“GE’s enforcement of the Edison patent by injunctions did not stifle competition nor did it endow GE with undue market power, let alone a ‘monopoly.’ Instead, it resulted in clear and tangible consumer welfare benefits.”
Would you believe the following scenario could happen under our patent system? An inventor of a fundamental technology receives a patent less than three months after filing; despite the public disclosure of the patent, industry contemporaries fail to appreciate the invention’s significance for nearly two years; once appreciated, widespread adoption and infringement of the patent ensues. Commanding 50% market share in unit sales of the patented product, the patent holder prevails in patent infringement suits obtaining court injunctions against all major rivals and maintaining a strict no-licensing policy. What happens next during the patent enforcement period would defy all conventional anti-patent narratives:
(1) successful patent enforcement not only fails to deter market participants, but the number of active manufacturers of the product doubles;
(2) total annual product unit sales in the market doubles;
(3) enforcement of the patent holder’s exclusive right fails to make it a “price maker” — it becomes a “price follower,” reducing its product prices three times as product unit prices in the market fall precipitously by two-thirds;
(4) the patent holder loses market share down to less than 50%; and
(5) the fundamental technology gains widespread use in consumer households and ushers-in the electrical revolution.
This indeed happened under our patent system—in the previously-unrecognized case of Thomas A. Edison’s incandescent lamp patent. His patent covered the electric incandescent lamp with extremely thin carbon filament of high electrical resistance, enclosed in a single glass globe sealed under near-perfect vacuum, as described in U.S. Pat. No. 223,898 issued on January 27, 1880. Contrary to historical folklore, Edison did not invent the electric lamp—decades before him, others had produced electric incandescent lamps, but employing low resistance, thick carbon illuminants, which lasted only several hours of operation. Edison was the first to recognize the commercial importance of illuminants made of extremely thin carbon filaments enclosed in near-perfect vacuum, resulting in over 1,000 hours of operation. With this pioneering recognition, Edison experimented with over 6,000 filament compositions, ultimately converging on the use of carbonized bamboo fibers that he patented in U.S. Pat. No. 251,540 filed on August 6, 1880. Edison did not invent the electric lamp; his pioneering invention claimed in the `898 patent did, however, unlock the field of commercial electric lighting.
After 1882, all incandescent lamp manufacturers followed Edison’s teaching. How then, despite the enforcement actions, injunctions, and refusal to license, were the competitive market activities described in (1) – (5) above possible? The answer lies in “design around:” the important feature of our patent system recognized by the U.S. Supreme Court, as it acknowledged the role of “the incremental innovator designing around the claims, yet seeking to capture as much as is permissible of the patented advance.” Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 36 (1997). When the Edison patent was enforced, competitors were able to use Edison’s basic teaching while circumventing the patent by designing around the patent claims to avoid infringement.
Designing Around Patents is an Underappreciated Benefit of the Patent System
Designing around patent claims is prevalent but not often appreciated as a means by which patents promote economic development through competition. In a paper pulished in August 2021 in the Journal of Competition Law & Economics that my co-author John Howells and I authored, we provide a novel detailed empirical study of the extent and timing of designing around patent claims, as exhibited in the Edison patent case. The Edison patent owner, General Electric Co. (“GE”), did not license the patent and when it enforced the patent, the following occurred in the enforcement period:
- Patenting surge of non-infringing lamp technologies, designing around Edison’s patent claims. Patenting rate of non-infringing designs rose from an average of 3 patents per year prior to enforcement to 17 per year during the enforcement period.
- The number of active manufacturers nearly doubled.
- A precipitous decline in unit price of electric incandescent lamps from about 60 cents to 20 cents, as market leader GE reduced its price 3 times.
- Unit lamp sales doubled as GE lost unit market share.
- Some design arounds Edison’s patent gave rise to new lighting technologies such as electromagnetic-induced lamps, gas-filled lamps, non-carbon filaments leading to the modern tungsten filaments, and the forerunners of modern fluorescent lamps.
- The efforts to design-around Edison’s claims also resulted in patentable inventions that pioneered new technologies in their own right, later applied in technological fields other than electric lighting. These included hermetically-seal connectors, the Tesla Coil, and Chemical Vapor Deposition (CVD) used today in semiconductor device fabrication.
GE and Westinghouse were the major suppliers of incandescent lamps, with effective duopoly pricing. Edison’s patent was upheld against Westinghouse and others, and injunctions issued. Thus, Westinghouse was put back at square one with a need to employ its design-around to remain in the market. It did so by employing prior art stopper lamp technology that it owned. This signaled opportunity to any new entrants who could stand up to the new technological challenge—a prospect for lucrative market position for those who found first and patented cost-effective solutions for circumventing Edison’s claims. The invention-around surge after 1891 can be seen as a patent race for capturing a competitive edge among those vying for a share of the incandescent lamp market that was effectively redefined as circumvention competition. This precipitated a break of the GE-Westinghouse de facto duopoly.
Despite the legal setback for Westinghouse and others, there was no economic setback. GE’s enforcement of the Edison patent by injunctions did not stifle competition nor did it endow GE with undue market power, let alone a “monopoly.” Instead, it resulted in clear and tangible consumer welfare benefits. Investments in design-arounds resulted in tangible and measurable dynamic economic efficiencies by (a) increased competition, (b) lamp price reductions, (c) larger choice of suppliers, (d) acceleration of downstream development of new electric illumination technologies, and (e) collateral creation of new technologies that would not have been developed for some time but for the need to design around Edison’s patent claims. These are all imparted benefits attributable to patent enforcement.
Evidently, this contradicts some contemporary legal scholarship on the Edison patent case. That literature is replete with made-up parade of horribles attributed to Edison’s patent and its enforcement: that “competition … suddenly became impossible;” that Edison’s patent was so basic as to “block others from entering the market;” that it “limit[ed] post-patent innovation;” and that “filament development and lamp development more generally virtually stagnated.” See the survey of these sources in our main article, bottom footnote on p.3.
Vilifying Individual Pioneer Inventors by Deflecting to Imaginary Harms
The narratives based on mythical harm to innovation inflicted by enforcers of pioneer patents is not unique to the Edison case. It is commonplace in many historical accounts of individual inventors’ efforts to enforce their pioneer patents. Most notoriously, it is alleged that the Wright Brothers’ pioneer airplane patent “seriously retarded” progress in aviation and that “the American aeronautics industry ground to a halt.” We debunk this manufactured nonsense in our article on the “Myth of the Early Aviation Patent Hold-Up.” In this case, we show that in fact aircraft manufacturers faced no patent barriers in a market dominated by government demand. Aircraft manufacturing and investments grew at an even faster pace after the assertion of the Wright Brothers’ patent than before. We show that the notion of the aircraft patent hold-up is a myth created by U.S. government officials in 1917 to persuade Congress to authorize eminent domain condemnation of basic aircraft patents. Scholars have since cited these government allegations and propagated the aircraft patent hold-up myth for a century. Authors of popular books have since made a career by vilifying the Wright Brothers based on these mythical fables of harm to American aviation development.
The same conventional but demonstrably false scholarly wisdom that economic harms and technological retardation prevailed has been debunked in our work on pioneer patents in early radio and the early automobile industry. These cases are remarkable for the fundamental pioneering technologies developed at the time with accompanying benefits they brought to our society. Yet many legal scholars appear to work in a cross-citation “echo chamber” that generally vilifies inventors for daring to seek and assert patents. When faced with a clear patented fundamental advance, many contemporary scholars seem to prefer posing as thoughtful and original contributors to “innovation scholarship” by deflecting to alleged social harms that they attribute to patent enforcement—a narrative which has no basis in fact in these cases. This deflection has also been used to manufacture the “patent hold-up” conjecture on standard-essential patents that was thoroughly debunked in a 2018 comprehensive review.
Today, such false narratives are bolstered and fueled by a chorus of companies that routinely free-load on patented technologies for which they take no license. Of course, it is annoying to infringers when patentees seek compensation or damages. The infringers’ rhetoric prevails in public discourse by sheer numerical and lobbying power. Unfortunately, this suppresses information on the positive aspects of patent enforcement, such as the design-around effects that we study in our article. Hopefully, this will help to put the record straight.
For more information, read the full article here.