QUESTONS

IV. Foundations of Modern U.S. Patent Law

a. Discuss the intangible nature of an idea and how a patent provides remedy for extracting value from information or an idea? b. Discuss the four incentives of U.S. patent law and their relative importance to commerce and innovation? c. Discuss the importance of U.S. patent law in commercialization

V. How Does the Patent "Right to Exclude" Operate?

a. What is an infringement? b. Discuss the importance of claims relative to infringement? c. Does in intent matter relative to infringement and why?

VI. What Does One Do with a Patent?

a. Discuss defensive and offensive strategies for utilizing patent rights? b. What is cross-licensing? c. How have large technology companies like Microsoft and Apple used cross-licensing to combat Patent Trolls (aka Non Practicing Entities or Patent Assertion Entities)? d. Take a position on the whether or not Patent trolls are good for the commercialization of innovation. Discuss your thoughts in light of the articles provided and support your position with data and examples.

RESSOURCES

Introduction to patent Law (article 1)

Chapter 1 INTRODUCTION TO THE PATENT SYSTEM

SYNOPSIS

1.01 The Patent Right 1.02 History and Origins of the Patent Right

[A] Early European Patent Systems

[B] The British Patent System and the Statute of Monopolies

1.03 U.S. Constitutional Basis: Adoption of the Copyright and Patent

Clause

[A] The Patent System and the U.S. Constitution

[B] Congressional Adoption of the Patent System

1.04 Foundations of Modern U.S. Patent Law

[A] The Statutory Nature of Patent Rights

[B] Utilitarian Underpinnings of the Patent System

[C] Patent Rights as an Appropriation Mechanism

[D] Incentives and Patent Law

1.05 1.06 1.07

1.01

How Does the Patent "Right to Exclude" Operate? What Does One Do with a Patent? Conclusion

THE PATENT RIGHT

Apatentis a right granted by the government that allows the patent owner to exclude others from practicing the invention during its term. This right is grounded in the U.S. Constitution, which has authorized Congress to create protection for inventive works. Acting pursuant to this power, Congress has enacted legislation, set forth at Title 35 of the U.S. Code, which provides the foundation for an inventor's ability to obtain patent protection for new and useful ideas.

To obtain a patent, one must submit a application to the U.S. Patent & Trademark Offce1(the "U.S. PTO"), the federal agency responsible for patent examination. The U.S. PTO's review considers whether the application includes all information required by the Patent Act. Such information includes a detaileddisclosureof the invention including how the invention can be made and used by others in the feld.2This disclosure must demonstrate the invention'sutility.3In addition, the applicant must include at least oneclaimthat provides notice of the

1The U.S. Patent & Trademark Offces issues three types of patents: 1) utility patents; 2) plant patents; and 3) design patents. Of these, utility patents are by far the most prevalent and are the primary focus of patent law courses and this book.See generallyChapter 5 (describing the different types of patents).

235 U.S.C. 112 (2000);see generallyScott Paper Co. v. Marcalus Mfg. Co., 326 U.S. 249, 254 (1945) ("The [patent] grant is conditioned upon the fling of an application in the patent offce describing the invention and the manner of making and using it.");infraChapters 7-11 (describing patent disclosure requirements).

335 U.S.C. 101;see infraChapter 22.

1

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2INTRODUCTION TO THE PATENT SYSTEMCH. 1

elements of the asserted invention.4The claimed invention must benovel5and fall within the purview of the Patent Act'sstatutory subject matter6 that is, the invention must be among the types of advances that are authorized for protection under the patent system. Further, the claimed invention must meet thenonobvi- ousness7requirement, such that the application does not claim what would be merely obvious to one of ordinary skill in the art.

If the requirements of patent law are met and the U.S. PTO issues a patent based on the application, the right becomes enforceable against infringers. A patentee may then choose to assert the right, for example by fling an infringement action in a U.S. District Court. If successful, the owner may obtain monetary relief and, under certain conditions, an injunction against further infringement. Subject to certain exceptions, under current law a patent has an effective life of twenty (20) years from the application's fling date.8

1.02 HISTORY AND ORIGINS OF THE PATENT RIGHT [A] Early European Patent Systems

Some early patent systems existed long ago, well before U.S. patent law was enacted. The earliest patent statute was passed in 1474 in the City of Venice. This statute provided a right to "every person who shall build any new and ingenious device in this City, not previously made in our Commonwealth," upon notice that the invention "has been reduced to perfection so that it can be used and operated."9Such inventions appeared to have been subject to an examination procedure to determine compliance with statutory requirements.10If the right was infringed, the inventor was entitled to a penalty of one hundred ducats and an order that the infringing device be destroyed.11

During the late ffteenth and sixteenth centuries, a number of other European countries developed the practice of issuing patents.12For example, an early French patent system provided the rights holder a "privilege to operate according to his invention,"13and an additional right that prohibited others from copying. Also, the French instituted an examination procedure that called for scientifc evaluation of a proposed invention, although in practice it appeared that a number of patents were granted without taking advantage of this resource.14As another example, during the sixteenth and seventeenth centuries, the Netherlands

4 35 U.S.C. 112;see infraChapter 10.

5 35 U.S.C. 102;see infraChapter 12.

6 35 U.S.C. 101;see infraChapter 23.

7 35 U.S.C. 103;see infraChapter 21.

8 35 U.S.C. 154(a)(2).

9 Reproduced inEdward C. Walterscheid,The Early Evolution of the United States Patent Law:

Antecedents (Part 1), 76 J. PAT. & TRADEMARKOFF. SOC'Y697, 709 (1994).

10Frank D. Prager,A History of Intellectual Property from 1545-1787, 26 J. PAT. OFF. SOC'Y, 711, 716 (1944).

11 Walterscheid,supranote 9, at 709.

12 Id.at 711.

13 Prager,supranote 10, at 724.

14 Id.at 725.

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1.02HISTORY AND ORIGINS OF THE PATENT RIGHT3instituted a patent custom that, at certain times in its history, required a written

specifcation or model as proof of the invention's existence.15

These European systems were not universally adopted and "at no time before the twentieth century did all major European nations even have patent laws."16Nonetheless, each of these systems include elements that have been incorporated into current U.S. law and thus provide some insight into the origins of these procedures. For example, France's examination procedure, the Netherlands' requirement for a written specifcation and the City of Venice's authorization for the recovery of monetary and injunctive relief have all become features of U.S. law.

[B] The British Patent System and the Statute of Monopolies

Great Britain's experience sheds critical understanding on considerations that later surfaced during the inception of the U.S. patent system. As background, the term "patent" has historically encompassed more than the rights granted to inventors as we use that term today. As to its derivation, "[p]atent, the adjective, means 'open,' and patent, the noun, is the customary abbreviation of 'open letter.' "17In Elizabethan England, "letters patent" a translation of the Latin termlitterae patentes referred to all types of directives that were openly and publicly made, in contrast to "letters close" which were kept private.18Letters patent included a variety of rights and privileges issued as a matter of royal prerogative,19such as grants of offce, pardons, rights, titles or monopolies.20

Between 1561 and 1600, Elizabeth I granted at least 51 patents of monopoly.21Although some appeared to have been granted to protect novel inventions, a number were granted to bring knowledge and skills developed elsewhere to England.22The crown granted the latter type to foster theimportationof industries existent outside England with the goal of encouraging new industries and manufacturing within the realm. In return for these monopoly grants, the recipient was expected "not only to introduce the new art, trade or industry within

15Walterscheid,supranote 9, at 714. Although in 1869 the Netherlands repealed this practice under the view that "a good law of patents is an impossibility," the country reinstated a patent system some years later in 1910. STAFF OFS. SUBCOMM.ONPATENTS, TRADEMARKS,ANDCOPYRIGHTS, 85THCONG., ANECONOMICREVIEW OF THEPATENTSYSTEM4-5 (Comm. Print 1958) [hereinafter "Economic Review"] (prepared by Fritz Machlup).

16John F. Duffy,Harmony and Diversity in Global Patent Law, 17 BERKELEYTECH. L.J. 685, 713 (2002);see generallyERICHKAUFER, THEECONOMICS OF THEPATENTSYSTEM1, 8-10 (1989) (detailing an anti-patent movement in Europe during the 1800's).

17 ECONOMICREVIEW,supranote 15, at 1.

18 Walterscheid,supranote 9, at 700-01 ("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",quotingWILLIAMBLACKSTONE, 2 COMMENTARIES ON THELAWS OFENGLAND316-317 (1768)).

19The royal prerogative in this context refers to the crown's practice of exercising broad discretion in the grant and modifcation of rights with respect to commerce.See generallyTHEODOREF.T. PLUCKNETT, TASWELL-LANGMEAD'SENGLISHCONSTITUTIONALHISTORY, 318 (11th ed. 1960).

20 Walterscheid,supranote 9, at 700-01;see alsoKAUFER,supranote 16, at 1.

21 Edward C. Walterscheid,The Early Evolution of United States Patent Law: Antecedents (Part 2),

76 J. PAT. & TRADEMARKOFF. SOC'Y849, 853 (1994)

22Adam Mossoff,Rethinking the Development of Patents: An Intellectual History, 1550-1800, 52 HASTINGSL.J. 1255, 1260-61 (2001).

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4INTRODUCTION TO THE PATENT SYSTEMCH. 1

England but also to practice or 'work' it within the country."23In addition, monopoly patents were granted for industries that had already been undertaken within the country but not been practiced for some time.24

In addition, Elizabeth I granted a number of monopoly patents to her courtiers for trades and industries that were already practiced domestically. These patents, which became known asodious monopolies, included such well-established businesses as white soap, ovens and furnaces, salt, mining certain metals and ores, playing cards, and ale.25As a consequence, rights holders were able to charge "ruinous" prices for these commodities.26Because of the effect of odious monopolies on the nation's citizens, Elizabeth I's practices led to considerable friction with Parliament.

In 1601, Parliament raised its strongest challenge to Elizabeth I's odious monopolies, by introducing legislation which had the potential to curtail the Queen's power of the royal prerogative. In response, Elizabeth I asked that the legislation be withdrawn in exchange for her concession that her patents could be submitted to "a Tryal according to law for the good of the People."27Parliament accepted this compromise, thereby subjecting the Queen's patents to scrutiny by the common law courts.

One of the most famous court challenges was theCase of Monopolies (Darcy v. Allen),28which examined a challenge to a patent for playing cards. In result, the court found in favor of the accused infringer.29According to one report of the case, the patent was found to violate Parliament's laws enacted "for the advancement of the freedom of trade and traffc."30This description appeared to have been an effort to limit the royal prerogative against the grant of odious monopolies in favor of control by Parliament. Nonetheless, as one scholar observes, the court did not issue a written opinion and, lacking a defnitive basis for the ruling, theCase of Monopolies"did not end the controversy over royal monopolies."31

Indeed, after the death of Elizabeth I, her successor James I continued to issue odious monopolies to members of his court.32In 1623, Parliament stepped in to stop the practice by enacting the Statute of Monopolies, which declared "all monopolies and . . . letters patent heretofore made or granted . . . contrary to the laws of this realm, and so are and shall be utterly void and of none effect."33Signifcantly, the Statute specifcally allowed a grant of a patent "to the true and frst inventor" for "the sole working or making of any manner of new manufactures

23 Walterscheid,supranote 21, at 857.

24 Id.at 858.

25 Id.at 854 n.14.

26 PLUCKNETT,supranote 19, at 318.

27 Walterscheid,supranote 21, at 866.

28 Jacob I. Corr,The Argument, Decision and Reports of Darcy v. Allen, 45 EMORYL. J. 1261 (1996)

(provides a comprehensive review of the decision and recognizes the uncertain grounds on which it rests).

29 Id.at 1263.

30 The Case of Monopolies (Darcy v. Allen), (1603) 77 Eng. Rep. 1260, 1265.

31 John F. Duffy,Inventing Invention: A Case Study of Legal Innovation, 86 TEX. L. REV. 1, 26

(2007).

32 Walterscheid,supranote 21, 76 J. Pat. & Trademark Off. Soc'y at 871.

33 Statute of Monopolies, 1623, 21 Jac. 1, c. 3, sec. 1, (Eng.).

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1.03ADOPTION OF THE COPYRIGHT AND PATENT CLAUSE5

within this realm" for a maximum term of fourteen years.34Additionally, the Statute required that such patents "be not contrary to the law nor mischievous to the state by raising prices of commodities at home, or hurt of trade, or generally inconvenient."35In this manner, the Statute of Monopolies drew a distinction between prohibited odious monopolies and those that provided public beneft of encouraging invention and new industries within England.

1.03 U.S. CONSTITUTIONAL BASIS: ADOPTION OF THE COPYRIGHT AND PATENT CLAUSE

[A] The Patent System and the U.S. Constitution

Between 1776 and 1789, when the U.S. Constitution was adopted, a number of the U.S. states issued patents that were enforceable within their borders. One historian estimates that likely no more than forty (40) such patents were issued throughout this time.36This practice soon ceased as the system for federal patent protection emerged. Specifcally, the Patent and Copyright Clause, which was unanimously adopted at the Constitutional Convention of 1787,37authorized Congress to create of a copyright and patent system as part of the legislative grant of powers, with the express purpose:

. . . [t]o 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.38

James Madison, writing in support of the clause in The Federalist Papers, noted that "the right to useful inventions seems . . . to belong to the inventors," and that the "States cannot separately make effectual provision" for such a right.39

While the Constitution was under consideration for ratifcation by the states Thomas Jefferson detailed his thoughts about patent protection for this country in a number of writings. Although not a Framer of the Constitution, Jefferson's views have become infuential to some degree in shaping patent jurisprudence. The U.S. Supreme Court has summarized his opinions as follows:

Jefferson, like other Americans, had an instinctive aversion to monopo- lies. It was a monopoly on tea that sparked the Revolution and Jefferson certainly did not favor an equivalent form of monopoly under the new government. His abhorrence of monopoly extended initially to patents as well. From France, he wrote to Madison (July 1788) urging a Bill of Rights provision restricting monopoly, and as against the argument that limited monopoly might serve to incite "ingenuity," he argued forcefully that the

Id.at sec. 6.

Id.

Edward C. Walterscheid,The Early Evolution of the U.S. Patent Law: Antecedents (5, Part II), 78 J. PAT. & TRADEMARKOFF. SOC'Y665, 668 (1996) (noting that "it is diffcult to know precisely how many state patents were actually granted, but it is unlikely that the total exceeded forty").

37SeeTyler L. Ochoa and Mark Rose,The Anti-Monopoly Origins of the Patent and Copyright Clause, 84 J. PAT. & TRADEMARKOFF. SOC'Y909, 922 (2002).

38U.S. CONST. art I, 8. 39THEFEDERALISTNO. 43 (James Madison).

34 35 36

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6INTRODUCTION TO THE PATENT SYSTEMCH. 1"beneft even of limited monopolies is too doubtful to be opposed to that of

their general suppression."40

Despite these statements, by 1807, Jefferson expressed his support for a U.S. patent system in a letter to Oliver Evans, stating "Certainly an inventor ought to be allowed a right to the beneft of his invention for some certain time . . . Nobody wishes more than I do that ingenuity should receive a liberal encouragement."41In all, Jefferson's writings have been seen as framing an issue which is the subject of ongoing concern up through to the present day that is, the extent to which "the underlying policy of the patent system that 'the things which are worth to the public the embarrassment of an exclusive patent,' as Jefferson put it, must outweigh the restrictive effect of the limited patent monopoly."42

In 1792, Alexander Hamilton issued a report to Congress that included a suggestion that patents issue for inventions that wereimportedinto the U.S., as formerly permitted under British law.43Under this suggestion, patent rights could be granted to "the introducer as well as to the inventor."44Hamilton's suggestion was not adopted. Rather, the minimum standard for patentability that has been developed over the history of U.S. patent law requires that an invention be novel45and "evidence more ingenuity and skill than that possessed by an ordinary mechanic acquainted with the business."46Mere importation of a technology that is already existent outside the U.S. is insuffcient.

[B] Congressional Adoption of the Patent System

The U.S. Constitution's Copyright and Patent Clause did not expressly create the U.S. patent system, but rather empowered the legislature to do so. Acting under this grant, Congress enacted the frst Patent Act in 1790, soon after U.S. government operations began. Since that time, patent law has been exclusively federal in origin.

The system established under the 1790 Patent Act was quite rudimentary. To obtain a patent under the frst Act, an inventor was required to petition a three- person panel that consisted of the Secretary of State, the Secretary for the Department of War, and the Attorney General of the United States.47The Act contained explicit disclosure requirements, including that the petition must

40Graham v. John Deere Co., 383 U.S. 1, 8-9 (1966),quotingV WRITINGS OFTHOMASJEFFERSON, at 47 (Ford ed., 1895)).

41Graham, 383 U.S. at 9quotingJEFFERSON,supranote 40, at 75-76. For an analysis of Jefferson's correspondence of the Copyright and Patent Clause,seeJustin Hughes,Copyright and Incomplete Historiographies: Of Piracy, Propertization, and Thomas Jefferson, 79 S. CAL. L. REV. 993 (2006).

42 Graham, 383 U.S. at 10-11.

43 SeeP.J. Federico,The Patent Act of 1793, 18 J. PAT. OFF. SOC'Y(SPECIALISSUE) 77, 79 (1936) ("The

encouragement of new inventions and discoveries at home is among the most useful and exception act which could govern the country. This privilege should be extended to the introducer as well as to the inventor") (quoting Hamilton's report).

44 Id.

45 See35 U.S.C. 102 (setting forth novelty requirements under current law).

46 Graham v. John Deere Co. 383 U.S. 1, 11 (1966) (describing patentability standard established in

Hotchkiss v. Greenwood, 52 U.S. 248 (1850)).

47Patent Act of 1790, ch. 7, 1, 1 Stat. 109-112 (April 10, 1790). The three-person panel was known as the "Commissioners for the Promotion of Useful Arts."Graham, 383 U.S. at 7. As the then-Secretary of State, Thomas Jefferson was a member of this group.

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1.03ADOPTION OF THE COPYRIGHT AND PATENT CLAUSE7

"describe the said invention or discovery, clearly, truly and fully."48The applicant was required to fle a written specifcation and submit models to both "distinguish the invention or discovery from other things before known and used," and describe the invention suffciently to enable others skilled in the art "to make, construct, or use the same."49Any two members of the panel could grant the petition if the invention was deemed "suffciently useful and important."50Where these conditions were met, the President would "cause the seal of the United States to be thereto affxed."51

In 1793, the Patent Act was amended again, eliminating the requirement that a patent be assessed to determine whether it was "suffciently useful and important."52According to one historian, those charged with examining patents had found the examination process under the 1790 Act quite burdensome and the 1793 amendment "eliminated the examination of the application and made the grant of a patent purely a clerical matter."53Although the Secretary of State created a Patent Offce in 1802, the agency lacked statutory authority to examine applications on their merits.54Within a few decades, Congress became concerned about the quality and volume of patents granted and the resulting patent litigation that had been fled. Because patents were issued without any meaningful assessment of validity, the courts bore the entire burden of determining patentability.55

In 1836, a report to the Senate observed that forty years without any examination process had resulted in "[a] considerable portion of some of the patents granted are worthless and void," and that "a great number of law suits arise, which are daily increasing in an alarming degree, onerous to the courts, ruinous to the parties, and injurious to society."56

That same year, Congress amended the Patent Act to authorize the creation of the Patent Offce as the agency expressly authorized to examine applications for compliance with specifed criteria such as adequate disclosure, novelty and utility.57The 1836 Act authorized the Patent Offce to reject an application if the subject matter had been previously invented in this country, had been previously patented or described in a patent publication in this or any other country, or had been previously in public use or on sale with the applicant's consent. Additionally, the revised Patent Act authorized the creation of a board to hear administrative appeals of Patent Offce rejections. Further, the Patent Offce was authorized to

48 Patent Act of 1790, 1.

49 Id.,2.

50 Id.,1.

51 Id.

52 Patent Act of 1793, ch. 11, 1, 1 Stat. 318-323 (February 21, 1793).

53 P.J. Frederico,The Patent Act of 1793, 18 J. PAT. OFF. SOC'Y77 (1936) (SPECIALISSUE).

54 See generallyP.J. Frederico,Dr. William Thornton and the Patent Offce to 1836, 18 J. PAT. OFF.

SOC'Y83 (1936) (SPECIALISSUE).

55Oren Bracha,The Commodifcation Of Patents 1600-1836: How Patents Became Rights And Why We Should Care, 38 LOY. L.A. L. REV. 177, 228 (2005) ("the 1793 system shifted the real gravity center to ex-post review in the courts. While the issuing authority was deprived of any meaningful role, all substantive decisions regarding patents were now to be made by the courts whenever a confict was laid at their doors.").

56 This report was authored by Senator Ruggles and quoted in P.J. Frederico,supranote 53.

57 Patent Act of 1836, ch. 357, 5 Stat. 117, 7 (July 4, 1836).

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8INTRODUCTION TO THE PATENT SYSTEMCH. 1decide interference actions to determine the rightful owner of a patent where more

than one inventor claimed the same invention.58

The 1836 amendments had a lasting signifcance. By formalizing and supporting an administrative examination system, the 1836 Act laid the foundation for an application process based on specifed statutory criteria. Certainly by 1836, the U.S. patent system bore little resemblance to the patent system established in Elizabethan times, when monopoly patents had been granted as a matter of royal favor. The Patent Offce, which began with a half dozen patent examiners,59has grown to over 4,500 examiners employed by the U.S. PTO today.60Since 1836, Congress has continued to exercise its statutory authority over the Patent Act by amending provisions numerous times. Over the recent past, Congress has continued to consider additional proposals for legislative reform.

1.04 FOUNDATIONS OF MODERN U.S. PATENT LAW

What is the nature of a patent right under U.S. law? At its inception, the patent system was adopted by the Framers of the Constitution without resolution of its deeper theoretical underpinnings. Indeed, a number of these questions are still the subject of political and scholarly debate. A few of these issues are discussed below.

[A] The Statutory Nature of Patent Rights

One early effort to defne the nature of the patent right was considered by the U.S. Supreme Court in the 1834 decisionWheaton v. Peters.61The issue presented inWheatonconcerned whether an author possessed a perpetual common law copyright that was enforceable in equity. To determine the dispute, the Court considered whether such authors and inventors had rights that were pre-existent under the common law or instead had been created pursuant to federal statutory law as authorized by the Constitutional grant. Focusing on the term "securing"62in the Copyright and Patent Clause,Wheatonfound the rights purely statutory in creation, explaining:

. . . [n]o one can deny that when the legislature are about to vest an exclusive right in an author or an inventor, they have the power to prescribe the conditions on which such right shall be enjoyed; and that no one can avail himself of such right who does not substantially comply with the requisitions of the law.63

AlthoughWheatonconsidered the issue in deciding an issue of copyright law, the case has been read to frmly establish the federal statutory nature of the patent

58Id.8. 59P.J. Frederico,Organization and Function of the Patent Offce, 18 J. PAT. OFF. SOC'Y209 (1936)

(noting that noting that the examination system started with "a half dozen or so" on July 4, 1836).

60The source for the number of currently employed examiners is a report issued by the U.S. Patent & Trademark Offce,Performance and Accountability Report: Fiscal Year 2006, at 12, available at http://www.uspto.gov/web/offces/com/annual/2006/2006annualreport.pdf.

61 See33 U.S. 591 (1834).

62 The Copyright and Patent Clause reads that Congress has the power "To promote the Progress

of Science and useful Arts, bysecuringfor limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." U.S. CONST. Art. I, Sec. 8 (emphasis added).

63Wheaton, 33 U.S. at 663-64.

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1.04FOUNDATIONS OF MODERN U.S. PATENT LAW9

right.64UnderWheaton, both state and common law are foreclosed as sources of law in favor of Congressional authority to determining the conditions and conse- quences of obtaining a patent.

[B] Utilitarian Underpinnings of the Patent System

During the 19th century, some European scholars65had discussed patent rights as grounded on the theory ofnatural rights66for the protection of inventions. For example, in 1791 the French Constitutional assembly adopted a patent statute that adopted a natural rights theory as its theoretical foundation, stating that "it would be a violation of the rights of man in their very essence if an industrial invention were not regarded as the property of its creator.67

Some early references to a natural law justifcation for U.S. patent law also exist.68Taking a contrary position, in 1813, Thomas Jefferson wrote:

Stable ownership is the gift of social law, and is given late in the progress of society. It would be curious then, if an idea, the fugitive fermentation of an individual brain, could, of natural right, be claimed in exclusive and stable property.69

Jefferson's statement was relied upon by the U.S. Supreme Court's 1966 decisionGraham v. John Deere Co., which defned patent rights in utilitarian terms, as law intended as "a reward, an inducement, to bring forth new knowledge."70TheGrahamCourt underscored that Jefferson had rejected a natural rights basis for the patent system in favor of the "social and economic rationale of the patent

64See, e.g., Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 229, n. 5 (1964).

65See generallyFritz Machlup and Edith Penrose,The Patent Controversy in the Nineteenth Century, 10 J. ECON. HIST. 1, 11-17 (May 1950) (citing and summarizing various commentator's natural right justifcations for patent rights).

66Perhaps the most prevalent natural right theory associated with intellectual property is John Locke's labor-desert theory, which was conceptualized in the context of traditional property rights. Locke's theory holds that the state should recognize a natural property right where one had labored with respect to a thing. As Locke explains:

The "labour" of his body and the "work" of his hands, we may say, are properly his. Whatsoever, then, he removes out of this state that Nature hath provided and left it in, he hath mixed his labor with it, and joined to it something that is his own, and thereby makes it his property.

JOHNLOCKE, TWOTREATISES ONGOVERNMENT12 (Third Ed. 1698). For an application of this theory to modern intellectual property law cases,see, e.g., Wendy J. Gordon,A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 YALEL.J. 1533 (1993).

67Quoted in Machlup and Penrose,supranote 65, at 11(citing Law of January 7, 1791, in ANTONSCHULLER, HANDBUCH DERGESETZE UBER AUSSCHLIESSENDEPRIVILEGIEN AUF NEUEERFINDECKUNGEN UNDVERBESSERUNGEN IMGEBIETE DERINDUSTRIE(Vienna, 1843).

68SeeFrederico,supranote 53 (describing legislative debates, including the statements of Mr. Murray "that an inventor has a natural right to the inventions he may make"). For an argument that the early development of American patent law was guided by natural rights principles,seeAdam Mossoff,Who Cares What Thomas Jefferson Thought About Patents? Reevaluating the Patent 'Privilege' in Historical Context, 92 CORNELLL. REV. 953 (2007).

69Graham v. John Deere Co. 383 U.S. 1, 9 n.2 (1966),quotingVI WRITINGS OFTHOMASJEFFERSON, at 180-181 (Washington ed.).

70Id.

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system."71Thus, regardless of the amount labor invested in an invention, according to the Court "[o]nly inventions and discoveries which furthered human knowledge, and were new and useful, justifed the special inducement of a limited private monopoly."72

[C] Patent Rights as an Appropriation Mechanism

Why is legal protection needed to "secure[e] for limited Times to. . . . Inventors the exclusive Right to their respective . . . Discoveries"?73To some degree, the answer lies in the problem raised by theintangiblenature of inventions. As a practical matter, rights to tangible goods, such as real or personal property, have attributes that permit disposition of ownership and exclusion based on principles that are well-established in the law. Such law seems less suited to regulating ideas and information in the absence of the creation of a intellectual property right that is designed to do so.

Generally, tangible goods arerivalrous that is, where possession of a good by one prevents possession by another. For example, under established legal rules, one with the right to possess real property can fence out trespassers or otherwise obtain a court order of exclusion. Similarly, disputes about possession of an item of tangible personal property such as a valuable painting can be resolved by a court decision that orders transfer of the painting to the rightful possessor.

Intangibles do not easily ft within this constructs because they arenon- rivalrous that is, one person's possession of the idea does not diminish another's ability to share and possess that same idea. Simply stated, one cannot "fence out" another from using an idea after the information has been disclosed. Jefferson eloquently recognized this in a letter dated 1807:

. . . the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.74

Information can easily be given away at low or no cost.75For example, one who develops and discloses a substance that can prevent the common cold can expect that others who learn of the formula will wish to make and proft from making a competing copy. In the absence of patent protection, disclosing the formula, even

71 Id.at 8-9.

72 Id.at 9.

73 U.S. CONST. art I, 8.

74 Graham, 383 U.S. at 9 n.2,quotingLetter to Oliver Evans (May 1807), V WRITINGS OFTHOMAS

JEFFERSON, at 75-76 (Washington ed.).

75Suzanne Scotchmer,Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, 5 J. ECON. PERSP. 29, 35 (1991);see alsoKenneth J. Arrow,Economic Welfare and the Allocation of Resources for Invention, in THERATE ANDDIRECTION OFINVENTIVEACTIVITY609, 614-615 (National Bureau of Economic Research, 1962), available at http://www.nber.org/chapters/c2144.pdf ("The cost of transmitting a given body of information is frequently in many cases very low. If it were zero, then optimal allocation would obviously call for unlimited distribution without cost.").

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1.04FOUNDATIONS OF MODERN U.S. PATENT LAW11once, might destroy the information's value and deprive the inventor of the cost of

its research and development absent some form of legal protection.76

Another dimension to the nonrivalrous nature of information has been recog- nized inArrow's Information Paradox.77According to this theory, those interested in purchasing information cannot ascertain its value without full disclosure, but once full disclosure has been made the purchaser has learned the information without making any payment. For example, one who wishes to purchase a formula to a drug to prevent the common cold will want to examine the information to determine the appropriate price. However, once the interested purchaser learns the information, she no longer has an incentive to pay for what has already been freely revealed.

Patents are thought to solve some of these problems by acting as anappropria- tion mechanism. In operation, the patent system creates a legally enforceable right to protect ideas similarly to the manner in which a fence surrounds real property.78The patent right allows inventors and inventing frms to exclude others from practicing the invention disclosed in the patent by providing the patent owner with the ability to assert the right against infringers.79The right to enforce preserves the value of the information, because although one learns the information from reading the patent, one cannot practice the patent without infringing the right. This appropriability also assists in resolving Arrow's Information Paradox to some degree. Specifcally, the patent right permits owners to share a fully disclosed invention with a potential purchaser, such that both parties can attempt to fully assess the value of the right while mitigating the concern that disclosure will lead to the devaluation of the idea.

In addition, some patents claim inventions for which there are few or no economic substitutes. For the owners of such patents, the patent right translates into the ability to charge more for products that incorporate these inventions. As one court has explained, "[p]atentees value the right to exclude in part because the ability to foreclose competitors from making, using, and selling the invention may allow them an opportunity to obtain above-market profts during the patent's term."80Thus, part of the patent law's incentive includes the fnancial return anticipated if a patented product is successful. An underlying assumption of the patent system is that "[t]he patent owner expends resources in expectation of receiving this reward."81

[D] Incentives and Patent Law

What are the specifc incentives contemplated by the patent system? One critical purpose of patent law is to provide anincentive to invent. As the U.S. Supreme Court has observed, "[p]atents are not given as favors," but granted only if the applicant's compliance with statutory requirements demonstrates that the inventor

76 Id.

77 This theory was explained in ARROW,supranote 75, at 615.

78 SeeKAUFER,supranote 16, at 19.

79 See generallyKenneth W. Dam,The Economic Underpinnings of Patent Law, 23 J. LEGALSTUD.

247 (1994) (recognizing that "if a frm could not recover the costs of invention because the resulting information were available to all, then we could expect a much lower and indeed suboptimal level of innovation.").

80 Biotechnology Indus. Org. v. District of Columbia, 496 F.3d 1362, 1372 (D.C. Cir. 2007).

81 King Instruments Corp. v. Perego, 65 F.3d 941, 950 (Fed.Cir.1995).

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has developed "a genuine invention" that amounts to an advance in a technological art.82The U.S. patent right is intended to provide an incentive to inventors and to those who support invention, with the ultimate goal of providing a public beneft. As explained by the Supreme Court, "The patent laws promote this progress by offering a right of exclusion for a limited period as an incentive to inventors to risk the often enormous costs in terms of time, research, and development. "83In turn, patent law anticipates that the resulting inventions "will have a positive effect on society through the introduction of new products and processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens."84

A further purpose of the patent system is to provide anincentive to discloseinventions to those who might otherwise maintain the information as trade secret.85The patentee's disclosure is thequid pro quofor the government grant of exclusivity.86The purpose of the disclosure is to enrich the art by adding to the total available information in the feld, and also to provide a roadmap for others to practice the invention once the patent term expires and the invention becomes part of the public domain. Consequently, no patent will issue if the invention disclosed in the application is already known to the public or obvious to those of skill in the art, as there is an absence of thequid pro quofor the patent right.87

Another purpose to the patent system is to provide anincentive to design aroundto others in the same feld. Generally, "designing around" refers to efforts to create an implementation that falls outside the scope of a claim to avoid infringing another's patent. For example, one attempting to avoid infringing a patent claim for a table requiring "at least four support members" may create a table supported by only one support post. This result is favorably viewed because the total amount of new inventions has increased now, two table implementations exist rather than only the four-legged version. Designing around is said to bring "a steady fow of innovations to the marketplace"88and therefore benefts the public.

One further purpose served by the patent system is theincentive to commercializethe invention. The right can be used to "stimulate the investment of risk capital in the commercialization of useful patentable inventions so that the public gets some beneft from them, which may not occur in the absence of some patent protection."89As the Supreme Court has stated, inventive activity fostered

82 Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 230 (1964).

83 Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974).

84 Id.

85 SeeBrenner v. Manson, 383 U.S. 519, 534 n. 21 (1966) ("As a reward for inventions and to

encourage their disclosure, the United States offers a seventeen-year monopoly to an inventor who refrains from keeping his invention a trade secret.") (quotation and citation omitted).

86Kewanee Oil Co., 416 U.S. at 481. ("When a patent is granted and the information contained in it is circulated to the general public and those especially skilled in the trade, such additions to the general store of knowledge are of such importance to the public wealth that the Federal Government is willing to pay the high price of 17 years of exclusive use for its disclosure, which disclosure, it is assumed, will stimulate ideas and the eventual development of further signifcant advances in the art.").

87See generallyEldred v. Ashcroft, 537 U.S. 186, 216 (2003); 35 U.S.C. 102-03 (providing the statutory basis for application rejections based on a failure to meet the novelty and nonobviousness requirements).

88 State Indus., Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1236 (Fed. Cir. 1985).

89 Rohm & Haas Co. v. Crystal Chem. Co., 722 F.2d 1556, 1571 (Fed. Cir. 1983).

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1.06WHAT DOES ONE DO WITH A PATENT?13

by the patent system "will have a positive effect on society through the introduction of new products and processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens."90

1.05 HOW DOES THE PATENT "RIGHT TO EXCLUDE" OPERATE?

A patentee's violation of the right to exclude is calledinfringement. One infringes an issued patent when one engages in the unauthorized making, using, offering to sell, selling, or importing into the United States any patented invention within the patent's term. Thus, in addition to its disclosure, a patent includes one or moreclaimswhich defne the patented invention. A patent's claims are perhaps the most critical portion, as the claims defne the scope of the right that the patent owner possesses. That is, when another person makes, uses, offers to sell, sell, or import that which is within the scope of a patent's claim without authorization, one infringes that claim.91

Abroadclaim will be infringed by conduct that concerns more implementations than anarrowclaim.92For example, a patent disclosing a table that includes abroadclaim as "an apparatus with a horizontal surface and at least one supporting member" will be infringed by both a four-legged table and a table relying on a single support post. On the other hand, a patent which includes anarrowerclaim as an "apparatus comprising a horizontal surfaceand four supporting legs" is infringed by another who makes, uses, offers to sell, sells, or imports a table with four legs without the authorization of the patent owner. However, one who makes a table with asinglesupport post doesnotliterally infringe the claim because that implementation does not have the "four supporting legs" as recited.

A few observations are warranted. Note that the infringement inquiry is performed by comparing the accused device, process, or method to the patent claim. The infringer's state of mind isnotpart of this inquiry. Rather, patent infringement can be found where there is no intent to infringe, and even where the infringer is entirely unaware of the patent's existence. Additionally, there is no requirement that the infringer copy the invention. Thus, infringement can be found where the accused device, process, or method has been independently developed by another.

1.06 WHAT DOES ONE DO WITH A PATENT?

Although the patent system as a whole is intended for public beneft, a patent inures as a private right to an individual patent owner. Private ownership has been said to implement the principle that "[t]he economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors in 'Science and useful Arts.' "93

90 Kewanee Oil Co., 416 U.S. at 480.

91 See35 U.S.C. 271(a).

92SeeRobert P. Merges and Richard R. Nelson,On the Complex Economics of Claim Scope, 90 COLUM. L. REV. 839 (1990) ("[t]he economic signifcance of a patent depends on its scope: the broader the scope, the larger the number of competing products and processes that will infringe the patent.").

93Mazer v. Stein, 347 U.S. 201, 219 (1954).

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14INTRODUCTION TO THE PATENT SYSTEMCH. 1

Patent owners use these privately held rights in a variety of ways. For example, some organizations obtain patents that cover key products in order to assert the patent rightoffensivelyagainst any rivals who attempt to make and sell competing products that incorporate that invention. In doing so, the organization can attempt to protect the research and development expenses that were used to develop the invention and to obtain a proft if the product is successful. For example, one who develops a novel preventative for the common cold may patent its formulation. If a rival attempts to make a sell an identically-formulated drug, the patentee can assert the claim in court against the rival to seek monetary and injunctive relief.

Because U.S. patent law does not require patent owners to practice their inventions, other strategic uses of patents are possible.94For example, one may fle or otherwise acquire patent rights throughout an entire technology feld. Using our previous example, a patentee may attempt to patentalleffective formulations for preventing the common cold. During the life of these patents, the patent holder can prevent potential competitors from entering the market for common cold preven- tatives entirely. Unless a competitor can design around the patents by creating an effective compound that has not been already claimed, the patent holder can prevent the introduction of all rival products.

Other uses of patents includedefensiveuses that is, a company may choose not to assert its patent rights unless accused of infringement. For example, assume that a patentee A makes four-legged tables and holds a number of related patents in that feld. Further assume that a rival table maker B owns a patent with a broad claim to a table, and accuses A's products of infringing B's patents. At that juncture, A may examine B's products to determine whether any infringe A's patents. If A so fnds, A may attempt to use A's patents as leverage to negotiate across-licensewith B. If those negotiations are successful, A can avoid a patent infringement lawsuit brought by B.

Cross-licensing raises other opportunities. For example, some industries are composed of a limited number of companies who engage in open-ended cross- licenses among them. This allows all those under such agreementsfreedom to operate that is, each company protected by such agreements can make and sell any manner of technological variations within that feld without concern that another within the industry will sue for patent infringement.

Additionally, patentees may raise revenue bylicensingtheir patents to others who manufacture and sell products. One may do so if one is unconcerned about creating competition for use of the invention. For example, an inventor who does not make or sell products may obtain licensing revenue from those who practice the patent. Companies that have patented their inventions, but have elected not to commercialize all of them, may obtain licensing fees from their unused patents.

Some individuals and companies purchase patents with the goal of using the patent to obtain licensing revenue. This activity has earned such patentees the derogatory labelpatent trolls. This term was coined to refer to " . . . somebody who tries to make a lot of money from a patent that they are not practicing, have no intention of practicing and in most cases never practiced."95A number of debates

94See generallyAmy L. Landers,Let the Games Begin: Incentives to Innovation in the New Economy of Intellectual Property Law, 46 SANTACLARAL. REV. 307 (2006) (detailing various strategic uses of patents).

95The term "patent troll" was coined by Peter Detkin, then in-house counsel for Intel Corp.SeeBrenda Sandburg,Inventor's Lawyer Makes a Pile from Patents, THERECORDER, July 30, 2001;andPeter N. Detkin,Leveling the Patent Playing Field, 6 J. MARSHALLREV. INTELL. PROP. L. 636 (2007).

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1.07CONCLUSION15

about patent reform and policy have centered on a debate about this practice, with some claiming that those who do not invent or commercialize patents are harming subsequent innovators through these practices.96

1.07 CONCLUSION

The patent right is granted pursuant to Congressional authority that derives from power enumerated in the Constitution. The U.S. patent right can trace some of its roots in former European patent systems.

The U.S. Supreme Court has viewed the U.S. patent right as both statutory and utilitarian in its focus. Patents are intended to provide incentives to invent, encourage disclosure to enrich knowledge in various felds, support commercializa- tion of inventions, and advance the creation of new implementations for those that design around existing patent claims.

As a general matter, patent law is a complex feld which offers signifcant protections for inventors. As a general matter, the appropriability of the patent right, coupled with Congressional authority to assign and license these rights,97serve as incentives to "build and create by bringing to the tangible and palpable reality around us new works."98Quoting legal philosopher Jeremy Bentham, the Federal Circuit has stated with respect to the grant of patent rights, "[i]t is supposed that men will not labor diligently or invest freely unless they know they can depend on rules which assure them that they will indeed be permitted to enjoy a substantial share of the product as the price of their labor or their risk of savings."99

96For a contrary view of this issue,seeRaymond P. Niro,Who Is Really Undermining the Patent System 'Patent Trolls' or Congress?, 6 J. MARSHALLREV. INTELL. PROP. L. 185 (2007).

97 See35 U.S.C. 261.

98 KSR Intern. Co. v. Telefex Inc., 127 S.Ct. 1727, 1746 (2007).

99 Patlex Corp. v. Mossinghoff, 758 F.2d 594, 599 (Fed. Cir. 1985),quotingJ. Bentham, THEORY OF

LEGISLATION, chs. 7-10 (6th ed. 1890).

The Founders' Decision to Foster NPEs and Patent Licensing (article 2)

The Founders' Decision to Foster NPEs and Patent Licensing

ByDavidKlineMarch 5, 2018

Print Art

EDITORIAL NOTE: What follows is an excerpt from David Kline's book titled "The Intangible Advantage: Understanding Intellectual Property in the New Economy," published by Michelson IP, 2017. Published here with permission.

The founding fathers intentionally created a patent system aordable by the masses, and which was approachable and far less administratively complex. As imperative as that was for U.S. economic success, perhaps the two most importa