifecycle). A great NY Times profile from a few months ago detailed the rise of Zenefits and how its business model developed. In short, Zenefits had started building some online HR software, and was trying to figure out a business model, when it realized that it could give away the software for free and just get commissions by also acting as an insurance broker. The full story is much longer (and fascinating), but here's a snippet from that profile:

When businesses buy health coverage for their workers, they often go through brokers, who play the role that travel agents once did for the airlines. They are middlemen who figure out the best fit between buyers and sellers of health care, then take a percentage of the sale. And the commissions can be quite hefty. After connecting a small business with a health care provider, a broker collects a monthly fee of about 4 to 8 percent of a company’s health premiums.

The commission rates are set by care providers and aren’t usually disclosed to the small-business purchasers. But the fees amount to several hundred dollars or more per employee annually, and they generally continue for as long as a business keeps its health coverage. The broker collects the monthly fee from the care provider even if the business never talks to its broker again.

“I was thinking, wait a minute, that is a ton of money, and these guys don’t do very much for it,” Mr. Conrad said. This presented an obvious business model for Zenefits. It would become a broker itself. Thanks to the Affordable Care Act, health insurance providers now publish set rates. This meant that Zenefits could offer brokerage online, letting small businesses buy health insurance pretty much the same way people shop for airline tickets.

From there, the "software" just became a hook and a selling point. Yes, it's still the core of the actual "business," but it's just an insanely effective promotion for the insurance brokerage part, which the company has also made super simple. Businesses pay the same exact price they would normally pay for their health insurance -- but they get this great HR software as part of the deal (and Zenefits collects the commissions that traditional insurance brokers would have collected for doing much, much less). Of course, as the article also notes, it's not easy to become a brokerage, but Zenefits put in all of the effort to become a registered insurance broker in various states to make this work -- and it's made the company grow like gangbusters.

And... of course, traditional insurance brokers absolutely hate it. The NY Times article noted that brokers have complained to regulators in four states, including Utah. And that brings us to the latest story. While the investigations in Texas and Washington went nowhere, in Utah, the Utah Insurance Department -- which is run by a former insurance broker named Todd Kiser (founder of Kiser Insurance Agency) -- has told the company that it has violated a bunch of rules for daring to give its software away for free. Specifically, the Insurance Department calls out [pdf] the fact that the free software somehow violates rules against "inducements" or "rebates" for insurance.

The full letter is an astounding example of regulations designed to protect incumbents over innovators. First it attacks the use of free software, despite the fact that the end result is better for companies:

Zenefits' providing free software use of its electronic platform and dashboard violates Utah's inducement and indirect rebate insurance laws. By Zenefits offering clients the free use of its electronic platform and dashboard, by which employers can control and coordinate payroll functions and manage tax-related elections; generate tax forms; access FSA, HSA, and accounts; and administer 401k retirement savings plans and stock options; Zenefits has created a significant free inducement for clients to purchase insurance products through Zenefits. This software use is neither part of the insurance contract nor directly related to the insurance contract. Also, Zenefits connecting of the various HR benefits and insurance together creates advantages for customers to have a single internet access site to manage all HR and insurance needs; however, again, because Zenefits does all of this for free, it creates an violating inducement and indirect rebate for clients to purchase insurance through Zenefits.

Nowhere does the Insurance Department appear to recognize that it's basically saying "offering a better product is illegal." Instead, later in the document, it flat out admits that its goal here is to protect the legacy players who didn't innovate:

Concerning Utah's insurance public policy and State interest, the Utah Insurance Department has the important responsibility to maintain a fair, competitive insurance business environment for all licensees. Some of the main purposes of the Utah Insurance Code are to ensure not only that insurance consumers are protected and treated fairly, but that licensees are also treated fairly within a financially healthy and adequate insurance market that is not only characterized by innovation, but also by fair conditions of competition for all insurance licensees. See Utah Code Sec. 31A-1-102. For these reasons, Utah's specific unfair inducement and rebating laws are strongly enforced.

In short, disrupting the old way of doing business is illegal, because the non-innovators can't keep up. The Utah Insurance Department further makes it clear that innovation that offers a better solution for companies who buy insurance is flat out not allowed under Utah law:

Insurance Department Bulletin 2010-7 emphasizes that a licensee that provides a benefit that is not specified in an insurance contract offered to an insured or potential insured is a violation of state law. This includes offering benefits not specified in the insurance contract at no cost or at a cost below fair market value. Also explained is the fact that providing other value added services not specified in an insurance contract are also insurance violations.

In short: offering insurance buyers a better deal is illegal. The state then says it will fine Zenefits and that the company needs to stop "violating" these rules, and instead come up with a "compliance plan." Of course, for Zenefits, the only really sensible solution is to not do business in Utah, meaning that Utah-based businesses are objectively (and significantly) worse off. That's crazy -- but it's the sort of ridiculous regulatory attacks presented to disruptive businesses all too frequently.

Filed Under: competition, disruptive innovation, incentives, innovation, insurance, rebates, regulations, todd kiser, utah, utah insurance department
Companies: zenefits

VP Of EU Commission On Copyright Reform: 'I'd Sing You Happy Birthday, But I Don't Want To Have To Pay The Royalties'

from the copyright-problems dept

Neelie Kroes, the VP of the European Commission, recently gave a speech about rethinking copyright in Europe, which kicks off with a little joke about the ridiculousness of Happy Birthday still being covered by copyright:

Happy birthday to you all at the Institute for Information Law.

I would sing you "Happy Birthday". But technically I think the song is still under copyright — I don't want to have to pay the royalty.

Of course, whether or not Happy Birthday is truly under copyright is at the heart of a big legal fight, with significant evidence suggesting that the song is clearly in the public domain.

However, Kroes is making a larger point about the way we view copyright today, and how that does not fit with how the world works. As such, she suggests rethinking how a copyright system should work:

I start from principles. What should a sound EU copyright system do?

First, it needs to promote creativity and innovation. To encourage and stimulate innovative new works, new opportunities, new channels, new models. To enable the research that leads to new discoveries.

This is a great start, and it highlights a key point of copyright law: it is supposed to encourage those kinds of things. The problem is that very little research has actually been done to determine if it actually does that. Instead, it's often taken on the basis of faith that it must do that, without considering whether it really does, or if there are other limiting downsides to how it's currently done. Some people claim that I am somehow "against" copyright. Nothing could be further from the truth. I am happy to support a copyright system that has been shown to actually promote creativity and innovation. I've just seen very little evidence to suggest our current system really does that.

Unfortunately, Kroes' next point seems a bit off to me, though I understand why she's making it:

Second, it must remunerate and reward creators. That's not just about fairness. We expect creators to invest their time and talent. Of course reward, recognition, remuneration are essential: without them, the creative tap would fast stop flowing. I have always believed that.

But the current copyright system does not do it well. Not nearly well enough. Many creators scrimp by on a pittance, unable to find their full audience, unable to share or sell their works as widely or creatively as they want. Limitations and obstructions do nothing for creativity.

A few points on this. First, it seems to come from the incorrect assumption that copyright is a sort of "welfare" system for artists. That's not its purpose, nor how it was designed. Copyright itself has never "remunerated or rewarded creators." You can create all you want, and if no one likes it, all the copyrights in the world won't get you paid. It's the market that decides if you'll be rewarded for your creativity, and sometimes the market is cruel. It's possible that copyright can, in some cases, help create such a market, but to argue that copyright's job, alone, is to help get artists paid is misleading, as it leaves out the basic fact that that's never been the job of copyright. It may be an offshoot of the first point -- creating the incentives for creativity and innovation -- but to elevate the "help people get paid" point, dangerously positions copyright as more of a welfare system for artists, rather than as a tool for incentives in the market.

At the same time, the argument that "the creative tap would fast stop flowing" also does not seem supported by the data. At a time when artists keep complaining that it's harder and harder to get paid, we've seen an astounding explosion in new content being created. Part of the issue is, in fact, that the money being spent today is spread much more widely -- thus you have a lot of artists making that said "pittance," but it does not appear to have resulted in any decrease in creativity.

That said, I'm all for figuring out more ways for there to be more creativity, and if we can figure out ways to get more artists paid, that's a great idea. It's why I'm excited about new innovative services that helps drive that process forward. Platforms like Kickstarter, Patreon, YouTube, Bandcamp and more have created entirely new ways for artists to make money from their artwork. But, there's something important to note in all of that: almost none of those really are reliant on "copyright," and pretty much all of them would function in nearly the identical fashion without copyright.

Again, this is not to say that copyright is not important. It's to point out that it's faulty and dangerous to assume that copyright alone is the tool by which to get artists paid. It leads to poor policy choices that often ignore more interesting (and potentially lucrative) methods being developed in the market.

Third – it should enable a digital single market. Removing the barriers that get between artists and their audience, that prevent innovation, that shatter economies of scale. The EU's leaders are signed up to a full, vibrant digital single market. So is President-designate Juncker. Now they need to act on their ambitions – copyright is a major, essential part.

I'll leave this aside for the moment because it's a messy and complex issue in Europe that isn't quite as simple as some would like it to be. I agree that taking down barriers would help, but there is a lot of nuance at play in this particular issue.

And last: perhaps most importantly, the legal framework needs to take account of the needs of society. Users' interest and expectations matter alongside creators' rights. Rules cannot be impractical, uncertain, or unreasonable for ordinary users.

Indeed, this is the most important, but I think it also goes hand in hand with the first item on the list. If you take into account the needs of society, and make sure that copyright really does focus on incentives for creativity and innovation, then everything else in the system works out nicely.

But still, Kroes is absolutely right to note that today's copyright laws don't function well under these current principles, and because of that copyright itself is at risk of becoming irrelevant:

Every day citizens here in the Netherlands and across the EU break the law just to do something commonplace. And who can blame them when those laws are so ill-adapted.

Every day, startups, small businesses, scientists abandon innovative ideas because the legal fees are too great.

Every day, people bypass the copyright system using alternatives like open source: something which can lead to huge creativity, innovation, and richness.

Copyright risks becoming an irrelevance.

And Kroes further points out how it's not just that copyright is out of touch, but it may actively be harming the principles she states above:

The Internet gives enormous opportunities for artists and consumers. More direct access to a wider audience, and a wider range of content. New ways to share, spread, sell. New ways to reward and recognise. New ways for audiences to appreciate – getting what they want, when they want it. A good copyright system would help us achieve that. Today's does not.

Some examples.

When uncertainty prevents people remixing or creating their own content, how does that boost creativity?

When teachers are afraid to share teaching materials online, how does that help our society?

When a European Video-on-Demand provider tries to expand to new markets, but gives up because clearing copyright is so catastrophically cumbersome: how does that benefit our economy?

When consumers want to buy films or TV shows online but find they are geo-blocked: how does that benefit the fight against piracy? How does it benefit the artists whose works they could be watching?

When lovers of old films have to physically fly to a different country to see them, even if they're no longer in commercial circulation, how does that support European culture?

When museums have to take out insurance specifically against the risk of copyright lawsuits, because it's too complex and costly to figure out – how does that help promote European heritage?

When you can't sing happy birthday, or post a picture of the Atomium, how is that fair or reasonable, how is that something you can explain to ordinary citizens?

When European scientists have to abandon text or data mining because they can't afford the legal fees – how does that help innovation and scientific progress? And by the way that restriction is costing our economy tens of billions of euros.

I see no real winners in any of those cases. Creators lose out; innovators lose out; users lose out; our economy loses out. The system serves no-one. Solve those problems and I see only winners. We just have to jump over our own shadow.

As she then notes, it's basically impossible to explain copyright to the average "man on the street." Many now see copyright as "a tool for obstruction, limitation and control" rather than "openness, innovation and creativity." The speech is well worth reading, and has some very good points. I just fear that the focus on that second point -- of pretending that copyright is a tool for guaranteeing payments in a kind of welfare system, is part of what leads to the current problems of the system, and takes it away from those other key goals of benefiting the public. If the system is designed properly to benefit the public, it should automatically create incentives that help artists, whose work is in demand, get paid.

Filed Under: copyright, creativity, eu, europe, incentives, innovation, neelie kroes, progress, public

When You Give Doctors Incentives To Get It Right, Rather Than To 'Do Everything', People Get Better Care For Less

from the economics-in-action dept

One of the biggest problems in trying to fix our insane and out of control healthcare system is the fact that the entire system has totally screwed up economics. The incentive structures are a disaster. The deeper you look at healthcare economics, the more horrific it is. Now, there are some very legitimate reasons how it ended up this way, because there's a strong argument that a purely "free market" healthcare system leads to very poor healthcare for many people who cannot afford it, and that basic healthcare is something that should be provided much more widely both because of basic human compassion and common sense, but also because there are carryover effects to an unhealthy population that effect us all broadly.

But, when you set up a system that has the incentives totally screwed up, what you end up with is what we have: a system where everything is insanely expensive for no other reason than it can be, and where the quality of healthcare is simply not that good, because there's no incentive to make it that way. Instead, there's incentives to simply add up bills as high as possible, with doctors ordering every test imaginable, and focusing on doing more, not doing what's best.

The folks over at Planet Money have an interesting podcast about some pilot programs that have come about because of Obamacare, that seek to realign the basic incentives of doctors to treat patients in the best way, rather than piling as many charges on them as possible. No matter what you think about everything else in Obamacare, it seems like these little-discussed pilot programs are an unquestionable step in the right direction.

In the Planet Money podcast, they talk about one simple way that the pilot program is having an almost immediate effect: by paying doctors a lump sum for overall treatment of a condition, and actually dinging them for errors, rather than rewarding them by allowing them to add more fees for fixing those problems, significantly fewer problems occur. The program also goes further in including the shocking idea of giving doctors feedback on how they're doing, using actual data, rather than letting them do whatever they want without consequences.

In theory, you'd hope that doctors are always seeking to do what's best for the patients, rather than what earns the most money, but it seems clear in practice that when doctors are given a little incentive to do their job better, rather than just do more, they actually do, in fact, do their job better, meaning that not only are people healthier, but the cost of the healthcare goes down. More of that, please.

Filed Under: doctors, economics, healthcare, incentives, medical care