THE PATENT SYSTEM AND THE MODERN ECONOMY* INTRODUCTION The history of the American patent system spans the growth of the Nation. It is written in the constitutional provision unanimously adopted in 1787,' the first patent act of 1790,2 and in the numerous patent statutes running down to the present 1952 Patent Code.3 In its inception the system was characterized as an expression of the right of an individual to the fruits of his inventive intellectual accomplishment. Today it operates in a dynamic research-centered economy at a time when application of the scientific method to the arts of both peace and war is a necessary ingredient of world leadership. And-while the individual inventor remains significant-the spotlight has shifted to the salaried scientist and engineer engaged in group research of the kind that accounts for the sustained whirlwind pace of current technical progress. No evaluation of the patent system can ignore these changes. The ultimate consideration, however, is not the fact of the change but rather whether the system performs a useful function in the modern economy. The success of the system in an earlier day can have no significance beyond its bearing on the present. Conversely, abuses of the patent system when patent and antitrust doctrines were less well developed can only stand as historical facts deserving consideration to the extent they represent current conditions. In like measure a meaningful analysis of the patent system demands a proper emphasis upon normal conditions. The patent systemlike the free enterprise economy of which it is a part-takes significance from over-all effect. The unusual is always of interest and the temptation great to concentrate upon it. The normal is by comparison dull and uninteresting. Yet, until the day-to-day operation of the patent system is explored there can be no perspective from which to consider the unusual or to evaluate the opportunities for improve ment. It is an important coincidence that the research and development competition fostered by the patent system has become progressively In the preparation of the present study the writer has had the benefit of comments and suggestions from a great number of persons skilled in the various technologies and having specific experience with various phases of the patent law in action. The number of such persons is too great for a listing of individual names. To each, the author expresses his sincere gratitude. 1 "The Congress shall have 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" (Constitution, art. 1, sec. 8, clause 8). 21 Stat. 109. * 66 Stat. 792. "The utility of this power (art. 1, sec. 8, clause 8) will scarcely be questioned. The copyright of authors has been solemnly adjudged, in Great Britain, to be a right of common law. The right to useful inventions seems with equal reason to belong to the inventors. The public good fully coincides in both cases with the claims of individuals. The States cannot separately make effectual provision for either of the cases, and most of them have anticipated the decision of this point, by laws passed at the instance of Congress" (The Federalist, No. 43 (Modern Library Edition, p. 279).) more important in recent years. No longer can business management confine competitive effort to existing production, management, and sales techniques. Rather, effort must be directed towards competition in the research and development of improved processes and products. Years ago, change was something to be accepted when it came but I ever encouraged. Even laggard business organizations that awaited the results of the activities of their more progressive rivals could usually adopt changes belatedly without serious competitive consequences. Few business organizations can survive with this attitude today. Rather, competition in process and product development and innovation is as important to business survival and growth as is management, production, and sales effort. Evidence of this competition appears on every hand. Newspapers and magazines abound with comment on new products and processes developed through competitive research and with announcements of the construction of new laboratory facilities. Stock analysts carefully study not only the traditional accounting and sales figures, but also the extent of research and development effort and accomplishment in relation to competitors. Annual reports likewise reflect the change. No longer do they boast of profits made on the tried and true products of the past. Instead they speak proudly of the new products and processes of the present and point to the proportion of sales volume in products developed through recent research. In countless fields of business, sales effort emphasizes not only price, quality, and like considerations, but additionally concentrates on the new features derived from research. This competition between rival organizations in research, development, and marketing of new products and processes is every bit as important to real economic progress as the classical competition in production and sales. It is crucial to the dynamic economy and is thus essential both to an increased standard of living and to maintenance of world leadership. It is due in large measure to the patent system and appropriately forms the subject of first consideration herein. The patent system is frequently criticized as inconsistent with the competitive economy and the antitrust laws. Misconceptions respecting the economic power conferred by letters patent are responsible for much of this criticism. The fact is that the system is a stimulus to competitive effort, both in terms of the competitive activity of existing firms in product and process development and in terms of inducing the formation and activity of new business based on new products and new processes. The system is accordingly complementary to the antitrust laws in effectuating the overall public policy of competition on all fronts. Of course there are questions with respect to the application of the patent law and the antitrust law to various specific competitive practices. These questions and the relation of the patent system to the competitive economy form the second major subject discussed herein. Finally, a patent system must be workable to be effective. Patent subject matter must be defined; practical procedures must be available for the issuance of patents; and the law must provide for effective enforcement of the rights granted. Judicial decisions and administrative practice have, over the years, given rise to the evolution of numerous patent doctrines and practices. They represent the prac tical steps taken by the judiciary and the Patent Office to make effective a body of law that the Congress can spell out only in outline. For the most part, these practices and doctrines have been effective and wise, and where change has been required it has been made. In a few respects, however, the system has "just growed" with the consequence that anachronisms exist and procedures devised to solve problems in the past have themselves given rise to current difficulties. Also the "invention" concept has been the source of controversy. And a problem of over-all complexity raises the question of possible simplification of all patent practice. Moreover, a problem exists of assuring to the Patent Office continued funds adequate for the vital task it must perform. Part 3 of this paper is devoted to a consideration of these aspects of the patent system. Over-all, the patent system represents a vitally necessary institution to preserve and enhance the research competition that has characterized the postwar economy. It is wholly consistent with the competitive economy as a whole, and the problems arising with respect to its relation to that economy can be handled with presently developed legal rules. As to the mechanics of the patent system, however, a number of changes are in order. 83984-57-2 PART I-THE PATENT SYSTEM AS A STIMULUS TO COMPETITIVE EFFORT IN RESEARCH AND DEVELOPMENT * * * The patent system encourages invention, not only in that Space limitations forbid consideration of all the economic, psychological, and social factors bearing on the operation of the patent sysConsideration must accordingly be confined to the role of the system in a specific economic area-the stimulation of competition in research and development. The competition here considered is not of the classical kind between sellers of like goods whose attention is primarily directed to the production and sales efforts involved. Rather, we deal with competition in the conception, development, Per Judge Evans in James P. Marsh Corporation v. United States Gauge Co., 129 F. 2d 161, 165 (7th Cir. 1942). "To illustrate, an inventor brings forth an apparatus which is better and made at less cost than any. thing heretofore made or used in this field. All competitors are threatened with loss and perhaps ruin if an equally good product is not made and sold at prices which meet the new patented product. At once, the inventive and creative talents of competitors are aroused. They are spurred to their best efforts to produce, not merely as good, but a better, product, by a new, noninfringing method or apparatus. Thus, instead of displaying monopolistic traits, the patent fosters competition among inventors and begets new and better products and lesser costs. As a result the public is the beneficiary." Per Judge Evans in Chicago Steel Foundry Co. v. Burnside Steel Foundry Company, 132 F. 2d 812, 816 (7th Cir. 1943). Over and above the competitive considerations here discussed, the patent system is credited with two desirable attributes. First, it honors the debt of society to the inventor. Second, it encourages disclosure of inventions rather than their use in secrecy. Both of these are important. Thus Mr. Justice Reed notes in Mazer v. Stein, 347 U. S. 201, 219 (1954), that "The 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'. Sacrificial days devoted to such creative activities deserve rewards commensurate with the services rendered." Thorger G. Jungersen-the unsuccessful plaintiff in Jungersen v. Ostby & Barton Co., 335 U. S. 560 (1949), and a pioneer in the investment casting process-testified that "I came to this country because of the American patent laws." Hearings before the Subcommittee on Patents, Trademarks, and Copyrights, of the U. S. Senate Committee on the Judiciary, 84th Cong., 1st sess., October 10-12, 1955, pursuant to S. Res. 92 (hereafter cited as Hearings, October 10-12, 1955, pursuant to S. Res. 92), p. 210. Ironically the Jungersen patent was upheld in Great Britain. Id. at p. 216. As discussed in the body of the text, secrecy works against the competition stimulated by the patent system. Apart from the competitive aspect secrecy is undesirable because there is a public value in having as much technical knowledge spread upon the public record as possible. And there are many marginal situations where the choice between secrecy and patenting is a real one turning on the extent of the legal rights which would be granted to the inventor by the patent. For discussion of the points generally urged in support of the patent system see Oppenheim, Cases on Federal Antitrust Laws 464-481 (1945), and Stedman, Invention and Public Policy, 12 Law and Contemporary Problems 649, 652 (1947) and see Frank, J., concurring in Picard v. United Aircraft Corp., 128 F. 2d 632, 643 (2d Cir. 1942). application, and marketing of new products and processes. This competition accents the differences-and derives its social usefulness from these differences. It is influenced by the patent system in three major respects. First, the patent system provides a protected market with the opportunity for unusual profit necessary to justify the heavy investment in time, effort, and capital necessary to bring the improvement to the public. This same protected market provides an entering wedge by which a business enterprise entering a new field can overcome the obstacles that otherwise discourage entry into an industry already populated. Finally, the ever-present threat of new firms with exclusive rights to new technologies compels existing enterprises to explore avenues of improvement upon pain of sudden obsolescence. All of these effects aid in generating a dynamic progressive environment under which the businessman must compete not only in terms of production and sales technique but must also exert his talents in the direction of technological improvement.? Competition in innovation is the aggregate result of many factors making up the "climate" for research and technological improvement generally. Most important of these is the psychological factor. Thus all industry tends to become improvement and research minded once the accomplishments of a few firms in this area become apparent. Indeed, nearly every technical "breakthrough" stimulates chain. reaction effects far beyond the area of immediate accomplishment and of importance surpassing the initial change. Conversely, when application of antitrust, patent, or other law apparently penalizes product improvement itself-or what is apparently normal conduct in relation to such improvement-the "climate" is adversely affected and all business tends toward the dull routine of making the same old thing in the same old way. The tax law similarly bears on the matter of technological innovation and in the past has exerted a depressing effect in some areas of research. In like measure some aspects of the tax laws-especially the capital gains provisions-have a direct and The importance of an economy with vigorous research and product competition has not been overlooked by the economists. Schumpeter states: "it is not that kind of competition [from the maker of an identical product] which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest scale unit of control for instance)-competition which strikes not at the margins of profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door ***" (Capitalism, Socialism, and Democracy 84 (3d ed. 1950).) Schumpeter's view is discussed at length in Hale and Hale, Monopoly in Motion: Dynamic Economics in Antitrust Enforcement, 41 Virginia L. Rev. 431 (1955). When asked what would happen if General Motors were faced with a revolutionary patent in the automobile industry, William S. Knudsen, then president of General Motors, testified "If such a thing were possible, we certainly would all either make a deal for license under this revolutionary patent or you will see a lot of people working 7 nights a week until we have found something." Pt. 2, TNEC hearings, p. 339. The recent consent judgment entered against American Telephone & Telegraph Co. (Jan. 24, 1956, in Civil Action No. 17-49, U. S. v. Western Electric Company et al.) has been publicized as a "sweeping patent victory" for the "antitrusters." See Business Week, January 28, 1956, p. 160. The net effect of this and similar publicity on the decree has been to leave the impression that the focus of the case was on the patents and that some real fault existed on the part of the company in its research and patent policies. The fact is that the company has followed a policy of granting patent licenses, both to other companies in the telephone field and to other manufacturers. See, e. g., TNEC hearings, pt. 3, p. 961, and McHugh, Bell System Patents and Patent Licensing, Bell Telephone Magazine, January 1949. A particularly troublesome aspect of the tax law has been the past uncertainty as to the deductibility of research and development expense as a "reasonable business expense," against the contentions of the Commissioner of Internal Revenue that such costs should be capitalized. See Bush, Science the Endless Frontier, 16 (1945). This problem is in large measure overcome by sec. 174 of the 1954 Internal Revenue Code. |