Patent History

During this last year, there has been a considerable increase in the interest of companies, and the general population in the meaning and use of Intellectual Property (IP) rights, and in particular patent rights. The profile of patent law and IP law in general has increased dramatically. Much of the popular press, including the Wall Street Journal, the New York Times, the Boston Globe, as well as journals like Wired magazine, Upside and the Red Herring, devote continuing attention to patent matters. However, a review of the history of patents, reveals that patents have a long and controversial past.

Early Patent History

The right for a U.S. citizen to seek a patent comes from the U.S. Constitution. Actually, the Constitution doesn’t explicitly grant people the right to get patents, it actually just says that Congress may provide inventors with rights to their inventions. However, even though it is only a suggestion, it is a suggestion made by the U.S. Constitution, therefore Congress generally felt obliged to set up some type of organization for granting patents. To this end, Congress set up the first patent board, which consisted Thomas Jefferson, Henry Knox, and Edmund Randolph. That was about 200 hundred years ago, and the U.S. has been granting patents ever since.

The early patent boards were not too busy as the U.S. was primarily an agricultural society, and science and technology was a dominion shared by wealthy, over educated Europeans, and as always, the military. But that all changed with the industrial revolution. Nineteenth-century businesses put a lot of stock in the power of patents to help them dominate markets and keep competitors at bay. In the “Great Telegraph Wars” of the 1870s, for example, financiers Cornelius Vanderbilt and Jay Gould hurled all manner of legal, financial and competitive assaults at each other as they ruthlessly schemed to control the most valuable assets in the industry: Thomas Edison’s telegraph patents. Both these men knew, and rightly so, that huge fortunes depended on those patents.

Similarly, RCA purchased the patents of Marconi and other radio pioneers and made millions by controlling the patents of radio broadcasting. During the nineteen twenties RCA again waged a brutal battle for the patents on television, ultimately having to recognize Philo Farnsworth as the original inventor and true patent owner.

The sudden and enormous wealth of the U.S. manufacturing industry and the protections that patents provided to these industries, were not unnoticed by those wealthy, educated Europeans. These men saw that industry was the future and that a new class of European workers was being created who could capture this future. This new European class comprised engineers and technicians (and a few chemists) that were full of hope and bright ideas. The aristocracy immediately went to work calling their lawyers and representatives to make sure that laws would be put in place to accomplish two things; first to protect the valuable ideas and inventions of this new class of European workers; and second, and most importantly, to make sure that these patents were immediately to become the property of the companies that employed these engineers, lest this new class of worker actually own something of value. Japan, in turn, also adopted a U.S. style patent office to foster growth of technology and defense companies.

Patents Fall Out of Fashion

Starting around 1930, and for the next several decades, patents steadily fell out of fashion as a means for companies, at least in the U.S., to protect their markets. It is difficult to know the exact reason why this falling out occurred, but there are several likely possibilities.

The first, and somewhat obvious choice, is the arrival of the Great Depression. The extreme economic difficulties that gripped the nation throughout the thirties effectively ended the lending of capital to small businesses. Wall Street was crippled and the angel investor market was all but shut down. Even the nascent airline industry, that throughout the twenties had been a source of fairly reliable ventures for technology minded entrepreneurs and investors, dried up. The actual use of patents to protect the research and development of small starting companies was only of theoretical interest. There were no small high-tech companies.

Moreover, the continued use by large companies of patent rights was met by the Supreme Court with considerable hostility. The thirties gave rise to a strong distrust in monopolies, and patents, particularly those held by large companies. These patents were seen as government sanctioned monopolies. Indeed, referring to this negative attitude toward patents, Judge Learned Hand stated: “I think a great deal of the odium that has surrounded the subject is because patents are monopolies.” This idea is further supported by the fact that during the 1940’s the Antitrust Division of the Justice Department launched “a major campaign against alleged patent abuses.”

Furthermore, the New Deal initiatives proposed by President Franklin D. Roosevelt had little use for patents. President Roosevelt appeared to hold a negative view toward patents. For example, in a 1938 message to Congress, he suggested that the patent system was one cause of the “economic malaise gripping the country.” Roosevelt’s plans and ideas were reflected by the Supreme Court, particularly after his court-packing plan was proposed, and as he appointed justices to the Supreme Court, such as Justices Black and Douglas.

The effect of the Supreme Court’s negative view towards patents was a string of rulings that created laws continually narrowing the scope of what was a patentable invention. Throughout this period the ability to get a patent, and the ability to have a court recognize a patent as valid, became much more difficult. Additionally, even if a patent was upheld as valid and infringed, courts were loathe to award substantial damages to the patent holder. Thus, patent suits were hard fought battles with little reward.

But American industry really didn’t care too much. After the thirties and forties, the American economy not only recovered, but it accelerated at a pace never seen before, growing to a point where it dwarfed all other economies in the world. During the 50’s and ’60s all the action in innovative technology was in the United States and companies grew huge selling and exporting technology. However, after World War II, large companies treaded lightly around their former friend patents, for fear as being seen as anti-competitive and monopolistic. However, one exception were the pharmaceutical firms, which relied on patents to help build one of the most profitable industry in history. The IBM judgment settlement required that IBM avoid accusing competitors of patent infringement. This decree lasted all the way through the 70’s and early 80’s. Not until the late ’70s did American inventors begin to experience intense competition from abroad — especially, of course, from Japan and other Asian nations. Thus, the competition among U.S. manufacturers took place in the marketplace for their products, not in the patent office — and certainly not in the courts.

The Return of Patents

As international competition increased during the 70’s, however, industry, the patent bar and the courts together realized the economic necessity of providing more and better protection for U.S. technology. In particular, U.S. companies were frustrated by the fact the European countries and Japan offered stronger patent protection than the United States. Similarly, Japanese and European companies that were used to strong patent protection, were unimpressed with the level of protection they were given in the United States. Industry lobbied Congress and the result was the Federal Courts Improvement Act that created the Court of Appeals for the Federal Circuit (CAFC)- a single court that would review the decisions made by lower court judges on all patent cases throughout the country. Not only was the CAFC able to present a unified and consistent interpretation of patent laws, but it could, and did, take a far more expansive view than some “generalist” courts of what a patent owner was entitled.

By 1982 the CAFC was in place and began hearing patent cases. Within the next year or so decisions began to come down from the CAFC and these decisions were interpreted, rightly or wrongly, as being pro patent holder and pro-patent rights. Although some disagreement exists whether the CAFC has really been significantly biased towards patents, it is generally accepted that the standard for obviousness applied by the CAFC is different from what lower courts had earlier applied. In fact, through the first five years of the CAFC’s existence the CAFC overturned almost 90% of those lower court opinions that found a patent to be invalid for being obvious in light of the prior art. Suddenly, the tide had changed again and patents were back in fashion. Now patent were again respected by the courts and patent holders could look to the court for injunctions and lost revenues.

The big companies that had lobbied Congress to create the CAFC, now could use the patents as they had intended to protect their markets and technology from International competitors. But what else patents could be used for still remained somewhat unclear.

And then the value of patent rights hit. By the late 1980’s it was clear that patents were going to be valuable and enforceable. At that time, in the United States the biotech industry was beginning to rise in prominence. The biotech industry is an industry built on technologies that require an enormous amount of capital, hundreds of millions of dollars, to be invested before any product can be realized. However, once a product is identified as successful, the ability to copy the technology employed for creating that product is remarkably simple. This discouraged venture capitalists from investing in start-up biotech companies.

These biotech start-ups turned to strong patent rights as a way of showing the investors that they could protect their technology and their investment so that if a young biotech company did hit on a new drug with the potential to be worth billions, that biotech company would have the right to fully exploit its intellectual property without fear that generic drug companies would quickly come in and make competing profits without having had to spend the research and development money provided by the investors. The venture capital community was convince and overnight the biotech industry fell in love with patents. Patents became the coin of the realm for biotech industries many of which had nothing more than their intellectual property and many of which knew it would be a decade or more before any product would be realized. Biotech companies lobbied Congress viciously getting laws changed and amended so that genes could be patented, transgenetic animals could be patented, the term of patents could be extended, and for a host of other reasons. And the patent office listened. The patent office was greatly interested in supporting the biotech industry and helping that industry grow within the United States. To that end the patent office, under the guidance of Commissioner Bruce Lehman listened carefully to what the biotech industry needed and worked hard to make sure that the patent office and Congress would provide the fledgling biotech industry with the rights it needed to attract capital and to grow.

This is the way things continued all through the late 80’s and then to the early 90’s. But by the mid 90’s a new industry appeared in the horizon. The Internet. The lessons that have been learned by venture capitalists investing in biotech companies were not lost on the venture capitalist that wished to invest in Internet startups. These venture capitalist knew that although the size of the investments required by Internet start-ups were significantly smaller than those required by biotech companies, the ease of knocking off a small company’s products was similar, and without the proper barriers and protections small startup companies would easily be put out of business by larger more aggressive software that are bounded within the software industry. Again, venture capitalist turned to patents to protect their investments and directed investee companies to prepare patent portfolios similar to the patent portfolios they had seen prepared for biotech companies.

Motivated by the ability to attract capital, software and Internet startups began filing patent applications as part of the standard startup procedures.

Tech companies continued to use the patent system and the number of patent applications filed for increased gradually year after year through the mid 90’s. Then, in 1998 the CAFC issued the State Street Bank decision. In the State Street Bank decision, the CAFC through an opinion written by Judge Giles Rich, overturned a Massachusetts court decision that had found a patent on a method of doing business to be improper subject matter for a U.S. patent. Thus, although the U.S. Patent Office had been granting patents on business methods including the one reviewed in the State Street Bank decision, for many years, the direct and forceful statements of the CAFC that these patents were the proper subject matter of U.S. patents removed a final barrier to the patenting of business methods. Specifically, the State Street Bank decision removed all doubt that such patents being issued by the U.S. Patent Office would be held enforceable by a court. The State Street Bank decision resulted in two things. First, industries that normally would never consider filing for patent protection, such as the insurance industry, retail industry, advertisement industry, and other such industries now saw patent rights as an available tool for protecting company innovations. Secondly, the State Street Bank decision got a lot of press. By 1999 the State Street Bank decision and patents that issued on business methods were constantly being brought into the public eye by the popular press. This resulted in a much higher awareness of patent rights by the public in general. Unsurprisingly, the greater interest and knowledge in patents fostered by the attention provided by the public press has resulted in an even greater increase in the number of patent applications being filed for each year in the United States.

Did a 14 Year-old Invent TV? YES!

Philo T. Farnsworth, or as he preferred Phil Farnsworth, is recognized as one of the great mathematicians of the 20th century. He invented television in 1922. He was 14 years old.

At the time, Farnsworth was attending a rural school house near his parent’s farm in Idaho. The farmhouse had electricity and he was fascinated by it. In a lab he set up in an attic loft he experimented with generators and electric motors. He also read articles about how scientists were trying to combine motion pictures with radio. The articles discussed the use of mirrors and spinning disks, none of which seemed realistic to Farnsworth. One night he hit on a better idea, capture incoming light in a jar that can detect the light and transmit it in a series of individual lines of electron beams. By magnetically deflect each line one at a time so that together they would form a moving picture. He sketched out his idea for his science teacher. They spent several weeks discussing the idea until they felt that Farnsworth plan was possible.

Decades later, when Farnsworth was fighting radio-industry giant RCA over who invented television first and who should get the patent, the Patent Office asked to meet with the science teacher. The teacher appeared and described what Farnsworth had come up with all those years ago. Base largely on the testimony of the science teacher and the notebooks kept by Farnsworth, the Patent Office awarded the patent rights to Philo T. Farnsworth.