The present attention shown to the purported scourge of non-practicing entities, or “patent trolls,” especially in the realm of tech and software patents, may give the impression that this is a relatively new issue caused by factors unique to the rapid rise of the Internet. However, in fact, patent trolls – as well as calls for changes to the law to prevent them – date back to at least the 1800’s. A look at their history suggests that they have more to do with fluidity in the definition of patentable subject matter than any unique feature of a particular class of inventions.
While many will point to George B. Selden as the “first patent troll” for his turn-of-the-century attempts to enforce his long delayed combustion engine patents against the nascent automotive industry, in fact a massive wave of non-practicing entities predated him. In the years just after the Civil War a rash of non-practicing entities, then entitled “Patent Sharks” arose to much clamor and complaint, driving law suits and forcing settlement. The big patent area back then: agricultural product design patents. The causes of this tide of litigation can be traced less to a sea change in invention and more to fundamental changes in the definition of what comprised a patentable invention.
1869 started one of the first debates about patentable subject matter. In 1869, the Commissioner of the Patent Office issued Ex parte Crane which held that applicants could obtain a design patent for functional improvements, arguing that he was “unable to perceive any good reasons why designs for utility are not fairly and properly embraced within the [design] statute.” Congress bolstered this opinion by amending the design patent statute in 1870 to change the scope of patentable subject matter from any “new and original” design to any “new, useful, and original” design. The result of this expansion in the scope of what qualified as a design patent was an explosion of new design patents over common farm implements. The rush was such that the next Patent Commissioner decried “[t]he idea of stretching the section in question to cover slight changes in the form of crowbars, spades, plows, scrapers, &c.” as “simply ridiculous, and tends to bring the whole system into disrepute.”
The boom in agricultural product design patents lead to a concomitant boom in threatened litigation and demands for licenses. The owners of these new design patents were not interested in producing products, merely enforcing their recently obtained rights. Patent owners sold their rights to “patent sharks “and “royalty agents” who scoured the countryside threatening farmers who were using common implements with lawsuits unless they were immediately paid between $10-100 (approximately $200-2000 in today’s dollars). And because these sharks targeted unsophisticated consumers in an era where legal representation in rural areas was poor, the farmers usually paid up. Venue shopping was rife, with sharks bringing suit in courts that were friendly to plaintiffs and inconvenient for defendants. In one instance a single patent holder brought over 4000 suits in Iowa with the understanding that “unwary and unsuspecting farmers” would pay the license demand “rather than be dragged one hundred and fifty miles away from their homes, at great inconvenience and expense.” As time wore on, the NPEs became more refined, banding together to form “patent rings” to drive out competition, broaden the scope of their enforceable rights, and subjecting farmers and competitors to wave after wave of royalty demands for the same or similar technology.
Unsurprisingly this led to declarations of public outrage akin to those seen today. Congress railed against the “the useless and dormant patents which have been granted, and to the evils which result from their resuscitation by the Cossacks who follow the army of inventors,” and claimed that the Constitution “never contemplated a system that would authorize or permit an army of swindlers to prey upon communities and plunder the unwary and unsuspecting.” However, then as now, a split between powerful industrial interests appeared to prevent amendment of the patent laws to prevent such abuses.
The roots of the modern patent troll boom can be traced to a similar expansion in the definition of patentable subject matter sparked by the Federal Circuit’s 1998 State St. Bank & Trust Co. v. Signature Fin. Grp., Inc. decision eliminating the so-called “business method exception” for software that produced a “useful, concrete, and tangible result.” In the 10 years following the Federal Circuit’s 1998 decision, the number of granted software patents expanded from approximately 30,000 per year to over 100,000 per year.
Moreover, the tactics employed in the modern era mirror those seen in the 1860s. Again the expansion of patentable subject matter lead to a rise in entities seeking not to produce new products, but to enforce newly obtained rights. Hence, the business model for the majority of these non-practicing entities is focused less on winning large lawsuits as it is in compelling the target to acquire a license. Similar tactics have also evolved, from the well-known venue and forum shopping that put the Eastern District of Texas on the litigation map and helped drive targets to acquiesce to license demands to the development of the 21st century version of “Patent Rings” such as the evolution of Rockstar Consortium from the ashes of Nortel.
The main difference between the trolls of today and the sharks of old is one of scale. To stretch the metaphor further: the NPEs of the 1800s hunted less like sharks and more like whales, scooping up thousands of tiny licenses like krill. Today, we have these sorts of “whales.” In addition, NPEs are often well financed litigants capable of litigating for big dollars.
The debate between NPEs and practicing enterprises was also present in the 1860’s. Courts did not frown upon entities that sought only to monetize an invention through license or lawsuit, but confirmed that such activities were essential to the right granted by Congress. For example in 1908, only a few decades after the rise and fall of the Patent Sharks, the Supreme Court confronted arguments that a patent on “self-opening” paper bags should be considered invalid because the owner was not engaging in production of such products. Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908). The Court categorically rejected these arguments, responding:
As to the suggestion that competitors were excluded from the use of the new patent, we answer that such exclusion may be said to have been of the very essence of the right conferred by the patent, as it is the privilege of any owner of property to use or not use it, without question of motive.
Id. at 429. Because the animating principle underlying the American patent system has always been the quid-pro-quo of a limited monopoly in exchange for the disclosure of an invention to the public, the fact that an inventor – or even later patent owner – might find more value in not using the invention is irrelevant to that patent’s validity. The Continental Paper Bag Court stressed that Congress fully understood this arrangement, and its alternatives, and continued to endorse such a system:
It is manifest . . . that Congress has not “overlooked the subject of non-user of patented inventions.” And another fact may be mentioned. In some foreign countries the right granted to an inventor is affected by non-use. This policy, we must assume, Congress has not been ignorant of nor of its effects. It has, nevertheless, selected another policy; it has continued that policy through many years. We may assume that experience has demonstrated its wisdom and beneficial effect upon the arts and sciences.
Id. at 429-30.
In the years that followed, the Supreme Court consistently found that whether a patent owner practices an invention or not is of no consequence. Even if there is evidence that a patent owner may have used a patent specifically for the mere suppression of competition and the generation of license fees, such evidence has no impact on the validity of the patent itself. See, e.g., Special Equipment Co. v. Coe, 324 U.S. 370 (1945) (finding that intent to use a patent not to practice an invention but to prevent competition via injunction was a “legitimate” use). In other words: “A patent owner is not in the position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or to grant its use to others.” Hartford-Empire Co. v. United States, 323 U.S. 386, 432 (1945).
Part of the reason Courts endorsed licensing type behavior was because many NPEs shared technology to help build more industries. For example, “vulcanized” rubber was invented by Charles Goodyear and considered a revolutionary invention at the time. To ensure widespread profitisation of the technology, Goodyear licensed his patents widely. Indeed, the decades of inferior “pure” rubber products that predated Goodyear’s inventions had so soured the market that Goodyear himself could not have afforded the marketing and production scales necessary to convince consumers that his product was different. Moreover, both Goodyear and his licensees were often aggressive litigants, generating a fair share of the funding that lead to further inventions utilizing rubber through lawsuits against competitors and end-users alike.
Similarly, Thomas Edison (nicknamed the “Wizard of Menlo Park”) earned far more from his impressive and voluminous patent portfolio than the production of actual products. Many of the famous Edison creations were flops when Edison tried to sell them, it was only when he began licensing his patents that inventions like the phonograph and light-bulb actually took off. Edison was also a prolific litigant and was well known for efforts to strangle competition using the vast array of patents his company held.
The Wright Brothers were also aggressive in seeking patents. They aggressively licensed competitors, and, when Glen Curtiss would not pay, they engaged in an epic patent battle. The Curtiss team commented that if someone jumped in the air and waved their arms, the brothers would sue. The lawsuits expanded around the world. In the end, these epic battles were eclipsed when the U.S. government needed plans for World War I. It was at this point that one of the first “patent pools” was born.
Then, as now, it was true that many inventors lacked the business acumen to monetize a new creation or the resources to put it into production. Additionally, during the hurly-burley of the industrial revolution and the subsequent messy birth of the electronic age both Congress and the courts recognized that it was far better to have a patent system where inventors and NPEs were encouraged to disclose inventions to the public – even if only to gain a short term monopoly that could be wielded against others – than to incentivize the widespread and inefficient use of trade secrets.
During the 1800s, meaningful legislation to curtail the activity of patent sharks was blocked by powerful industry players who feared that such changes would impact their own patent portfolios. Thus, then, as now, while broad substantive changes to the patent system were much talked about, they were unable to become law. Instead, what appeared to be more effective in stemming the tide of license demands and lawsuits was the establishment of organizations that allowed small farmers to band together to fight the sharks in court and in the court of public opinion: the farmers’ increasingly well-organized opposition took its toll on the sharks’ business—first, by raising the litigation costs involved in enforcing patent rights, and second, by changing the political environment in ways that discouraged local officials from aiding patent owners. By the time the Populist movement swept through the region in the 1890s, the problem had significantly abated.
Finally, thirty years after the start of the crisis, and well after it had mostly abated did Congress amend the Patent Act to remove design patent protection for functional items.
One of the most important conclusions that arises from the age of agricultural patent sharks is that scientific or technical sophistication at the PTO is less important than ambiguity in the law regarding patentability. While it seems intuitive to blame the profusion of software and technical patents on examiners who simply rubber stamp any claim that contains the words “computer” or “via the internet,” such arguments are likely less salient when discussing the ability of the 1800s patent office to examine designs for farm implements.
Instead, in both instances there was a change in a fundamental definition of what comprised patentable subject matter, and that change brought a major building block of commerce into the ambit of the patent system. In the age of the sharks, the farm remained the core of the U.S. economy, driving a gold rush of new patents covering every element of the farming process. Such a rush also encourages the formation of patent thickets, as speculators scramble for any potentially protectable chunk of the market. The same phenomenon drove the development of modern tech and software patents. In the aftermath of State Street, once again the market found that the machinery that undergirded the economy was suddenly open to being patented, leading to a similar gold rush.
As we look back over the last 150 years, we can learn a lot about age-old patent debates. As we appear to repeat similar refrains, understanding this history is a helpful tool in solving our current and future problems.