Thursday, February 25, 2010

Distrito Federal – Brasilia to the World

An Open Invitation to President Lula...

Patents are social contracts between the public and inventors. In exchange for sharing enabling disclosures on inventions with the public, the inventor may receive a limited-time market restriction around third party commercial exploitation of the invention. For two decades, a fundamental misunderstanding has been promoted by industrialized countries – most robustly supported by the WTO and its TRIPS agreement – focusing on the rights of patent holders. Galvanized around the treatments for HIV/AIDS, marginalized countries have been coerced into debating these presumed rights while offering no attention or voice to the other half of the social contract – namely, the public interest. Every patent is required to contain the disclosure – the recipe if you will – for how a skilled person can replicate the invention. If it does not provide such clarity, it is not a legal patent and any untaught claim is unenforceable. Pharmaceutical companies have extorted vast sums from marginalized countries under the “compulsory license” concessions derived from costly battles around patent estates. In most instances, the combatants in the battles waged on drugs, technology, communications, and defense, have overlooked two glaring omissions.

First, with few exceptions, the platform compounds for most key pharmaceuticals are NOT patented in worldwide patent filings. In the most notorious cases of HIV/AIDS drugs, the core compounds were protected in the U.S. and parts of Europe alone. While pharmaceutical companies did file patents on production methods after the fact (and often with complicit patent offices turning a blind eye towards rules of patentability), the core compounds (together with its original production processes) were entirely unrestricted in the majority of the world. The patent thickets constructed by pharmaceutical companies DO NOT limit the use of the compound. They simply restrict the distinct processes of manufacturing in the countries with protection. While the Doha Declaration and other uses of Article 31 of the TRIPS Agreement have co-opted the debate around patents into the nefarious faux concessions for public health interest, all of this sound and fury obscures the real point. In most instances, the countries impacted by patent allegations have an open source alternative to create domestic solutions. These open source alternatives are derived from: 1) failure to file original patents in countries thereby rendering them public access from the first year after filing; and, 2) expired, abandoned or otherwise public domain alternatives which provide freedom to operate alternatives to branded product claims of proprietary positions. Countries from Brazil, to India, to Thailand, have been seduced into debating an untested presumption of rights which must immediately be informed.

Second, as evidenced in the recently-released Global Innovation Commons (debuted in Florianopolis, Brazil in October 2009), hundreds of thousands of patented technologies are described in patents which do NOT enjoy international enforcement rights. If a patent has not been filed in a country, that country is free to use the information for its own market use and can enter into international commerce around the patented invention provided that no commercial activity whatsoever is done in countries of enforcement. Companies selling patented technologies to countries in which the patents enjoy no protection are not capable, under patent law, to defend any unprotected element of technology. [Note: There are instances where companies, realizing their patent filing failures, impose patent-like restrictions by contract.] When resolving Trade Credit Offset obligations, hundreds of multi-national companies seek to receive offset credits from technology transfer however, in most reviewed cases, the patents transferred to countries like China, Brazil, India, Korea, Taiwan, etc. DO NOT EXIST. There is a common misunderstanding around patents. Just because someone has a patent in Europe, for example, does not give them any market restriction rights outside of Europe. A patent is only enforceable in jurisdictions where it is filed. A user of patented technology in other markets is not “stealing intellectual property” (an allegation frequently made by the U.S. Commerce Department on behalf of companies who forgot to protect their assets in emerging markets); rather, it is salvaging an abandoned property option. A patent holder cannot, by virtue of a transfer of a patent, create an asset around something that was not first filed and enforced in the recipient country. A U.S. patent – not filed and in good standing in Brazil – cannot be transferred to Brazil for any value other than value for the Brazilian recipient to limit use in the U.S. market. The patent has NO effect in Brazil and has no restriction on third party use in Brazil.

Brazil’s President Lula has been seen, by many, as an advocate for the world’s marginalized states in the area of WTO’s TRIPS matters. Coming out of the Doha round of WTO negotiations (and I use that term loosely), he was willing to stand up and use the tools that the incumbency had provided him – namely ethical use exemptions for public health under Article 31. However, as he is now coming to the close of his dynamic presidency, I would strongly recommend that he take a game-changing approach. I would suggest that Brazil make an explicit statement that FULLY honors the TRIPS agreement in a way that the industrialized authors of WTO never anticipated. Practically, I would recommend that President Lula:

1. Immediately lay Commons Claim for the public benefit to ALL intellectual property records of patents filed by EVERY patent holder in the world which did not seek Brazilian jurisdiction status;

2. Immediately distribute these Global Innovation Commons patents to academic institutions, state-sponsored research laboratories, small and medium sized enterprises, and nationally domiciled corporations for immediate use in:

a. Domestic research, development, deployment, and commercial use;

b. International commerce between countries in which the same protections were equally ignored;

c. Resolution of Trade Credit Offset obligations (over $13 billion in current obligations associated with foreign technology procurement at present) by inviting foreign patent holders to receive partial offset credit if they teach Brazilian companies how to use their technology and agree to subcontract with the same for production, assembly, or advanced research and development; and,

3. Extend the logic of the Article 31 concession to ALL technologies under the argument that NO right should restrict the use of technologies if the holder is not actively operating in the market. In short, no patent holder should be free to block technologies to clean energy, health care, water, or infrastructure if they are not actively offering the same in the market.

It is time for credible voices like President Lula to frame a global standard that is not merely the best that can be done with the flimsy arguments offered by incumbents – like the compulsory licensing façade built on the untested presumption of validity of patents – but to raise the standard to say that the world now stands to take seriously the public interest in the patent contract. We the people, in exchange for true disclosures of technologies that advance our well-being, will offer limited market protections to those who disclose true advances and make those disclosures to all humanity. If the patent holder ignores any country or its people, the social contract not only is not enforceable there, but the ignored places must unite to use the open source created by arrogance and ignorance and create the Generic Innovation Industry – a new force for economic transformation in a new global economy. And if Merck, and its monopolistic allies, fear that this will provide a “chilling effect on research” (, then they are clearly not the right company to address the world’s greatest challenges. I trust that President Lula uses his final months in the Presidency to fully unleash Brazil’s creative engine for global transformation. By this summer, we should see Open Source cellulosic ethanol production, Open Source desalination; Open Source agro-industry; Open Source bio-technology; Open Source high speed transportation; Open Source everything.

The World needs this leadership at a time when the industrial incumbents are now alleging hollow patent estates blocking climate, food, water, communications, power, and health technology deployments. If we're going to be serious as a human race about our intractable challenges, we must have accountability for the fact that most of what we're looking for is already here - just buried out of sight by those who profit from the perpetuation of the status quo.

Wednesday, February 17, 2010

Give Chance a Hope

I just spent the last several days in Rio de Janeiro. Selecting the days of Carnival for a business trip to Rio has its positives and its drawbacks but I can assure you that the positives far outweigh the distractions (not to mention that many of the distractions are quite positive). I was a guest of APEX, a critical component of Brazil’s economic development and engagement strategy and, as a result, was treated to a first class trade promotion experience. True to form, observing events wasn’t enough for me – I had the amazing experience of being invited to dance with one of the best samba schools in the Carnival parade!

As I interacted with public and private sector influencers in Brazil, I was overwhelmed by a single observation which is the subject of my post this week. The observation is complex and I’m sure it will leave more than a few puzzling but, here goes.

The stated purpose of our visit was to carry forward conversations about the use of Trade Credit Offsets as an accelerator for enterprise creation and financing in Brazil. While experts from around the world come to Brazil loudly promoting investment in Brazil, this cacophony has masked a huge reality – I think intentionally. Let me explain.

Business is built on the interaction, and value exchange, between a steward of resources or goods and those who have use for those resources or goods. The nature of the value exchange may take the form of commerce with money or it may take the form of defined mutual benefit. However, in Brazil, the desire to create equity-based capital markets – encouraged by experts from abroad and reinforced by influencers within – provides the context for a deep systemic failure. Clamoring for “access to capital” to create the next “Silicon Valley” illusion is en vogue. When a person like me asks about cash-flow, revenue, or value exchange, I’m viewed as an anachronism. You see, in our promotion of economic development around the world, we’ve not promoted business – we’ve promoted usurious capital markets where it’s about investment returns, not enterprise. Stop and think. How many of you actually KNOW the business of the companies in which your pensions are invested. Get it?

A Trade Credit Offset is a function of market asymmetries. When a country buys a fighter plane or a hydroelectric power plant, the economic imbalance created by a net outflow of money from a country to a company is excessive – many times representing significant fractions of GDP. To address this imbalance, most countries impose Trade Credit Offsets which act a bit like a rebate. If, as a company, I sell a billion dollar power plant to a country, I am required to create $300 million dollars of market with the country in return. Historically this took the path of purchasing commodities, raw materials or components. Offsets can range from 25% to 100% of the nominal value of the contract and must be satisfied before the company can recognize the revenue on its balance sheets.

Over time, companies began setting up local subsidiaries for component manufacturing, assembly or service creating employment value which, in many instances helped deal with offsets. More recently – and most substantially used by China – technology transfer and know-how have become increasingly desirable by countries increasing their industrial efforts. Multiples are put in place to incentivize things like technology transfer which, in many instances receives a 10 fold multiple on its value as the offset satisfaction.

In fiscal year 2009, we identified over $5.2 billion in unsatisfied Trade Credit Offsets in Brazil. This number is staggering on a number of levels. First, what it means is that while Brazilian economic development professionals are running around looking for equity capital, they’re ignoring the LARGEST capital source in Brazil, created by Brazilian procurement and waiting to be deployed. Second, it means the supplier companies providing goods and services to Brazil are likely holding large amount of contingent revenue on their books (up to $20 billion) which cannot be recognized until satisfied. Third, it means that while creating offsets, Brazil is not effectively using this program for the fulcrum it affords. Brazil is paying premium price for less than they should be getting and they’re leaving untapped billions on the table.

So, I explained this in my meetings in Rio. Not surprisingly, people connected with Brazil’s largest corporations got it immediately. In many cases, their response was informed by the fact that they have suffered cost overruns and huge expenses from being overbilled by foreign companies who are passing along offset risk in proprietary pricing and financing. But regrettably, and to the round-about point of this post, the people in the public sector were frozen in disbelief. Their first response was, “I can’t believe what you are saying.” Frequently that response was followed by, “Why hasn’t anyone ever told me about this?” And then, my favorite, “Do you have a white-paper on this?”

I guess this is the point where I had my mini-epiphany of the week. A white-paper! Really?

If you had gone for three days in the desert without water and I handed you a bottle of water, would you first ask me to explain the chemical structure of water? Would you debate the importance of water and your lack of clarity around whether water is really as important as others say it is? And as you’re dying of dehydration, would you convene a committee to explore the merits of taking water given the possibility that it might be from the tap versus from a mountain spring in France? No. You’d drink the water.

I guess what struck me was the irony that people looking for investment – when confronted with capital far in excess of their wildest imaginations of capital for business development – chose to continue to pursue the proven failed model and walk past the largest capital asset the country has at its disposal. Which leads me to the title of my post “Give Chance a Hope”. It’s time that we give ourselves the permission to trust our observation of facts rather than rationalize consensus thinking in the face of wholesale evidentiary dissension.

Our current economic and social paradigms are heavily biased on propaganda. The controllers of the message become the arbiters of truth – even when all evidence stands in direct contravention. They are the hypnotists of those charged with leadership. In Papua New Guinea, I presented the Provincial Government of East New Britain with data from a mining company’s PUBLIC FILINGS on the stock exchange. This data explicitly said that the company was taking gold out of the country and not paying their required royalty. The mining company successfully prevailed upon the local press to publish a retraction of a report of the company’s own public filings. The Provincial Government cowered in the face of pressure from the mine. At no point did the government ever independently verify the news published by the mine on the company’s own website which confirmed their abuse. And the Toronto Stock Exchange, when informed of the same information, has taken no action against incontrovertible evidence of legal and financial violations.

Over 100 countries have been exposed to the Global Innovation Commons – a repository of open source innovations available for immediate deployment in the fields of carbon-alternative energy, agriculture and soil management, clean water, and tropical diseases. The vast majority of those who encounter the repository of OPEN SOURCE data remain convinced that they cannot use the information because it was once patented. Think about it. The very system which Thomas Jefferson established to SHARE information with the general public has been so thoroughly abused that the very basis of the social contract has been rendered unimaginable by the same general public. Over $2 trillion dollars of innovation, available for free, untouched!

Where’s the problem? Is the Government of East New Britain corrupt? Are economic developers in 100 countries corrupt? No, I think not. As a matter of fact, I think that the true failure is summarized most honestly by a gentleman representing my generous host in Brazil who had the decency of acknowledging, “We didn’t even know we could know.”

In the face of the self-proclaimed “knowledge economy” it is a moral failure to accept “not knowing” as a justification for the perpetuation of mineral rights abuses, inefficient energy technology legacies, contaminated water, food shortage and land degradation, and rampant disease. My friends in Brazil, Papua New Guinea, and over 100 other countries are not the problem – we all are. We must act to educate. We must inform ourselves and commit to sharing information with others. Start by getting the messages in this blog out to your friends and colleagues – look at the referenced data – draw your own conclusions and ACT.


Sunday, February 7, 2010

Mythical Paradox – Epic Confusion

Nature revealed and mind made clear, they visited the Buddha;
Actions complete and all achieved, they flew aloft.

Journey to the West
, Wu Cheng En’s epic account of China’s manifest destiny may intimidate would-be readers due to its size. However, within its 99 transformations in over 1,700 pages, one can begin to see the archetypal logic which seems to inform today’s global market dynamics. For those who are seriously intent on understanding the movements being made by the Chinese government, Journey to the West should be the top of the reading list.

Prior to the formation of the current National Development and Reform Commission or NDRC (formerly known as ICC-SCORES), its director arranged for me to receive an authorized translation of Journey to the West. “Understand this,” he said, “and you will begin to understand China.”

To the Western reader, the simple moral of the epic is that things are not as they seem. What meets the eye is not only not the case but is diametrically opposed to the truth. Consummating in the final interaction with Buddha in which the heroes find a paradox in the scrolls, wisdom and enlightenment are only discerned from altering perspectives and freeing observation from preconception.

This week, I was puzzling over the prevailing ignorance evidenced by monetary policy and government experts on how to deal with China. In our reductionist myopia, we seem to believe that China is constrained by the same legacy and logic that characterized our ascent to global market economic hegemony. Our leaders seem incapable of looking at things free from preconceptions. This incapacity is inextricably linked to our undoing.

Take stock of the following certainties over which U.S. or European arrogance have little to no effect:

1. Gold – While the Responsibility Jewellery Council and other NGOs seek to advocate for more ethical and responsible gold production, and Western investors seek to hedge currency risk with vacuous metals bets, China has announced its commitment to increase their reserves eight to ten fold. In the West, market conversations circle around the price of gold and irrationality of the Chinese buying such quantities at market prices. What is ignored is the close to 8 years of sophisticated development of Chinese gold extraction efforts – including those coordinated by Robert Friedland, one of the world’s most notorious metals men. Friedland’s Ivanhoe Mines (TSX: IVN and NYSE: IVN) have been actively working with the Chinese to vastly expand domestic production of gold, copper, molybdenum, and coal and have focused considerable attention of the tough to access and tougher to audit claims of vast gold reserves in Southern Mongolia. Friedland and Apple’s Steve Jobs spent early life together in the land of and with the people of Journey to the West. With no love lost between Friedland and the U.S. Justice Department, one has to wonder whether China’s alliance with Friedland is, in part, fueled by the “He who laughs last” truism. China is not going to buy their 10,000 tonnes, they’re going to extract them. And an American (supported by the Toronto and New York stock markets) is going to aid the process.

2. Consumerism – We continue to hold a naïve belief that the only way for China to advance economically is through American-style consumerism supported by debt. We do not have the capacity to consider market conditions which not only challenge our notions but may, in fact, preclude China from following the American path. As I indicated before, the 60 – 100 million males (a consequence of China’s one-child policy leading to gender inequality) are going to create a market dynamic without modern precedent. All of the earning potential and inherited wealth of these men are going to be expended in a single generation. The degree to which this dynamic is managed with consumption vs. alternative market actions is unknown. Clearly, placating a male population which may be at times quite displeased with their lot in life will be a primary concern for the Chinese government. Doing whatever is necessary to keep this population docile is of paramount concern. There are reports from many nations that financial incentives are being offered by the Chinese government to induce African, Pacific, and South American countries to provide residence to men relocating to other countries. China can invert its export economy rapidly by producing for domestic consumption and still have yet-unseen models to fundamentally alter its economy.

3. Energy – President Obama’s nostalgia for a Kennedy-style shoot-for-the-moon science and technology stimulus with clean, green energy technologies would be admirable were it not delusional. Whether it’s electric cars, biofuels, solar, wind, or nuclear, China’s millions of technology trained engineers have already out-maneuvered their U.S. counterparts at most turns. Uranium linkages with Australia and Central Asia, coal deposits in Mongolia, and oil and natural gas contracts with Iran, African states and partnerships with South America mean that legacy energy feedstock control will allow China to time its conversion when it’s ready – not when the U.S. dictates new energy mandates. And, by the way, the new saber rattling with Iran doesn’t help. An “oops” tactical nuclear strike would make Iranian oil and natural gas fields difficult to access due to the possible cloud of uranium hexafluoride. However, as that radioactive, toxic cloud drifts with the prevailing winds into Pakistan and India, the last hope for resolution of our Middle East position will wither in an atomic instant.

As you read this posting, it’s not good enough to just puzzle over the enigmas wrapped in this seventh century poem. It is time to take action. If you fear currency volatility, do not run to gold. The game is over and, unless you have a mine in your backyard, you’re the pawn, not a player. If commodities are interesting, follow those which have deployable use. We’ll have more batteries, semiconductors, and, yes, sweet food in the future than we’ll have use for gold. If your business is counting on U.S. consumerism fueled by easy credit to rebound, wake up. The experiment ended and your government simply accelerated its demise. It is time to put direct efforts into building trading networks across the globe where interdependence will build mutuality of interests. And if you think that we’re going to solve unemployment with green jobs, prepare to be the out-sourcing country. That’s right. If you can install power systems whose instructions are shipped in Chinese and Hindi, you’re going to be more employable. And, by the way, when your children learn Mandarin in school so that they can respectfully engage with our colleagues to the West, recommend Wu Cheng En’s Journey to the West. It will help them become better neighbors.