Newspapers have reported a massive patent infringement campaign against individuals—almost 1,000 farmers were sued for patent infringement in just one courthouse in a single year! Even worse, the plaintiff is not a competing farmer or manufacturer; instead, it merely bought the patent rights and is now asserting them against unsophisticated defendants for the sole purpose of obtaining royalty payments.
In an increasingly rare moment of agreement, members of Congress, the president, lobbying groups, and others have found a common enemy. It’s the dreaded “patent troll.” Although this term has proven next to impossible to define, it usually refers to an individual or company who doesn’t manufacture a patented invention but instead authorizes others to make or sell the innovative technology. In more legalistic terms, these are entities whose business model is licensing others to manufacture and sell patented innovation, and they do so through either contract negotiations or patent infringement lawsuits.
Recently, the patent licensing business model has taken center stage in the public policy debates in a way not seen since the 19th century (when the popular rhetorical epithet was “patent shark”). In fact, the story of massive numbers of farmers being sued for patent infringement was not torn from today’s headlines—unless of course one is looking at headlines from the late 1880s.
Yet, many smart people assume that the patent licensing business model—and the buying and selling of patents themselves—is an entirely recent development. In 2006, for instance, Justice Anthony Kennedy stated as simple fact in eBay v. MercExchange that “An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.” Commentators now assert in prestigious law journals that the “patent marketplace is a relatively new secondary market.” Now we’re seeing calls that the patent laws should be changed in response to this “new” development by mandating that all patent owners manufacture or sell their patented innovations in the marketplace.
The problem, as I stated in testimony before Congress in the fall, is that the “patent troll” epithet would require us to condemn famous American innovators like Thomas Edison and Charles Goodyear who contributed immensely to America’s innovation economy in the 19th century. This is not hyperbole. This pejorative label has been applied to universities, such as the University of Wisconsin. It has also been applied to individual inventors who have had to sue commercial firms for infringing their patents. The reason is that they all license rather than manufacture their patented innovation. This has long been an essential feature of the American patent system in successfully and efficiently promoting new inventions and driving the innovation economy. This isn’t unique to patented innovation, as Adam Smith famously recognized in 1776; it is specialization and the division of labor that are the keys to a flourishing market—in the context of patented innovation, inventors should invent and businesspeople should manufacture and sell. This is why it was embraced by Goodyear, Edison, and others in the 19th century, and for this they would be condemned today.
Still not convinced? Let the facts be submitted to a candid world (to turn a phrase from the Declaration of Independence).
Thomas Alva Edison
Thomas Edison both sold and licensed his patented innovations. As economists have reported, Edison sold many patents in his early career to fund his full-time research and development activities. Even after he became widely successful and famous—known as the “Wizard of Menlo Park”—Edison still participated in the secondary market, such as selling his patented innovation in incandescent light bulbs to the General Electric Co. (as discussed in a recent biography).
But Edison also manufactured and sold some of his patented innovations, such as his first efforts at commercially exploiting his electric light bulb and phonograph. These business ventures have been described as “shaky” and “dismal” by his biographers. The products that ultimately dominated the marketplace from Edison’s initially path-breaking inventions were oftentimes produced by his competitors, such as the Victrola record player. Henry Ford famously quipped that Edison was “the world’s greatest inventor and the world’s worst businessman.”
Edison would have been wiser to continue to embrace market specialization—inventing in his lab and selling or licensing his patents to others to manufacture and sell his innovative products. It was doing this that brought him his fame and fortune as a young innovator at Menlo Park, and ironically it would have brought him notoriety today as a “patent troll.”