Friday 15 August 2014

Nothing New Under the Sun: “Patent Trolls” Have Been Around Forever (well, at least a couple hundred years)

In a fascinating paper titled, “Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century”, Professor Zorina Khan of Bowdoin makes many interesting points.  Professor Khan, an economics professor who studies law and economics history, essentially states that non-practicing entities (NPEs) have been with us for decades—back to the nineteenth century, that there has not been an "explosion" in patent suits when the last two hundred years are considered, and explains why prizes are not preferable to patents to incentivize invention and commercialization from a historical perspective.  To get a gist of her approach in considering critiques of the patent and copyright systems, Professor Khan states: “In general, these debates and policy proposals are primarily based on rhetoric and self-interest rather than on objective assessments of empirical evidence.”  And, she was referring to debates (very similar to today’s debates) in the nineteenth century. 

In reference to the U.S. Supreme Court eBay v. MercExchange decision concerning injunctions, Professor Kahn notes that:

According to a recent Supreme Court decision, "trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”  The historical evidence refutes such claims, since “non-practising entities” or patent rights-holders who do not manufacture their inventions or final goods are hardly anomalous. Rather, as Adam Smith suggested, specialization and the division of labour are endemic to efficient markets. NPEs were the norm during the nineteenth century, and technology markets provide ample evidence that patentees who licensed or assigned their rights were typically the most productive and specialized inventors. As markets in invention became more competitive, many patentees cross-licensed their patents to other inventors to avoid the potential for conflicting rights. In some cases, patent rights were allotted to companies that intended to produce the invention or associated final goods. But in many others, “speculators” invested in patents with the intention of profiting from the margins of price differentials, without participating in either inventive activity or manufacturing, much as a financial investor might trade in a share in a company in secondary and tertiary markets. These different patterns all characterized a process of securitization that proved to be as fundamental to the development of technology and product markets as it was to the mobilization of financial capital.

Professor Kahn also attacks the notion that there has been a “patent explosion” in recent years (the increase in patenting is likely the result of the introduction of a disruptive technology):

Americans from the beginning of the colonial period have always considered themselves to be exceptionally litigious, and equally hyperbolic about decrying its consequences. Litigation is a function of many factors, including changes in legal rules, uncertainty, conflicting interpretations of rights and obligations, defensive and aggressive measures, and the scale of the underlying market. One of the most straightforward explanations of the volume of patent lawsuits is related to the numbers of patents filed. Figures 1(a) and (b) support the hypothesis that the “patent litigation explosion” merely mirrors a parallel “explosion” in patenting. Patent applications and grants alike have risen sharply, from approximately 270,000 applications and 153,000 grants in 1999, to 543,000 and 253,000 respectively in 2012, with especially rapid growth between 2009 and 2010. Opinions may differ but, although it has increased over the past few years, the rate of litigation (cases as a percentage of patents), is still unexceptional. This is especially true since changes in legal rules (ironically intended to reduce litigation) have led to a nominal or administrative increase in the numbers of cases filed in the most recent years.  

However, two decades may be insufficient to assess whether patent disputes have reached a pathological level. We therefore estimate the long run patterns for patenting and litigation, between 1790 and 2012. Figure 2 shows patent grants per capita over the two centuries of the existence of the federal patent system, for total patents and patents filed by domestic residents. It suggests that the “long nineteenth century” was an extraordinarily creative period in terms of patented innovations, when the numbers of patents relative to population attained levels that have not been exceeded until the final three years. Figure 3 presents the patterns over time of reported patent cases relative to patents between 1790 to 2000.  This historical trend in litigation rates relative to patents granted clearly does not support claims that litigation in the past decade has “exploded” above the long term norm. In fact, the per patent rate of litigation was highest in the era before the Civil War and during the subsequent market expansion that started in the 1870s. Patent litigation rates were increasing toward the end of the twentieth century, but the increase comprised a return toward the long-term norm.

Technological innovations in the 21st century have undoubtedly transformed production and consumption. However, from the perspective of a world where mail was delivered by stagecoach, the advent of the telegraph was far more transformative to communications in the antebellum era than the change from a landline to a cellphone. This was not just true of “great inventions” but also of supposedly incremental discoveries such as safety pins, aspirin and manufactured soap. Every new innovation that mattered in the marketplace brought uncertainties, conflicts and consequences that were initially processed in state and federal courts, until these issues were resolved through various institutional mechanisms. Figure 4 shows new innovations like the telegraph, telephone and automobile were inevitably accompanied by an upswing in total civil litigation. . . .

Enormous profits awaited those who were able to successfully commercialize new inventions and satisfy or anticipate market demand, creating wealth for some entrepreneurs on a scale that was unprecedented then, or since. Numerous inventors were attempting to resolve similar problems, leading to multiple patent interferences, overlapping claims, and efforts to invent around existing patents. Complex combinations of hundreds of patents often covered any particular device, so it is not surprising that intense competition for these excess returns centered around these rights.  Licensing and litigation comprised a common strategy by “practicing” and “non-practicing entities” alike. Austin and Zebulon Parker of Ohio prosecuted claims for licenses against millers across the nation and engaged in countless lawsuits regarding an 1829 patent for an improved waterwheel. George Campbell Carson’s smelting patents were held to be worth an estimated $260 million in damages and royalties and he floated shares in the Carson Investment Company, which was formed to pursue potential defendants.  In the railroad industry “… a ring of patent speculators, who, with plenty of capital, brains, legal talent and impudence, have already succeeded in levying heavy sums upon every considerable railway company in the land…. This case is not an isolated one, but there were hundreds of them, and the railway company that made up its mind to insist upon its rights had to keep a large legal force, a corps of mechanical experts, and other expensive accessories, in order to secure that end.”

Her article is full of interesting examples of NPEs of the nineteenth century, and she also notes that Daniel Webster was paid $332,000 as lead attorney in a single patent case in 1852.  She also makes the argument that historically prizes failed to provide the same technological spillover benefits as patents.  Notably, she states that the only thing really different in patent practice and law today than from the nineteenth century is that legislators are actually passing many more laws to address the complaints about the enforcement and use of patents.  Apparently, there was a little more restraint on behalf of legislators in the U.S. back in the day. 


Nia Roberts said...

What a fascinating analysis! Thanks for posting this - it's good to get a different perspective.

Mike Mireles said...

Dear Ms. Roberts,

Thank you for your kind comment. Warm regards, Mike