CHAPTER 1 History and Architecture of the Patent System INTRODUCTION The term “patent” is short for “letters patent,” derived from the Latin litterae patentes, meaning open letters.1 Generally, letters patent were letters addressed by the sovereign “to all whom these presents shall come,” reciting a grant of some dignity, office, franchise, or other privilege that has been given by the sovereign to the patentee.2 The modern American patent is a government issued grant, which confers upon the patent owner 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 period of 20 years ending from the filing date of the patent application.3 A patent gives its owner the right to exclude; a patent does not provide a positive right to make, use, or sell the invention.4 As Chief Justice Taney, in the mid-nineteenth century, stated in Bloomer v. McQuewan, “[t]he franchise which the patent grants consists altogether in the right to exclude everyone from making, using or vending the 1. It should be noted that a patent for invention was just one form of “letters patent.” In England, the Crown would conduct much of its state business by means of charters and letters patent, including the grant of privileges to inventors to practice their inventions. As William Blackstone writes in his Commentaries: The King’s grants are also matter[s] of public record. These grants, whether of lands, honors, liberties, franchises, or aught besides, are contained in charters, or letters patent, that is, open letters, literae patentes: so called, because they are not sealed up, but exposed to open view, with the great seal pendant at the bottom; and are usually directed or addressed by the King to all his subjects at large. WILLIAM BLACKSTONE,2COMMENTARIES ON THE LAWS OF ENGLAND 316-17 (1768). The opposite of letters patent is letters close or litterae clausae, which are sealed so that only the addressee can read the contents of the letter. 2. ENCYCLOPEDIA BRITANNICA 969-70 (1942). 3. 35 U.S.C. § 154 (2006). Prior to June 8, 1995 (the effective date of the GATT-TRIPS legislation), the term for a United States patent was 17 years from the date the patent issued.In April 1994, the United States and several other countries participated in the Uruguay Round Agreements. The Uruguay Round included an “Agreement on Trade-Related Aspects of Intellec- tual Property” (TRIPS). The TRIPS patent section precipitated the change of the U.S. patent term from 17 years from date of issuance to 20 years from the filing date. As a result, the present patent term for applications filed before June 8, 1995, is (1) 17 years from date of issuance; or (2) 20 years measured from the filing date of the earliest referenced application, whichever is greater. For applications filed on or after June 8, 1995, the patent term is 20 years measured from the earliest claimed application filing date. 4. See FRANK Y. G LADNEY,RESTRAINTS OF TRADE IN PATENTED ARTICLES 1-17 (1910), for a good early twentieth-century discussion of the confusion that persisted in the lower courts as to what a patent granted to the inventor. 1 2 1. History and Architecture of the Patent System thing patented without the permission of the patentee. This is all that he obtains by the patent.”5 In this regard, it is important to understand that while a patent provides its owner with a legal monopoly — a statutory right to exclude — it rarely allows for an economic monopoly. An economic monopoly refers to the presence of signifi- cant market power, which can be defined as the ability of a firm to price a product above marginal cost without losing substantial sales. The reason a patent typically does not confer market power is that there are usually viable substitutes for the patented good (e.g., if I charge too high a price for my patented mouse trap, the consumer will purchase a cat).6 Thus, while a patentee with a marketable product has the opportunity to earn economic rents, he will typically — with rare exception7 — have to contend with viable substitutes. Moreover, the patent system neither guides inventors as to where they should channel their inventive energies, nor guarantee commercial success;8 rather, it is the marketplace that signals to inventors where the financial rewards reside, and the costs and benefits of a given research project.9 Thus, the patent system 5. 14 How. 539, 549 (1852). The practical significance of this distinction is explored in section B of this chapter (Economics of Patent Law), in Chapter 2, section B, in Comment 1 following the Incandescent Lamp case, and at the beginning of Chapter 7 on infringement. The right to exclude, without the right to use, is somewhat peculiar to patent law (as well as the law of copyright and negative easements). In contrast, the property right in real property (e.g., land) or personal property (e.g., a car or a computer) is a right to use that carries with it a logically subordinate right to exclude. That right to exclude exists to ensure the owner’s full enjoyment of the right to use. 6. See, e.g.,WILLIAM M. LANDES &RICHARD A. POSNER,THE ECONOMIC STRUCTURE OF INTELLECTUAL PROPERTY LAW 374-75 (2003) (stating “[t]he average patent . confers too little market power on the patentee in a meaningful economic sense to interest a rational antitrust enforcer, and sometimes it confers no monopoly power at all”) (emphasis in original); Michael A. Carrier, Unraveling the Patent-Antitrust Paradox, 150 U. PA.L.REV. 761, 791 (2002) (stating “patents typically do not demonstrate market power, and the set of technological substitutes that cannot be practiced because of the patent grant often has little overlap with the set of products that consumers view as economic substitutes”). 7. See Thomas F. Cotter, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments: A Commentary on Hovenkamp, Janis and Lemley,87MINN.L.REV. 1789, 1814 n.94 (2003) (stating “pharmaceutical patents . sometimes do confer market power”). 8. See 1HERBERT HOVENKAMP,MARK D. JANIS &MARK A. LEMLEY,IPAND ANTITRUST § 4.2a (2005) (noting a patent grant “is not even a guarantee of market success,” let alone giving rise to an economic monopoly) 9. See B. ZORINA KHAN,THE DEMOCRATIZATION OF INVENTION:PATENTS AND COPYRIGHTS IN AMERI- CAN ECONOMIC DEVELOPMENT, 1790-1920 66 (2005) (stating that in the United States, patent “statutes from the earliest years ensured that the ‘progress of science and useful arts’ was to be achieved through a complementary relationship between law and the market in the form of a patent system”); STEVEN W. U SSELMAN,REGULATING RAILROAD INNOVATION:BUSINESS,TECHNOLOGY, AND POLITICS IN AMERICA, 1840-1920 97-98 (2002) (stating “a patent in and of itself conveyed no rewards or special privileges. Inventors did not receive a bounty based on the perceived utility of their handiwork. Rather, a patent merely extended to creative individuals a legal claim upon those who wished to use their novelties. The market would determine the number of takers and the amount they were willing to pay”); NUNO PIRES DE CARVALHO,THE TRIPS REGIME OF PATENT RIGHTS 1-9 (2nd ed. 2005) (discussing relationship between patent system and marketplace); BROOKE HINDLE,EMULATION AND INVENTION 18 (1981) (noting patent system “rested entirely upon the market economy”). Reflecting this sentiment, Henry Ellsworth, the superintendent of the patent office from 1835-45, in his report to the Secretary of State about the need for patent reform, wrote “for no sooner are the wants of the public known than men of ingenuity attempt to supply them.” REPORT FROM THE HON.HENRY L. ELLSWORTH TO THE SECRETARY OF STATE AND TRANSMITTED TO THE SELECT COMMITTEE ON THE PATENT LAWS 175, 177 (1836). See also JOEL MOKYR,THE GIFTS OF ATHENA: HISTORICAL ORIGINS OF THE KNOWLEDGE ECONOMY 76 (2002) (asking “which of all the problems that Introduction 3 embodies a self-selection process that works hand-in-hand with the market- place to foster innovation in a decentralized setting.10 Yet patent law’s “reward structure cannot be modified according to the market structure in which the innovator operates,”11 which means that some innovations will be over- rewarded while others under-rewarded.12 As two commentators have argued, a unitary patent system “simply cannot offer the range of proper incentives for the variety of technologies and industrial sectors it would need to serve.”13 In this decentralized setting, patent law can be viewed as a system of laws that offer a potential financial reward as an inducement to invent, to disclose technical information, to invest capital in the innovation process, and to facilitate efficient use and manufacturing of invention through licensing. No- tably, some industries respond to these incentives differently than others, and this holds true not only for established entities, but start-ups and entrepreneurs, as well.14 For instance, the pharmaceutical and medical equipment industries rely heavily on patents, whereas the chemical process and communications equipment industries prefer trade secrecy and lead time into the market, respectively, relying less on patents.15 And some industries seek patent protec- tion with an eye towards commercialization and generating revenue, while might be solved will an ingenious and creative individual apply his or her efforts to? The answer must be based in part on the signals that the market or another device sends to the potential inventor about the private and social benefits”).