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.
