America is without question the most innovative country in the world. This has been the case since its founding over 200 years ago. One of the great innovations of America’s Founding Fathers is the U.S. patent system. This has encouraged innovation for all of these years. However, some argue that the patent system is outdated and no longer encourages innovation. In particular, many libertarians believe that patents are government approved monopolies that discourage innovation. In this paper we examine the U.S. patent system, explain how it encourages innovation, and why libertarians in particular should support this system that operates according to libertarian values and resist current efforts at “reform” that introduce government regulation and limits competition.
What Are Patents?
To understand the U.S. patent system, we first need to understand what a patent is. Patents are simply property rights for inventors that are issued by the United States Patent and Trademark Office. The language of the statute states that any person who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent,” subject to the conditions and requirements of the law. Patents do not protect ideas by themselves, but the implementation of ideas. For example, one cannot patent the idea of voice transmission over wires. But one could patent a method for voice transmission over wires comprising receiving sound vibrations and converting them to modulations of an electrical current by means of a membrane attached to a carrier of the electrical current in such a way that when the membrane vibrates in response to sound vibrations, the membrane causes a modification to the electrical current during a part of each vibration, etc. In other words, one cannot patent the idea of a telephone but can patent a specific implementation of a telephone.
A patent grants to its holder the right to exclude others from making, using, offering for sale, or selling the invention in the United States or importing the invention into the United States. Therefore, patents prohibit others from “making, using, offering for sale, or selling” the invention without permission from the patent holder. Thus, anyone who wants to use the invention in this manner needs a license from the patent holder. Generally, patents are enforceable for twenty years after the application for the patent is filed. Patents issued in the United States are only enforceable in the United States, U.S. territories, and U.S. possessions.
Patents offer protection for inventors from competitors. Without patents, inventors have no incentive to disclose how they created their inventions. In the past, before patent systems were put in place, inventors kept their technologies to themselves and when they died, their technologies were lost. Some technologies in the past were lost forever. For example, during the 17th century, Antonio Stradivari and his sons knew the secret to crafting violins and other stringed instruments that produced unparalleled sound quality. A picture of one such violin is shown in Figure 1. There are only about 600 of these instruments left in the world, and the word “Stradivarius” has now come to mean a violin with great sound quality. The secret to creating these instruments died with the Stradivari family. Even today, people argue about what made these instruments so unique and their music so beautiful.
Another invention that was lost is the Antikythera Mechanism, shown in Figure 2, which was found by divers off the west coast of Greece. This device had many parts, and may have been used by the people of Ancient Greece during the first and second centuries B.C. to track the movement of the planets and the sun. These two great inventions and the technologies behind them could have been saved if there were patents, which would have provided a record for the implementation of these inventions, and would have allowed others to produce the invention after the patent term had expired.
Patents encourage innovation not discourage it. Patents are a way for the government to give protection for a limited time to inventors while encouraging them to disclose their knowledge. In this way, others can learn the new technologies and build upon them, improve them, or invent better ways of doing the same thing.
A Brief History of the U.S. Patent System
In medieval times, the grant of exclusive rights by the monarch was an easy way for him or her to raise money without needing to tax the people. These monopolies had serious effects on the economies of the European countries. In 15th century Venice, monopolies were deliberately granted to encourage innovation. During this time, Venice fought a war with the Turks, which led to Venice losing most of its trading empire in the Mediterranean. This resulted in Venice having to focus more on manufacturing rather than trade. To protect that manufacturing, Venice passed the first known laws to protect inventors involved in manufacturing.
Towards the end of Queen Elizabeth I’s rule in the 16th century, English courts granted monopolies to businesses that had introduced a new industry to the country. In 1624, the English Parliament passed the Statute of Monopolies. This limited the power of the monarch in granting monopolies. Under this statute, the monarch could only grant monopolies for fourteen years.
The legal basis for the U.S. patent law is found in the Article I, Section 8 of the United States Constitution: “The Congress shall have Power To… promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries…” By including this clause in the Constitution, the Founding Fathers intended to protect individuals from the power of large entities. Also, the Founding Fathers considered patents to be so important that they passed the Patent Act of 1790 even before passing the Bill of Rights. Thomas Jefferson had a changing view of patents. In 1787, he was opposed to any type of monopoly including patents, but by 1789, his position had changed. As Secretary of State, Jefferson became the first acting head of the U.S. patent office. With regard to this patent law, Jefferson observed that it had “given a spring to invention beyond his conception.” Since 1790, the United States has greatly benefited from its patent system, which resulted in the United States becoming the most innovative country in the world.
What is Libertarianism?
Libertarianism is the belief that all people have the right to live their lives in any way, as long as they respect the rights of other people. Libertarians value life, liberty, and property as inherent rights. Libertarians believe in advancing the rights of people and limiting the size of the government. Many people say that the Founding Fathers of the United States were libertarians in practice because the U.S. Constitution favors limited government and protection of individual rights.
David Boaz, executive vice president of the Cato Institute, expresses this idea very precisely in his book “Libertarianism: a Primer”:
Libertarianism is the view that each person has the right to live his life in any way he chooses so long as he respects the equal rights of others… Libertarians defend each person’s right to life, liberty, and property—rights that people possess naturally, before governments are created. In the libertarian view, all human relationships should be voluntary; the only actions that should be forbidden by law are those that involve the initiation of force against those who have not themselves used force—actions like murder, rape, robbery, kidnapping, and fraud.
Many notable libertarians, such as Ayn Rand and Milton Friedman had a similar view of the world. When one first hears the word “libertarianism,” one may think of the word “liberty,” which is defined in the Merriam-Webster Dictionary as “the state or condition of people who are able to act and speak freely” and “the power to do or choose what you want to.”
Owning property is an essential element of liberty. Protecting property and property rights is a major concern of libertarianism and one of the few functions of government that nearly all libertarians agree is necessary. The book “The Virtue of Selfishness,” a collection of essays and papers by Ayn Rand and Nathaniel Branden. Rand, founder of Objectivism, a branch of libertarianism, confirms this binding between liberty and property ownership:
There is no such dichotomy as “human rights” versus “property rights.” No human rights can exist without property rights. Since material goods are produced by the mind and effort of individual men, and are needed to sustain their lives, if the producer does not own the result of his effort, he does not own his life. To deny property rights means to turn men into property owned by the state. Whoever claims the “right” to “redistribute” the wealth produced by others is claiming the “right” to treat human beings as chattel.
Is Intellectual Property Property?
The issue intellectual property has divided libertarians as to whether there can really be ownership in the result of result of human creativity, and continues to do so today. Some libertarians believe that inventors deserve a claim to their hard work, while others argue that patents are government-enforced monopolies and that the current United States patent system needs to be reformed. What the patent and copyright laws acknowledge is the paramount role of mental effort in the production of material values. These laws protect the mind’s contribution in its purest form: the origination of an idea. The subject of patents and copyrights is intellectual property.
Ayn Rand strongly supported patents. In her book “Capitalism: The Unknown Ideal,” she states:
An idea as such cannot be protected until it has been given a material form. An invention has to be embodied in a physical model before it can be patented; a story has to be written or printed. But what the patent or copyright protects is not the physical object as such, but the idea which it embodies. By forbidding an unauthorized reproduction of the object, the law declares, in effect, that the physical labor of copying is not the source of the object’s value, that that value is created by the originator of the idea and may not be used without his consent; thus the law establishes the property right of a mind to that which it has brought into existence.
Many libertarians believe that intellectual property, being intangible, is not real property. A formal libertarian definition of property is difficult to formulate, but we would say that property is that which can be produced or contribute to production. Intellectual property falls clearly within these constraints. Yet some libertarians complain that intellectual is not tangible and is defined by government regulation—the patent laws—such that it would not exist without government definition. Let us look at this argument closer. Land is unquestionably property in the minds of libertarians. Yet the land upon which a house is built was not created by the property owner. It was created by nature or God, depending on your inclination, but no one would claim it to be created by the owner, whereas intellectual property is unquestionably created by the inventor. And how far do property lines extend? Property lines are determined by local governments. One can argue that property lines are negotiated by owners and enforced by governments, but when we moved into our homes, there were no negotiations with surrounding property owners. And how far above ground and below ground do property rights extend? These limitations are definitely not negotiated with other property owners but are determined by laws enforced by governments. Patents also have limitations in terms of scope and time that are determined by government laws. One can see that limitations on patents are similar to those on physical property and in some respects are more closely connected to production. For these reasons, libertarians should recognize patents as they do other forms of property.
As a secondary but important example, libertarians are generally concerned about government spying on private conversations. When the government captures a phone conversation, it is not physically taking property. It is simply copying intangible data that exists as a form of transient electrical signals. Copying does not involve removing the original—the phone conversation is not destroyed when it is copied. Yet libertarians recognize that this copying of intangible data is a kind of theft of property. Libertarians should thus be wary of making the argument that intangible patents cannot be property or they may lose their contrary argument that private conversations are personal property to be protected.
Non-Practicing Entities, Patent Trolls, and Free Markets
Non-practicing entities (NPEs) are organizations that buy intellectual property and license the rights to others. Most commonly they deal in patents. Typically these NPEs purchase patents from companies in need of a capital influx, companies that are moving from one area of technology or one type of product to another, companies that are closing down and need to monetize their assets for distribution to their shareholders, and individual inventors who do not have the money and experience to license or litigate large companies that are infringing their IP.
The term “patent troll” was coined by attorney Peter Detkin to describe bad actors who abuse the patent system or use loopholes in the law in ways that were unintended and that hurt patent holders and impede innovation. Ironically, Peter is now a founder of Intellectual Ventures, the largest NPE that is often labeled a “patent troll” by its critics. Let us examine this term.
First, the term patent troll is now used derogatorily to describe any company dealing in patents that the name caller does not like. This was evidenced at a conference last year entitled “Patent Trolls and Patent Reform” at the Stanford University Law School. The term “patent troll” not only included NPEs but also companies that were forced out of the market by larger competitors and who were trying to recoup their R&D expenses as represented by their patents. The term was also used for companies that sent letters demanding hundreds of dollars in license fees to small mom-and-pop stores that used, for example, allegedly infringing fax machines and scanners. The term was even applied to universities attempting to license the results of their research to corporations. Whether or not one likes these entities and their business models, lumping them all together is simply a means for tarnishing all of them for the practices of some of them.
For our discussion, we will use the neutral term NPE to describe those companies that buy and sell patents and patent rights. These companies act similarly to a grocery store, which could otherwise be labeled “grocery trolls” because, just as the argument against NPEs goes, such grocery trolls do not produce fruits and vegetables, they simply purchase them from those who do and then sell them to consumers. This model which is understood and encouraged by libertarians and other supporters of free markets, provides a great service by connecting distant producers and consumers and achieving economies of scale. No free market libertarian would think that such “grocery trolls” were exploiting a system, reducing consumption, hurting framers, or otherwise undeserving of the service fees that they charge. Similarly, NPEs should be praised by free market libertarians for providing a vital market that allows easier exchange of property and connecting producers and consumers who otherwise could not connect.
The America Invents Act
On September 16, 2011, Congress passed and President Obama signed into law the America Invents Act (“AIA”), the first major patent reform legislation in over 60 years. One justification for the change was to restrict the “abuse of patent trolls,” a concept that should have sent chills through each and every libertarian. When government attempts to regulate the property rights of an individual or business because of its particular business model, free markets are destroyed and government concepts of “fairness” override actual fairness, or what we call freedom.
Another justification for the new law was “harmonization with Europe and the rest of the world.” As libertarians know, Europe has socialist tendencies that include bringing monopoly charges against U.S. businesses while maintaining their own government-supported monopolies. The EU has recently brought antitrust cases against US firms Google, Facebook, Amazon, 21st Century Fox, Disney, NBCUniversal, Paramount Pictures, Sony, Fox, Warner Bros, and Qualcomm. At the same time, European governments subsidize businesses such as Airbus.
European governments significantly regulate European businesses and have labor laws tilted clearly and steeply in favor of employees and against businesses. Innovation in Europe and the rest of the world has paled in comparison to the United States since at least World War II if not since this country’s founding. The idea of making U.S. law similar to European law should have been a serious red flag for libertarians and other friends of free markets.
In particular, one of the most serious changes was to make U.S. patent law depend on the concept of first-to-file rather than first-to-invent that had been the original law and the original intent of our Founding Fathers. Originally, U.S. patent law was purposely intended to reward the first person to figure out a way to implement a novel, useful invention even if that person did not have the resources to produce the invention. This would give power to the creative genius and allow him or her to raise funds or license the patent to a manufacturer. European patent law, on the other hand, required an inventor to produce the actual invention, ensuring that inventions stayed with the wealthy class. Zorina Khan, Associate Professor of Economics at Bowdoin College, writes in her book “The Democratization of Invention” about U.S. patent laws since the founding of the United States, in contrast to those of Britain:
Rather than an elite that possessed rare technical skills or commanded large stocks of resources, the rise in patenting was associated with a democratic broadening of the ranks of patentees to include individuals, occupations, and geographic districts with little previous experience in invention. One finds among the roster of patentees not only engineers and machinists, but also candidates for the Greenback Party, schoolteachers, poets, humble factory workers, housewives, farmhands, teenagers, and even economists.
Furthermore she attributes a kind of opportunity available to women in 19th century America through invention and patents that was not available through laws or social norms:
[R]ecords indicate that nineteenth century women were active participants in the market for technology… Patents by women comprised only a small fraction of total patents, but the overall patterns of patenting and the pursuit of profit opportunities by women inventors were similar to those of male inventors… Women in frontier regions were especially inventive, and devised ingenious mechanisms to ease the burden of an arduous existence far from the conveniences of cities and extended social networks.
The AIA changed the longstanding first-to-invent requirement to a first-to-file, supposedly to reduce litigation costs because it is easy to verify which inventor filed paperwork first with the patent office. It is important to remember, however, that in America litigation occurs not because we have a lot of greedy people and unscrupulous lawyers, as is often decried, but because litigation is the great equalizer. The laws apply equally to all, and litigation is a sometimes long and costly process that allows justice to be served, within the confines of human fallibility, without regard to the litigants’ social status, wealth, employment, race, color, or religion. However, now rather than rewarding the initial producers of intellectual property, this major change in U.S. patent law rewards the first entity to fill out paperwork and pay the government’s fees. This means that once again the power of the patent is given to the large corporations. This provision of the AIA in particular should alarm libertarians in that it has undone over 200 years of creative invention and equality of opportunity in favor of large corporations, wealthy individuals, and government bureaucracy.
Libertarians believe in property rights and government protection of those rights as one of the few necessary requirements of government. Ownership of property and free markets leads to competitive production and trade of goods, which in turn leads to prosperity for all of society. Intellectual property is property like other forms of property, and so government must protect IP as it protects other forms of property because it too leads to competition and trade and prosperity. Libertarians should encourage a strong patent system and object to any “reforms” that limit intellectual property ownership or introduce more government regulation than is required.
We thank Ray Strong, IT Researcher at IBM and leader of the Conservative Forum Constitution Discussion Group, for his deep read of this article and his numerous comments that forced us to reexamine our arguments and clarify several important points. We also thank to Bob Sachs, Partner at Fenwick & West LLP and commentator on patent eligibility and related patent issues on Bilski Blog, for his feedback.
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