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]