AN ECONOMIC REVIEW OF THE PATENT SYSTEM

By Fritz Machlup

I. INTRODUCTION

Patent, the adjective, means "open," and patent, the noun, is the customary abbreviation of "open letter." The official name is "letters patent," a literal translation of the Latin "litterae patentes." Letters patent are official documents by which certain rights, privileges, ranks, or titles are conferred. Among the better known of such "open letters" are patents of appointment (of officers, military, judicial, colonial), patents of nobility, patents of precedence, patents of land conveyance, patents of monopoly, patents of invention. Patents of invention confer the right to exclude others from using a particular invention. When the term "patent" is used without qualification, it nowadays refers usually to inventors' rights. Similarly, the French "brevet," derived from the Latin "litterae breves" (brief letters), is a document granting a right or privilege, and usually stands for "brevet d'invention."

Defined more accurately, a patent confers the right to secure the enforcement power of the state in excluding unauthorized persons, for a specified number of years, from making commercial use of a clearly identified invention. Patents of invention are commonly classed with other laws or measures for the protection of so-called "intellectual property" or "industrial property." This class includes the protection of exclusivity for copyrights, trademarks, trade names, artistic designs, and industrial designs, besides technical inventions; other types of "products of intellectual labor" have at various times been proposed as worthy of public protection. It has seemed "unjust" to many, for example, that the inventor of a new gadget should be protected, and, perhaps, become rich, while the savant who discovered the principle on which the invention is based should be without protection and without material reward for his services to society.2 Yet, proposals to extend government protection of "intellectual property" to scientific discoveries have everywhere been rejected as impractical and undesirable.3

These explanations might seem superfluous were it not for the confusion caused by the similarity between the adjectives in "open letter" and "disclosed invention." Thus, we are told that "the word 'patent' as a part of the grant entitled 'Letters Patent' was adopted to indicate that the invention was being disclosed to the public and that the patent right was a reward for such disclosure, namely, for making the invention patent to the public as distinguished from being latent." Gustav Drews, The Patent Right in the National Economy of the United States (New York: Central Book Co., 1952), p. 3. This etymological contention

is without foundation.

The granting of rewards for scientific discoveries has often been proposed. The so-called Ruffini proposals to this effect were adopted by the Council of the League of Nations in 1923. The problem was reviewed in C. J. Hamson, Patent Rights for Scientific Discoveries (Indianapolis: Bobbs-Merrill, 1930). See also the report on The Protection by Patents of Scientific Discoveries of the Committee on Patents, etc., of the American Association for the Advancement of Science, Science, vol. 79 (1934), supp. No. 1.

In 1928, the Executive Board of the National Research Council, Washington, D. C., voted that "the protection by law of a scientist's property rights in his discoveries was not feasible, and was of doubtful desirability." See Lawson M. McKenzie, "Scientific Property," Science, vol. 118 (December 1953), p. 767.

II. HISTORICAL SURVEY

A. EARLY HISTORY (BEFORE 1624)

The oldest examples of grants of exclusive rights by kings and rulers to private inventors and innovators to practice their new arts or skills go back to the 14th century. Probably the first "patent law," in the sense of a general promise of exclusive rights to inventors, was enacted in 1474 by the Republic of Venice.5 In the 16th century, patents were widely used by German princes, some of whom had a well-reasoned policy of granting privileges on the basis of a careful consideration of the utility and novelty of the inventions and, also, of the burden which would be imposed on the country by excluding others from the use of these inventions and by enabling the patentees to charge higher prices."

Some of the exclusive privileges were on new inventions; others on skilled crafts imported from abroad. Some of the privileges were for limited periods; others forever. (For example, the canton Bern in Switzerland granted in 1577 to inventor Zobell a "permanent exclusive privilege.") Some of the privileges granted protection against imitation and therefore, competition, and thus created monopoly rights. Others, however, granted protection from the restrictive regulations of guilds, and thus were designed to reduce existing monopoly positions and to increase competition. In view of the latter type of privilege, patents have occasionally been credited with liberating industry from restrictive regulations by guilds and local authorities and with aiding the industrial revolution in England. In France, the persecution of innovators by guilds of craftsmen continued far into the 18th century. (For example, in 1726, the weavers' guild threatened design printers with severe punishment, including death.) Royal patent privileges were sometimes conferred, not to grant exclusive rights, but to grant permission to do what was prohibited under existing rules.8

7

Many of the privileges, however, served neither to reward inventors and protect innovators, nor to exempt innovators from restrictive regulations, nor to promote the development of industry in general, but just to grant profitable monopoly rights to favorites of the court or to supporters of the royal coffers. Patents of monopoly of this sort became very numerous in England after 1560, and the abuses led to increasing public discontent. In 1603, in the "Case of Monopolies," a court declared a monopoly in playing cards void under common law, and in 1623-24 Parliament passed the Statute of Monopolies (21 Jac. I., cap. 3) forbidding the granting by the Crown of exclusive rights to trade, with the exception of patent monopolies to the "first

4 W. H. Price, English Patents of Monopoly (Boston: Houghton Mifflin, 1906); Arthur A. Gomme, Patents of Invention (London: Longmans, Green, 1936); M. Frumkin, "The Origin of Patents, "Journal of the Patent Office Society, vol. 27 (1945), p. 143; Harold G. Fox, Monopolies and Patents (Toronto: University of Toronto Press, 1947).

S. Romanin, Storia documentata di Venezia (Venice: 1855), vol. 4, p. 485.

Cf., for example, the thoughtful considerations which August of Saxony expressed in connection with a 10-year privilege granted for a new invention in 1558. The documents are quoted by Fritz Hoffmann, "Beiträge zur Geschichte des Erfindungsschutzes in Deutschland im sechzehnten Jahrhundert," Zeitschrift für Industrierecht, vol. X (1915), p. 89. Briefly reviewed in Edith Tilton Penrose, The Economics of the International Patent System (Baltimore: Johns Hopkins Press, 1951), p. 3.

? Harold G. Fox, op. cit., supra, note 4, pp. 85, 125-126.

Augustin-Charles Renouard, Traité des brevets d'invention (Paris: 3d edition, 1865), p. 43; F. Malapert, "Notice historique sur la législation en matière de brevets d'invention," Journal des Économistes, 4th series, vol. 3 (1878), p. 100.

E. Wyndham Hulme, "The Early History of the English Patent System," Select Essays on AngloAmerican Legal History (Boston: Little, Brown, 1909), vol 3; Harold G. Fox, op. cit., supra, note 4.

and true inventor" of a new manufacture. It is this emphasis of the law, that only the first and true inventor could be granted a monopoly patent, which justified designation of the Statute of Monopolies as the "Magna Carta of the rights of inventors."

B. THE SPREAD OF THE PATENT SYSTEM (1624-1850)

The Statute of Monopolies is the basis of the present British patent law, and became the model for the laws elsewhere. Some of the Colonies were the first to follow: Massachusetts, for example, in 1641. To South Carolina goes the credit for enacting, in 1691, the first "general" patent law, as distinguished from authorization to the Crown to make patent grants. 10 The larger countries of Europe were much slower. An edict of King Louis XV of France, in 1762, did little more than prohibit permanent privileges and provide for inventors' patents limited to 15 years. In 1791, the Constitutional Assembly passed a comprehensive patent law, in which the inventor's right in his creation was declared a "property right" based on the "rights of man."

In the United States of America, the Constitution of 1787 had given Congress the power

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.

Under this power, the Congress passed the first patent law in 1790 and amended it in 1793.

The next country to adopt patent legislation was Austria. In 1794, a Hofdekret (royal decree) announced the establishment of a patent system, and in 1810 such a law was enacted. Opposed to the doctrine of the inventor's "natural rights," it provided, and the amended act of 1820 repeated, that inventors had neither any property rights in their inventions nor any rights to patents; the Government reserved its prerogative to grant privileges to restrict what was called their subjects' "natural rights to imitate" an inventor's idea."1

Four different legal philosophies about the nature of the inventor's right were thus expressed in the patent laws of the various countries: the French, recognizing a property right of the inventor in his invention and deriving from it his right to obtain a patent; the American, silent on the property question, but stressing the inventor's legal right to a patent; the English, recognizing the monopoly character of the patent, and regarding it in theory as a grant of royal favor, but in practice regularly allowing the inventor's claim to receive a patent on his invention; the Austrian, insisting that the inventor has no right to protection, but may, as a matter of policy, be granted a privilege if in the public interest.

Regardless of these differences concerning the inventor's rights, in one form or another, the patent system, in the sense of a system of inventor's protection regulated by statutory law, spread to other countries. Patent laws were enacted in Russia in 1812; Prussia, 1815; Belgium and the Netherlands, 1817; Spain, 1820; Bavaria,

19 South Carolina Laws of the Province, 21 (Trott ed.); cited from Burlingame, March of the Iron Men (New York: Scribners, 1938), p. 64.

Paul Beck von Mannagetta, Das österreichische Patentrecht (Berlin: Heymann, 1893), p. 105. See also Anton Edler von Krauss, Geist der österreichischen Gesetzgebung zur Aufmunterung der Erfindungen im Fache der Industrie (Wien: Mösle und Braumüller, 1838), pp. 8-18.

1825; Sardinia, 1826; the Vatican State, 1833; Sweden, 1834; Wurttemberg, 1836; Portugal, 1837; Saxonia, 1843.

C. THE RISE OF AN ANTIPATENT MOVEMENT (1850-1873)

During the second quarter of the 19th century various groups pressed for the strengthening of the patent system and for its expansion. In Britain, they wanted patents made more easily obtainable and more effectively enforceable. In Germany a unified patent system was sought after an agreement of the Zollverein in 1842 had reduced the value of patents by permitting patented articles to be imported from member states. Petitions in Switzerland, partly inspired by German interests, asked for patent legislation. Provoked by such pressures and in line with the free-trade movement of the period, an antipatent movement started in most countries of Europe. Parliamentary committees and royal commissions in Britain investigated the operation of the patent system in 1851-52, in 1862-65, and again in 1869-72. Some of the testimony was so damaging to the repute of the patent system that leading statesmen urged its abolition.13 A patent-reform bill, providing for stricter examination of applications, a reduction of the term of protection to 7 years, and compulsory licensing of all patents, was passed by the House of Lords.

In Germany several trade associations and chambers of commerce recommended abolition of the patent laws, the Kongress deutscher Volkswirte in 1863 condemned "patents of invention as injurious to common welfare;" 15 the Government of Prussia decided to oppose the adoption of a patent law by the North German Federation; and Chancellor Bismarck in 1868 announced his objections to the principle of patent protection.16

In Switzerland, the only industrial country of Europe that had remained without patent legislation, the legislature rejected proposals in 1849, 1851, 1854, and twice in 1863, the last time with a reference to the fact that "economists of greatest competence" had declared the principle of patent protection to be "pernicious and indefensible." 17

In the Netherlands the majority of the Parliament was convinced that "a good law of patents is an impossibility." 18 The abolitionists. won and, in 1869, the patent law was repealed.

12 Fritz Machlup and Edith Penrose, "The Patent Controversy in the 19th Century," The Journal of Economic History, vol. X (1950), pp. 1-29.

13 For contemporary reports see Parliamentary Debates, The Economist, The Spectator, and The West minster Review. For selections from testimonies, committee reports, and parliamentary speeches by John Lewis Ricardo, Lord Granville, Lord Stanley, Sir Roundell Palmer, Robert A. Macfie, and others, see Robert Andrew Macfie, The Patent Question under Free Trade (London, second edition, W. J. Johns, 1864), and R. A. M. (Macfie), editor, Recent Discussions on the Abolition of Patents for Inventions in the United Kingdom, France, Germany, and the Netherlands (London: Longmans, Green, 1869). 14"Die Gutachten der preussischen Handelsvorstände über die Patentfrage, "Vierteljahrschrift für Volks wirthschaft und Kulturgeschichte, 2. Jahr (1864), No. I, pp. 193-215; see also Hermann Grothe, Das Pater! gesetz für das Deutsche Reich (Berlin: Guttentag, 1877), pp. 22-32; Al. Pilenko, Das Recht des Erfinders (Berlin: Heymann, 1907), pp. 96-102.

15 "Bericht über die Verhandlungen des sechsten Kongresses deutscher Volkswirte zu Dresden am 14. 15., 16., und 17. September," Vierteljahrschrift für Volkswirthschaft und Kulturgeschichte, 1. Jahr (1963), No. III, p. 221.

16 Hirth's Annalen des Norddeutschen Bundes (Berlin) 1868, pp. 39-42; id., 1869, p. 33.

17 Offizielles Bundesblatt, Jahrgang 1864, No. II, pp. 510-511.

18 M. Godefroi, in the debate in the Dutch Parliament. Quoted in the British House of Commons Ses sional Papers, LXI, doc. 41 (Feb. 16, 1870).

D. THE VICTORY OF THE PATENT ADVOCATES (1873-1910) The tide turned in 1873, when the antipatent movement collapsed rather suddenly, after a most impressive propaganda campaign by the groups interested in patent protection. The following reasons have been given for the sudden change: the great depression, the rise of protectionism that came with it, the rise of nationalism, and the willingness of the patent advocates to accept a compromise.

The free-trade idea had been the chief ideological support of the antipatent movement: patent protection had been attacked along with tariff protection. Now, "thanks to the bad crisis," public opinion had turned away from "the pernicious theory ** competition and free trade" (Reichstagsabgeordneter Ackermann, opening the debate on the German patent bill in 1877).19

The strategic compromise was the acceptance of the principle of compulsory licensing-of compelling all patentees to license others to use the invention at reasonable compensation.20 This idea had been proposed in 1790 in the United States Senate,21 in 1851 in the House of Lords in Britain,22 in 1853 by a German official,23 in 1858, 1861, and 1863 at various conferences of British scientific organizations, 24 and now in 1873 at the Patent Congress held at the Vienna World's Fair. 25 The patent advocates and the free traders compromised on this general limitation on the patentees' monopoly power. (Despite the resolution of the Patent Congress, the actual adoption of compulsory licensing has been rather slow in some countries, and is still resisted in the United States of America.)

The defeat or disappearance of the opposition was reflected in the actions of the legislatures of several countries. In Britain the drastic reform bill that had passed the House of Lords was withdrawn in the House of Commons in 1874. In Germany a uniform patent law for the entire Reich was adopted in 1877. Japan, which had adopted her first patent law in 1872 only to abolish it again in 1873, enacted another law in 1885. Switzerland, more conservative than other nations, held out longer; a referendum in 1882 still rejected patent legislation, but a new referendum in 1887 enabled the legislature to pass a law. Patentability of inventions in the chemical and textile industries was limited by a requirement of mechanical models for all patented inventions. But this limitation was deleted from the law by an amendment in 1907, after Germany had threatened higher tariffs on certain Swiss products.26 The Netherlands, the last bastion of "free trade in inventions," reintroduced a patent system in 1910, to become effective in 1912.

19 Hermann Grothe, op. cit., supra, note 14, p. 52.

"It was widely held that the compulsory-licensing compromise "saved the patent system.' Paul Beck von Mannagetta, Das neue österreichische Patentrecht (Vienna: Hölder, 1897), p. 17. "They wanted to eliminate the objection that a patent granted a monopoly." Franz Wirth, Die Patent-Reform (Frankfurt a. M.: 1875), p. 69. Cf. also Hermann Grothe, op. cit., supra, note 14, p. 37, and Al. Pilenko, op. cit., supra, note 14, p. 102.

"Record of the Proceedings in Congress Relating to the First Patent and Copyright Laws, printed by the Patent Office Society, edited by P. J. Federico (1940). Compulsory licensing in cases of suppression of inventions had been provided by the South Carolina Patent Act of 1784. See Pooling of Patents, Hearings before the House Committee on Patents on H. R. 4523, 74th Cong., pt. 4 (1935), pp. 3570-3571. House of Lords, Parliamentary Debates, 1851 (July 1, 1851).

"See Pilenko, op. cit., supra, note 14, p. 523.

Transactions of the National Association for the Promotion of Social Science, 1858 (London: 1859), p. 148; Report of Joint Committee with British Association for the Advancement of Science, Transactions of the National Association for the Promotion of Social Science, 1861 (London: 1862), p. 230; Transactions of the York Meeting of the National Association for the Promotion of Social Science, 1863 (London: 1864), p. 664. "Der Erfinderschutz und die Reform der Patentgesetze: Amtlicher Bericht über den Internationalen Patent-Congress zur Erörterung der Frage des Patentschutzes (Dresden: 1873). See English text of the resolution in Papers Relating to the Foreign Relations of the United States, pt. 1, vol. 2 (1873), p. 75. W. Stuber, Die Patentierbarkeit der chemischen Erfindungen (Bern: Stampfli, 1907), pp. 26 ff.