The Answer Is Transaction Costs

Shibumi! Legit Idea, or Shady Dealings?

July 30, 2024 • Michael Munger

Share episode

Send us a text

You can throw shade, but can you own the idea of shade? Shibumi's sunshade has become an essential part of the coastal landscape, but that has sparked some fierce legal battles. We'll talk patents, beginning with the evolution of shade solutions from caveman ingenuity to Shibumi's wind-powered marvel. Plus, you'll get the inside scoop on the recent lawsuit where Shibumi defended its designs against Beach Shade LLC, demonstrating the high stakes of protecting intellectual property in today's competitive markets.

But the beach isn't the only place optimization matters. Ever wondered the optimal way to board a plane or fund your education? We dive into the secrets behind efficient airline boarding procedures and the real-world challenges that complicate them. Then, we shift to a heated debate on Income Share Agreements (ISAs) versus traditional student loans, exploring their unique benefits and drawbacks. Get ready to question everything you thought you knew about intellectual property as we discuss Boldrin and Levine's controversial views on innovation and competition. 

Links and Resources:

Shibumi:



If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. We're still at the beach. We probably will always be at the beach, to be honest. So a beach question Shibumi, the sunshade Everybody has one. Does Shibumi have a monopoly and if so, on what exactly? Why do we have patents and how do we know what they mean? And says who. Why do we have patents and how do we know what they mean? And says who? A new twedge, a book of the week plus this week's letters and more Straight out of Creedmoor. This is Tidy C.

Speaker 1:

I thought they'd talk about a system where there were no transaction costs, but it's an imaginary system. There always are transaction costs when it is costly to transact, institutions matter and it is costly to transact. If you've been to the beach or anywhere near a beach in the last year or two, you have seen the Shibumi beach shade. They were blue and green. They now have a nauseating orange and yellow model, which I've seen a few of. They don't look that great, but the blue and green ones. There's a couple of different models. There's one that is the classic. There is a new low noise version that's also the same size as the classic and there's a mini A. Shibumi is a frame that you set up. Both ends are in the ground and in between it's a kind of light parachute material and it's held aloft by the wind. There's usually enough wind at the beach that it holds the material out to make a shelter under which you have shade. Now Shibumi has pretty aggressively asserted its rights to the exclusive legal ability to make this particular kind of sunshade.

Speaker 1:

It got me to wondering what is the nature of intellectual property rights and what are the transaction cost implications of intellectual property rights. So I thought perhaps we should go way back to think about this. And, of course, if you're going to go way back, you should do it with Jimmy Castor. What we're going to do right here is go back. You should do it with Jimmy Castor. What we're going to do right here is go back way back back into time when the only people that existed were troglodytes, cavemen, cavewomen, neanderthals. So we go way back. We have Og. Og the caveman walking around in the sun says Og, hot sun, hot on head, sun, hot on everything of Og. So Og sees a tree, maybe Og sees an animal skin, and Og thinks of the idea of hanging the animal skin in the tree to create shade from the sun. Now this obviously happened so long ago that it's not even really worth talking about the idea, and I'm making air quotes.

Speaker 1:

The idea that having some short sort of shelter from the hot sun will make you feel better is not a patentable idea. Well, that's not all that a Shibumi is, of course. I went and looked up the Shibumi patents. There's quite a few of them. There's more than 20 that they have asserted. But the main patent and I'll put up a link to it in the show notes has these claims First, shibumi is a system for providing shade onto a surface comprising a canopy configured for engagement with and complete aerial suspension by a single continuous frame.

Speaker 1:

Wherein the frame consists essentially of a plurality of sections configured for end-to-end alignment from a left end to a right end. Wherein each section is configured to engage with any adjacent section. Wherein the left end and the right end are configured to be secured to the surface for aerially supporting the frame and completely suspending the canopy aerially. And a container for housing and transporting all the other components of the system. Wherein the container is also an anchor, a cord selectively engaged or coupled to an interior of the container, for inverting the container to serve as the anchor for housing weight, the cord selectively engageable or coupled to the frame. The second claim is all the system of claim one, further comprising a cable extending through the plurality of sections of the frame from the left end to the right end. Third, the system of claim one wherein the canopy includes at least one loop on a suspension end, the loop configured for accepting a portion of the frame there through.

Speaker 1:

Well, there's quite a few more claims. One of the things that was surprising that I guess to me surprising, they also Shibumi is claiming a patent on the idea that the container that you use to transport the shelter has separate sections so that you can put the collapsible frame into one part and the canopy fabric into another. They're claiming a patent on the ability to use this container to transport and then remove and set up the shelter. The other thing that they're asserting a patent for and this actually is kind of interesting is at least one strap, including a strap fastener on one end and configured for fastening to a canopy, fastener on the other end for securing the canopy into position relative to the frame. Now, if you ever put up a shibumi, you know that that is actually a pretty clever part of a shibumi.

Speaker 1:

Ever put up a shibumi? You know that that is actually a pretty clever part of a shibumi. The canopy itself has straps on each of the ends of the parts where the frame goes through, and these are elastic and rubber-coated, so when you wrap them around the frame, they hold the ends of the canopy in place quite securely. That actually is pretty clever. The question is quite securely? That actually is pretty clever. The question is is it patentable? Well, I'm not an expert on that question. The question of whether something is patentable I will leave to patent attorneys but there was a lawsuit in 2023 where Shibumi Shade brought a suit against a company called Beach Shade LLC, and I'll post in the show notes a link to a discussion of this lawsuit. Shibumi Shade asked for a preliminary injunction against Beach Shade, saying that Beach Shade would have to stop producing their beach shade, which is just what the name suggests. It looks quite a bit like the Shibumi.

Speaker 1:

The court case, though, turns on the question not of whether the two things look alike to an observer, but whether the features of the in this case, beach shade violate the claims that are made in the patents that have been secured by Shibumi, the judge decided that a preliminary injunction would be granted. It's a design and utility patent infringement case. They also the court denied beach shade motion to dismiss based on some other technical conditions. So both products, the Shibumi shade and the beach shade cordless, consist in effect of an arched frame, a canopy and a carrying case. But the products differ in their respective canopy designs, the method of attachment to the frame and the method of anchoring the apparatus to the ground. Those differences, the court observed, are especially difficult to discern and not easily distinguishable from the patented design. The court found that an ordinary observer viewing the beach shade cordless as a whole would likely be deceived into believing the beach shade cordless is the same as the Shibumi's patented design.

Speaker 1:

Now Beach Shade tried to highlight several differences between the Shibumi shade and their beach shade. The court rejected them because the analysis only considered whether the accused product is the same as the patented design, not whether both parties' products are the same. Beachade also argued that Shibumi's design patents are invalid. So notice that this is a pretty typical lawyerly tactic. You're trying to argue both things. First, we're not violating Shibumi's patent. Second, shibumi doesn't have a valid patent because they're asserting claims that are actually common.

Speaker 1:

Whether a design is dictated by its function is based on five factors Whether the protected design represents the best design. Whether alternative designs would adversely affect the article's utility. The existence of concomitant utility patents. Whether any advertisement tout features of the design as having specific utility that is, providing shade from the sun in this case. Whether any element of the design or overall appearance is not clearly dictated by function. If you have the Shibumi and it has two colors, blue and green, if you were to make another product that is also a beet shade but it was blue and green, there's nothing about the function that would dictate those colors, and so that would mean that you're trying to imitate in a way that would confuse consumers. So that's an example of the problem of features of the design not being clearly dictated by function. Well, in any case, what's interesting is that the court only found the existence of concomitant utility patents, meaning that the problem was that Beach Shade did not distinguish itself in terms of the actual parts, the functional parts. They only provided statements that said that the particular use was not necessarily the best. The small changes that they had made were differences in the function, although it would not be necessarily apparent to a casual observer. So the court found the evidence clearly established both a loss of customers and increased production costs for Shibumi.

Speaker 1:

The balance of equities favored protecting Shibumi and the public interest is best served by protecting the rights of a valid patent when an injunction in the niche market could not have broad-reaching effects that negatively impact the public's interest. Accordingly, the court granted in part Shibumi's motion for preliminary injunction and they enjoined Beach Shade, meaning say that they've made it illegal. Beach Shade is not allowed to continue the manufacture. Legal Beach Shade is not allowed to continue the manufacture. Importation, use, sale and offers to sell the Beach Shade cordless product, which that shuts down Beach Shade as being a viable producer.

Speaker 1:

Notice that it seems like the public might very well have two interests here. One of those interests is in protecting valid patents. The other is to be able to obtain essentially identical products at a much lower price. What patents do is restrict competition. That's what they're supposed to do. It is a government-awarded monopoly. If you're worried about monopoly, it seems like patents are going to be a pretty bad idea. Question is under what circumstances does the value of a patent outweigh the granting of a state-protected monopoly? So this is not just that Shibumi is saying we have the right to do this. The state is sending men with guns to Beach Shade to close them down. And if they refuse to close down, they'll not only be put out of business, they'll lose all of their assets, they won't even be able to sell them off. Question is under what circumstances is an idea patentable? Whoa? That sound means it's time for the twedge.

Speaker 1:

This week's economics joke. A patent examiner and his alligator walked into a bar. The patent examiner asked the bartender Do you serve lawyers here? Sure do, replied the bartender. Good, said the patent examiner. Give me a burger and a beer and I'll have a lawyer for my gator. Well, the point of the joke is that if you are a patent examiner and you read the patent application of the sort that I read parts of here for Shibumi, the claims are pretty grandiose and extensive. Basically they're claiming that they, and not Ogg, thought of the idea of a shelter. Now that's an exaggeration. I did give some examples of things that Shibumi has that are actually interesting and unique, but lawyers are going to attempt to make the patent as large as possible, as extensive and encompassing as possible, and patent examiners are tired of fighting with attorneys. So that would be the basis for that joke Letters.

Speaker 1:

First, I was intrigued by your depiction of different parking lots and the emergent behavior that happens when people seek a scarce resource. Seems to me that the ownership of the parking spaces is firstly that of the parking lot owner, but this person abdicates, or really delegates the responsibility of determining who has the right to the next empty spot to customers as a whole. This delegation leads to an emergent problem of managing scarce resources. The problem could be optimized using operations research methods with regard to wait times, but it's not, for the solution to problems are determined through emergent economic behavior. My question how close do emergent solutions meant to minimize the transaction cost of wait time come to the mathematical optimum on average, and if this is knowable, what strategies could potentially narrow the gap between these emergent solutions and the optimal solutions? Could we change culture to arrive at a closer to the optimal state outcome? Thanks t s End of letter. What's an interesting point. The emergent customs are going to be hard to change once you have selected one and it's an equilibrium. You're basically dealing with the folk theorem. There are many possible equilibria in this allocation problem and once you've arrived at one, it's going to be hard to change to another, even if the emergent solution is not optimal. Even if the emergent solution is not optimal Made me think of airline boarding.

Speaker 1:

There's an obvious optimal solution in terms of minimizing time and that is first you board all the window seats, then you board all the middle seats and last you board all the aisle seats. As far as I know, it's not used anywhere. Not a single airline uses that. Now, the reason is that there are other considerations. People want to get there first. They want to be able to use the scarce resource of the overhead bins, which are allocated on a first-come, first-served basis. So boarding priority is valuable. So we have an optimal solution and then we have a very different solution. I guess it's emergent in the sense that the airlines all look at what each other does and while that window seat, middle seat, aisle seat priority could be used and it would be a lot faster, no one does so.

Speaker 1:

As far as I know, the optimal solution, whatever that is, is not used anywhere in a main beach parking lot and I actually think, as I said last time, that reservations are the best way to do this. So if you had no transactions cost of operating the reservation system. You could charge quite a bit more for someone having access to a parking spot for the whole day and think how much more valuable that is. Rather than having to be there at 8 15 am, I can roll up at 10 o'clock. There's my parking space, I think 12 30. You know the restaurant's food here at the beach not that great. So I drive to a restaurant, have lunch, come back at two my parking space is still there. I could pay a hundred dollars for that. It would be worth a lot to me to be able to have that parking space reserved. As far as I know, there's no place that does that. I'd be interested if someone could tell me an example of a beach parking lot that has day-long reservations and charges a higher price as a result.

Speaker 1:

The second letter as you may know, there's already a way to sell equity in future income as a way of financing education Income share agreements, or ISAs. The way isas work is the investor pays for the education and the student pays back the investor a percentage of their subsequent income over an agreed-upon term. It's typically structured so the student only pays if their income is above some minimum. Usually there's also a cap on the total amount paid back to comply with usury laws. To my mind, this has three major advantages over traditional student loans. First, there's an insurance effect. People who end up making more subsidize people who make less akin to homeowner's insurance. Second, there's an intertemporal effect. If you don't make much for three years and then hit it big, not having to pay in those three years when you didn't have much money is very helpful, even if the total that you pay, say in real dollars, is the same or even a little more than it would have been with a conventional student loan.

Speaker 1:

Third, there's an important signaling function. If investors are willing to set up an attractive ISA for a program, that's great evidence that it will teach you useful skills and lead to a good job, at least if the investors are right. Prospective students often have very little idea of what the likely employment and income outcomes are after completing some degree or certification, and it's hard to get clear, unconflicted information. Isas can go a long way towards solving that. Say, you want to do a one-year coding academy. You look at several options, one of which offers an ISA with great terms. That's a strong signal that that academy is likely to lead to a high-paying job. Unfortunately, one issue with some current ISA programs for standard colleges is that they're major agnostic, so there's no useful signal by major, that is, which major is likely to lead to a higher income, and that leads to negative selection for the program, undermining it Best CR. End of letter.

Speaker 1:

No, I did not know about that, cr. I did not know about ISAs. It is interesting that there is the insurance, interttemporal and signaling functions. Why is it and I'm asking generally why is it that ISA programs are not different according to major? It may seem unfair, but you're losing a lot of the value of people's willingness to invest. I would be willing to invest quite a bit more in someone who is going to major in something where the payoff is likely to be large and quick, and that does seem like it would provide a signal in the sense that I'm going to choose a major that will pay off faster, and if I want to do something else, I should recognize that it's going to be more expensive. But thank you, cr. I did not know about ISAs and so when I kind of speculated that something like that might be useful, unsurprisingly if I'm right about something being useful, then somebody else thought of it 10 years ago or more the Book of the Week.

Speaker 1:

This week's book is Against Intellectual Monopoly by Michele Boldrin and David Levine. Boldrin is at Washington University in St Louis. The book Against Intellectual Monopoly was published in 2008, so 15 years ago by Princeton University Press. There's a great econ talk where Russ Roberts talks to Michele. I think it is worth listening to if you haven't thought about the arguments against the public interest in patents, particularly long-term patents, patents for things that might actually be pretty trivial.

Speaker 1:

Boldrin claims that the main advantage would be first mover in the development of a brand name. Obviously, if there were no patents, then Beach Shade would be allowed to make something quite close to what Shibumi's look like and we'd have much lower prices At some point. Low prices are enough to create a public interest. After all, most of the concerns that we have about the use of competition to discipline monopoly operate through the fact that other firms are going to enter this industry if production costs are substantially below the cost that consumers are willing to pay. So competition drives the market price down to production costs and that competition among producers reduces production costs over time because people are trying to find ways to produce things that are better and cheaper, not because they're public-spirited, but because that's the way to earn more profits.

Speaker 1:

Patents block that and the Boldrin takes a pretty extreme position in this book with Levine. It's worth reading. I'm not sure it's entirely persuasive because they would get rid of patents and intellectual property rights almost entirely, but it's interesting to read that book to get an idea of how the argument works Well. The next episode will be released on Tuesday, august 6th. We'll have a new topic, some letters and, of course, a new hilarious twedge. All that and more next week on Tidy C.