Cheers went up loudly around Silicon Valley today, at least in the C-suites of the large incumbent companies. Why? Because now the President, who has been a heavy fund raiser here in the Valley, is promising to institute reforms of the nation’s intellectual property regime that favor those incumbent companies and potentially harm inventors and entrepreneurs. This follows a recent shift in our patent regime, also heavily tipped in favor of large well established technology companies, that favors those who are the first to file for a patent not the first to invent a new technology.

For years, law firms, academics and lobbyists working for big technology companies like Apple, HP and Intel have been pushing for these kinds of reforms. But the individual entrepreneurs and inventors who have historically been “present at the creation” of these now giant companies are not able to make their voices heard in the same way. They are widely dispersed, often young and without the huge resources of the incumbents.

Many new inventions threaten the existing invested capital of the incumbents and they are in fact worried about the impact they could have on their existing business models. In fact, many new ideas are unable to find investors or are swept up into the giant portfolios that the big companies now assemble and are never heard from again.

That’s why a young Bill Gates in the 1970′s made a passionate defense in favor of the IP rights of writers of software code for startups like his, but years later Gates started attacking the granting of patents to code writers. As Richard Stallman of the Free Software Foundation discovered:

“Here’s what Bill Gates told Microsoft employees in 1991: ‘If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today…A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose.’”

Of course, Microsoft was fast becoming one of those giants and now it uses that power to back groups like Intellectual Ventures which is scooping up thousands of patents and providing expensive mass licenses to firms that want a moat around their business model. Valley VC’s recently established a firm called RPX that does much the same thing.

It is no surprise then that an older successful Bill Gates was once asked what kept him awake at night and he answered – to an audience in Palo Alto – the fear that two guys in a garage somewhere nearby were developing a new way of doing things that would threaten his business model. Ironically, at that very moment, in the late 90s, Sergey Brin and Larry Page had started a little company called Google, first in their dorm rooms at Stanford and then in a nearby garage.

In other words, when the IP system helped a young Gates he tried to enforce it, when it began to threaten him he found ways to change it. Gates is not alone in this, of course, as Apple and Intel and Cisco and HP and ATT and IBM all do the same thing. But do we ever stop to ask, where will the new forms of these companies come from?

One of the targets of the patent reform movement are companies derisively labelled “trolls.” In the pure form these are companies formed solely to buy up orphaned technology that may have value because it is possible there are infringers out there in the world of existing companies. Thus, these companies provide a valuable secondary market for the exploitation of technology that inventors can no longer afford to pursue. Our entire economy is built on similar kinds of secondary markets, for IP and for financial instruments and for entertainment products, heck, even for used cars.

The advantage of these markets is that inventors know there is at least some value they can get out of their invention even if they cannot build an entire company around it. The existence of this market also signals to incumbent players that they have to play by the rules. I spent eight years on the board of directors of a technology company whose original inventions were trampled on by big players, like AMD, Apple and Intel. That destroyed the company and only an aggressive licensing and litigation strategy helped recover some value for our shareholders.

That (eventually successful) strategy was long, complex, expensive and unpredictable. Now the new reforms will make defending the original ideas of our entrepreneurs and inventors even more difficult.

The bottom line is that in many ways we are all “trolls” now because the pace of innovation is so intense that every inventor and firm must have an aggressive IP strategy, both defensive and offensive.

And yet when firms like the one I helped out as a lawyer and a board member try to defend their own technology, they are dismissed as “trolls.”  When firms like Acacia Research emerge to provide a secondary market for IP that might otherwise be grabbed without compensation by larger players they are dismissed as trolls.

Meanwhile, it is the large incumbent and increasingly less innovative companies that are using their resources to capture the political process in order to defend their slowing business models.

We will all pay a price in a weaker culture of innovation.

Susan Rice, the troubled potential nominee to replace Hillary Clinton as Secretary of State, seems to have a peculiar interest in Canadian energy companies. Earlier this week On Earth, a magazine published by the environmental group Natural Resources Defense Council, reported that an unusually large part of her and her husband’s personal wealth is tied up in Canadian energy companies and banks that stand to gain significantly if the U.S. State Department approves the Keystone XL pipeline to bring oil from Canada through the United States for export through ports on the Gulf of Mexico. (The “XL” project is an extension of the overall Keystone project which includes pipelines to bring Canadian oil to U.S. based refineries that became operational in 2010.)

The personal portfolio of Rice and her Canadian-born husband Ian Cameron includes shares in two large Canadian energy companies, Cenovus and EnCana. Until 2009, EnCana was both an oil and natural gas company. It then spun off its oil assets in the newly formed Cenovus entity. It is likely that Rice obtained the shares of Cenovus as a result of an original investment in EnCana.

Both EnCana and Cenovus are large Canadian energy firms with links to Keystone. EnCana entered into a joint venture with ConocoPhillips known as Wood River which owns refineries in the U.S. built to process oil that comes from Canada via one completed part of the Keystone pipeline project. Cenovus now owns that interest in the Wood River project. The Toronto Globe and Mail reported in 2011 that Cenovus was “banking” on overall approval of the pipeline project “underscore[ing] the high stakes” if the project were not approved.

It turns out that Rice and her husband were also willing to wager a substantial part of the assets of their family foundation on the prospects of those very same two energy companies. A filing with the IRS by the Rice-Cameron Family Foundation reveals that the Foundation has most (approximately 80%) of its investments in typical diversified stock and bond funds. These are valued at approximately $750,000. But the remaining 20%, valued at about $180,000, is invested in EnCana and Cenovus. Those companies are the only direct equity investments made by the Foundation. A copy of the filing can be found here.

Also of interest is that the Foundation filing is for the tax year ending November 30, 2011, so unlike the older 2009 disclosure document provided by On Earth, the IRS filing (called a “Form 990″) indicates a continuing interest in Canadian energy prospects lasting until late 2011.

My own view about Ambassador Rice is that her potential nomination as Secretary of State should be opposed because she represents the “relativist” world view that animates Obama’s approach to foreign policy. To date, Obama has not been able to put a significant institutional piece of the national security apparatus outside the White House in the hands of a loyal “relativist.” This would change if Rice, a hard core loyalist of both Obama and Valerie Jarrett, were put in charge of the Department of State.

But it is also quite odd to see this information about her approach to investing. What appears to be a heavy bet on a major energy transaction is a high risk strategy that would not be typical for a family foundation or even for someone with the resources that Rice and Cameron own personally. Diversity is the norm for the assets of foundations and other non-profit entities. Rice and her husband are trustees of the Foundation and owe it a fiduciary duty. Normally that duty mandates diversity of assets. Here, however, they have put nearly 20% of the Foundation’s assets into just two companies, both with links to the controversial Keystone project, although that appears to be no longer the case for EnCana.

Another troubling aspect of the interest of RIce in the international oil industry is the fact that oil companies are notorious for being bad actors in the global economy, an issue I explored in my article The PetroChina Syndrome. In the past, for example, there were large protests about the investment of Talisman, a Canadian oil company, in Sudan. There are also allegations that some of the companies held in the Rice and Cameron personal portfolio do business with Iran. At a minimum one would have expected Rice to divest her holdings in this controversial sector while serving the public as a diplomat.

Secretary of State Candidate Has a Major Financial Stake in Canadian Tar Sands | OnEarth Magazine.

The blogosphere has been raging with debate today about the role of Mitt Romney at Bain. My first reaction was, well, if this is true, if Mitt Romney told one government agency he had only a passive role at Bain as of 1999 and told the SEC that he was Bain’s CEO then that is a problem.

But could it be true?

Unfortunately the reporting by the MSM on this issue has been horribly confused. I noted in several tweets that the problem might be that Romney was CEO of the general partner of a limited partner. If that were the case then the two disclosures made by Romney might be reconciled. The GP of an LP of a PE fund – yes, I know, a mouthful – may indeed be a passive player in the complex world of PE funds.

Not trusting the MSM and not getting any clarity from the Obama twitterers either, I decided to dig into the SEC documents myself. I have written in depth about PE funds here and here so thought it worth assessing. Well, it did not take long to figure out that Romney may have a real problem on his hands and that this may explain his rather confused response to the situation today.

Let me give just one example, although there may be more. In 2000, after Romney has stated he left active control of Bain, Bain entered into a transaction that left it and associated entities holding nearly 33% of the shares of Odwalla, the juice company.  Bain had sold to Odwalla another company called Fresh Samantha. When Odwalla later sold itself to Coca Cola, Bain made a handsome return on those shares.

WaPo’s Factchecker looked at this transaction and clearly did not understand it. They concluded that it did not show that Mitt Romney had a managerial role. That is manifestly not true. In a 13D filing that Bain made describing their role, Bain makes it clear that Romney was not just the holder of a passive LP interest. He was also sole shareholder, sole director, CEO, President, Managing Director and “thus is the controlling person” of Bain Capital, Inc.

This is the missing link in today’s story.

The key question in a PE firm is where the power lies.  It lies in the management company at the heart of the web of entities set up by a PE fund. The management company is the wheelhouse of a PE firm where the key decisions are made that then radiate throughout the entire system.  Whether it is KKR or Blackstone or Carlyle or TPG or Bain, there is always such an entity. And at Bain – during Romney’s tenure – that entity was Bain Capital, Inc., a separate entity that Bain itself explained in its Odwalla filing had as its “principal business” “that of a management company and managing partner of the BCIP Entities.” (In this transaction the BCIP Entities were the underlying “passive” investment funds like Bain Capital VI which had handed over to Bain Capital, Inc., the power to manage their investment.)

In other words it is at Bain Capital, Inc. where major decisions about Bain as a whole were made. While Romney would have worked with fellow professionals to develop an overall strategy with respect to an investment like that in Fresh Samantha or Odwalla, at the end of the day he, and he alone, had sole legal responsibility for decisions made by Bain Capital, Inc. Of course, specific responsibilities and decisions could be delegated or structured differently with respect to different transactions, so a final conclusion about power and decision making can only be made if the agreements between the entities are made public.

But it is reasonable to conclude from the description provided by Bain itself to the SEC that Bain Capital, Inc. was acting as the leader of the underlying passive investors and thus Romney would have had a key and substantive role in such decisions as whether to sell Fresh Samantha to Odwalla and how to use the 33% stake Bain had received in Odwalla to wield power inside that company. This would have included important active decisions on votes for the Odwalla board of directors (in fact, two Bain employees sat on the Odwalla board at this time) and eventually on the sale of Odwalla to Coke. Even if Romney spent most of his time running the Olympics, at the end of the day his signature was needed on key decisions like these as he was the “controlling person” of Bain Capital, Inc.

A similar kind of relationship could be found a year later, in 2001, now some two years after Romney said he had left active control of Bain behind, at Domino’s, the pizza chain company.  Bain had a 49% stake in that company and its fiscal year 2000 annual report on form 10-K filed on March 28, 2001 lists Romney as – still – wholly owning Bain Capital, Inc.

One year later, however, Romney’s name disappears from the Domino’s SEC filing. And so does Bain Capital, Inc. The latter is replaced by Bain Capital Investors, LLC, which appears to have, at that point, taken over for Bain Capital, Inc., and likely for Romney himself as the central managerial entity in the Bain network. Only when that step had been completed can it be said that indeed Romney no longer had an “active” role at Bain.

Whether this adds up to a felony, of course, as the Obama campaign argued today is a separate question. But there can be little doubt that as a legal matter, Mitt Romney remained in charge at Bain through his control and legal responsibility for Bain Capital, Inc., the management company at the heart of the Bain empire.  While Romney also held controlling positions in limited partnerships that, indeed, have “limited” roles in the day to day life of Bain overall, that is not the case with respect to Bain Capital, Inc., the hub of the entire enterprise.

As my article in Dissent and book chapter suggest, there is a larger problem at stake here than the political campaign. I argue there that we live in an era of private equity capitalism. Even firms not owned or connected to PE funds are nonetheless impacted by their pressure on them for greater profits and efficiency. Hopefully some clarity can come to the PE debate and a healthy discussion about alternatives to PE capitalism can emerge.