All posts by Adam Mossoff

It’s Time to Say “No” to Junk Science in the Patent Policy Debates

Last March, forty economists and law professors submitted a letter to Congress expressing “deep concerns with the many flawed, unreliable, or incomplete studies about the American patent system that have been provided to members of Congress.”  These concerns were confirmed again last week when Unified Patents released a report on patent litigation with the same kind of “highly exaggerated claims regarding patent trolls” that the professors were concerned about.

The Unified Patents report is another publication in a long line of “studies” that use absurdly expansive definitions of non-practicing entities (NPEs) or “patent trolls” to produce dramatic-sounding, inflated results. In this case, Unified Patents defines an NPE as a “Company which derives the majority of its total revenue from Patent Licensing activities.” Similar to past reports that have been repeatedly and consistently critiqued for being deeply flawed in both substance and methodology, this definition includes many individual inventors, universities, startups, small businesses, biotech companies, and countless other laudable innovators who are key drivers of the innovation economy in the U.S. It even includes venerable American inventors like Thomas Edison, Nikola Tesla, and Charles Goodyear, among many others. These are the people and companies Unified Patents is condemning as “patent trolls” and whom it is lobbying Congress to punish with patent legislation that would weaken their ability to obtain and to protect their innovation.

In sum, the core definition in Unified Patent’s report is so broad that it renders the results of its study completely uninteresting, unremarkable, and predictable – it’s like saying that 90% of people who sue over an auto accident own cars. Unfortunately, this report is not being touted so innocuously in D.C. at a moment when Congress is finally waking up to the realization that proposed bills like H.R. 9 (the so-called “Innovation Act”) will do more harm to the innovation economy than good.

At this late date, another junk science report hardly deserves yet another detailed analysis and critique. They didn’t care to heed previous critiques, so why expect that the proponents of this report would act with any more integrity now or in the future? In short, it is long past the time to simply say “no” to junk science reports like this.

Tesla’s New Patent Policy: Long Live the Patent System!

Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on the company’s blog with a catchy title: “All Our Patent Are Belong to You.” Commentary in social media and on blogs, as well as in traditional newspapers, jumped to the conclusion that Tesla is abandoning its patents and making them “freely” available to the public for whomever wants to use them. As with all things involving patented innovation these days, the reality of Tesla’s new patent policy does not match the PR spin or the buzz on the Internet.

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

If you’re not puzzled by Tesla’s announcement, you should be. This is because patents are a type of property right that secures the exclusive rights to make, use, or sell an invention for a limited period of time. These rights do not come cheap — inventions cost time, effort, and money to create and companies like Tesla then exploit these property rights in spending even more time, effort and money in converting inventions into viable commercial products and services sold in the marketplace. Thus, if Tesla’s intention is to make its ideas available for public use, why, one may wonder, did it bother to expend the tremendous resources in acquiring the patents in the first place?

The key to understanding this important question lies in a single phrase in Musk’s announcement that almost everyone has failed to notice: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” (emphasis added)

What does “in good faith” mean in this context? Fortunately, one intrepid reporter at the L.A. Times asked this question, and the answer from Musk makes clear that this new policy is not an abandonment of patent rights in favor of some fuzzy notion of the public domain, but rather it’s an exercise of his company’s patent rights: “Tesla will allow other manufacturers to use its patents in “good faith” – essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars.” In the legalese known to patent lawyers and inventors the world over, this is not an abandonment of Tesla’s patents, this is what is known as a cross license.

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard. In the context of patented innovation, this agreement is more complicated, but it is in principle the same thing: if automobile manufacturer X decides to use Tesla’s patents, and Tesla begins infringing X’s patents on other technology, then X has agreed through its prior use of Tesla’s patents that it cannot sue Tesla. Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

The only thing unique about this cross licensing offer is that Tesla publicly announced it as an open offer for anyone willing to accept it. This is not a patent “free for all,” and it certainly is not tantamount to Tesla “taking down the patent wall.” These are catchy sound bites, but they in fact obfuscate the clear business-minded nature of this commercial decision.

For anyone perhaps still doubting what is happening here, the same L.A Times story further confirms that Tesla is not abandoning the patent system. As stated to the reporter: “Tesla will continue to seek patents for its new technology to prevent others from poaching its advancements.” So much for the much ballyhooed pronouncements last week of how Tesla’s new patent (licensing) policy “reminds us of the urgent need for patent reform”! Musk clearly believes that the patent system is working just great for the new technological innovation his engineers are creating at Tesla right now.

For those working in the innovation industries, Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents: Musk was able to secure venture capital funding for his startup company and he was able to secure for Tesla a dominant position in the electrical car market through his exclusive use of this patented innovation. (Venture capitalists consistently rely on patents in making investment decisions, and for anyone who doubts this need to watch only a few episodes of Shark Tank.) Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark. This is clear, for instance, from the statement to the LA Times that companies or individuals agreeing to the “good faith” terms of Tesla’s license agree not to make “knockoffs of Tesla’s cars.”

There are other equally important commercial reasons for Tesla adopting its new cross-licensing policy, but the point has been made. Tesla’s new cross-licensing policy for its old patents is not Musk embracing “the open source philosophy” (as he asserts in his announcement). This may make good PR given the overheated rhetoric today about the so-called “broken patent system,” but it’s time people recognize the difference between PR and a reasonable business decision that reflects a company that has used (old) patents to acquire a dominant market position and is now changing its business model given these successful developments.

At a minimum, people should recognize that Tesla is not declaring that it will not bring patent infringement lawsuits, but only that it will not sue people with whom it has licensed its patented innovation. This is not, contrary to one law professor’s statement, a company “refrain[ing] from exercising their patent rights to the fullest extent of the law.” In licensing its patented technology, Tesla is in fact exercising its patent rights to the fullest extent of the law, and that is exactly what the patent system promotes in the myriad business models and innovative products that are created in the innovation industries.

Demand Letters and Mandatory Disclosures: First Amendment Concerns

In the recent calls to revise the patent system to address so-called “patent trolls” — an ill-defined term that effectively derails any discussion of patent policy based in reality — Congress is considering bills that would impose mandatory disclosures on all demand letters sent by patent owners. Although there is no definitive definition of what constitutes a “demand letter,” a classic, undisputed example is correspondence asserting that the recipient is infringing a patent and demanding payment of damages, a royalty, or both.

Assuming for the sake of argument that there is a definitively proven systemic problem with demand letters, the First Amendment’s limitations on Congress’s power to restrict speech should not be ignored.  This is especially the case when the speech is necessary for legally securing property rights in the courts. This brief essay will review the Supreme Court’s application of the First Amendment to mandated speech (compelled speech), which strongly suggests that Congress should tread very carefully in legislating in this area.

The First Amendment’s Prohibition on “Compelled Speech”

The First Amendment guarantees “freedom of speech,” which the Supreme Court has applied to protect both what one says and what one chooses not to say.  The important recognition of these two corollary rights began with the Supreme Court’s rejection of “compelled speech” in the 1943 case, West Virginia State Board of Education v. Barnette, which invalidated a state law requiring students to recite the Pledge of Allegiance and to salute the flag while doing so.  As the Court later explained in its 1977 decision in Wooley v. Maynard, “[t]he right to speak and the right to refrain from speaking are complementary components of the broader concept of individual freedom of mind.”  In sum, the First Amendment secures two necessarily interrelated and equally important rights — the right to speak and the right to not speak — because both reflect the complete freedom of thought and expression secured to individuals by the Constitution.

Since the Barnette decision, the First Amendment has solidly protected individuals from government-compelled expression, at least in the context of non-commercial speech. In these cases, the Court has applied the “strict scrutiny” standard of review for statutes or regulations compelling speech (requiring a compelling government interest achieved through the least restrictive means and with no alternative methods for achieving the compelling interest available).  Unsurprisingly, as a result of this strict scrutiny, the right not to speak has been firmly secured under the First Amendment.

When first faced with the question of compelled commercial speech, though, the Supreme Court took a different approach in its 1980 decision in Central Hudson Gas & Electric Corporation v. Public Service Commission.  In Central Hudson, the Court invalidated a ban on promotional advertising by utility companies when they mailed customers their utility bills, but it crafted a lower standard of review under the First Amendment for compelled commercial speech — what is known as “intermediate scrutiny.” In compelled commercial speech cases, the Court now applies a four-factor test: (1) is the speech protected under the First Amendment (false, misleading, or promoting illegal activities is unprotected), (2) does the government have a “substantial interest” justifying the compulsion of speech, (3) does the law directly advance this substantial interest, and (4) is the law any more extensive than necessary to achieve this substantial interest.

Five years later, the Supreme Court decided Zauderer v. Office of Disciplinary Counsel (1985), in which an attorney was sanctioned under an Ohio state law for advertising his services to potential clients.  The Zauderer Court struck down the state law, but it applied an even lower standard of review for situations in which the compelled commercial speech consists of “purely factual and uncontroversial information.” In these situations, the Zauderer Court applied the “rational basis” standard of review, holding that a commercial speakers’ First Amendment rights are respected when the “disclosure requirements are reasonably related to the State’s interest” in preventing consumer deception.

Demand Letters: Inextricably Mixed Non-Commercial and Commercial Speech

Although demand letters may appear to be a form of pure commercial speech, this is far from the actual truth. To be clear, a demand letter informs its recipient that it is infringing a property right secured under federal law.  While this has commercial implications, it is not the same thing as an advertisement in the marketplace, such as a sign in a storefront window or a banner ad on a website. Thus, for the same reason that the Supreme Court voided compelled speech requirements in the solicitation of charitable donations in Riley v. National Federation of Blind of North Carolina (1988), there are serious and substantial reasons for thinking that mandating certain speech requirements in demand letters may also be constitutionally suspect under the First Amendment. As the Riley Court explained in refusing to adopt a rational basis standard of review for what clearly looked like solicitations of a commercial nature, “the First Amendment guarantees ‘freedom of speech,’ a term necessarily comprising the decision of both what to say and what not to say.”

Characterizing demand letters as purely commercial speech conflicts with the essential nature of the American patent system.  Patent rights are not commercial monopolies; to the contrary, the longstanding and unique American approach to promoting technological innovation has been to define and secure property rights in this innovation.  As such, a claim of patent infringement is at heart a legal claim, not a commercial claim. While protecting property, especially patented innovation that is being licensed or sold in the marketplace, has commercial implications, this does not mean that the legal act of securing this property right constitutes an act of commercial speech. Although the law has been heavily influenced by economic analysis in the last several decades, a lawsuit is not the same as a commercial transaction.

Similarly, a threat of a potential lawsuit is also not the same thing as engaging in a purely commercial transaction.  A demand letter, even if requesting payment of a royalty under a license agreement, is a critical first step to enforcing a property right.  Without the threat of a potential lawsuit, infringers would “hold out” and continue infringing, and thus patent owners would no longer have a right to the patented innovation. Thus, the essential nature of a property right in which the owner is secured the exclusive use of the protected asset is fundamentally inseparable from the commercial deployment of this asset in the marketplace — the former is what makes the latter possible. This is why strong and certain property rights are the cornerstone to vibrant economic growth and a flourishing society.

For these reasons, demand letters do not fit the Supreme Court’s definition of commercial speech in its compelled speech cases.  In Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc. (1973), the Court defined commercial speech as “speech which does ‘no more than propose a commercial transaction.’” This clearly covers the core commercial speech example of an advertisement in the marketplace.

But as made clear in cases like Riley, Virginia State Board, and Bolger, speech often comprises both non-commercial and commercial elements. In such situations, the Court has refused to apply by rote its traditional “rational basis” test for commercial regulations, and, as evidenced in decisions like Riley, it has knowingly departed from this lax constitutional standard where there is a close constitutional question about a law compelling speech.

As the Riley Court explained, a mixture of both non-commercial and commercial elements in a communication should be treated by the courts for First Amendment review as non-commercial speech if these elements are “inextricably intertwined.”  A claim to legal protection of a property right against infringement with a concomitant demand for damages or a license is speech that has both non-commercial and commercial elements that are “inextricably intertwined.” In fact, in its 1983 decision in Bolger v. Youngs Drug Products Corp., the Supreme Court held that referring to a product sold in the marketplace does not necessarily make a communication a form of “commercial speech.” Even more relevant in thinking about the constitutional limitations in mandating disclosure requirements in demand letters is that the Bolger also held that an economic motivation for sending a communication does not by itself define it as a form of “commercial speech.”

The Court’s compelled speech cases raise serious First Amendment concerns about legislating mandatory disclosures in demand letters. As communications serving the core function of securing property rights that are being infringed in the marketplace, demand letters certainly have non-commercial and commercial speech elements that are “inextricably intertwined.”

Stymying the Function of Property Rights in Innovation

In addition to the fundamental constitutional concern, there are strong policy concerns about adopting this type of systemic revision to the patent system. As property rights, patents can be freely conveyed or licensed in the marketplace. This essential feature of securing property rights in innovation is what has made it possible for the American patent system to successfully promote innovation relative to other alternative systems for promoting and commercializing innovation.  The significance of freely alienable and enforceable patent rights, whether in historical context or in today’s innovation economy, is that this is an essential legal mechanism to bring innovation from the lab or garage to the marketplace — and into people’s everyday lives, such as smartphones, tablets, and personalized medicine.

Mandating disclosures in demand letters carries serious risk in disrupting the operation of this complex innovation market.  As reported by the Heritage Foundation, shifting burdens merely waters down patent rights.  The economic reality is that our patent system is essential to maintaining the virtuous cycle of investment and development that drives innovation forward.  Overbroad legislative measures revising the patent system raise the very real danger of producing unintended consequences that can derail that system.

 

A Historical Perspective of Patent Litigation: Continued Innovation & Recurrent Controversy

In her forthcoming George Mason University Law Review article, “Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century,” Professor B. Zorina Khan sheds light on today’s hot-button patent issues and controversies through a detailed exploration of concerns surrounding our patent system throughout its two hundred and twenty-four year evolution into what is today “the most effective economic engine known to man.”  As the old adage cautions, “those who cannot remember the past are condemned to repeat it,” and, indeed, a historical perspective of the policies and precedents that have shaped today’s patent system is invaluable in developing the foresight necessary to sustain our complex innovation economy.

Today, fears of escalating patent litigation rates and so-called “patent trolls” have captivated the news media and public alike, spurring a new wave of radical proposals seeking to “fix” our “broken” patent system.  Patent dissidents (often companies whose business models rely on other IP rights, such as trade secrets, or companies who benefit from freely using others’ patented innovation) and commentators alike now claim that the patent system has not evolved to accommodate the “Brave New World of smartphones, silicon chips, and one-click patents.”  Yet, as Professor Khan observes, while the technological innovations of the twenty-first century are undoubtedly great, “[f]rom the perspective of a world where mail was delivered by stagecoach, the advent of the telegraph was far more transformative to communications in the antebellum era than the change from landline to cellphone.” (All quotes from Professor Khan are from her article.)

That is to say, the “socioeconomic and institutional impacts” of today’s technological innovations “are arguably hardly comparable to those of the first century of the U.S. patent system.”  While twenty-first century technological innovation seems to move forward at a breakneck pace, believing that such rapid innovation is unique to the modern era is hopelessly near-sighted.  Concerns that innovation is outpacing the evolution of our patent system, or that the courts are ill-equipped to understand or handle modern innovation, are similarly anachronistic.  As Justice Cardozo famously wrote in 1921, “the great inventions that embodied the power of steam and electricity, the railroad and the steamship, the telegraph and the telephone, have built up new customs and new law.”  History has proven our patent system to stand the test of time, paving the way for the United States to overtake other nations and become “the world leader in technology and industry.”  Today, though the technologies are obviously different, “much of the underlying economic and legal fundamentals remain unchanged.”  As such, consideration of today’s patent controversy as a continuum of past discussions, rather than an isolated occurrence, is crucial to evaluating the merits of dramatic revisions to our patent system.

Of particular concern to many in today’s patent policy debates is the perceived rise of the so-called “patent troll,” an ill-defined and misleading term that often refers to any individuals or entities that engage in patent licensing in lieu of manufacturing, such as individual inventors, universities, and start-up companies.  Yet, as Professor Khan observes, patent licensing companies and other purely commercial patent owners who solely license their patented innovation are hardly new.  In fact, specialists in the licensing and enforcement of patent rights “were the norm during the nineteenth century, and technology markets provide ample evidence that intermediaries benefited creative individuals, since patentees who licensed or assigned their rights to such ‘trolls’ were typically the most productive and specialized inventors.”  Throughout the nineteenth century, great and lesser inventors alike were able to leverage their reputations and underwrite their research and development costs by offering shares in future patents.  At the same time, this process “promoted trade in patent rights and technological innovations internationally, and numerous American patentees succeeded in creating multinational enterprises and dominating global industry.”

As such, historical experience illustrates a fundamental premise of free markets that rings true to this day: value is created through the division of labor and free, consensual exchange among everyone in the marketplace.  Professor Khan explains: intermediaries of the nineteenth century, what we today refer to as “patent trolls,” reduced the costs of search and exchange, enhanced liquidity, improved market depth and breadth, and increased overall efficiency of the technology and product markets.  These basic economic facts were recognized as essential to the “progress of the useful arts” from the inception of the U.S. patent system in 1790.  As a result, an extensive national network of licensing and assignments quickly developed in the early nineteenth century that made it possible for American inventors to benefit from patent markets to a far greater extent than in other countries.  Although the face of technology has since changed and the law continues to evolve, it is this system that has persisted to form the underpinnings of our modern innovation economy.

Anxieties today over so-called “patent trolls” are often coupled with a perception of an “explosion” in patent litigation in recent decades.  Yet, as Professor Khan finds, the empirical data yields no such statistically significant increase in litigation rates.  Rather, the data shows that increases in patent litigation rates correlates with parallel increases in patenting.  Given the birth of the modern information revolution prompted by the high-tech and biotech industries, patent applications and grants have increased sharply over the last decade, from approximately 270,000 applications and 153,000 grants in 1999 to 543,000 applications and 253,000 grants in 2012.  Concurrently, while the rate of litigation has increased over the past few years, that increase was entirely unexceptional when normalized for issued patents.  Moreover, actual increases in real patent litigation rates in the past two years are due to Congress’s changes in the patent system, such as the America Invents Act of 2011, which prohibited joinder of multiple defendants in single lawsuits.

Professor Khan’s exploration of the long run patterns for patenting and litigation between 1790 and 2012 further illustrates that litigation in the past decade has not “exploded” above the long-term norm.  Instead, the empirical data shows that “the per patent rate of litigation was highest in the era before the Civil War, and during the significant market expansion that started in the 1870s and heralded a ‘second industrial revolution’ that dramatically improved living standards.”

Despite the lack of empirical evidence demonstrating any sort of “explosion” in patent litigation, concerns about patent litigation rates are increasingly directed at the software industry.  This has prompted  patent dissidents to call for special legislative or judicially created patent rules governing a specific type of technology, the similarly ill-definedsoftware patent.” As Professor Khan ably shows, however, given the recent rise of software in the marketplace in only the past couple decades, the increase in litigation rates over software patents is entirely unsurprising.  The historical record teaches that “[l]itigation rates varied by industry, and were correlated with the advent of the latest technologies that were most valuable in the marketplace.”  Accordingly, during the “second industrial revolution,” disputes in the electricity and telecommunications industry accounted for over 40% of all patent lawsuits filed by the great inventors of that time.

Similar “patent wars” were waged by inventors and intermediaries alike for a multitude of expanding markets – shoemaking, mechanical reapers and other agricultural machinery, rubber products, motion pictures, early aviation, radio, and sewing machines, just to name a few.  Professor Khan concludes:

In short, “vexatious” and costly litigation about all areas of law – patents, property, contracts, and torts alike – were inevitably associated with the advent of important disruptive innovations.  The moral here is that it is not possible to pre-assign labels that would predict who would act in a meritorious fashion or who would engage in unproductive behavior to drive out competitors or to participate in questionable greenmail.

Indeed, though the face of technology continues to change, and patent policy debates reverberate through history, the longstanding rules and standards underpinning the patent system have functioned effectively for over two centuries as a means of promoting entrepreneurship and technological progress.  History matters.  Substantive reforms of our patent system should be undertaken with the upmost care, unclouded by historical amnesia, and “only after careful analysis to ensure that proposed changes are compatible with the fundamental principles of this institution.”

[Thank you to Steven Tjoe for his assistance with this post]

The History of Patent Licensing and Secondary Markets in Patents: An Antidote to False Rhetoric

The patent licensing business model is a flashpoint of controversy in the patent policy debates. Individuals and firms that specialize in licensing patented innovation – and companies that purchase patents in order to license them – have come under attack by the President, members of Congress, companies, lobbying groups, and others. On December 6, 2013, the House of Representatives passed a bill (HR 3309) that specifically targets the licensing and litigation of patents. Thus, the patent licensing business model has taken center stage in the public policy debates in a way not seen since the late nineteenth century — when the popular rhetorical epithet for these companies was “patent shark.”

Today, patent licensing entities are referred to as “non-practicing entities” (NPE), “patent assertion entities” (PAE), or the more fashionable and inflammatory term “patent troll.” As I explained in my recent Senate testimony, these monikers, especially “patent troll,” are more rhetorical epithets than settled, objective, descriptive terms, as evidenced by the fact that they are applied arbitrarily against all types of patent owners. But the similarities between the nineteenth-century rhetoric and today’s rhetoric is striking, and thus this essay provides a brief overview of the history of patent licensing and of the buying and selling of patents (what patent lawyers and economists call “secondary markets”).

An historical review of patent licensing and secondary markets, even if brief and necessarily incomplete, is important because history is used to frame the patent policy debates today. Unfortunately, in addition to mistaken empirical claims based on flawed statistical studies, the policy debates are riddled with mistaken claims about past legal and commercial norms concerning patented innovation. For instance, law journal articles often state that the “patent marketplace is a relatively new secondary market.” Many commentators simply assume that patent licensing is a new phenomenon, and thus they assert that the patent system should now adopt a manufacturing requirement for patent owners in order to address the allegedly “new” problems caused by the supposedly “new” patent licensing business model. Through rote repetition in scholarship, blogs, op-eds and newspaper articles, such claims have solidified into conventional wisdom among policy and legal elites.

This conventional wisdom (like much conventional wisdom) is profoundly mistaken. As award-winning economist Zorina Khan has explained in her thoroughgoing research into the history of the American patent system, licensing has long been an essential feature of the uniquely American patent system, which secured property rights in innovation to both inventors and to the marketplace actors who commercialized the innovation.  Professor Khan and other economists have recently expanded upon and extended their historical research to more directly address today’s hot-button policy debate concerning patent licensing and secondary markets. Legal historians, such as Christopher Beachamp, have also begun delving into the historical record and have found a wellspring of materials on secondary market and patent licensing activities in the nineteenth century.

This historical research should be read by all lawyers, scholars, or commentators who are interested in or concerned about the patent licensing business model and related issues, such as patent litigation.  In this short essay, I can only briefly summarize some of this research and expand upon it with contributions from my own research into the primary sources in the nineteenth-century American patent system. In fact, my own historical scholarship has reached similar conclusions, as I found that early American legislators and judges regarded patents as property rights – defined specifically as civil rights securing fundamental property rights – and that this had profound real-world implications in the unfettered sale and licensing of patents in the nineteenth-century marketplace.

I.   The Patent Licensing Business Model in the Nineteenth Century

The patent licensing business model is not a new phenomenon in the commercialization of patented innovation in the marketplace. Of course, a complete survey of all such individuals and firms who used the patent licensing business model to commercialize patented innovation is beyond the scope of this short essay, and so I will focus here on just a few prominent examples of the patent licensing business model in the nineteenth century. This part thus focuses on Thomas Edison, Charles Goodyear, and Elias Howe, Jr. The latter inventors are significant, because they prove that long before Edison began his massive inventive labors in the late nineteenth century, prominent inventors and patent owners utilized the patent licensing business model in the early nineteenth century (what historians call the Antebellum Era), revealing that this commercial practice has very old historical antecedents.

1.   Thomas Alva Edison

Thomas_EdisonMany people do not realize that Thomas Edison was an exemplar of the patent licensing business model, and he certainly meets the definition of an “NPE” employed in the patent policy debates today. Edison sold and licensed his patents, especially in his early invention-intensive career. As discussed in one recent article, he conveyed at least 20 of his early patented inventions to third parties in order to fund his full-time research and development efforts. He also assigned outright some of his later patents; as reported by another scholar, Edison sold his patents in his innovative incandescent light bulbs to the General Electric Company.

But Edison is admittedly a mixed example because he also directly engaged in the manufacture and sale of some of his patented innovations, such as the electric light bulb and the phonograph. These business ventures, however, were lackluster at best and disastrous at worst. In the compelling account of Edison’s career, The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World, Randall Stross recounts how the products that ultimately dominated the marketplace from Edison’s initially path-breaking inventions were oftentimes those of his competitors, such as the Victrola record player. As his close friend, Henry Ford, famously quipped, Edison was “the world’s greatest inventor and the world’s worst businessman.” (Ford knew of which he spoke, because, as Stross recounts, Ford provided Edison a total of $1.2 million in business loans, some of which he was forced to forgive.)

Thus, while Edison easily meets the definition of an “NPE” given his embrace of the patent licensing business model early in his career, he also serves as an important lesson given his many failures in the business world later in his career. At the end of the day, Edison should have stuck with the patent licensing business model that brought him his early fame and fortune as a young innovator at Menlo Park.

2.   Charles Goodyear (Patent No. 3,633)

CharlesGoodyearCharles Goodyear invented the process for vulcanized rubber in 1839 and received a patent for it on June 15, 1844 (Patent No. 3,633), but he never manufactured or sold rubber products. Instead, Goodyear only sold his rights in his patented innovation to other individuals and firms—transferring in the marketplace the rights to license, manufacture, sell, or use the process of vulcanizing rubber.  These individuals and firms produced the ubiquitous rubber products that formed a critical part of the Industrial Revolution, and many of Goodyear’s licensees also engaged in extensive litigation against end-users, such as dentists.

As reported by biographers, Goodyear was crazy about rubber and about inventing and finding new uses for it. He even wrote a two-volume treatise (Gum Elastic and Its Varieties) on the history, invention, and uses of vulcanized rubber. True to form, Goodyear even had several copies of this treatise printed with “hard rubber bindings and covers,” and, as one historian of technology recounts, “Page after page of Gum-Elastic is devoted to [listing] different kids of boats, life preservers, buoyant travel bags and even frogman suits, but also … fire hose, escape rope and medical instruments” that could be made with rubber. As the archetype of the obsessive inventor, Goodyear was not interested at all in manufacturing or retail sales of his patented innovation.

It is also significant that many of the individuals and firms who purchased patent rights from Goodyear brought many, many patent infringement cases in the nineteenth century. In fact, the Goodyear Dental Vulcanite Company was a patent licensing company that sued hundreds, if not thousands, of dentists for patent infringement. This proves that the claims today that “end-user lawsuits” are an entirely new phenomenon are just as wrong as the mistaken claims about the allegedly new phenomena of patent licensing and the secondary markets.

Of course, many people do not know about Goodyear’s early claim to fame as an “NPE” because they mistakenly associate the eponymously named Goodyear Tire & Rubber Company with the inventor. But this company is merely named after the famous inventor, as it was formed in 1898, almost four decades after Goodyear’s death in 1860. (It was even involved in a trademark lawsuit with Goodyear’s descendants over the use of the name.)

3.   Elias Howe, Jr. (Patent No. 4,750)

Elias_Howe_portraitElias Howe, Jr., invented the lockstitch in 1843 and he received a patent for it on September 10, 1846 (Patent No. 4,750), and he also licensed this patented innovation for most of his patent term. Similar to many patent licensing companies today, Howe often entered into royalty agreements after suing commercial firms and individuals upon discovering that they were infringing his patent rights. One historian referred to Howe’s patent litigation practice of “suing the infringers of his patent for royalties” as his “main occupation” for “several years.” In fact, Howe’s assertion of his patents against infringers who refused his licensing offers precipitated the very first “patent war” in the American patent system — the Sewing Machine War of the 1850s (as it was called at the time in newspapers and among the litigants).

Howe’s litigation practices were both innovative and controversial. Interestingly, he employed patent litigation practices that are routinely called novel when they occur today. For instance, Howe was destitute when his licensing demands were refused in the early 1850s, and thus he found a businessperson to invest in his patent infringement lawsuits, receiving funding from and selling a one-half interest in his patent to George W. Bliss. (This is called “third-party financing” today.) Ultimately, after being a principal legal pugilist in the Sewing Machine War, Howe joined the Sewing Machine Combination of 1856, the very first patent pool in American history, through which he made almost the entirety of his multi-million-dollar fortune on the basis of his royalties. Yet, his licensing and litigation practices remained the source of much public scorn; one 1867 magazine article acerbically stated that “the secret of Mr. Howe’s success” was that “he litigated himself into fortune and fame.”

In sum, Howe, Goodyear, Edison and many, many others confirm that the patent licensing business model has not only existed since the early nineteenth century, it also has served a significant function in the commercialization of patented innovation in the United States. Other famous early nineteenth century inventors also extensively assigned and licensed rights in their inventions in addition to engaging in manufacturing and other commercial activities themselves. The list includes William Woodworth (planing machine), Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick (mechanical reaper), as well as many others. Such commercial practices continued into the twentieth century and up through today, with innovative firms like Bell Labs, IBM, Apple, and Nokia, among others, using this long-established tradition of commercializing patented innovation through the patent licensing business model.

II.   Secondary Markets in Patents in the Nineteenth Century

Despite the fact that Goodyear, Howe, and others licensed their patents and patent rights, the conventional wisdom today is that historically there have been no markets in patents by which non-inventors profited from the secondary sale, licensing, or other uses of patented innovation. In effect, the claim is that today’s “patent marketplace is a relatively new secondary market.” This conventional wisdom is just as mistaken as the conventional wisdom regarding the alleged novelty of the patent licensing business model itself.

1.   Secondary Markets in the Antebellum Era (pre-Civil War)

In the Sewing Machine War in the 1850s, the various patents obtained by different inventors on different components of the sewing machine were purchased or exchanged between a variety of individuals and firms. In fact, one of the most significant inventive contributions to the development of the sewing machine was made by John Bachelder (Patent No. 6439, issued May 8, 1849), but Bachelder neither manufactured sewing machines nor licensed his patent. He sold his patent to Isaac Singer, who ultimately assigned it to the pool of patents owned and licensed by the Sewing Machine Combination, the patent pool formed in 1856 by Singer and other patent owners to resolve the hard-fought Sewing Machine War.

Even before the outbreak of the Sewing Machine War in the early 1850s, there was patent litigation brought by secondary owners of patents. As I report in my article, for instance, in 1849, one sewing machine inventor

had the unfortunate distinction of being the first sewing machine patentee threatened with litigation for infringing another sewing machine patent. After [Allen B.] Wilson invented a double-pointed shuttle in 1848, A.P. Kline and Edward Lee, the owners of the [John] Bradshaw patent, threatened Wilson with a lawsuit for infringing their patent. Lacking the funds to defend himself, Wilson sold his patent rights to this particular invention to Kline and Lee to settle the dispute.

In sum, Bradshaw had obtained a patent on sewing machine technology in 1848 and then sold it to Kline and Lee, who then sued Wilson for patent infringement. In exchange for settling their lawsuit against him, Wilson transferred his 1848 patent to Kline and Lee. (Wilson was undaunted by this experience, as he proceeded to obtain three more patents on sewing machines). Regardless of what one thinks of the propriety of Kline and Lee’s lawsuit against Wilson, it is clear that in the 1840s they were engaged in a secondary market in acquiring patents and asserting them against infringers.

Such sales and transfers of patents and patent rights were not limited to sewing machines, and in fact were very common for all patented innovation in the nineteenth century. In the classified ads section in an 1869 issue of Scientific American, among ads touting the value to purchasers of “Woodbury’s Patent Planing and Matching and Moulding Machines” and ads declaring “AGENTS WANTED – To sell H.V. Van Etten’s Patent Device for Catching and Holding Domestic Animals,” one can find ads offering for sale patents and rights in patents: Ads1869

Image from Scientific American (Aug. 28, 1869), p. 143.

Again, this was not unusual. The classified ads sections in nineteenth-century issues of Scientific American reflect incontrovertible evidence of both secondary markets in patents and the patent licensing business model. One page of classified ads in an 1854 issue of Scientific American, for instance, has the following ads for the sale of patents and patent rights: Ads1854

Image from Scientific American (Aug. 12, 1854), p. 383.

2.   Secondary Markets in the Late Nineteenth Century

The secondary market in patents continued throughout the nineteenth century, as confirmed in recently published research by economists Naomi R. Lamoreaux, Kenneth Sokoloff, and Dhanoos Sutthiphisal. Their research reveals the fundamental, significant role performed by patent attorneys as market intermediaries in the late nineteenth century, effectively serving as predecessors of today’s patent aggregators. This included one businessperson who “invested in patents for hat-frame formers, rails for high-speed railroads, electric railroad systems, and pliers.” Another’s “investments spanned the technological gamut from envelopes to drills to arc lamps to sewing machines to railroad signaling systems.” As Lamoreaux, Sokoloff, and Sutthiphisal indicate, the wide-ranging innovation invested in by these individuals “suggests they were not primarily manufacturers seeking to improve the efficiency of their production processes or expand their product lines.”

Admittedly, these businesspersons were closer to what we would define today as angel investors or venture capitalists, but this is more likely the result of legal, market, and technological factors that are exogenous to the patent system. For instance, the twentieth century witnessed incredible innovation in the development of advanced forms of corporate structure, as well as equally innovative development of complex legal and financial mechanisms, that allow for commercialization of patented innovation in ways that would have been outright impossible (or grossly inefficient) in the nineteenth century. Moreover, the technological advances wrought by the digital revolution — computers, the Internet, email, smartphones, wireless telecommunications, and many others — have reduced substantially the information costs and transaction costs in the commercialization of patented innovation.

Such factors are significant because they directly affect the commercialization of patented innovation, and thus they cannot be ignored in assessing historical practices in the innovation industries. The creation of the Sewing Machine Combination of 1856, the very first patent pool, as well as the Singer Sewing Machine Company’s radical commercial innovation in mass marketing and in developing the first rent-to-own and trade-in programs, is significant evidence of the dynamic and mutually reinforcing relationship between technological, legal and commercial innovation. In brief, innovation breeds innovation, and we must therefore be careful to avoid anachronistic judgments about the nineteenth-century absence of today’s aggregation of large-scale patent portfolios by corporations engaged in manufacturing, licensing, or both.

Within the constraints of primitive nineteenth-century corporate law and financial mechanisms one easily finds an abundance of “patent agents,” commercial investors, patent licensing practices, and secondary markets in patents.  This fact is significant evidence by itself that today’s secondary markets and patent licensing business models have clear historical antecedents. Notwithstanding any legal or corporate differences, it is simply false to assert that secondary markets in patents and patent licensing are new phenomena today. Such assertions, reflected in today’s conventional wisdom, are myth, not reality.

III.   Conclusion

Of course, the twenty-first-century innovation economy is incredibly different from that of the nineteenth-century innovation economy. The exogenous market and technological variables at work in this economy are different as well. But the conventional wisdom today that the patent licensing business model and secondary markets in patents are new and unprecedented is simply false.  It is equally wrong to infer a negative policy judgment from this mistaken historical claim. Whether there is benefit or harm from such commercial innovation is an important empirical and policy question, but such benefits or harms should no more be based on incorrect claims about historical practices than they should be based on studies that are, in the words of the GAO Report on Patent Litigation, “nonrandom” and “nongeneralizable.”

In fact, the long history of the widespread adoption and use of the patent licensing business model, as well as the secondary markets that make such patent licensing business models possible, should be unsurprising. These commercial activities reflect the basic economic principle of the division of labor that Adam Smith famously recognized as essential to a successful free market and flourishing economy—in this context, it is the division of labor between inventors and businesspersons. Commentators (and Congress) should tread very carefully in seeking to abolish this long-established feature of the American patent system.