Preface and Foreword Welcome to Introduction to Intellectual Property , an OpenStax resource. This textbook was written to increase student access to high-quality learning materials, maintaining the highest standards of academic rigor at little to no cost. About OpenStax OpenStax is part of Rice University, which is a 501(c)(3) nonprofit charitable corporation. Our mission is to make an amazing education accessible for all. Our first openly licensed college textbook was published in 2012, and our library has since scaled to over 40 books for college and high school courses used by millions of students. OpenStax Tutor, our low-cost personalized learning tool, is being used in college courses throughout the country. Through our partnerships with philanthropic foundations and our alliance with other educational resource organizations, OpenStax is breaking down the most common barriers to learning and empowering students and instructors to succeed. 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Format You can access this textbook for free in web view or PDF through OpenStax.org, and for a low cost in print. About Introduction to Intellectual Property This unique resource provides a clear, effective introduction to the legal issues and applications of Intellectual Property. The book is directed at students and ordinary citizens with no formal background in the field, and who may be studying entrepreneurship, marketing, computer science, engineering, or other fields. It is useful in an array of courses ranging from Business Law and Product Design to Information Systems and many others. Introduction to Intellectual Property covers patent basics and enforcement, copyright, trademark, and trade secrets. Each chapter is authored by an expert in the respective field, all under the guidance of principal author David Kline and executive editor David Kappos. The luminaries involved with this project represent the forefront of knowledge and experience on these topics, which makes the text an even more valuable resource for instructors, students, and professionals. While informative for anyone with a professional or personal interest in intellectual property, this resource is a formal textbook, and is designed for the effective instruction of college students. Each chapter contains learning objectives, subsections, and topically oriented review questions. Introduction to Intellectual Property was originally developed by the Michelson 20MM Foundation, released under the title The Intangible Advantage . It remains available along with an accompanying online course, video series, and other resources. Visit https://michelsonip.com/intangible-advantage/ for more information, and see below for more detailed descriptions of these assets. Answers to Questions in the Book Assessment Questions' answers are provided in the Answer Key at the end of the text. About the Authors Senior Contributing Authors David Kline David Kline was a Pulitzer-Prize-nominated journalist and author who covered some of the world’s most important stories over the last 30 years for the New York Times, Wall Street Journal, Christian Science Monitor, Rolling Stone, the Atlantic, Harvard Business Review, CBS and NBC TV , and other national media. He was also a contributing writer for Wired magazine for many years. In more recent years, Kline wrote on a variety of business and technology topics, with a special focus on intellectual property issues. His bestselling book Rembrandts in the Attic from Harvard Business Press is considered the seminal work on patent strategy within corporate America, and it has helped to shape the direction of corporate and policy-maker thinking on patent issues. In 2016, Kline was named one of the “World’s Top 300 Intellectual Property Strategists” by Intellectual Asset Management magazine. David Kappos David Kappos is widely recognized as one of the world’s foremost leaders in the field of intellectual property, including intellectual property management and strategy, the development of global intellectual property norms, laws and practices as well as commercialization and enforcement of innovation based assets. From August 2009 to January 2013, Mr. Kappos served as Under Secretary of Commerce and Director of the United States Patent and Trademark Office (USPTO). In that role, he advised the President, Secretary of Commerce and the Administration on intellectual property policy matters. As Director of the USPTO, he led the Agency in dramatically reengineering its entire management and operational systems as well as its engagement with the global innovation community. He was instrumental in achieving the greatest legislative reform of the U.S. patent system in generations through passage and implementation of the Leahy Smith America Invents Act, signed into law by the President in September 2011. Contributing authors Kerry L. Bundy, Partner, Faegre Drinker Randall E. Kahnke, Partner, Faegre Drinker Robert G. Krupka, Krupka Law Group Presented By Gary K. Michelson, M.D. Reviewers Paul R. Michel, Chief Judge (ret.) U.S. Court of Appeals for the Federal Circuit Richard Epstein, Director, Classical Liberal Institute at New York University Paul M. Janicke, University of Houston Law Center Louis Foreman, Founder and CEO, Edison Nation Sharon Beaudry, Oregon Institute of Technology Nancy R. Olsen Waldron, Lasell University Student and Instructor Resources Animated Video Series The Michelson 20MM Foundation has provided a series of brief animated and narrated videos explaining the basics of Intellectual Property. Available on YouTube at https://www.openstax.org/l/IPBasics. Michelson 20MM Foundation Educator Portal This robust offering from the providers of this textbook offers educators widespread resources to support their teaching. These include Assessment sets, Lecture Slides, and Discussion Questions. Go to https://michelsonip.com/teachip/ to learn more and log in. (Note that access to this site is not maintained by OpenStax, and will require a separate account creation process.) Online Course The Michelson 20MM Foundation has also provided a comprehensive and free online course through course provider Udemy. Visit https://michelsonip.com/free-course/ to register and learn more. Technology Partners As allies in making high-quality learning materials accessible, our technology partners offer optional low-cost tools that are integrated with OpenStax books. To access the technology options for this book, visit the book page on openstax.org. Foreword: The Intangible Advantage I did not start out to be an inventor. I wanted to be a doctor. That’s all I ever wanted to be, ever since the day I sat at my grandmother’s kitchen table—I must have been seven years old—and smelled her flesh burning on the stove. You see, my grandmother suffered from syringomyelia, a crippling spinal disease that results in terrible back pain and the loss of sensation to pain and temperature in the extremities, especially the hands. When I saw the flames licking up through her fingers that day, I screamed, and she quickly doused her hand in the sink. “Don’t worry,” she told me. “One day you’ll become a doctor and you’ll fix me.” Some 20 years later, I had graduated medical school and completed a residency in orthopedic surgery, and was doing a fellowship in spinal surgery at St. Luke’s Medical Center in Houston when I stumbled upon a problem in an otherwise routine case. The case was a discectomy—the removal of a ruptured disk that is pressing on a nerve root. I noticed that because the disc had ruptured slowly over time, it had created a bone spur, which was like a little rhinoceros horn of bone, as hard as ivory. So I asked myself, How is taking out that disc going to help the patient if the bone spur is going to cause him pain for the rest of his life? I wanted to take that bone spur out, but I knew of no way to do that because it was sticking straight up about five inches down inside a narrow little hole in the patient’s back. So I asked a very famous surgeon in the hospital, “How do you get that bone spur out?” “Do not put a high speed burr in there and attempt to grind it down,” he said. He had tried that once, and ended up damaging the patient’s spinal cord and paralyzing her for life. That sounded to me like a pretty strong argument against trying that approach again. Then I asked the head of my fellowship program, “How do I get that bone spur out?” He explained that he once tried using a grabber instrument called a ronguer to try to break off the bone spur. But the pressure exerted on the instrument caused it to explode, sending fragments all throughout the dural sac. Luckily, he was able to retrieve the pieces and repair the damage. But once again, here was an approach that didn’t exactly recommend itself. No matter which spine expert I asked, the response was always the same. They all told me what not to do. Leave the bone spur alone, they said—just sew up the patient and send him home, even if it means dooming him to a lifetime of pain. Be content to follow the age-old motto of the physician, “First, do no harm.” Be content? George Bernard Shaw once said that inventors are a disgruntled lot. And I must have been pretty disgruntled with the lack of any solution for that bone spur, because I decided to invent a solution myself. Instead of trying to grind down the spur (with potentially disastrous results) or break it off (again, with potentially disastrous results), I came up with a counterintuitive approach. You see, I realized that while a bone spur itself is the hardest bone known to man, it sits atop the vertebrae, the inside of which is much softer and more mesh-like. What if I tried tapping the spur into the softer vertebrae? I found a tool normally used for an entirely different purpose and thought it might suffice for the job. And the next time I had a discectomy case with a bone spur, I tried out my new tool. I tapped the bone spur lightly with it, but nothing happened. I tapped it again, harder, but still nothing happened. Then I tapped it really hard, and that’s when I heard a “pop” and felt the instrument suddenly sink down. Now, I knew I couldn’t have damaged any nerves or structures because I had retractors holding the nerve and the dural sac out of the way. But when I looked inside, I could not see the bone spur anywhere. It was gone. And I thought, “Uh-oh.” So I brought in an x-ray machine and looked for the bone spur. It turned out the spur had corked the very hole that I had created when I broke it off and pushed it into the vertebrae—like a cork in a bottle. There wasn’t a drop of blood anywhere, and no damage to any tissue. In other words, my procedure was self-sealing! To this day, it remains the best solution for this problem. Over the next few months, I designed a set of instruments better suited to removing bone spurs no matter where they were located in the spinal canal. I gave the drawings to a machinist, and he created the tools according to my design. Soon I was using them routinely on bone spur cases, and getting such good results that other surgeons started sending me their bone spur cases. But eventually, these surgeons began asking me to provide them with a set of tools of their own. I said sure, and for each request, I would ask my machinist to fabricate another set of tools. Finally, the machinist told me that it would be cheaper just to make a hundred sets at once, since the major cost of fabricating the tools was in setting up the jigs on the machine. I thought that made perfect sense. After all, the demand for the tools from other surgeons was growing. In addition, I was disgruntled enough with the standard of care in other areas of spinal treatment that I had already invented several other new spinal surgery tools. So I started a little company to sell my tools and devices. I quickly realized, of course, that I needed to patent my inventions to protect all the time, money, and effort that I had invested to develop them. After all, if you don’t patent your inventions, especially in a competitive industry like medical devices, others will simply copy those inventions with impunity and sell them at a lower cost because they didn’t have to invest anything to develop them in the first place. That’s a great way to drive the innovators out of any industry and halt any further technical advances in that field. Over the next 15 years or so, I continued to invent various new spinal surgery tools and techniques, eventually obtaining more than 950 patents worldwide for innovations that fundamentally changed the practice of spinal surgery. These innovations are today employed in the vast majority of spinal surgeries worldwide. In fact, they became so widely adopted and so central to modern spinal treatment that in 2005 the giant medical device company Medtronic purchased the majority of my patent portfolio of spinal surgery inventions for $1.35 billion. Having retired from medical practice, I now devote my energy and philanthropy to inventing new solutions to problems beyond orthopedics. The Michelson Medical Research Foundation, launched with a $100 million grant, is dedicated to funding cutting-edge medical research that would be considered to avant-garde to receive funding from the National Institutes of Health or other conventional funding sources. In just one area of medical research, we committed to funding the prestigious Sabin Vaccine Institute with an initial $5 million five-year grant to develop effective vaccines against the parasitic worms that infect 1.4 billion of the world’s poorest people with devastating effect. The Michelson Found Animals Foundation promotes pet adoption and offers $50 million in research grants as well as a $25 million prize to any scientists who discover a way to chemically spay and neuter animals via a single, low-cost injection. Found Animals Foundation is one of the largest privately funded animal welfare foundations in the world and focuses on helping to end shelter euthanization and to improve the lives of pets and their people. My wife Alya and I also donated $50 million to the University of Southern California for the USC Michelson Center for Convergent Bioscience, to pursue medical breakthroughs in cancer and other diseases. The Michelson 20MM Foundation is dedicated to ensuring that equitable postsecondary educational opportunities that lead to meaningful careers are accessible to all, in part by making textbooks and new forms of interactive educational content available for free online to college students. At the cutting edge of higher education, the foundation helps forward-thinking entrepreneurs, nonprofits, and organizations close the opportunity gap. The Michelson Institute for Intellectual Property, a flagship Michelson 20MM initiative, provides access to intellectual property (IP) education to support budding inventors and entrepreneurs and close the existing “IP education gap.” Which brings me to the important book you are now reading. The Intangible Advantage: Understanding Intellectual Property in the New Economy is the first-ever text on intellectual property (IP) aimed at ordinary citizens, especially college students. As such, it is an important innovation in and of itself—one that hopefully will solve a big problem in American education. I’m particularly proud to have this newly released version of the textbook adapted for OpenStax, an initiative that has been at the cutting edge of innovation in higher education since its founding in 2012, and is also one of the Michelson 20MM Foundation’s inaugural grantees. As such, it is an important innovation in and of itself — one that hopefully will solve a big problem in American education. Until now, intellectual property has been taught only in law schools or the occasional business school seminar. In today’s knowledge economy, however, this is no longer sufficient. That’s because over the last 40 years, intellectual property has grown from an arcane, narrowly-specialized legal field into a major force in American social and economic life. It comprises an astonishing 45 percent of total U.S. GDP today, and represents 80 percent of the market value of all publicly-traded companies in the U.S. Put simply, intellectual property is now the chief engine of wealth creation and economic growth in the world. And as such, it has become a subject of vital importance for all Americans, not just those in the legal profession. There's a scene in the 1967 movie “The Graduate” when Mr. McGuire (Walter Brooke) offers career advice to a young Benjamin Braddock (Dustin Hoffman)? “Plastics!” he says. “There’s a great future in plastics. Will you think about it?” Half a century later, intellectual property has become the new watchword for almost any career of the future. Look around and you’ll see IP’s imprint everywhere. The business pages are filled with headlines of corporate “patent wars.” Art journals debate whether the artist Richard Prince’s appropriation of other people’s work is infringement or fair use. Music critics discuss the implications of the $7 million copyright infringement verdict against Robin Thicke and Pharrell Williams for allegedly borrowing certain musical themes from the work of soul singer Marvin Gaye. Indeed, from Silicon Valley startups to Fortune 500 board rooms, from MIT engineering labs to Wall Street trading desks, and from college business seminars to debates in Congress over global trade policy, intellectual property issues now lie at the heart of almost every arena of modern life today. And as a result, any young person today who does not understand at least the basics of intellectual property—and its value and role in science, business, arts, and the professions—will find themselves at a distinct disadvantage in the world of tomorrow. This book comes in several forms, suitable for different uses. The traditional ebook version of The Intangible Advantage contains the full text—including the hidden history of the U.S. patent system, the world’s first democratized patent system—as well as links to the first-ever series of popular animated videos on the basics of intellectual property. These videos answer such common questions as “Can I Patent That?” and “What If Someone Infringes Your Trademark?" Finally, The Intangible Advantage has a companion online course, Intellectual Property: Inventors, Entrepreneurs, Creators, available for free on Udemy. The online course is for self-directed learners — whether college students in an IP fundamentals course, users of the United States Patent and Trademark Office and the U.S. Copyright Office, or young executive trainees working in corporate law and engineering departments in firms both large and small. Such a ground-breaking body of work would not have been possible without the extraordinary contributions of some of the leading lights in the intellectual property world over the past four years. Principal author, the late David Kline, did a masterful job of translating the hidden history, complex legal doctrines, and practical workings of the U.S. intellectual property system into popular and engaging prose. It probably helped that he is not a lawyer by background, but rather a former war correspondent-turned-business journalist who wrote “Rembrandts in the Attic,” the seminal work on patent strategy in corporate America published by Harvard Business Press. In addition to his deep curiosity about the role of IP in the new economy, David was passionate about illuminating even the most complex subject matter for the benefit of today’s students. His impact on this text, and our entire Michelson Institute for Intellectual Property initiative, is beyond measure. Contributing author Robert G. Krupka is one of the foremost patent litigators in the nation. Anyone who wants to understand the complex (and controversial) American system of patent litigation can do no better than read his chapter on “Patent Enforcement.” Contributing authors Randall E. Kahnke’s and Kerry L. Bundy’s expert rendition of the role and importance of trade secret law in the American economy will be much appreciated by students as well as business leaders in every industry. This is especially the case now that Congress enacted the first federal trade secret act. To be sure, a book that explains the complex workings of patent, copyright, trademark, and trade secret law in popular, non-legalese prose—especially one largely written by a non-lawyer (albeit a recognized expert in the field)—needs careful vetting. And for our “peer-reviews” we relied on the advice and counsel of a number of leading IP academics and practitioners, five of whom stand out most strongly for their contributions. Chief Judge (ret.) Paul R. Michel of the U.S. Court of Appeals for the Federal Circuit, the nation’s main court for patent appeals, made enormous contributions in reviewing the manuscript not only for its legal theories but for its explanations of practical aspects of the patent system as well. His carefully-reasoned insider’s explanation of how the patent system really works made all of us who worked on this project feel privileged to sit at the feet of such a patient master. Professor Richard Epstein is the Laurence A. Tisch Professor of Law at New York University, a senior fellow at the Hoover Institution, and professor emeritus and senior lecturer at the University of Chicago. Considered one of the most influential legal thinkers of modern times, Professor Epstein’s detailed review of the manuscript proved vital to this project. Professor Paul M. Janicke teaches in the Intellectual Property and Information Law Program at the University of Houston Law Center. His critique and guidance early on in the development of the manuscript was invaluable. Inventor and entrepreneur Louis Foreman is the founder and CEO of Edison Nation , an invention commercialization organization, and creator and executive producer of the Emmy Award-winning PBS TV show, Everyday Edisons . His insights into the commercialization challenges faced by independent inventors were extremely helpful. Finally, former U.S. Undersecretary of Commerce and Director of the U.S. Patent and Trademark Office David Kappos served as executive editor of the book. Especially for a subject like intellectual property that is so sharply defined by subtle nuances of law and practice, his unique expertise at the very center of the IP system helped to sculpt the manuscript’s final shape. I would be remiss if I did not mention the tireless leadership of Michelson 20MM executive producer Phil Kim, who was both midwife and guiding hand of this project from its inception four years ago until its final realization in April of 2016. He reminds us all just how valuable clear vision and calm steadiness in the face of trials really are in an effort such as this. Similar praise and gratitude must be offered to Mayra Lombera and Marisa Moosekian, the Michelson 20MM producers who somehow managed to make all the myriad moving parts (and people) in this project fit together successfully. Whatever personality or production challenges arose, they somehow—I don’t really know how—made this whole thing work. America's Founders created the world’s first democratized intellectual property system for the common man. Now, the brightest minds in intellectual property have collaborated to democratize this once-inscrutable subject and bring you the world’s first intellectual property textbook, online course, and videos series for readers and learners like you. I hope you will find it enlightening—and useful. –Gary K. Michelson, M.D. December, 2020

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Introduction (credit: modification of work “Float Glass Unloading” by ICAPlants/wikimedia.org, CC BY 3.0)

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The Foundations of Patent Protection The first U.S. Patent (credit: US Patent Office via Wikimedia Commons / Public Domain) Learning Objectives After completing this section, you will be able to Describe the philosophical logic behind granting patents. Describe the role of patents in fostering invention. Do Patents Really Promote Innovation? Before reading this section, please watch the overview video below covering the usefulness of patents - how ironic that a system for granting exclusive rights to inventors is the greatest vehicle for knowledge-sharing and technology transfer ever devised by human beings. What Is a Patent? A patent is an intellectual property right granted by the government of a nation to an inventor that gives them the exclusive right to the invention for up to 20 years, in exchange for disclosing the details of the new technology to society for its ultimate benefit. In the United States, a patent is a legal instrument in the form of a document issued by the United States Patent and Trademark Office (USPTO). It gives the inventor of any new, useful, and non-obvious machine, process, manufacture, or composition of matter the right “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a limited time in exchange for public disclosure of the invention. United States Patent and Trademark Office. (2012, January 26). Patents. Retrieved from www.uspto.gov/patents/index.jsp A U.S. patent is only recognized domestically, and cannot be enforced in another country. History of Patents in the United States The legal foundation for U.S. intellectual property rights was laid by the Founders in 1787, in the very first Article of the U.S. Constitution, which outlined the precepts of our democratic society. In Article 1, Section 8, Clause 8 of the Constitution, Congress was given the authority to “promote the progress of Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”. U.S. Constitution Arr. 1, § 8 America was the first country in the world to enshrine intellectual property rights in its national constitution. And the Founders did this quite deliberately, says B. Zorina Khan, an economic historian at Bowdoin College whose book, The Democratization of Invention: Patents and Copyrights in American Economic Development , was awarded the Alice Hanson Jones Prize for an outstanding work in economic history. B. Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development , 1790-1920, Cambridge University Press, 2005. “To the men who gathered in Philadelphia to ‘promote the general welfare,’” Khan wrote, “it was self-evident that ideas, industrial and cultural inventions, and democratic values were integrally related. American democratic institutions would ensure that rewards accrued to the deserving based on [merit] rather than on the arbitrary basis of class, patronage, or privilege.” Indeed, the Founders viewed intellectual property rights as vital to the new nation’s economic survival. As George Washington himself stated in his first annual address to Congress in 1790, “The advancement of agriculture, commerce, and manufactures by all proper means will not, I trust, need recommendation. But I cannot forbear intimating to you the expediency of giving effectual encouragement to the introduction of new and useful inventions.” The question is, with all the challenges they faced, why did the Founders think it so crucial to create a strong intellectual property system? Their reasons were both universal—i.e., applying to all societies—and also very particular to America’s revolutionary experience. “Bargain” Theory vs. “Natural Rights” Theory Every society that affirms intellectual property rights offers two justifications for doing so: the bargain or contract theory and the natural rights theory . “Bargain” Theory The “bargain” theory starts with the commonsense premise that people will be encouraged to invent new products and services that benefit society if they are likely to profit by doing so. The U.S. Constitution thus offers inventors a bargain: If you invent something useful—e.g., a cotton gin in 1794 that boosted agricultural production a hundredfold, or a semiconductor 163 years later that sparked the creation of a trillion-dollar new industry and millions of jobs—then the Constitution and statutes say that, as a quid pro quo, you can have the exclusive right to that invention for a “limited time,” after which it goes into the public domain and belongs to society. Patent for an electrode lead for semiconductor devices(credit: US Patent Office via Wikimedia Commons / Public Domain) There is something so simple yet economically potent about this concept. As Abraham Lincoln—America’s only presidential patentee ( No. 6469 for a device to lift boats over shoals)—noted, the beauty of the patent system is that it “added the fuel of interest to the fire of genius.” “Natural Rights” Theory The “natural rights” theory, meanwhile, invokes another commonsense premise that most of us instinctively hold to be true: that the product of mental labor is by all rights the property of its creator, no less than the product of physical labor is the property of its creator (or of the person who purchases it from that creator). This is what Daniel Webster was referring to when he said, “The American Constitution does not attempt to give an inventor a right to their invention, or an author a right to his composition; it recognizes an original, pre-existing, inherent right of property in such invention or composition.” This right is not absolute, of course, and inventors’ inherent rights may at times be circumscribed by national security or other concerns. But in exchange for disclosing to the public the nature and details of the invention, the Constitution authorizes the government to enforce the inventor’s exclusive property right to that invention for a limited time. Daniel Webster, an American lawyer and statesman. (credit: Wikipedia / Public Domain) Two important public policy goals are thus served. The inherent property rights of inventors and authors to their creations are protected, thereby helping to ensure that the wellsprings of creation and productivity do not dry up for lack of incentive. And yet the benefits derived from these inventions and creations are ultimately harnessed to the public good through disclosure, thus promoting the progress of the nation and “the general welfare” of its citizens. How Patents Foster Innovation To help understand why patent rights not only encourage inventors but also promote the wider diffusion of new technology for the benefit of society, economic historians Naomi Lamoreaux and the late Kenneth Sokoloff suggested the following thought experiment: Imagine a world in which there was no patent system to guarantee inventors property rights to their discoveries. In such a world, inventors would have every incentive to be secretive and to guard jealously their discoveries from competitors [because those discoveries] could, of course, be copied with impunity. “By contrast, in a world where property rights in invention were protected, the situation would be very different. Inventors would now feel free to promote their discoveries as widely as possible so as to maximize returns either from commercializing their ideas themselves or from [licensing] rights to the idea to others. The protections offered by the patent system would thus be an important stimulus to the exchange of technological information in and of themselves. Moreover, it is likely that the cross -fertilization that resulted from these information flows would be a potent stimulus to technological change. Naomi R. Lamoreaux and Kenneth L. Sokoloff, “Inventors, Firms, and the Market for Technology: U.S. Manufacturing in the Late Nineteenth and Early Twentieth Centuries,” Historical Paper 98, National Bureau of Economic Research, Cambridge, Mass., 1997. It’s more than just “likely.” Extensive research in the United States and other nations shows that patents have served as a powerful stimulant to technological knowledge sharing. A 2006 survey published by the French economists Francois Leveque and Yann Meniere, for example, found that 88 percent of U.S., European, and Japanese businesses rely upon the information disclosed in patents to keep up with technology advances and direct their own R&D efforts. Francois Leveque and Yann Meniere, “Patents and Innovation: Friends or Foes?” CERNA (Centre d’economie industrielle Ecole Nationale Superieure des Mines de Paris), December, 2006. Patents Don’t Block Innovation, They Promote It From the earliest days of the United States, patent and legal records show how inventors (including Thomas Edison) regularly kept abreast of developments in their fields. They did this by studying patent descriptions published by both the USPTO as well as by industry publications such as Scientific American, which was founded in 1845 by Munn and Company, the leading patent agency of the nineteenth century, expressly to spread new technological knowledge and facilitate the buying and selling of patents. For example, Elias E. Reis—inventor of a number of devices to exploit the heat generated by electrical currents—reported that when he read in the Official Gazette in 1886 about a patent issued to Elihu Thomson for a new method of electric welding, “there immediately opened up to my mind a field of new applications to which I saw I could apply my system of producing heat in large quantities.” See “Record of Elias E. Reis,” 8, Thomson v. Reis , case 13,971, box 1,845, Interference Case Files, 1836-1905, Records of the Patent Office, Record Group 241, National Archives, courtesy of B. Zorina Khan. In many industries, specialized journals kept readers informed about new patents of interest. In fact, new research in 2012 discovered that rather than blocking development, Thomas Edison’s seminal 1880 incandescent lamp patent ( No. 223,898 ) actually “stimulated downstream development work” that resulted in “new technologies of commercial significance [including] the Tesla coil, hermetically sealed connectors, chemical vapor deposition process, tungsten lamp filaments and phosphorescent lighting that led to today’s fluorescent lamps.” Ron D. Katznelson, “Inventing Around Edison’s Incandescent Lamp Patent: Evidence of Patents’ Role in Stimulating Downstream Development,” May, 2012, derived from: http://works.bepress.com/cgi/viewcontent.cgi?article=1073&context=rkatznelson Even the word “patent” signifies its social purpose of disclosure. It is derived from the Latin patent meaning “open,” and is the present participle of “pate¯re,” meaning “to stand wide open.” This explains the origin of the term “letters patent” (“letters that lie open”), which refer to the patent documents issued by the English Crown. These were not closed with a seal but were instead kept open, with the seal hanging at the bottom, notifying all not to infringe upon the patent. Front page of the first "Scientific American" issue, August 8, 1845. (credit: modification of work by Scientific American via Wikimedia Commons / Public Domain) As with any economic and legal instrument, patents have the potential to slow innovation if their grant of exclusive rights is too broad. But the overwhelming preponderance of economic research and real-world experience demonstrate that, on balance, intellectual property rights tend to stimulate invention, economic growth, and the diffusion of new technological knowledge in every country where they exist. This fact by itself, however, does not explain why the U.S. patent system became a model for much of the world. To understand why it did—and how it helped build the most successful economy in the history of the world—we must examine the revolutionary design of the U.S. patent system itself and the ways in which it overcame the weaknesses of earlier patent systems. Assessment Questions

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The Weakness of Early Patent Systems (credit: modification of work "Ink Jar and Quills" by Student of Rhythm via flickr / CC BY 2.0) Learning Objectives After completing this section, you will be able to Outline the history of patents from antiquity through the 1700s. Identify flaws in early European patent systems. History of Patents: 500 BC to the 1700s Given the commonsense logic of granting patents to stimulate invention, it comes as no surprise that patent- like incentives date all the way back to antiquity. In the ancient Greek city of Sybaris (located in what is now southern Italy) in 500 BC, “encouragement was held out to all who should discover any new refinement in luxury, the profits arising from which were secured to the inventor by patent for the space of a year.” Charles Anthon, “ A Classical Dictionary ,” Harper & Bros, 1841. The first formal patent legal institutions were developed in the Republic of Venice in the mid-1400s. The Venetian Statute of 1474 decreed that the inventors of new and useful devices would be protected from infringers and copiers for ten years so long as they disclosed the details of their inventions. Most Venetian patents were granted in the field of glass making, and when a large number of these glass makers emigrated to other countries in Europe, they sought similar protections from the local authorities. This is how the notion of patent rights, and their expression in patent legal systems, began to spread and gain acceptance throughout Europe. Initially, however, English and French monarchs used patents not simply to stimulate invention, but also to grant exclusive trade monopolies to those favored by the court. In the reign of Elizabeth I in the latter 1500s, some 50 patent monopolies were granted over the trade in such staples as salt, soap, starch, iron, and paper. Critics said these “enriched the monopolist and robbed the community” while doing absolutely nothing to stimulate new technology or industry. A growing public outcry ultimately forced Elizabeth’s successor James I to revoke these grants of trade monopolies in 1610. In 1624, the Statute of Monopolies formally repealed the practice and henceforth restricted patent rights solely to new inventions. Portrait depicting Queen Anne of Great Britain by John Closterman, circa 1702. (credit: Workshop of John Closterman via Wikimedia Commons / Public domain) European countries made several other important innovations in their early patent systems. In the mid-1500s, France became the first to publish patent descriptions from inventors who chose to submit them. England under the reign of Queen Anne (1702–1714) was the first to require inventors to submit a written description of their patent to “describe and ascertain the nature of the invention and the manner in which it is to be performed.” And in 1729, France began to publish abbreviated digests of patent descriptions, but these were intermittent and subject to delays of up to 60 years after the patents were originally granted. As might be expected, this lack of regularity limited the technological knowledge sharing that is one of the great benefits of a patent system. Flaws of Early Patent Systems Old World patent systems suffered from other major weaknesses as well. Patents for inventions imported from other countries were regularly granted, increasing the incentive for would-be patentees to copy the creative work of others rather than invent for themselves. And there was generally no systematic examination of patents by technical experts, in part because this was viewed as an intrusion upon the prerogatives of the Crown. But the biggest problem with early patent systems was that they all shared a tendency to reinforce the wealth and prerogatives of elites, not the welfare and productive capacity of the whole of society. In Britain, patents were favors granted “by grace of the Crown” and were often only secured through court connections. They were also “subject to any restrictions the government cared to impose, including the expropriation of the patent without compensation.” Op. cit., Khan. What’s more, patent application fees were prohibitively high—more than 11 times the per capita annual income of the average British citizen—which put the system out of reach of all but the wealthy. Yet ironically, in the parliamentary debates over the patent system, the exclusion of the “working classes” was regarded as one of the chief virtues of the British patent system. British patent law also severely limited the ability of inventors to sell or license the rights to their discoveries, as noted in a contemporary 1832 book entitled A Practical Treatise on the Law of Patents for Inventions . Richard. Godson, A Practical Treatise on the Law of Patents for Inventions and of Copyright, Saunders and Benning, 1832. Retrieved from Google books, at bit.ly/QmPhaZ This restriction, along with “working requirements”—these were regulations that forced patentees to manufacture products based on their patents within two or three years of issuance or lose their patent rights—limited innovation activity mainly to those who had the factories (or the ready capital to build them) needed to produce such products. These rules had two significant effects upon the British economy. They restricted innovation to only a small sector of the population rather than unleashing the creativity and productivity of the whole people. And they created a bias toward inventions that enhanced the market dominance of incumbent, capital-intensive industries rather than opening up new markets for the sorts of disruptive new industries that usually drive economic progress. “European societies were organized in ways that concentrated power in the hands of elites and facilitated [parasitic] rent-seeking by favored producers,” notes historian B. Zorina Khan. “The organization of invention was no exception. A society that restricts [invention] to elites can generate exceptional gains early on, but the initial spurt is unlikely to be maintained.” Indeed, the result in Britain was unbalanced and narrowly focused economic growth. Inventors faced high transaction and monetary costs, a limited market for their inventions, and a great deal of uncertainty. Diffusion of new technological knowledge was severely inhibited, and the rate of technological change was adversely affected as a result. Eventually, Britain’s initial leadership of the Industrial Revolution had more to do with its large existing commercial holdings and manufacturing base, and its vast stores of amassed capital, than with systemic or broad-based encouragement of innovation within British society. The Changing Tide The elitist nature of early patent systems reflected the feudal economic relations that dominated that era. But by the late eighteenth century, capitalist economies were beginning to emerge across Europe, and in Britain, nationwide lobbies of manufacturers and patentees called for an overhaul of the patent system to bring it in line with this new economy. The needed reinvention would come not from Britain, however, nor even from France, which had its own democratic revolution soon after America’s. Instead, it took place in the newly liberated United States, where a vibrant capitalism unburdened by centuries of entrenched feudalism was developing. This, then, is the story of one of the most admired of all American inventions—the modern democratized patent system, now used widely throughout the world.

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America’s Uniquely Democratic Patent System Learning Objectives After completing this section, you will be able to Explain the role of the Founding Fathers in developing the U.S. patent system. Explain the six unique features of the U.S. patent system. Never mind that intellectual capital accounts A Patent System For Everyone Before reading this section, please watch the overview video below covering why America developed the world’s first patent system for the common man, and what we got out of it as a result (hint: the strongest economy on the face of the earth). Never mind that intellectual capital accounts for 55 percent of total U.S. GDP today. Kevin A. Hassett and Robert J. Shapiro, “ What Ideas Are Worth: The Value of Intellectual Capital and Intangible Assets in the American Economy ,” Sonecon, 2012. Or that it represents up to 80 percent of the market value of all public companies in the U.S. “Intangible Asset Market Value,” Ocean Tomo, derived from http://bit.ly/bAPJVH To most citizens today, patents and other intellectual property are inscrutable mysteries. But to America’s Founding Fathers, they were matters of the highest national importance. The Challenge Facing the Founders The people who led the revolution and were later tasked with writing a Constitution were not concerned simply with creating lasting political structures that could defend the hard-won freedom and sovereignty of the newly liberated colonies. They also struggled to stimulate the rapid growth of industry to ensure the new nation’s economic survival. The survival of the United States of America was far from certain in those days. It was a backward agrarian economy, dependent on imports and lacking major domestic industry, with a population of barely three million inhabitants. Britain, meanwhile, with whom the United States had just fought a war and would soon fight another, had three times the U.S. population, boasted the most powerful economy on Earth, and was the unrivaled leader of the emerging Industrial Revolution. Political cartoon circa 1780 titled "The English Lion Dismember'd or the Voice of the Public for an Enquiry into the Public Expenditure" (credit: modification of work by BPL via Wikimedia Commons / CC BY 2.0) It was, therefore, a critical task of the leaders of the new American nation to design institutions—including a patent system—that would encourage economic activity and investments to spur the growth of America’s primitive economy. It’s important to note that although the Founders deeply believed in democratic ideals of government, they were not wild-eyed idealists. They were very practical people who faced an overwhelming challenge: How do you build a national economy from scratch, one that can prosper without British imports? To do that, they needed to mobilize every asset they had. Unlike Britain, however, America had no significant capital or commercial assets. In fact, the American standard of living at that time was actually lower than in many of their South American neighbors. Stanley Engerman and Kenneth Sokoloff,“ Factor Endowments, Institutions, and Differential Paths of Growth Among New World Economies ,” in Stephen Haber (ed), How Latin America Fell Behind, Stanford University Press, Palo Alto, California, 1997. All America had was abundant, but still untapped, natural resources, and a population widely regarded in the world as uniquely enterprising and independent minded. Ours was the world’s fastest-growing population, doubling in size every 20 years. Americans were also widely literate (albeit mostly lacking in higher education) and informed by what Washington Irving called “the general diffusion of knowledge.” Most important, unlike the tenant farmers and laborers who made up the bulk of England’s rigid class society, the vast majority of Americans were free-holding small farmers, merchants, shopkeepers, artisans, and mechanics—the forerunners of what we today call the middle class—who were possessed with what publisher Hezekiah Niles called “a universal ambition to go forward.” This was America’s principal asset, their ace in the hole. And men such as George Washington, Thomas Jefferson, and James Madison knew they had to find a way to unleash the creative and productive potential of these independent citizens if the country was to industrialize and survive. Incentives Needed to Spur Economic Growth As Jefferson wrote to his daughter Martha in 1787, it was precisely because America was bereft of Europe’s vast resources and left to its own devices that “we are obliged to invent and execute; to find means within ourselves, and not to lean on others.” But how to do that? From the historical record, it appears that the Founders quite consciously sought to construct a patent system that would do what no other patent system in the world had ever done before—namely, stimulate the inventive genius and entrepreneurial energy of the common man. As noted earlier, the first thing they did was to affirm inventors’ and authors’ rights in the U.S.Constitution itself. Although the intellectual property clause was ultimately adopted by unanimous consent of the delegates on September 5, 1787, there had been some debate about the issue. Thomas Jefferson in particular had expressed reservations about the wisdom of granting “temporary monopolies” (i.e., patent rights), given that Americans had just waged a bloody war of independence to overthrow the British monopoly of trade and political power. But as other delegates noted, and Jefferson eventually came to realize, a monopoly of trade is a far cry from the temporary incentives granted to inventors in return for the benefits they provide society. “How can the exclusive right of an invention be compared with a monopoly in trade?” D.P. Holloway, a Commissioner of Patents, would later argue in his 1863 annual report to Congress. “How can the exclusive privilege to sell salt in Elizabeth’s time, which added not one bushel to the production, but which enriched the monopolist and robbed the community, and the exclusive right of Whitney to his cotton gin, which has added hundreds of millions [of dollars] to the products and exports of the country, be both branded, with equal justice, with the odious name of monopoly?” United States Patent Office, Annual Report of the Commissioner of Patents 1863. Retrieved from Google Books at http:// bit.ly/Meh0Pv Portrait of Thomas Jefferson by Rembrandt Peale, circa 1805 (credit: Rembrandt Peale via Wikimedia Commons / Public domain) In the words of Louis Wolowski, Chair of Industrial Economics at the Conservatoire des Arts et Métiers: “[Inventors’] rights under patents, are called ‘monopolies’ only from the poverty of language, which has failed to express in words a distinction which no less clearly exists.” The Founders understood this distinction clearly. “Rather than monopolists,” says historian Khan, “patentees were viewed as beneficent contributors to progress, and the consistent goal of those who shaped the system was to encourage domestic ingenuity, whatever the social class of the inventor.” Opt. cit., Khan. Or as James Madison put it in Federalist Paper 43, “The public good fully coincides with the [patent rights] of individuals.” Creating a New Type of Patent System The real genius of the Founders, however, lay in the way they consciously integrated democratic principles into the design of the world’s first modern patent system—principles that had a profound impact on the pace and direction of U.S. economic growth. These were reflected in six fundamental innovations in our patent system that departed from European practice. Low Fees: Making Patents Affordable The original patent law passed by Congress on April 10, 1790, deliberately set patent fees to a level any ordinary citizen could afford—initially $3.70, but three years later raised to $30. This was still less than 5 percent of the rate in Britain. Patent fees remained $30 for the next 70 years, ensuring that virtually any citizen could participate in the Industrial Revolution. The results were dramatic. Whereas most of Britain’s handful of inventors came from privilege, the vast majority of America’s thousands of inventors came from humble beginnings. They included farmers, factory workers, merchants, mechanics, and other artisans. Of the 160 so-called “great inventors” of nineteenth-century America, over 70 percent had only a primary or secondary school education. Many had no formal schooling at all. And some of the most famous names in American invention—Matthias Baldwin (locomotive), George Eastman (roll film), Elias Howe (sewing machine), and Thomas Edison (electric light and phonograph)—had to leave school early to support their families. One of Matthias Baldwin's early locomotives, the Memnon. (credit: Internet Archive Book Images via Wikimedia Commons / No restrictions) What’s more, in another sign of economic democratization, most U.S. inventors had no formal scientific or technical training. They had only the general knowledge common to citizens of the day, plus whatever they taught themselves. What distinguished them was their ingenuity in applying that general knowledge to the practical problems of daily existence, and then exploiting the commercial opportunities that arose as a result. In short, they were entrepreneurial. The rapid growth of inventive activity during early American industrialization was characterized by a disproportionate increase in the involvement of segments of the population with relatively common sets of skills and knowledge,” note Sokoloff and Khan. “Rather than being accounted for by an elite who possessed rare technical knowledge or commanded large amounts of financial resources, the rise in patenting coincided with a broadening of the ranks of patentees to encompass many individuals, occupations, and geographic districts.” Kenneth Sokoloff and B. Zorina Khan, “ The Democratization of Invention During Early Industrialization, 1790O1846 ,” Working Paper No. 578, Department of Economics, University of California, Los Angeles, December, 1989. Making the patent system inexpensive invited everyone’s participation. In the words of Englishman John Standfield, quoted in an 1880 issue of Scientific American , “The cheap patent law of the United States has been and still is the secret of the great success of that country.” Simplifying Application Procedures The Founders greatly simplified administrative procedures in applying for a patent. This was no small thing when you consider that British applicants were forced to seek approval from seven different offices, and then twice—twice!—obtain the signature of the King. If they wanted a patent that covered Scotland and Ireland as well, they needed approval from ten more offices. British patent procedures were so Byzantine, in fact, that author Charles Dickens wrote a spoof of them entitled A Poor Man’s Tale of a Patent , in which his main character, an inventor, is forced to seek approvals from 34 offices, some of which had been abolished years before and no longer existed. Obviously, few inventors could hope to run this gauntlet successfully unless they had the wherewithal to hire very expensive patent agents to assist them. In the United States, on the other hand, applications only needed the approval of a single patent office, which created repositories throughout the country where inventors could drop off their applications and models and have them forwarded to the patent office at government expense. Rural inventors could even apply for a patent through the mail—postage free! This last perk for rural inventors turned out to have a big impact on the course of U.S. economic development. While most British industrial breakthroughs were confined to London or other big cities, U.S. inventions were widely distributed across the country, in urban and rural areas both. The result was broader- based economic growth and less income inequality in the United States. Spreading New Technological Knowledge Another unique feature of the U.S. patent system was its systematic effort to spread new technological knowledge throughout society, thereby creating a virtuous circle of innovation begetting more innovation. In Britain, patents were only open to public inspection after paying a fee, and until 1852 were not even officially printed, published, or indexed. In France, printed information about patents was limited to brief titles in patent indexes, intermittently published and only available in the office in which these had been originally filed. By contrast, the first U.S. patent law explicitly stated that “copies of patent Specification together with similar Models [are] to be made at the public Expence and lodged in each state.” Patent Act of 1790, HR-41, In addition, as noted in the previous section, a plethora of publications by government and industry enabled any citizen with an interest to keep abreast of the latest patented technologies. Examining Patents for Validity In a very crucial departure from Old World practice, the Founders created the world’s first examination system for patents to ensure their novelty , non-obviousness , and utility . The examinations were initially conducted by a committee composed of the Secretary of State (Thomas Jefferson), Secretary of War (Henry Knox), and Attorney General (Edmund Randolph). But this was found to be cumbersome, so in 1793 a simple registration system was established. It turned out, however, that without the examination of applications for novelty, non-obviousness, and utility, the validity of issued patents began to be questioned. So the reforms of the 1836 Patent Act specified that henceforth applications would be scrutinized by technically trained examiners to ensure that the invention represented a genuine advance in the state of the art. For the first time anywhere in the world, the criteria for granting a patent depended solely upon the merits of the application rather than the identity or the mere say-so of the inventor. The situation was very different in Europe. In France, the following caveat was printed on each patent: “The government, in granting a patent without prior examination, does not in any manner guarantee either the priority, merit or success of an invention.” Imagine trying to interest a group of investors in your new invention with that kind of warning label attached to it! In Britain, meanwhile, the lack of any examination of patent validity made the purchase of a patent right highly speculative and costly, thereby limiting investment in new technology. By contrast, says Khan, “the U.S. examination system reduced uncertainty about the validity of patents, and provided [interested parties] with a signal of [their] potential value.” This proved to be crucial in facilitating the growth of an extensive market in the sale and licensing of valuable patent rights—the first large-scale market of this type in the world. No “Working Requirements” Reduced Monopoly Control The fifth distinguishing feature of the U.S. patent system was the lack of any sort of “ working requirements .” In the debate over HR-41, the bill that became the first U.S. patent law in 1790, “the Senate suggested requiring patentees to make products based on the patent or license others to do so. But the House rejected this as an infringement of patentees’ rights.” Op. cit., Khan. Indeed, the Founders believed working requirements would only strengthen monopoly power and skew invention toward incumbent industry by limiting patents to those with the factories (or the capital to build them) needed to manufacture products from their inventions. B. Zorina Khan, “ Antitrust and Innovation Before the Sherman Act ,” Antitrust Law Journal, No. 3, 2011. In short, the Founding Fathers of this nation deliberately and quite consciously created what we now call “ non-practicing entities ” (NPEs) in order to expand the pool of inventors in their then backward economy to include ordinary citizens without the wealth or resources to commercialize their own inventions. And it worked, leading to a dramatic surge in innovation in nineteenth-century America as large numbers of ordinary citizens started inventing and then licensing their discoveries to enterprises for commercialization. By 1865, the U.S. per capita patenting rate was more than triple that of Britain’s, according to the annual reports from the commissioners of patents in both countries, and by 1885, it was more than quadruple that of Britain. Each U.S. patentee was also far more prolific than their British counterpart, so by mid-century, the United States was patenting five times the number of inventions as Britain each year, even though the populations were then equal in size. Creating a Market for New Technology The sixth unique feature of the U.S. patent system—and along with the refusal to impose working requirements, the one that had the greatest impact on future U.S. economic growth—was “an explicit provision for the sale of patent rights [that] both the courts and the U.S. Patent Office acted to facilitate.” Naomi R. Lamoreaux and Kenneth L. Sokoloff, “ Inventive Activity and the Market for Technology in the United States: 1840O1920 ,” Working Paper 7107, National Bureau of Economic Research, Cambridge, Mass. 1999. Why facilitate the buying and selling of patents? Because doing so enabled ordinary worker or farmer inventors without the capital to commercialize their own discoveries to still participate in inventive activity and earn income by licensing or selling their patents to enterprises that could. This ability to license patent rights (along with the low application fees) turned inventing into a new career path for thousands of poor but technically creative citizens. B. Zorina Khan, “ Institutions and Technological Innovation During Early Economic Growth: Evidence From the Great Inventors of the United States, 1790-1930 ,” Working Paper 10966, National Bureau of Economic Research, Cambridge, Mass., 2004. It also proved to be a powerful means of mobilizing capital for investment in new technologies and their commercialization into new products and services for society. That patents could be used as tradable assets by non-practicing entities without the wealth to commercialize their own discoveries was a wholly unique feature of the American patent system. By 1880, 85 percent of all U.S. patents were licensed by their inventors, compared with 30 percent of British patents. B.Zorina Khan, The Democratization of Invention Patents and Copyrights in American Economic Development, 1790-1920, Cambridge University Press, 2005. Patent licensing, in fact, was the principal means by which new discoveries were commercialized in the decades before the early twentieth- century emergence of in-house corporate R&D departments. Publications such as Scientific American were founded specifically to facilitate the trade in patents, and it regularly featured lists of new and interesting patents, which commercial enterprises then licensed or purchased to use in their product development efforts. American Bell Telephone’s new product pipeline, for example, operated like most others at the time. According to its 1894 annual report, the company’s R&D department licensed 73 patents from outside inventors, while developing only 12 from its own employees. Thomas Blanchard was a typical inventor-licensor. He was the son of a small farmer who invented and patented a mechanical tack-maker in 1806 that could fabricate five hundred tacks per minute, each superior to tacks made by hand. He sold the rights to his machine for $5,000, quite a sum in those days. He then invented a lathe to produce uniform gun stocks, and the patent he received for it enabled him to attract investors for the production of those gun stocks for the local Boston market. Blanchard also leased his patent rights to gun producers nationwide, as well as to manufacturers of tool handles and wheel spokes. The income he generated from patent licensing enabled him to make inventing his full-time career. He went on to invent a wood-bending machine, an upriver steamboat, and a steam wagon that was used until the introduction of railroads in the United States, and received a total of 25 patents during his career. Portrait of Thomas Blanchard, circa 1912 (credit: modification of work by George Iles via Wikimedia Commons / Public domain) According to a 2013 Congressionally mandated Government Accountability Office (GAO) report on NPEs, “History is filled with examples of successful inventors who did not develop products based on the technologies they patented.” It specifically cited the case of Elias Howe, who patented a method of making a lockstitch but did not produce sewing machines. Instead, Howe licensed his patents to the Singer Company, which then deployed Howe’s invention in its sewing machines. “ Intellectual Property: Assessing Factors that Affect Patent Infringement Litigation Could Improve Patent Quality ,” U.S. GAO, August 2013. Patent licensing, scholars have found, was facilitated by an array of intermediaries—lawyers, venture financiers, and patent licensing agents—who “lowered the transaction costs and improved the efficiency” of the trade in and commercialization of patented technology. “By enabling, indeed encouraging, inventors to focus on what they did best [i.e., invention], this division of labor gave rise to the most technologically fertile period in American history.” Naomi Lamoreayx and Kenneth Sokoloff, “ Intermediaries in the U.S. Market for Technology, 1870-1920 ,” Working Paper No. 9017, National Bureau of Economic Research, Cambridge, MA. June, 2002. The Positive Effects of Licensing The Founders’ decision to foster NPEs and patent licensing proved crucial to America’s rapid technological progress and economic growth. Indeed, patent records from the nineteenth century reveal that more than two-thirds of the “great inventors” of the Industrial Revolution, including Thomas Edison and Elias Howe, were NPEs who specialized in invention and licensed some or all of their patents to outside enterprises for development into new products. B.Zorina Khan and Kenneth L.Sokoloff, “Intellectual Property Institutions in the United States: Early Development and Comparative Perspective ,” World Bank Research Workshop, July 17-19, 2000 Had the United States followed the approach of older European patent systems and limited patent rights solely to inventors who made or sold products—or prevented them from licensing their patents—America might not have even had an Industrial Revolution. In any event, the result of this division of labor between invention and production was exactly as Adam Smith predicted: “The growth of market trade in patents raised the returns to invention and encouraged a division of labor whereby technologically-creative individuals increasingly specialized in their comparative advantage—invention,” noted Lamoreaux and Sokoloff. “It was the expanded opportunities to trade in patented technologies that enabled the independent inventors of this golden age to flourish—and that stimulated the growth of inventive activity generally.” The benefits of that division of labor remain visible today, embodied in the thousands of university and other NPE patents licensed by companies large and small each year, as well as by the positive U.S. balance of trade in patent licensing, estimated to be worth at least $150 billion annually as of 2006. More than 5,000 new products and 7,000 new companies have been created with the help of university NPE patents alone in the last 30 years. Joseph Hornett and David Johnson, Purdue Research Foundation. Derived from: bit.ly/O7iA18 And licensors of patented technology help the United States maintain its technology leadership in critical economic sectors. A New Species called “Patent Trolls” To be sure, there is new a species of NPE known as “patent trolls” who use low-quality patents to extort so-called “license fees” from small businesses unable to pay the cost of standing up to them in court. But their activities have nothing in common with real patent licensing. Typically, these patent owners send form letters to hundreds, or in some cases thousands, of random small businesses, claiming with little or no evidence that they are “infringing” their patents. These letters then demand so-called “licensing fees” ranging from one to several thousands of dollars to avoid a patent infringement lawsuit that could cost those businesses far more to defend against in court—even if the business owner is innocent of any infringement. Beginning in mid-2013, a torrent of bad faith demand letters began targeting small businesses, sparking wide protest. The National Federation of Independent Businesses (NFIB) and many other business groups and trade associations demanded action, and Washington responded in 2014 with several pieces of proposed reform legislation. By early 2015, the Federal Trade Commission (FTC) had acted against one sender of bad faith demand letters, and federal legislation to rein in such abuses seemed likely to pass. At the state level, meanwhile, by early 2015, 15 states had enacted laws to curb abusive patent demand letters, and 11 others were actively considering similar bills. In addition, the attorneys general of several states have used consumer protection laws against making false claims to force these “patent trolls” to stop sending their extortionist demand letters. These abusive patent litigants should not be confused with legitimate NPEs, however, whose primary business is invention and technology licensing, not extorting so-called “license fees” from innocent businesses. Patent licensing facilitates the transfer and commercialization of technology into new products and services and promotes U.S. economic growth. A Patent System for Everyone In sum, these six unique features of the U.S. patent system—low fees, simplified procedures, examination of applications by trained experts, systematic disclosure of new technological knowledge, lack of “working requirements,” and encouragement of robust trade in patent rights—all had a powerfully beneficial impact on the nation’s economic growth. But none of that would have been possible were it not for the broad-based democratic rule of law in the United States and the critical role played by the U.S. legal system in interpreting and enforcing America’s revolutionary patent laws. ?

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The Role of the U.S. Legal System Learning Objectives After completing this section, you will be able to Describe the differences between U.S. and European patent laws. Describe the history of patent litigation in the United States. U.S. Patent Law vs. European Patent Law Just as with any other property right, patent rights would be meaningless without the ability to enforce them in court. And from the earliest days of the patent system, says Khan, “Our legal system remained true to the Constitution in the belief that the defense of rights in patented invention was important in fostering industrial and economic development.” In Britain and other European countries, patents were viewed as “pernicious monopolies that restricted community rights and [Had] to be carefully monitored and narrowly construed.” B.Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 , Cambridge University Press, 2005. The enforcement and interpretation of patent laws by the courts in Europe also tended to be highly variable and dependent upon the whims of each individual judge. In the United States, however, early courts treated inventors’ patent rights with deference, just as they did the rights of other property owners. Famed Supreme Court Justice Joseph Story repeatedly declared that patent rights were “sacred” and were the just reward for inventive ingenuity. As he noted in Lowell v. Lewis (1817), “the proper duty of the court” is to ensure that “wrongdoers may not reap the fruits of the labor and genius of other men.” The relative uniformity and certainty of enforcement of patent rights by the courts also proved critical in encouraging capital to invest in commercializing those patent rights. Contrasting the patent laws and policies of the United States and Britain, Supreme Court Justice Henry Baldwin went to some lengths in Whitney v. Emmett (1831) to show how English courts saw patents as a zero-sum trade-off between private rights and the public good. The explicit intention of U.S. patent law, however, was “to benefit the inventor, in the belief that maximizing individual welfare leads to maximum social welfare.” Nonetheless, U.S. intellectual property laws did try to strike a balance between the needs of the many and the few. “Patent laws ensured the security of private property rights in invention. However, it was also necessary to balance the just claims of inventors against the dangers of exclusive monopolies that might restrict the scope of current and future invention.” Op. cit., Khan. Changes in U.S. Patent Law Through the Years Over the years, of course, that balance has moved back and forth between relatively stronger versus weaker enforcement of patent rights. With the rise of the robber barons in the late nineteenth century, government and the courts increasingly viewed patents through the prism of antitrust, in some cases even compelling large firms like IBM to license their patents to competitors. Then with the advent of the high-tech revolution in the 1980s, antitrust concerns faded and the courts began once again to view stronger patent rights as helpful in fostering innovation. Interestingly, the U.S. legal system has always operated on the theory that the best way to achieve the proper balance between private rights and public interest was not through government decree, centralized management, or compulsory licensing but rather through the decentralized decision making and market interactions of inventors themselves. The court’s role was to resolve the inevitable conflicts that arose, on a case by case basis. Throughout all the twists and turns in patent enforcement over the centuries, however, the federal courts have remained unwavering on four key principles of U.S. patent law. An “Explosion” of Patent Litigation? Patent litigation, of course, has always been an integral feature of the U.S. patent system. The first patent case on record was that of Benjamin Folger, whose patent for the production of candles was invalidated by the district federal court for New York in 1792. This was merely the first of many hundreds (and eventually thousands) of cases in which patent litigation served the important function of settling either the validity or the disputed ownership of the rights to critical new technologies—the litigation between telephone inventors Alexander Graham Bell and Elisha Gray being perhaps the most famous case in point. By doing so, the courts provided greater certainty regarding the value of such rights to entrepreneurs and investors alike. Today, some critics contend that an “explosion of patent litigation” unlike any in history is harming business and diverting resources better spent on innovation. No responsible observer would deny that the courts have seen an increase in patent infringement suits in recent years, just as they have seen a rise in personal injury claims and product liability suits. But that said, the evidence shows that the rate of patent litigation today is actually below historical norms. According to USCourts.gov figures, the number of patent infringement suits filed in the United States increased 59 percent between 2001 and 2011—from 2,520 cases in 2001 to 4,015 cases in 2011. Meanwhile, the number of patents granted in that same period increased by only 35 percent, which supports the view that patent litigation has become more frequent over the last decade as the role and value of intellectual property has increased in the Knowledge Economy. A comparison of the illustration of the telephone in Alexander Graham Bell’s diaries and Elisha Gray’s patent application. (credit: modification of work by Elisha Gray and Alexander Graham Bell via Wikimedia Commons / Public domain) Statistics from USCourts.gov show an even sharper rise in the number of patent suits filed in 2012, to 5,189 cases. But analysts attribute most of this increase to the anti-joinder provisions of the Patent Act of 2011, which curtailed the practice of naming multiple defendants in a single infringement suit. According to Carla Rydholm of the patent analytics firm Lex Machina, “Plaintiffs must [now] meet more stringent requirements to file a case against multiple defendants. So instead of Plaintiff X filing one case naming 20 defendants, Plaintiff X might file 20 lawsuits (one per defendant) each with unique civil action numbers.” When looked at over the longer term, however, it turns out that 96 percent of all the increase in patent infringement suits since 1991 can be explained by a corresponding increase in patents granted, reports the PricewaterhouseCoopers’s 2013 Patent Litigation Study. Http://www.pwc.com/en_US/us/forensic-services/publications/assets/2012-patent- litigation-study.pdf In case you’re wondering if the increase in patents granted is itself a sign of a patent system being increasingly gamed by speculators wanting to cash in on the new “patent gold rush,” note that the average number of patents issued per billion dollars of GDP has remained at or below the same level—13 patents per billion dollars of GDP—since 1963. Sean Connolly, “Patent Litigation Rates: What They Tell Us and What They Don’t,” derived from: http://connollyip.com/patent-litigation-rates-what-they-tell-us-and-what-they-dont/ Interestingly, although the number of suits filed has increased in rough correlation to patent grants, the number that actually go to trial has remained fairly constant over the last 30 years. About 90 percent of the suits filed each year are abandoned or settled. Of the three hundred that remain, two-thirds never go to trial, and are adjudicated on summary judgment (of noninfringement in most cases). The nation is thus left with, at most, between 90 and 112 patent infringement trials per year—exactly the same number that went to trial 10, 20, and even 30 years ago. Gene Quinn, “Patent Litigation Statistics: 1980- 2010, IP Watchdog , derived from: http://www.ipwatchdog.com/2011/08/02/patent-litigation-statistics-1980-2010/id=17995/ To be sure, there can be significant costs to business even in litigating and settling patent suits that never go to trial. But no one has shown that the relative cost of patent litigation today is higher than it was historically, or that the cost of patent litigation is more burdensome than other customary legal costs in business, especially the huge cost of regulatory compliance. The evidence does not suggest that patent litigation is “out of control” today. As retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the main court for patent appeals since 1982, notes, “The level of patent litigation today is rather modest for a nation with two million active patents and hundreds of thousands of businesses competing against each other.” History supports Judge Michel on this point. The estimated 124-plus smartphone patent suits filed between 2009 and 2012 http://en.wikipedia.org/wiki/Smartphone_wars. are less than one- quarter the number of patent suits filed during the first “Telephone Wars” of Alexander Graham Bell’s time. Back then, the American Bell Telephone Company and its successor, AT&T, litigated 587 patent cases alone. “The Telephone Cases,” Wikipedia, http://en.wikipedia.org/wiki/The_T elephone_Cases. Even more surprising, given the common belief in a patent litigation “explosion” today, patent and legal records from the golden age of invention during the mid-nineteenth century U.S. Industrial Revolution show that the patent litigation rate at that time—defined as the number of patent suits filed in a decade divided by the number of patents issued in that decade—reached 3.6 percent. B. Zorina Khan, “ Property Rights and Patent Litigation in Early Nineteenth-Century America ,” Journal of Economic History, 1995, vol. 55, issue 01, pages 58-97. In contrast, USCourts.gov figures show the patent litigation rate during the decade 2001 to 2011 was less than half that—only 1.52 percent. From 2002 to 2012, reflecting the increased suits but also the increased (276,788) patents issued, the litigation rate was 1.57 percent. Over the entire period from 1790 to 1860, the patent litigation rate averaged 1.65 percent. Today’s smartphone wars, then, are simply “back to the future” when it comes to the ways in which disruptive new industries are developed. Historians have noted that every major industrial breakthrough of the last 150 years—from the development of the sewing machine, telephone, automobile, radio, aircraft, medical stent, and even disposable diaper industries, to the birth of the semiconductor and Internet e-commerce industries—witnessed exactly the same surge in patenting and patent litigation that we see in today’s smartphone field. Adam Mossoff, “The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s, ” Arizona Law Review , Vol. 53, pp.165-211,2011. And just as with smartphones today, the most competitive technology arenas have always been the most litigious. In Edison’s time, the inventors of electrical discoveries were four times more likely than other inventors to be involved in patent litigation, and accounted for 41 percent of all patent suits filed during that period. B.Zorina Khan, The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920, Cambridge University Press, 2005. In any event, by early 2015, it had already become clear that a noticeable decline in patent litigation was under way. Most analysts attributed the decline to a series of U.S. Supreme Court rulings in 2014 limiting the patentability of software and increasing the ability of the courts to impose sanctions on abusive litigants, which will be discussed later in this chapter. Also driving this decline in litigation was the availability of new post-grant review proceedings under the new America Invents Act, which allow third parties to challenge patents and, if the evidence so warrants, have their claims invalidated by the USPTO’s Patent Trial and Appeal Board. Although patent litigation is costly, the historical record suggests that it serves a vital function by settling the validity and disputed ownership of patent rights so these can be commercialized into new products, new services, and new medical treatments. This is, in fact, the proper role of the courts.

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What the U.S. Patent System Wrought Learning Objectives After completing this section, you will be able to Explain the effects of the U.S. patent system on American economic development. Describe trends in U.S. patenting over the years. Creating the World’s Most Successful Economy In 1630, the puritan John Winthrop, future governor of Massachusetts colony, declared that “We shall be as a city upon a hill, the eyes of all people are upon us.” One hundred and fifty years later, the Founders of the United States of America proved Winthrop right, offering the world a vision of liberty and democratic governance that continues to inspire people to this day. As noted previously, the men who led the Revolution and wrote the Constitution were not wild-eyed revolutionaries. They were eminently practical people who managed to create the longest- living modern democratic political and economic system on the planet. In other words, they must have done something right. And one of those things was surely the patent system they created. Because almost from the moment of its inception, it began to spark innovation and economic growth on a scope and scale never before seen in the world. Only two months after America’s first patent law was signed in 1790, in fact, Thomas Jefferson himself noted that it had “given a spring to invention beyond my conception.” Within 13 years, America surpassed Britain—until then, the unrivaled leader of the industrial revolution—in the number of new inventions patented, even though Britain still had more than twice America’s population. By 1870, as noted earlier, the United States was patenting more than five times the number of inventions as Britain, although their populations were by then roughly equal in size. At first, most British observers were dismissive of American innovation efforts, declaring that the former colony would never be able to progress beyond the simple imitation of superior European technologies. But eventually Britain and other nations took note of the way the U.S. patent system seemed to be stimulating invention and economic growth at an unheard-of pace. Photograph of William Thompson, Lord Kelvin. (credit: modification of "Photo by Messrs. Dickinson, London, New Bond Street" (according to http://www.sil.si.edu/DigitalCollections/hst/scientific-identity/fullsize/SIL14-T002-07a.jpg) via Wikimedia Commons / Public domain) Sir William Thompson (pictured above), a British inventor and scientist attending the 1876 Centennial Exhibition in Philadelphia, looked at the amazing array of American inventions—including Bell’s telephone, the Westinghouse airbrake, Singer’s sewing machines, and Edison’s improved telegraph—and had this to say: “If Europe does not amend its patent laws, America will speedily become the nursery of useful inventions for the world.” Scientific American , October 21, 1876, courtesy of B. Zorina Khan. Meanwhile, the Swiss Commissioner in attendance, the shoe manufacturer Edward Bally, offered a similar warning to his Old World countrymen: “American industry has taken a lead which in a few years may cause Europe to feel its consequences in a very marked degree.” Then, there’s Japan’s Assistant Secretary of State Korekiyo Takahashi, who visited the U.S. Patent Office. Upon his return home, he said, “What is it that makes the United States such a great nation? We investigated, and we found it was patents. And we will have patents.” Even the British jurist Sir Henry Sumner Maine, who had once argued that “the establishment of the masses in power is the blackest omen” for the future of invention, later changed his tune. He conceded that the U.S. patent system was “one of the provisions of the Constitution that have most influenced the destinies of the American people” and that it had made the United States “the first in the world for the number and ingenuity of [its] inventors”. Henry Sumner Maine, Popular Government , courtesy of B. Zorina Khan. As historians Lamoreaux and Sokoloff noted, “[Foreign] observers attributed much of the country’s rapid technological progress to its distinctive patent system. Quite revolutionary in design at inception, the U.S. patent system came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies. These features attracted the technologically creative, even those who lacked the capital to directly exploit [i.e., commercialize] their inventions . . . and also fostered a division of labor between the conduct of inventive activity and the application of technical discoveries to actual production. It is no coincidence that Britain and many other European countries [later] began to modify their patent institutions to make them more like those of the Americans.” Naomi R. Lamoreaux and Kenneth L. Sokoloff, “ Financing Innovation in the United States: 1870 to Present ,” MIT Press, Cambridge, Mass. 2007. Every Breakthrough Spurs Patenting Spikes The patent system’s central role in fostering innovation can be seen in the patenting spikes that occur with every major industrial breakthrough. A major surge in patenting took place in the 1880s, for example, when the number of new patents issued each year jumped 56 percent to about 20,000, compared with the 12,000 issued yearly during the previous decade. This patent boom corresponded with rapid advances in the emerging railroad, telegraph, telephone, and electric light and power industries that signaled the industrialization of the U.S. economy. The next sharp surge in patent issuances began around 1902 and lasted until 1916 or so, when the number of patents granted doubled from 20,000 per year to around 40,000 per year. This was the period of the newborn automobile and aircraft industries’ most rapid early-stage growth. Patenting levels then remained relatively stable at about 40,000 per year until around 1960 or so, when the revolution in plastics and other synthetic materials along with boom-time growth in the aerospace and computer industries pushed patenting levels to 60,000 per year. There they remained until the mid- 1980s, when the personal computer and emerging high-tech industries of Silicon Valley began to power the whole of the U.S. economy and propel us toward the age of the Internet. Patenting levels then rose to around 80,000 to 100,000 yearly With the rise of the Internet, social media, mobile telephony, and smartphones over the last two decades, the number of patent applications filed each year with the U.S. Patent and Trademark Office (USPTO) has surged fourfold. In 2014, the USPTO received 578,802 applications, finding 300,678 of these applications worthy of receiving a patent. This is but the latest spike in innovation and patenting. USPTO Patent No. 2956845 for an axial piston pump. (credit: modification of work by Gunnar A. Wahlmark, Rockford, Illinois USA. via Wikimedia Commons / Public domain) Clearly, whenever the United States has undergone a major industrial renaissance during which technology advances lead not only to the birth of new industries, but also to the reshaping of existing ones, patenting levels rise dramatically. It is no surprise, therefore, that Silicon Valley, midwife of many of the new Knowledge Economy industries of the past 60 years, is home to less than 1 percent of the nation’s population but earns 12 percent of its patents each year. The Valley is now the site of a new USPTO satellite office serving high-tech innovators there. “ Silicon Valley wins in securing U.S. patent office ,” San Francisco Chronicle, July 3, 2012. The patent system has also been crucial in facilitating the growth of new start-up businesses, with 67 percent of entrepreneurs reporting that they find patents valuable in obtaining venture financing. “ Patenting by Entrepreneurs: The Berkeley Patent Survey Part III of III ,” PatentlyO, July 21, 2010. This is important because although large companies contribute enormously to American innovation and industrial growth through their in-house research and development operations as well as via their partnerships with research universities, start-up companies play a particularly strong role in the creation of entirely new industries. Indeed, virtually every innovative new industry of the last 150 years—From the telegraph, telephone, and electric power industries of the 1800s, to the auto, aircraft, materials, and aerospace industries of the twentieth century, to the semiconductor, personal computer, software, biotech and Internet e-commerce industries of the last 60 years—was launched by an entrepreneurial start-up company. The Founders would not be surprised by this. They created the world’s first democratized patent system, after all, for a reason: to stimulate the ingenuity of the common man. They had asked themselves a question—the same question reiterated two generations later by Supreme Court Justice Joseph Story when he spoke before an audience of ordinary mechanics: “Ask yourselves, what would be the result of one hundred thousand minds ... urged on by the daily motives of interest, to acquire new skill, or invent new improvements.” Reported in American Jurist and Law Magazine , vol. 1 (1829), courtesy of B. Zorina Khan. The result was the most successful economy on the face of the earth. Patents and the American Dream It’s not only the economy that the patent system helped shape, but the culture and consciousness as well. As the eminent historian Gordon S. Wood observed in his 2010 book Empire of Liberty , “By the early nineteenth century, technology and prosperity were assuming for Americans the same sublime and moral significance that the enlightenment had reserved for the classical state and the Newtonian universe. Eli Whitney, inventor of the cotton gin, and Robert Fulton, creator of the steamboat, became national heroes.” And for the first time in human history, a nation had come to see its greatness not in empire or military might or royal lineage, but in its capacity for technological progress. There was nothing preordained about America’s economic success, no special “Yankee ingenuity” gene in their hereditary stock. As Scientific American noted in 1876, the United States advanced “not because we are by nature more inventive than other men. Every nationality becomes inventive the moment it comes under our laws.” Rather, the secret of America’s success was a uniquely democratic patent system that “added the fuel of interest to the fire of genius” in generations of ordinary citizens—and in so doing, helped in a very real way to give birth to the American Dream itself. Ironically, few people today even know the origin of the term “the American Dream.” In fact, it was coined in 1931, by the historian James Truslow Adams in his book Epic of America , and it is instructive to read what Adams meant by it: “The American Dream, that has lured tens of millions of all nations to our shores in the past century, has not been a dream merely of material plenty, though that has doubtless counted heavily. It has been much more than that. It has been a dream of being able to grow to fullest development as a man and woman, unhampered by the barriers which had slowly been erected in the older civilizations, unrepressed by social orders which had developed for the benefit of classes rather than for the simple human being of any and every class.” Only in America could a working class youth named Thomas Edison with less than three years of schooling develop himself into the world’s greatest inventor—a visionary who gave the world some of the most important technologies of late nineteenth- and early twentieth-century life. This is exactly what the Founders had in mind when they created the U.S. patent system.

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