# Management of Technology and Innovation

## Skills Needed for MTI

1. No matter what method is used, what skills do you need to successfully manage technology and innovation?
There are a number of skills needed to successfully manage technology and innovation in the organization. No matter what organization you are a part of, there are two skills the organization must develop to be successful—the ability to manage learning and knowledge processes, and the ability to analyze and forecast future trends. Individual skills that are critical to the organization’s success include leadership/followship and creative thinking.
Organizational skills involve how the firm puts people and resources together to create value—building capabilities. With the right capabilities, the organization can develop a competitive advantage. In the world of technology and innovation, the management of learning and knowledge processes is critical. The organization needs to have systems in place that allow it to collect data that can be analyzed to form information. The information needs to be used to gain knowledge and insight. At each step, learning takes place. Organizational learning is the acquisition of knowledge through the collection of data that is analyzed to gather information, which is then transferred and shared through communication among members of the organization. This communication process provides the foundation for knowledge acquisition and enhancement within the firm. There are two types of knowledge that must be managed: explicit knowledge (codified or written down as rules or guidelines) and tacit knowledge (which emerges from experience of an individual). Tacit knowledge can become explicit at some point if the expert is able to codify the knowledge for others. However, it is not always possible to codify tacit knowledge. For example, Henry Bessemer was sued by the patent purchasers who could not get his steel-making process to work. In the end Bessemer set up his own steel company because he knew how to gauge when to add and subtract heat based on the impurities in the iron ore, even though he could not convey it to his patent users. Bessemer’s company became one of the largest in the world and changed the face of steelmaking. After the introduction of the Bessemer process, steel and wrought iron became similarly priced, and some users, primarily railroads, turned to steel. The insights and experiences that are gained from the gathering of data and converting that data into information are key to successful MTI. Organizational knowledge is the sharing and utilization of the learning that takes place in the firm.
The ability to forecast the future is another key organizational skill in the management of technology and innovation. This involves scanning the environment for trends and possible areas of value-creation opportunities. It also involves understanding the risk involved with newness in the firm and the risk involved in not seeking newness—both can cause the firm to lose value. Any method of forecasting comes with limitations. These include:
1. Forecasting methods, by definition, are uncertain in their outcomes. Usually the firm is trying to develop scenarios concerning best, worst, and most likely outcomes. With this information, risk can be assessed.
2. Forecasts are imperfect—the firm cannot predict all potential influences in the competitive marketplace. Bessemer knew he had a better process, but he did not predict the problems he had licensing his patent.
3. Forecasts are at best an educated guess. Many forecast techniques rely on statistical analysis, but the numbers used in the analysis are forecasts themselves or rely on patterns of behavior continuing in the marketplace.
4. With all the issues with forecasting, a company that produces excellent forecasts will most likely formulate better strategy and capture more value.
The knowledge-management system of the firm can help the ability of the firm to forecast. Experience and learning about industry and general environment trends can help individuals and teams forecast more accurately.
Individuals within the firm also need to have certain skills to enhance the management of technology and innovation processes. These skills include a balance of leadership and followship and the ability to think creatively.
Most individuals in the organization understand what leadership is. For MTI, it is important that the right person be in the leadership position when needed. For example, in new product development, the leader during the design phase is likely to be an engineer, the leader in the prototype development phase may be an engineer or a production person, and as the product is introduced to the marketplace the leader may be a marketing person. It is necessary for these individuals to communicate, and they may all be on a project team that is under the direction/coordination of a dedicated project manager. However, the leadership on the project shifts within the creation-to-market process. While leadership is critical, so is followship. Followship is the mirror image of leadership. Most will never have taken a class in followship. You cannot have leaders without followers. There is a skill set for leadership and a skill set for followship. It is the actions of followers that determine the success of a leader. The success of organizations is more the result of good followship than of great leadership. Leadership is influencing others, and followship is seeking or accepting influence. In the case of new product development outlined above, each of the individuals were leaders during some point in the project and each were followers during the project. Individuals spend a lot of time seeking and learning about leadership, but followship is also critical to organizational success. Innovative companies are often lead by a combination of two individuals who lead and follow each other. For example, Microsoft was founded by Bill Gates and Paul Allen. The names of firms started or built by two people are common: Sears & Roebuck, Proctor & Gamble, Marks and Spencer. The characteristics of a good follower include:
1. They are truthful. Followers who tell the truth and leaders who listen are an unbeatable combination.
2. They are supportive. Don’t blame your boss for an unpopular decision or policy. “I know this is an unpopular decision, but…” Absent person example of trust. [I call it confessing the sins of the boss in the hallway after the meeting.]
3. They give the boss the benefit of their knowledge and experience. Your job is to make the organization successful.
4. They take the Initiative to solve problems by providing solutions, not just issues.
5. They keep the leader Informed. The higher a manager is in an organization, the more people are less inclined to talk openly with them. Great followers provide the good, the bad, and the ugly of information, knowledge, and experience.
1. No matter what method is used, what skills do you need to successfully manage technology and innovation?
There are two skills the organization must develop to be successful—the ability to manage learning and knowledge processes, and the ability to analyze and forecast future trends. Individual skills that are critical to the organization’s success include leadership/followship and creative thinking. There are two types of knowledge that must be managed: explicit knowledge and tacit knowledge.


# Management of Technology and Innovation

## Managing Now for Future Technology and Innovation

1. How do you look into the future to keep pace?
To keep pace with changes in technology and to keep up with needed innovation processes, individuals within the firm must keep track of what competitors are doing as well as what inventions or discoveries may usurp an industry’s place in the market. This is an external process, and that involves scanning the environment. The information gathered during scanning should inform the firm about the general trends and opportunities to create new value. Internally, the firm wants to understand the task and processes as well as understand the skills that currently exist in the organization. By identifying potential future scenarios in the external environment and understanding what resources and capabilities the firm has, the task for those managing technology and innovation becomes answering the key questions:
1. Where are we now?
2. Where do we want to be?
3. What do we need to move from here to there?
1. How do you look into the future to keep pace?
To keep pace with changes in technology and to keep up with needed innovation processes, individuals within the firm must keep track of what competitors are doing as well as what inventions or discoveries may usurp an industry’s place in the market. This is an external process, and that involves scanning the environment.

### Chapter Review Questions

1. How do we define technology and innovation, and how are they related?
2. What are the four areas that need to be managed by the firm if it is going to take advantage of the technology it has and the technology it needs to create?
3. What are the five Cs of managing innovation, and how do they help direct a firm’s innovation activities?
4. How does an organization enhance its agility? When is more agility needed in the firm?
5. Compare and contrast the advantages and disadvantages of the three approaches for technology and innovation development.
6. What circumstances indicate a firm should consider an external process for developing/acquiring technology?
7. How does a firm determine the type of external process for developing/acquiring technology it should pursue?
8. What are the benefits of using internal sources for developing new technologies, products, and/or processes? What are the potential disadvantages?
9. How does an entrepreneurial firm identify and utilize a value proposition?
10. How does knowledge management impact the management of technology and innovation?
11. Followship is critical to MTI—how does the quality of followship in the organization impact the ability of leadership to create value?
12. How does the management of technology and innovation help a firm create value? Why should the firm strive to have a unique value proposition?

### Management Skills Application Exercises

1. Assess the education that you have received from grade school up to this course. What technology has been used to provide education to you? What technology and innovation would improve the “product” of education?
2. Come up with 50 alternative uses for the following products: day-old newspapers, old television sets, ballpoint pens, used Dixie cups. Share your results with other students as see if that develops new ideas.
3. Think of the best experience you have had using a smartphone app (e.g., banking, rideshare, etc.) and a bad experience that could be improved through an app. Describe the features and functionality and the benefits for both the customers and organization that would use the app.

### Managerial Decision Exercises

1. You are a manager at a traditional automobile manufacturer (Ford, GM, Daimler-Chrysler). You know that Tesla is an up-and-coming competitor, and you’re also working on electric cars for your company. An article in the Wall Street Journal about electric cars and the future of gas stations has caught your interest. One sentence has caught your eye: “Until you drive an EV, you are colored by 135 years of going to the gas station. Under that scenario, you say ‘Where is the new company that’s doing EV charging on street corners or in my highway entrance?,’ but that isn’t really how this works.” What innovations regarding recharging or other aspects of traditional “driving” could be incorporated into the electric vehicles you are developing?
2. You are a sales manager and know that technologies like automation, robotics, artificial intelligence, and the Internet of things are changing the way that you use and interact with the products that you use. You sense that your customers might be a good source for forecasting future product innovations. You decide to ask your salespeople to interview their toughest customers to generate ideas. Write up eight questions that your sales representatives can use to gather the information.
3. In October 2015, Google restructured into Alphabet, a holding company, which analysts said would facilitate innovation among its diverse subsidiaries. What are the benefits and risks of this decision, and would you have made a similar or alternative decision?

### Critical Thinking Case

### Novartis’s Prescription for Invoice Processing

What do you do when you have more than 600 business units operating through 360 independent affiliates in 140 countries around the world—processing complex invoices in various languages and currencies? You seek out the best technology solution to make the job easier.
At global pharmaceutical giant Novartis, the IT department is a strategic resource, a community of 2,000 people serving 63,000 customers in 200 locations and 25 data centers. Because most of the company’s invoices come from international suppliers, they have differences in design, language, taxes, and currency. Consequently, many ended up as “query items” requiring manual resolution by Novartis accounting staff—which delayed payments and made those invoices extremely costly to process. In fact, finance personnel spent so much of their time resolving queried invoices that other work suffered. A solution was badly needed.
To maximize its investment, Novartis needed a flexible solution that would meet its current and future needs and function in other business departments in a variety of geographic locations. It should provide fast, accurate document capture and multilanguage support, and should extend to other types of information—such as faxes and electronic data—in addition to paper documents. Finally, in order to obtain financing for the project, return on investment (ROI) was required within nine months of project implementation.
Input Accel for Invoices from EMC/Captiva was the answer. The software extracts data from paper documents, applies intelligent document recognition (IDR) technology to convert them to digital images, and sends relevant data to enterprise resource planning, accounts payable (A/P), and other back-end management systems. The specialized Input Accel server manages output by recognizing and avoiding holdups in the workflow process. It also ensures if a server goes offline, others will carry on functioning, thus avoiding downtime.
Now Novartis scans incoming invoices at a centrally located site, and the images are transmitted to the Input Accel for Invoices server for image improvement. Invoice data is then extracted and validated against supplier information. Most invoices are transferred directly for payment, with relatively few invoices requiring transfer to one of three accounts payable clerks who deal with queries manually. Novartis is a global leader in research and development of products that improve health issues. Input Accel was selected by Novartis to be part of its accounting system.
Thanks to IT, overall efficiency has increased, processing errors are reduced, and accounting personnel can use their time and expert knowledge for more meaningful tasks than resolving invoice errors. For Novartis, it is “mission accomplished.”
2. What factors contributed to Novartis’s invoice processing being so complex?
3. How did IT help the company solve that problem?
4. What other uses and functions does Input Accel serve, and how will this be useful to Novartis over the long term? (You may want to visit the EMC/Captiva website, https://www.emc.com, for more information on Input Accel’s capabilities.)
Sources: “OpenText Acquires EMC Enterprise Division,” MetaSource, http://www.metasource.com, September 20, 2016; Novartis corporate website, http://www.novartis.com, March 20, 2006; “Processing Invoices From Around the World,” ECM Connection, https://www.ecmconnection, February 2, 2006; Kathryn Balint, “Captiva’s Paper Chase Paying Off,” San Diego Union-Tribune, December 9, 2005, pp. C1, C5.


# Patent Basics

## The Foundations of Patent Protection

### Learning Objectives

After completing this section, you will be able to
1. Describe the philosophical logic behind granting patents.
2. Describe the role of patents in fostering invention.

### Do Patents Really Promote Innovation?

Before reading this section, please watch the overview video below covering the usefulness of patents - how ironic that a system for granting exclusive rights to inventors is the greatest vehicle for knowledge-sharing and technology transfer ever devised by human beings.

### What Is a Patent?

A patent is an intellectual property right granted by the government of a nation to an inventor that gives them the exclusive right to the invention for up to 20 years, in exchange for disclosing the details of the new technology to society for its ultimate benefit.
In the United States, a patent is a legal instrument in the form of a document issued by the United States Patent and Trademark Office (USPTO). It gives the inventor of any new, useful, and non-obvious machine, process, manufacture, or composition of matter the right “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a limited time in exchange for public disclosure of the invention. United States Patent and Trademark Office. (2012, January 26). Patents. Retrieved from www.uspto.gov/patents/index.jsp A U.S. patent is only recognized domestically, and cannot be enforced in another country.

### History of Patents in the United States

The legal foundation for U.S. intellectual property rights was laid by the Founders in 1787, in the very first Article of the U.S. Constitution, which outlined the precepts of our democratic society. In Article 1, Section 8, Clause 8 of the Constitution, Congress was given the authority 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”.U.S. Constitution Arr. 1, § 8
America was the first country in the world to enshrine intellectual property rights in its national constitution. And the Founders did this quite deliberately, says B. Zorina Khan, an economic historian at Bowdoin College whose book, The Democratization of Invention: Patents and Copyrights in American Economic Development, was awarded the Alice Hanson Jones Prize for an outstanding work in economic history.B. Zorina Khan,  “To the men who gathered in Philadelphia to ‘promote the general welfare,’” Khan wrote, “it was self-evident that ideas, industrial and cultural inventions, and democratic values were integrally related. American democratic institutions would ensure that rewards accrued to the deserving based on [merit] rather than on the arbitrary basis of class, patronage, or privilege.”
Indeed, the Founders viewed intellectual property rights as vital to the new nation’s economic survival. As George Washington himself stated in his first annual address to Congress in 1790, “The advancement of agriculture, commerce, and manufactures by all proper means will not, I trust, need recommendation. But I cannot forbear intimating to you the expediency of giving effectual encouragement to the introduction of new and useful inventions.”
The question is, with all the challenges they faced, why did the Founders think it so crucial to create a strong intellectual property system? Their reasons were both universal—i.e., applying to all societies—and also very particular to America’s revolutionary experience.

### “Bargain” Theory vs. “Natural Rights” Theory

Every society that affirms intellectual property rights offers two justifications for doing so: the bargain or contract theory and the natural rights theory.

### “Bargain” Theory

The “bargain” theory starts with the commonsense premise that people will be encouraged to invent new products and services that benefit society if they are likely to profit by doing so. The U.S. Constitution thus offers inventors a bargain: If you invent something useful—e.g., a cotton gin in 1794 that boosted agricultural production a hundredfold, or a semiconductor 163 years later that sparked the creation of a trillion-dollar new industry and millions of jobs—then the Constitution and statutes say that, as a quid pro quo, you can have the exclusive right to that invention for a “limited time,” after which it goes into the public domain and belongs to society.
There is something so simple yet economically potent about this concept. As Abraham Lincoln—America’s only presidential patentee (No. 6469 for a device to lift boats over shoals)—noted, the beauty of the patent system is that it “added the fuel of interest to the fire of genius.”

### “Natural Rights” Theory

The “natural rights” theory, meanwhile, invokes another commonsense premise that most of us instinctively hold to be true: that the product of mental labor is by all rights the property of its creator, no less than the product of physical labor is the property of its creator (or of the person who purchases it from that creator). This is what Daniel Webster was referring to when he said, “The American Constitution does not attempt to give an inventor a right to their invention, or an author a right to his composition; it recognizes an original, pre-existing, inherent right of property in such invention or composition.”
This right is not absolute, of course, and inventors’ inherent rights may at times be circumscribed by national security or other concerns. But in exchange for disclosing to the public the nature and details of the invention, the Constitution authorizes the government to enforce the inventor’s exclusive property right to that invention for a limited time.
Two important public policy goals are thus served. The inherent property rights of inventors and authors to their creations are protected, thereby helping to ensure that the wellsprings of creation and productivity do not dry up for lack of incentive. And yet the benefits derived from these inventions and creations are ultimately harnessed to the public good through disclosure, thus promoting the progress of the nation and “the general welfare” of its citizens.

### How Patents Foster Innovation

To help understand why patent rights not only encourage inventors but also promote the wider diffusion of new technology for the benefit of society, economic historians Naomi Lamoreaux and the late Kenneth Sokoloff suggested the following thought experiment:
 Imagine a world in which there was no patent system to guarantee inventors property rights to their discoveries. In such a world, inventors would have every incentive to be secretive and to guard jealously their discoveries from competitors [because those discoveries] could, of course, be copied with impunity. “By contrast, in a world where property rights in invention were protected, the situation would be very different. Inventors would now feel free to promote their discoveries as widely as possible so as to maximize returns either from commercializing their ideas themselves or from [licensing] rights to the idea to others. The protections offered by the patent system would thus be an important stimulus to the exchange of technological information in and of themselves. Moreover, it is likely that the cross -fertilization that resulted from these information flows would be a potent stimulus to technological change.  Naomi R. Lamoreaux and Kenneth L. Sokoloff,
It’s more than just “likely.” Extensive research in the United States and other nations shows that patents have served as a powerful stimulant to technological knowledge sharing. A 2006 survey published by the French economists Francois Leveque and Yann Meniere, for example, found that 88 percent of U.S., European, and Japanese businesses rely upon the information disclosed in patents to keep up with technology advances and direct their own R&D efforts. Francois Leveque and Yann Meniere, “Patents and Innovation: Friends or Foes?” CERNA (Centre d’economie industrielle Ecole Nationale Superieure des Mines de Paris), December, 2006.

### Patents Don’t Block Innovation, They Promote It

From the earliest days of the United States, patent and legal records show how inventors (including Thomas Edison) regularly kept abreast of developments in their fields. They did this by studying patent descriptions published by both the USPTO as well as by industry publications such as Scientific American, which was founded in 1845 by Munn and Company, the leading patent agency of the nineteenth century, expressly to spread new technological knowledge and facilitate the buying and selling of patents. For example, Elias E. Reis—inventor of a number of devices to exploit the heat generated by electrical currents—reported that when he read in the Official Gazette in 1886 about a patent issued to Elihu Thomson for a new method of electric welding, “there immediately opened up to my mind a field of new applications to which I saw I could apply my system of producing heat in large quantities.” See “Record of Elias E. Reis,” 8,  In many industries, specialized journals kept readers informed about new patents of interest.
In fact, new research in 2012 discovered that rather than blocking development, Thomas Edison’s seminal 1880 incandescent lamp patent (No. 223,898) actually “stimulated downstream development work” that resulted in “new technologies of commercial significance [including] the Tesla coil, hermetically sealed connectors, chemical vapor deposition process, tungsten lamp filaments and phosphorescent lighting that led to today’s fluorescent lamps.” Ron D. Katznelson, “Inventing Around Edison’s Incandescent Lamp Patent: Evidence of Patents’ Role in Stimulating Downstream Development,” May, 2012, derived from: http://works.bepress.com/cgi/viewcontent.cgi?article=1073&context=rkatznelson
Even the word “patent” signifies its social purpose of disclosure. It is derived from the Latin patent meaning “open,” and is the present participle of “pate¯re,” meaning “to stand wide open.”
This explains the origin of the term “letters patent” (“letters that lie open”), which refer to the patent documents issued by the English Crown. These were not closed with a seal but were instead kept open, with the seal hanging at the bottom, notifying all not to infringe upon the patent.
As with any economic and legal instrument, patents have the potential to slow innovation if their grant of exclusive rights is too broad. But the overwhelming preponderance of economic research and real-world experience demonstrate that, on balance, intellectual property rights tend to stimulate invention, economic growth, and the diffusion of new technological knowledge in every country where they exist.
This fact by itself, however, does not explain why the U.S. patent system became a model for much of the world. To understand why it did—and how it helped build the most successful economy in the history of the world—we must examine the revolutionary design of the U.S. patent system itself and the ways in which it overcame the weaknesses of earlier patent systems.

### Assessment Questions


# Patent Basics

## The Weakness of Early Patent Systems

### Learning Objectives

After completing this section, you will be able to
1. Outline the history of patents from antiquity through the 1700s.
2. Identify flaws in early European patent systems.

### History of Patents: 500 BC to the 1700s

Given the commonsense logic of granting patents to stimulate invention, it comes as no surprise that patent- like incentives date all the way back to antiquity. In the ancient Greek city of
      Sybaris (located in what is now southern Italy) in 500 BC, “encouragement was held out to all who should discover any new refinement in luxury, the profits arising from which were secured to the inventor by patent for the space of a year.”
        Charles Anthon,
        “
The first formal patent legal institutions were developed in the Republic of Venice in the mid-1400s. The Venetian Statute of 1474 decreed that the inventors of new and useful devices would be protected from infringers and copiers
      for ten years so long as they disclosed the details of their inventions. Most Venetian patents were granted in the field of glass making, and when a large number of these glass makers emigrated to other countries in Europe, they sought similar
      protections from the local authorities. This is how the notion of patent rights, and their expression in patent legal systems, began to spread and gain acceptance throughout Europe.
Initially, however, English and French monarchs used patents not simply to stimulate invention, but also to grant exclusive trade monopolies to those favored by the court. In the reign of Elizabeth I in the latter 1500s, some 50
      patent monopolies were granted over the trade in such staples as salt, soap, starch, iron, and paper. Critics said these “enriched the monopolist and robbed the community” while doing absolutely nothing to stimulate new technology or industry.
A growing public outcry ultimately forced Elizabeth’s successor James I to revoke these grants of trade monopolies in 1610. In 1624, the Statute of Monopolies formally repealed the practice and henceforth restricted patent rights
      solely to new inventions.
European countries made several other important innovations in their early patent systems. In the mid-1500s, France became the first to publish patent descriptions from inventors who chose to submit them. England under the reign of
      Queen Anne (1702–1714) was the first to require inventors to submit a written description of their patent to “describe and ascertain the nature of the invention and the manner in which it is to be performed.” And in 1729, France began to publish
      abbreviated digests of patent descriptions, but these were intermittent and subject to delays of up to 60 years after the patents were originally granted. As might be expected, this lack of regularity limited the technological knowledge sharing that
      is one of the great benefits of a patent system.

### Flaws of Early Patent Systems

Old World patent systems suffered from other major weaknesses as well. Patents for inventions imported from other countries were regularly granted, increasing the incentive for would-be patentees to copy
      the creative work of others rather than invent for themselves. And there was generally no systematic examination of patents by technical experts, in part because this was viewed as an intrusion upon the prerogatives of the Crown.
But the biggest problem with early patent systems was that they all shared a tendency to reinforce the wealth and prerogatives of elites, not the welfare and productive capacity of the whole of society. In Britain, patents were
      favors granted “by grace of the Crown” and were often only secured through court connections. They were also “subject to any restrictions the government cared to impose, including the expropriation of the patent without compensation.”
        Op. cit., Khan.

What’s more, patent application fees were prohibitively high—more than 11 times the per capita annual income of the average British citizen—which put the system out of reach of all but the wealthy. Yet ironically, in the
      parliamentary debates over the patent system, the exclusion of the “working classes” was regarded as one of the chief virtues of the British patent system.
British patent law also severely limited the ability of inventors to sell or license the rights to their discoveries, as noted in a contemporary 1832 book entitled
      A Practical Treatise on the Law of Patents for Inventions.

        Richard. Godson, A Practical Treatise on the Law of Patents for Inventions and of Copyright, Saunders and Benning, 1832.  Retrieved from Google books, at bit.ly/QmPhaZ

      This restriction, along with “working requirements”—these were regulations that forced patentees to manufacture products based on their patents within two or three years of issuance or lose their patent rights—limited innovation activity mainly to
      those who had the factories (or the ready capital to build them) needed to produce such products.
These rules had two significant effects upon the British economy. They restricted innovation to only a small sector of the population rather than unleashing the creativity and productivity of the whole people. And they created a
      bias toward inventions that enhanced the market dominance of incumbent, capital-intensive industries rather than opening up new markets for the sorts of disruptive new industries that usually drive economic progress.

“European societies were organized in ways that concentrated power in the hands of elites and facilitated [parasitic] rent-seeking by favored producers,” notes historian B. Zorina Khan. “The organization of invention was no
      exception. A society that restricts [invention] to elites can generate exceptional gains early on, but the initial spurt is unlikely to be maintained.”

Indeed, the result in Britain was unbalanced and narrowly focused economic growth. Inventors faced high transaction and monetary costs, a limited market for their inventions, and a great deal of uncertainty. Diffusion of new
      technological knowledge was severely inhibited, and the rate of technological change was adversely affected as a result. Eventually, Britain’s initial leadership of the Industrial Revolution had more to do with its large existing commercial holdings
      and manufacturing base, and its vast stores of amassed capital, than with systemic or broad-based encouragement of innovation within British society.

### The Changing Tide

The elitist nature of early patent systems reflected the feudal economic relations that dominated that era. But by the late eighteenth century, capitalist economies were beginning to emerge across Europe, and in
      Britain, nationwide lobbies of manufacturers and patentees called for an overhaul of the patent system to bring it in line with this new economy. The needed reinvention would come not from Britain, however, nor even from France, which had its own
      democratic revolution soon after America’s. Instead, it took place in the newly liberated United States, where a vibrant capitalism unburdened by centuries of entrenched feudalism was developing.
This, then, is the story of one of the most admired of all American inventions—the modern democratized patent system, now used widely throughout the world.


# Patent Basics

## America’s Uniquely Democratic Patent System

### Learning Objectives

After completing this section, you will be able to
1. Explain the role of the Founding Fathers in developing the U.S. patent system.

2. Explain the six unique features of the U.S. patent system. Never mind that intellectual capital accounts

### A Patent System For Everyone

Before reading this section, please watch the overview video below covering why America developed the world’s first patent system for the common man, and what we got out of it as a result (hint: the strongest economy on the face of the earth).
Never mind that intellectual capital accounts for 55 percent of total U.S. GDP today.
        Kevin A. Hassett and Robert J. Shapiro,
        “
      Or that it represents up to 80 percent of the market value of all public companies in the U.S.
        “Intangible Asset Market Value,” Ocean Tomo, derived from http://bit.ly/bAPJVH

      To most citizens today, patents and other intellectual property are inscrutable mysteries. But to America’s Founding Fathers, they were matters of the highest national importance.

### The Challenge Facing the Founders

The people who led the revolution and were later tasked with writing a Constitution were not concerned simply with creating lasting political structures that could defend the hard-won freedom and
      sovereignty of the newly liberated colonies. They also struggled to stimulate the rapid growth of industry to ensure the new nation’s economic survival.
The survival of the United States of America was far from certain in those days. It was a backward agrarian economy, dependent on imports and lacking major domestic industry, with a population of barely three million inhabitants.
      Britain, meanwhile, with whom the United States had just fought a war and would soon fight another, had three times the U.S. population, boasted the most powerful economy on Earth, and was the unrivaled leader of the emerging Industrial Revolution.
It was, therefore, a critical task of the leaders of the new American nation to design institutions—including a patent system—that would encourage economic activity and investments to spur the growth of America’s primitive economy.
It’s important to note that although the Founders deeply believed in democratic ideals of government, they were not wild-eyed idealists. They were very practical people who faced an overwhelming challenge: How do you build a national
      economy from scratch, one that can prosper without British imports? To do that, they needed to mobilize every asset they had.
Unlike Britain, however, America had no significant capital or commercial assets. In fact, the American standard of living at that time was actually lower than in many of their South American neighbors.
        Stanley Engerman and Kenneth Sokoloff,“
      All America had was abundant, but still untapped, natural resources, and a population widely regarded in the world as uniquely enterprising and independent minded.
Ours was the world’s fastest-growing population, doubling in size every 20 years. Americans were also widely literate (albeit mostly lacking in higher education) and informed by what Washington Irving called “the general diffusion of knowledge.”
Most important, unlike the tenant farmers and laborers who made up the bulk of England’s rigid class society, the vast majority of Americans were free-holding small farmers, merchants, shopkeepers, artisans, and mechanics—the
      forerunners of what we today call the middle class—who were possessed with what publisher Hezekiah Niles called “a universal ambition to go forward.”

This was America’s principal asset, their ace in the hole. And men such as George Washington, Thomas Jefferson, and James Madison knew they had to find a way to unleash the creative and productive potential of these independent
      citizens if the country was to industrialize and survive.

### Incentives Needed to Spur Economic Growth

As Jefferson wrote to his daughter Martha in 1787, it was precisely because America was bereft of Europe’s vast resources and left to its own devices that “we are obliged to invent and execute;
      to find means within ourselves, and not to lean on others.”

But how to do that? From the historical record, it appears that the Founders quite consciously sought to construct a patent system that would do what no other patent system in the world had ever done before—namely, stimulate the
      inventive genius and entrepreneurial energy of the common man.

As noted earlier, the first thing they did was to affirm inventors’ and authors’ rights in the U.S.Constitution itself. Although the intellectual property clause was ultimately adopted by unanimous consent of the delegates on September 5, 1787, there had been some debate about the issue. Thomas Jefferson in particular had expressed reservations about the wisdom of granting “temporary monopolies” (i.e., patent rights), given that Americans had just waged a bloody war of independence to overthrow the British monopoly of trade and political power. But as other delegates noted, and Jefferson eventually came to realize, a monopoly of trade is a far cry from the temporary incentives granted to inventors in return for the benefits they provide society.

“How can the exclusive right of an invention be compared with a monopoly in trade?” D.P. Holloway, a Commissioner of Patents, would later argue in his 1863 annual report to Congress. “How can the exclusive privilege to sell salt in
      Elizabeth’s time, which added not one bushel to the production, but which enriched the monopolist and robbed the community, and the exclusive right of Whitney to his cotton gin, which has added hundreds of millions [of dollars] to the products and
      exports of the country, be both branded, with equal justice, with the odious name of monopoly?”
        United States Patent Office, Annual Report of the Commissioner of Patents 1863.  Retrieved from Google Books at http:// bit.ly/Meh0Pv

In the words of Louis Wolowski, Chair of Industrial Economics at the Conservatoire des Arts et Métiers: “[Inventors’] rights under patents, are called ‘monopolies’ only from the poverty of language, which has failed to express in
      words a distinction which no less clearly exists.”
The Founders understood this distinction clearly. “Rather than monopolists,” says historian Khan, “patentees were viewed as beneficent contributors to progress, and the consistent goal of those who shaped the system was to
      encourage domestic ingenuity, whatever the social class of the inventor.”
        Opt. cit., Khan.

Or as James Madison put it in Federalist Paper 43, “The public good fully coincides with the [patent rights] of individuals.”

### Creating a New Type of Patent System

The real genius of the Founders, however, lay in the way they consciously integrated democratic principles into the design of the world’s first modern patent system—principles that had a profound
      impact on the pace and direction of U.S. economic growth. These were reflected in six fundamental innovations in our patent system that departed from European practice.

### Low Fees: Making Patents Affordable

The original patent law passed by Congress on April 10, 1790, deliberately set patent fees to a level any ordinary citizen could afford—initially $3.70, but three years later raised to $30. This was
      still less than 5 percent of the rate in Britain. Patent fees remained $30 for the next 70 years, ensuring that virtually any citizen could participate in the Industrial Revolution.
The results were dramatic. Whereas most of Britain’s handful of inventors came from privilege, the vast majority of America’s thousands of inventors came from humble beginnings. They included farmers, factory workers, merchants,
      mechanics, and other artisans.
Of the 160 so-called “great inventors” of nineteenth-century America, over 70 percent had only a primary or secondary school education. Many had no formal schooling at all. And some of the most famous names in American
      invention—Matthias Baldwin (locomotive), George Eastman (roll film), Elias Howe (sewing machine), and Thomas Edison (electric light and phonograph)—had to leave school early to support their families.
What’s more, in another sign of economic democratization, most U.S. inventors had no formal scientific or technical training. They had only the general knowledge common to citizens of the day, plus whatever they taught themselves.
      What distinguished them was their ingenuity in applying that general knowledge to the practical problems of daily existence, and then exploiting the commercial opportunities that arose as a result. In short, they were entrepreneurial.
The rapid growth of inventive activity during early American industrialization was characterized by a disproportionate increase in the involvement of segments of the population with relatively common sets of skills and knowledge,”
      note Sokoloff and Khan. “Rather than being accounted for by an elite who possessed rare technical knowledge or commanded large amounts of financial resources, the rise in patenting coincided with a broadening of the ranks of patentees to encompass
      many individuals, occupations, and geographic districts.”
        Kenneth Sokoloff and B. Zorina Khan,
        “

Making the patent system inexpensive invited everyone’s participation. In the words of Englishman John Standfield, quoted in an 1880 issue of
      Scientific American, “The cheap patent law of the United States has been and still is the secret of the great success of that country.”

### Simplifying Application Procedures

The Founders greatly simplified administrative procedures in applying for a patent. This was no small thing when you consider that British applicants were forced to seek approval from seven different
      offices, and then twice—twice!—obtain the signature of the King. If they wanted a patent that covered Scotland and Ireland as well, they needed approval from ten more offices. British patent procedures were so Byzantine, in fact, that author Charles
      Dickens wrote a spoof of them entitled
      A Poor Man’s Tale of a Patent, in which his main character, an inventor, is forced to seek approvals from 34 offices, some of which had been abolished years before and no longer existed. Obviously, few inventors could hope to run
      this gauntlet successfully unless they had the wherewithal to hire very expensive patent agents to assist them.
In the United States, on the other hand, applications only needed the approval of a single patent office, which created repositories throughout the country where inventors could drop off their applications and models and have them
      forwarded to the patent office at government expense. Rural inventors could even apply for a patent through the mail—postage free!
This last perk for rural inventors turned out to have a big impact on the course of U.S. economic development. While most British industrial breakthroughs were confined to London or other big cities, U.S. inventions were widely
      distributed across the country, in urban and rural areas both. The result was broader- based economic growth and less income inequality in the United States.

### Spreading New Technological Knowledge

Another unique feature of the U.S. patent system was its systematic effort to spread new technological knowledge throughout society, thereby creating a virtuous circle of innovation begetting more
      innovation. In Britain, patents were only open to public inspection after paying a fee, and until 1852 were not even officially printed, published, or indexed. In France, printed information about patents was limited to brief titles in patent
      indexes, intermittently published and only available in the office in which these had been originally filed.
By contrast, the first U.S. patent law explicitly stated that “copies of patent Specification together with similar Models [are] to be made at the public Expence and lodged in each state.”
        Patent Act of 1790, HR-41,

      In addition, as noted in the previous section, a plethora of publications by government and industry enabled any citizen with an interest to keep abreast of the latest patented technologies.

### Examining Patents for Validity

In a very crucial departure from Old World practice, the Founders created the world’s first examination system for patents to ensure their
      novelty,
      non-obviousness, and
      utility. The examinations were initially conducted by a committee composed of the Secretary of State (Thomas Jefferson), Secretary of War (Henry Knox), and Attorney General (Edmund Randolph). But this was found to be cumbersome, so in 1793 a simple registration system was established. It turned out, however, that without the examination of applications for novelty, non-obviousness, and utility, the validity of issued patents began to be questioned. So the reforms of the 1836 Patent Act specified that henceforth applications would be scrutinized by technically trained examiners to ensure that the invention represented a genuine advance in the state of the art.

For the first time anywhere in the world, the criteria for granting a patent depended solely upon the merits of the application rather than the identity or the mere say-so of the inventor.
The situation was very different in Europe. In France, the following caveat was printed on each patent: “The government, in granting a patent without prior examination, does not in any manner guarantee either the priority, merit or success of an invention.” Imagine trying to interest a group of investors in your new invention with that kind of warning label attached to it!
In Britain, meanwhile, the lack of any examination of patent validity made the purchase of a patent right highly speculative and costly, thereby limiting investment in new technology.
By contrast, says Khan, “the U.S. examination system reduced uncertainty about the validity of patents, and provided [interested parties] with a signal of [their] potential value.” This proved to be crucial in facilitating the growth of an extensive market in the sale and licensing of valuable patent rights—the first large-scale market of this type in the world.

### No “Working Requirements” Reduced Monopoly Control

The fifth distinguishing feature of the U.S. patent system was the lack of any sort of “working requirements.” In the debate over HR-41, the bill that became the first U.S. patent law in 1790, “the Senate suggested requiring patentees to make products based on the patent or license others to do so. But the House rejected this as an infringement of patentees’ rights.”Op. cit., Khan.

Indeed, the Founders believed working requirements would only strengthen monopoly power and skew invention toward incumbent industry by limiting patents to those with the factories (or the capital to build them) needed to manufacture products from their inventions.
      B. Zorina Khan,
        “

In short, the Founding Fathers of this nation deliberately and quite consciously created what we now call “non-practicing entities” (NPEs) in order to expand the pool of inventors in their then backward economy to include ordinary citizens without the wealth or resources to commercialize their own inventions. And it worked, leading to a dramatic surge in innovation in nineteenth-century America as large numbers of ordinary citizens started inventing and then licensing their discoveries to enterprises for commercialization.
By 1865, the U.S. per capita patenting rate was more than triple that of Britain’s, according to the annual reports from the commissioners of patents in both countries, and by 1885, it was more than quadruple that of Britain. Each
      U.S. patentee was also far more prolific than their British counterpart, so by mid-century, the United States was patenting five times the number of inventions as Britain each year, even though the populations were then equal in size.

### Creating a Market for New Technology

The sixth unique feature of the U.S. patent system—and along with the refusal to impose working requirements, the one that had the greatest impact on future U.S. economic growth—was “an explicit
      provision for the sale of patent rights [that] both the courts and the U.S. Patent Office acted to facilitate.”
        Naomi R. Lamoreaux and Kenneth L. Sokoloff,
        “

Why facilitate the buying and selling of patents? Because doing so enabled ordinary worker or farmer inventors without the capital to commercialize their own discoveries to still participate in inventive activity and earn income by
      licensing or selling their patents to enterprises that could. This ability to license patent rights (along with the low application fees) turned inventing into a new career path for thousands of poor but technically creative citizens.B. Zorina Khan,
        “
      It also proved to be a powerful means of mobilizing capital for investment in new technologies and their commercialization into new products and services for society.
That patents could be used as tradable assets by non-practicing entities without the wealth to commercialize their own discoveries was a wholly unique feature of the American patent system. By 1880, 85 percent of all U.S. patents
      were licensed by their inventors, compared with 30 percent of British patents.
        B.Zorina Khan,

Patent licensing, in fact, was the principal means by which new discoveries were commercialized in the decades before the early twentieth- century emergence of in-house corporate R&D departments. Publications such as
      Scientific American
      were founded specifically to facilitate the trade in patents, and it regularly featured lists of new and interesting patents, which commercial enterprises then licensed or purchased to use in their product development efforts.
American Bell Telephone’s new product pipeline, for example, operated like most others at the time. According to its 1894 annual report, the company’s R&D department licensed 73 patents from outside inventors, while developing
      only 12 from its own employees.
Thomas Blanchard was a typical inventor-licensor. He was the son of a small farmer who invented and patented a mechanical tack-maker in 1806 that could fabricate five hundred tacks per minute, each superior to tacks made by hand.
      He sold the rights to his machine for $5,000, quite a sum in those days. He then invented a lathe to produce uniform gun stocks, and the patent he received for it enabled him to attract investors for the production of those gun stocks for the local
      Boston market. Blanchard also leased his patent rights to gun producers nationwide, as well as to manufacturers of tool handles and wheel spokes. The income he generated from patent licensing enabled him to make inventing his full-time career. He
      went on to invent a wood-bending machine, an upriver steamboat, and a steam wagon that was used until the introduction of railroads in the United States, and received a total of 25 patents during his career.
According to a 2013 Congressionally mandated Government Accountability Office (GAO) report on NPEs, “History is filled with examples of successful inventors who did not develop products based on the technologies they patented.” It
      specifically cited the case of Elias Howe, who patented a method of making a lockstitch but did not produce sewing machines. Instead, Howe licensed his patents to the Singer Company, which then deployed Howe’s invention in its sewing machines.
        “

Patent licensing, scholars have found, was facilitated by an array of intermediaries—lawyers, venture financiers, and patent licensing agents—who “lowered the transaction costs and improved the efficiency” of the trade in and
      commercialization of patented technology. “By enabling, indeed encouraging, inventors to focus on what they did best [i.e., invention], this division of labor gave rise to the most technologically fertile period in American history.”
        Naomi Lamoreayx and Kenneth Sokoloff,
        “

### The Positive Effects of Licensing

The Founders’ decision to foster NPEs and patent licensing proved crucial to America’s rapid technological progress and economic growth. Indeed, patent records from the nineteenth century reveal that
      more than two-thirds of the “great inventors” of the Industrial Revolution, including Thomas Edison and Elias Howe, were NPEs who specialized in invention and licensed some or all of their patents to outside enterprises for development into new
      products.
        B.Zorina Khan and Kenneth L.Sokoloff,

Had the United States followed the approach of older European patent systems and limited patent rights solely to inventors who made or sold products—or prevented them from licensing their patents—America might not have even had an
      Industrial Revolution.
In any event, the result of this division of labor between invention and production was exactly as Adam Smith predicted:
The benefits of that division of labor remain visible today, embodied in the thousands of university and other NPE patents licensed by companies large and small each year, as well as by the positive U.S. balance of trade in patent
      licensing, estimated to be worth at least $150 billion annually as of 2006. More than 5,000 new products and 7,000 new companies have been created with the help of university NPE patents alone in the last 30 years.
        Joseph Hornett and David Johnson, Purdue Research Foundation. Derived from: bit.ly/O7iA18

      And licensors of patented technology help the United States maintain its technology leadership in critical economic sectors.

### A New Species called “Patent Trolls”

To be sure, there is new a species of NPE known as “patent trolls” who use low-quality patents to extort so-called “license fees” from small businesses unable to pay the cost of standing up to them
      in court. But their activities have nothing in common with real patent licensing.
Typically, these patent owners send form letters to hundreds, or in some cases thousands, of random small businesses, claiming with little or no evidence that they are “infringing” their patents. These letters then demand so-called
      “licensing fees” ranging from one to several thousands of dollars to avoid a patent infringement lawsuit that could cost those businesses far more to defend against in court—even if the business owner is innocent of any infringement.
Beginning in mid-2013, a torrent of bad faith demand letters began targeting small businesses, sparking wide protest. The National Federation of Independent Businesses (NFIB) and many other business groups and trade associations
      demanded action, and Washington responded in 2014 with several pieces of proposed reform legislation. By early 2015, the Federal Trade Commission (FTC) had acted against one sender of bad faith demand letters, and federal legislation to rein in such
      abuses seemed likely to pass.
At the state level, meanwhile, by early 2015, 15 states had enacted laws to curb abusive patent demand letters, and 11 others were actively considering similar bills. In addition, the attorneys general of several states have used
      consumer protection laws against making false claims to force these “patent trolls” to stop sending their extortionist demand letters.
These abusive patent litigants should not be confused with legitimate NPEs, however, whose primary business is invention and technology licensing, not extorting so-called “license fees” from innocent businesses. Patent licensing
      facilitates the transfer and commercialization of technology into new products and services and promotes U.S. economic growth.

### A Patent System for Everyone

In sum, these six unique features of the U.S. patent system—low fees, simplified procedures, examination of applications by trained experts, systematic disclosure of new technological knowledge, lack of
      “working requirements,” and encouragement of robust trade in patent rights—all had a powerfully beneficial impact on the nation’s economic growth.
But none of that would have been possible were it not for the broad-based democratic rule of law in the United States and the critical role played by the U.S. legal system in interpreting and enforcing America’s revolutionary patent laws.


# Patent Basics

## The Role of the U.S. Legal System

### Learning Objectives

After completing this section, you will be able to
1. Describe the differences between U.S. and European patent laws.
2. Describe the history of patent litigation in the United States.

### U.S. Patent Law vs. European Patent Law

Just as with any other property right, patent rights would be meaningless without the ability to enforce them in court. And from the earliest days of the patent system, says Khan, “Our legal
      system remained true to the Constitution in the belief that the defense of rights in patented invention was important in fostering industrial and economic development.”
In Britain and other European countries, patents were viewed as “pernicious monopolies that restricted community rights and [Had] to be carefully monitored and narrowly construed.”
        B.Zorina Khan,
      The enforcement and interpretation of patent laws by the courts in Europe also tended to be highly variable and dependent upon the whims of each individual judge.
In the United States, however, early courts treated inventors’ patent rights with deference, just as they did the rights of other property owners. Famed Supreme Court Justice Joseph Story repeatedly declared that patent rights were
      “sacred” and were the just reward for inventive ingenuity. As he noted in

      (1817), “the proper duty of the court” is to ensure that “wrongdoers may not reap the fruits of the labor and genius of other men.”
The relative uniformity and certainty of enforcement of patent rights by the courts also proved critical in encouraging capital to invest in commercializing those patent rights.
Contrasting the patent laws and policies of the United States and Britain, Supreme Court Justice Henry Baldwin went to some lengths in

(1831) to show how English courts saw patents as a zero-sum trade-off between private rights and the public good. The explicit intention of U.S. patent law, however, was “to benefit the inventor, in the belief that maximizing individual
      welfare leads to maximum social welfare.”
Nonetheless, U.S. intellectual property laws did try to strike a balance between the needs of the many and the few. “Patent laws ensured the security of private property rights in invention. However, it was also necessary to
      balance the just claims of inventors against the dangers of exclusive monopolies that might restrict the scope of current and future invention.”
        Op. cit., Khan.

### Changes in U.S. Patent Law Through the Years

Over the years, of course, that balance has moved back and forth between relatively stronger versus weaker enforcement of patent rights. With the rise of the robber barons in the late
      nineteenth century, government and the courts increasingly viewed patents through the prism of antitrust, in some cases even compelling large firms like IBM to license their patents to competitors. Then with the advent of the high-tech revolution in
      the 1980s, antitrust concerns faded and the courts began once again to view stronger patent rights as helpful in fostering innovation.
Interestingly, the U.S. legal system has always operated on the theory that the best way to achieve the proper balance between private rights and public interest was not through government decree, centralized management, or
      compulsory licensing but rather through the decentralized decision making and market interactions of inventors themselves. The court’s role was to resolve the inevitable conflicts that arose, on a case by case basis.
Throughout all the twists and turns in patent enforcement over the centuries, however, the federal courts have remained unwavering on four key principles of U.S. patent law.

### An “Explosion” of Patent Litigation?

Patent litigation, of course, has always been an integral feature of the U.S. patent system. The first patent case on record was that of Benjamin Folger, whose patent for the production of candles
      was invalidated by the district federal court for New York in 1792. This was merely the first of many hundreds (and eventually thousands) of cases in which patent litigation served the important function of settling either the validity or the
      disputed ownership of the rights to critical new technologies—the litigation between telephone inventors Alexander Graham Bell and Elisha Gray being perhaps the most famous case in point. By doing so, the courts provided greater certainty regarding
      the value of such rights to entrepreneurs and investors alike.
Today, some critics contend that an “explosion of patent litigation” unlike any in history is harming business and diverting resources better spent on innovation. No responsible observer would deny that the courts have seen an
      increase in patent infringement suits in recent years, just as they have seen a rise in personal injury claims and product liability suits. But that said, the evidence shows that the rate of patent litigation today is actually below historical norms.
According to
      USCourts.gov
      figures, the number of patent infringement suits filed in the United States increased 59 percent between 2001 and 2011—from 2,520 cases in 2001 to 4,015 cases in 2011. Meanwhile, the number of patents granted in that same period increased by only 35
      percent, which supports the view that patent litigation has become more frequent over the last decade as the role and value of intellectual property has increased in the Knowledge Economy.
Statistics from
      USCourts.gov
      show an even sharper rise in the number of patent suits filed in 2012, to 5,189 cases. But analysts attribute most of this increase to the anti-joinder provisions of the Patent Act of 2011, which curtailed the practice of naming multiple defendants
      in a single infringement suit. According to Carla Rydholm of the patent analytics firm Lex Machina, “Plaintiffs must [now] meet more stringent requirements to file a case against multiple defendants. So instead of Plaintiff X filing one case naming
      20 defendants, Plaintiff X might file 20 lawsuits (one per defendant) each with unique civil action numbers.”
When looked at over the longer term, however, it turns out that 96 percent of all the increase in patent infringement suits since 1991 can be explained by a corresponding increase in patents granted, reports the
      PricewaterhouseCoopers’s 2013 Patent Litigation Study.
        Http://www.pwc.com/en_US/us/forensic-services/publications/assets/2012-patent- litigation-study.pdf

In case you’re wondering if the increase in patents granted is itself a sign of a patent system being increasingly gamed by speculators wanting to cash in on the new “patent gold rush,” note that the average number of patents
      issued per billion dollars of GDP has remained at or below the same level—13 patents per billion dollars of GDP—since 1963.
        Sean Connolly, “Patent Litigation Rates: What They Tell Us and What They Don’t,” derived from: http://connollyip.com/patent-litigation-rates-what-they-tell-us-and-what-they-dont/

Interestingly, although the number of suits filed has increased in rough correlation to patent grants, the number that actually go to trial has remained fairly constant over the last 30 years. About 90 percent of the suits filed
      each year are abandoned or settled. Of the three hundred that remain, two-thirds never go to trial, and are adjudicated on summary judgment (of noninfringement in most cases).
The nation is thus left with, at most, between 90 and 112 patent infringement trials per year—exactly the same number that went to trial 10, 20, and even 30 years ago.
        Gene Quinn, “Patent Litigation Statistics: 1980- 2010,

To be sure, there can be significant costs to business even in litigating and settling patent suits that never go to trial. But no one has shown that the relative cost of patent litigation today is higher than it was historically,
      or that the cost of patent litigation is more burdensome than other customary legal costs in business, especially the huge cost of regulatory compliance.
The evidence does not suggest that patent litigation is “out of control” today. As retired Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, the main court for patent appeals since 1982, notes, “The
      level of patent litigation today is rather modest for a nation with two million active patents and hundreds of thousands of businesses competing against each other.”
History supports Judge Michel on this point. The estimated 124-plus smartphone patent suits filed between 2009 and 2012
        http://en.wikipedia.org/wiki/Smartphone_wars.

      are less than one- quarter the number of patent 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 587 patent cases alone.
        “The Telephone Cases,” Wikipedia, http://en.wikipedia.org/wiki/The_T elephone_Cases.

Even more surprising, given the common belief in a patent litigation “explosion” today, patent and legal records from the golden age of invention during the mid-nineteenth century U.S. Industrial Revolution show that the patent
      litigation rate at that time—defined as the number of patent suits filed in a decade divided by the number of patents issued in that decade—reached 3.6 percent.B. Zorina Khan,
        “

In contrast,
      USCourts.gov
      figures show the patent litigation rate during the decade 2001 to 2011 was less than half that—only 1.52 percent. From 2002 to 2012, reflecting the increased suits but also the increased (276,788) patents issued, the litigation rate was 1.57 percent.
Over the entire period from 1790 to 1860, the patent litigation rate averaged 1.65 percent.
Today’s smartphone wars, then, are simply “back to the future” when it comes to the ways in which disruptive new industries are developed. Historians have noted that every major industrial breakthrough of the last 150 years—from the
      development of the sewing machine, telephone, automobile, radio, aircraft, medical stent, and even disposable diaper industries, to the birth of the semiconductor and Internet e-commerce industries—witnessed exactly the same surge in patenting and
      patent litigation that we see in today’s smartphone field.
        Adam Mossoff, “The Rise and Fall of the First American Patent Thicket: The Sewing Machine War of the 1850s,
        ”

And just as with smartphones today, the most competitive technology arenas have always been the most litigious. In Edison’s time, the inventors of electrical discoveries were four times more likely than other inventors to be
      involved in patent litigation, and accounted for 41 percent of all patent suits filed during that period.
        B.Zorina Khan,

In any event, by early 2015, it had already become clear that a noticeable decline in patent litigation was under way. Most analysts attributed the decline to a series of U.S. Supreme Court rulings in 2014 limiting the
      patentability of software and increasing the ability of the courts to impose sanctions on abusive litigants, which will be discussed later in this chapter. Also driving this decline in litigation was the availability of new post-grant review
      proceedings under the new America Invents Act, which allow third parties to challenge patents and, if the evidence so warrants, have their claims invalidated by the USPTO’s Patent Trial and Appeal Board.
Although patent litigation is costly, the historical record suggests that it serves a vital function by settling the validity and disputed ownership of patent rights so these can be commercialized into new products, new services,
      and new medical treatments.
This is, in fact, the proper role of the courts.


# Patent Basics

## What the U.S. Patent System Wrought

### Learning Objectives

After completing this section, you will be able to
1. Explain the effects of the U.S. patent system on American economic development.
2. Describe trends in U.S. patenting over the years.

### Creating the World’s Most Successful Economy

In 1630, the puritan John Winthrop, future governor of Massachusetts colony, declared that “We shall be as a city upon a hill, the eyes of all people are upon us.”
One hundred and fifty years later, the Founders of the United States of America proved Winthrop right, offering the world a vision of liberty and democratic governance that continues to inspire people to this day. As noted
      previously, the men who led the Revolution and wrote the Constitution were not wild-eyed revolutionaries. They were eminently practical people who managed to create the longest- living modern democratic political and economic system on the planet.
In other words, they must have done something right. And one of those things was surely the patent system they created. Because almost from the moment of its inception, it began to spark innovation and economic growth on a scope and
      scale never before seen in the world.
Only two months after America’s first patent law was signed in 1790, in fact, Thomas Jefferson himself noted that it had “given a spring to invention beyond my conception.” Within 13 years, America surpassed Britain—until then,
      the unrivaled leader of the industrial revolution—in the number of new inventions patented, even though Britain still had more than twice America’s population. By 1870, as noted earlier, the United States was patenting more than five times the number
      of inventions as Britain, although their populations were by then roughly equal in size.
At first, most British observers were dismissive of American innovation efforts, declaring that the former colony would never be able to progress beyond the simple imitation of superior European technologies. But eventually Britain
      and other nations took note of the way the U.S. patent system seemed to be stimulating invention and economic growth at an unheard-of pace.
Sir William Thompson (pictured above), a British inventor and scientist attending the 1876 Centennial Exhibition in Philadelphia, looked at the amazing array of American inventions—including Bell’s telephone, the Westinghouse airbrake, Singer’s
      sewing machines, and Edison’s improved telegraph—and had this to say: “If Europe does not amend its patent laws, America will speedily become the nursery of useful inventions for the world.”

Meanwhile, the Swiss Commissioner in attendance, the shoe manufacturer Edward Bally, offered a similar warning to his Old World countrymen: “American industry has taken a lead which in a few years may cause Europe to feel its
      consequences in a very marked degree.”
Then, there’s Japan’s Assistant Secretary of State Korekiyo Takahashi, who visited the U.S. Patent Office. Upon his return home, he said, “What is it that makes the United States such a great nation? We investigated, and we found
      it was patents. And we will have patents.”
Even the British jurist Sir Henry Sumner Maine, who had once argued that “the establishment of the masses in power is the blackest omen” for the future of invention, later changed his tune. He conceded that the U.S. patent system
      was “one of the provisions of the Constitution that have most influenced the destinies of the American people” and that it had made the United States “the first in the world for the number and ingenuity of [its] inventors”.
        Henry Sumner Maine,

As historians Lamoreaux and Sokoloff noted, “[Foreign] observers attributed much of the country’s rapid technological progress to its distinctive patent system. Quite revolutionary in design at inception, the U.S. patent system
      came to be much admired for providing broad access to property rights in new technological knowledge and for facilitating trade in patented technologies. These features attracted the technologically creative, even those who lacked the capital to
      directly exploit [i.e., commercialize] their inventions . . . and also fostered a division of labor between the conduct of inventive activity and the application of technical discoveries to actual production. It is no coincidence that Britain and
      many other European countries [later] began to modify their patent institutions to make them more like those of the Americans.”
        Naomi R. Lamoreaux and Kenneth L. Sokoloff,
        “

### Every Breakthrough Spurs Patenting Spikes

The patent system’s central role in fostering innovation can be seen in the patenting spikes that occur with every major industrial breakthrough. A major surge in patenting took place in the
      1880s, for example, when the number of new patents issued each year jumped 56 percent to about 20,000, compared with the 12,000 issued yearly during the previous decade. This patent boom corresponded with rapid advances in the emerging railroad,
      telegraph, telephone, and electric light and power industries that signaled the industrialization of the U.S. economy.
The next sharp surge in patent issuances began around 1902 and lasted until 1916 or so, when the number of patents granted doubled from 20,000 per year to around 40,000 per year. This was the period of the newborn automobile and
      aircraft industries’ most rapid early-stage growth. Patenting levels then remained relatively stable at about 40,000 per year until around 1960 or so, when the revolution in plastics and other synthetic materials along with boom-time growth in the
      aerospace and computer industries pushed patenting levels to 60,000 per year. There they remained until the mid- 1980s, when the personal computer and emerging high-tech industries of Silicon Valley began to power the whole of the U.S. economy and
      propel us toward the age of the Internet. Patenting levels then rose to around 80,000 to 100,000 yearly
With the rise of the Internet, social media, mobile telephony, and smartphones over the last two decades, the number of patent applications filed each year with the U.S. Patent and Trademark Office (USPTO) has surged fourfold. In
      2014, the USPTO received 578,802 applications, finding 300,678 of these applications worthy of receiving a patent. This is but the latest spike in innovation and patenting.

Clearly, whenever the United States has undergone a major industrial renaissance during which technology advances lead not only to the birth of new industries, but also to the reshaping of existing ones, patenting levels rise
      dramatically. It is no surprise, therefore, that Silicon Valley, midwife of many of the new Knowledge Economy industries of the past 60 years, is home to less than 1 percent of the nation’s population but earns 12 percent of its patents each year.
      The Valley is now the site of a new USPTO satellite office serving high-tech innovators there.
        “

The patent system has also been crucial in facilitating the growth of new start-up businesses, with 67 percent of entrepreneurs reporting that they find patents valuable in obtaining venture financing.
        “
      This is important because although large companies contribute enormously to American innovation and industrial growth through their in-house research and development operations as well as via their partnerships with research universities, start-up
      companies play a particularly strong role in the creation of entirely new industries. Indeed, virtually every innovative new industry of the last 150 years—From the telegraph, telephone, and electric power industries of the 1800s, to the auto,
      aircraft, materials, and aerospace industries of the twentieth century, to the semiconductor, personal computer, software, biotech and Internet e-commerce industries of the last 60 years—was launched by an entrepreneurial start-up company.
The Founders would not be surprised by this. They created the world’s first democratized patent system, after all, for a reason: to stimulate the ingenuity of the common man. They had asked themselves a question—the same question
      reiterated two generations later by Supreme Court Justice Joseph Story when he spoke before an audience of ordinary mechanics: “Ask yourselves, what would be the result of one hundred thousand minds ... urged on by the daily motives of interest, to
      acquire new skill, or invent new improvements.”
        Reported in

The result was the most successful economy on the face of the earth.

### Patents and the American Dream

It’s not only the economy that the patent system helped shape, but the culture and consciousness as well. As the eminent historian Gordon S. Wood observed in his 2010 book
      Empire of Liberty,
And for the first time in human history, a nation had come to see its greatness not in empire or military might or royal lineage, but in its capacity for technological progress.
There was nothing preordained about America’s economic success, no special “Yankee ingenuity” gene in their hereditary stock. As Scientific American noted in 1876, the United States advanced “not because we are by nature more
      inventive than other men. Every nationality becomes inventive the moment it comes under our laws.”
Rather, the secret of America’s success was a uniquely democratic patent system that “added the fuel of interest to the fire of genius” in generations of ordinary citizens—and in so doing, helped in a very real way to give birth to
      the American Dream itself.
Ironically, few people today even know the origin of the term “the American Dream.” In fact, it was coined in 1931, by the historian James Truslow Adams in his book
      Epic of America, and it is instructive to read what Adams meant by it:
Only in America could a working class youth named Thomas Edison with less than three years of schooling develop himself into the world’s greatest inventor—a visionary who gave the world some of the most important technologies of
      late nineteenth- and early twentieth-century life.
This is exactly what the Founders had in mind when they created the U.S. patent system.