To hear some critics tell it, the explosion of patent suits in the smartphone industry is evidence of a patent system that is fundamentally “broken,” at great cost to U.S. innovation.
Such histrionics, however, ignore one crucial but little known fact: throughout American history, the buying, selling, and litigating of patents has always been essential to U.S. economic success. Not only that, the truth is that today’s patent litigation rate is less than half what it was in the mid-19th century, a period widely-recognized as the “golden age” of American innovation.
To appreciate the role played by patent trading and litigation in U.S. economic growth, remember that our patent system was the first in the world to unleash the innovative potential of ordinary citizens. To create this democratized patent system, the Founding Fathers deliberately designed it to facilitate the growth of patent trading markets. As economists Naomi Lamoreaux and Kenneth Sokoloff, two of most respected experts on early American invention, have noted, the first U.S. patent law in 1790 was unique in the world for containing “an explicit provision for the sale of patent rights [that] both the courts and the U.S. Patent Office acted to facilitate.”
Why facilitate the buying and selling of patents? Because doing so made it economically feasible for ordinary worker- or farmer-inventors without the capital to commercialize their own discoveries to still participate in invention, earning income instead by licensing or selling their patents to enterprises that could. This ability to license patent rights — along with application fees that were less than 5 percent those in Britain —turned inventing into a new career path for technically-creative citizens and sparked a huge surge of invention among the U.S. citizenry.
By 1865, the per capita patenting rate in the U.S. was triple that of Britain’s, and the vast majority of those citizen-inventors were what we now call “non-practicing entities,” or NPEs, who licensed their patents to others to commercialize into new products. Indeed, patent and legal records from the 19th century indicate that more than two-thirds of the 160 so-called “great inventors” of the Industrial Revolution — including Thomas Edison — were NPEs.
Their licensing activities were critical to U.S. industrial development. In the 1894 annual report of the American Bell Telephone Company, for example, the company reported that it had licensed 73 patents from outside inventors while developing only 12 inventions internally.
“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,” observed 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 more generally.”
Just as with other property rights, of course, patents rights would be meaningless without the ability to enforce them in court. And throughout U.S. history, patent litigation has served to settle the disputed ownership of rights to critical new technologies — the litigation between telephone inventors Alexander Graham Bell and Elisha Gray being the most famous case in point — and provide certainty regarding the value of such rights to entrepreneurs and investors alike.
But with the recent explosion of patent suits in the smartphone industry, where the lineup of litigants resembles a circular firing squad, isn’t patent litigation now out of control?
Actually, the facts show otherwise. According to Lex Machina’s authoritative “Database of U.S. Patent Litigation 2011,” the number of patent suits filed between 2001 and 2010 has held steady at less than 3,000 per year. Only about a hundred of these cases actually went to trial each year — the exact same number that went to trial ten, 20, and even 30 years ago.
The evidence hardly suggests, therefore, that patent litigation is “out of control” today. In fact, according to retired chief judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the main court for patent appeals, “It’s rather modest for a nation with two million active patents and hundreds of thousands of firms competing against each other.”
To put it in even broader historical context, the estimated 100 patent suits currently filed in the smartphone industry is actually less than one-fifth the number of 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 a whopping 587 patent cases alone.
According to economist Zorina Khan, the recipient of the Alice Hanson Jones prize for outstanding work in North American economic history, the patent litigation rate in the mid-19th century — defined as the number of patent suits filed during a decade divided by the number of patents issued in that decade — reached 3.6 percent. In contrast, the litigation rate during the most recent decade of the 2000s was less than half that — only 1.5 percent.
(Although the number of patent suits rose to 3,474 in 2011, a similar increase in patents issued last year leaves the litigation rate unchanged and still very modest by historical standards.)
But what about those patent litigants who file frivolous cases against deep-pocketed businesses in an effort to extort settlements? It’s true that the patent industry has a few actors who take advantage of the legal system to drive settlements, just as the personal injury field has its ambulance chasers and corporate law has its “shareholder rights trolls.” But these few outliers are hardly the norm in the $500 billion annual global patent licensing trade. That’s the price we pay for a democratized legal system that allows everyone unfettered access to the courts.
In short, today’s smartphone patent wars are simply “back to the future” when it comes to how disruptive new industries are developed. Every major technological and industrial breakthrough in U.S. history — from the Industrial Revolution to the birth of the automobile and aircraft industries on up to today’s Internet and mobile communications revolutions — has been accompanied by exactly the same surge in patenting, patent trading, and patent litigation that we see today in the smartphone business. This is how the rights to breakthrough new technologies have always been distributed to those best positioned to commercialize them — to the benefit of the whole nation in terms of new jobs, new medical advances, and new products and services.
The secret of America’s success wasn’t simply due to some “Yankee ingenuity” gene in our hereditary stock. It was also due to our unique patent system — the first in the world to facilitate patent trading markets and provide unfettered access to the courts where patent disputes could be resolved for the benefit of inventors, entrepreneurs, and investors alike. This patent system helped the U.S. build the most successful economy in the history of the world.
[Editorial Note: This article was originally published by Forbes Magazine under the titled No, the Patent System is Not Broken, and is re-published here with the permission of Mr. Lustig.]