Discussions of patent policy in the United States and elsewhere often overlook the fact that the original intent of issuing patents (not to be confused with sovereign-granted commercial privileges) was to encourage the disclosure and spread of novel devices to stimulate manufacturing and trade. The earliest patents (such as those awarded by the Republic of Venice in the 15th century) were designed for this purpose.
Patents issued to the U.S. government were comparatively few before World War II. (Military contractors typically retained patent rights by default.) By the height of U.S. involvement in World War II, research in federal laboratories, along with industry contracts with the military services, had contributed to a ten-fold increase in federal government patents.
Until the 1980s federal policy treated most of the intellectual property produced by research funded with public dollars as presumptive public property. Using royalty-free licenses issued by federal research agencies, the private sector could develop and market products incorporating information contained in federally owned patents.
When Congress created the Atomic Energy Commission (AEC) in 1946, the national security ramifications of the AEC’s work meant that the federal government would remain the owner of inventions produced by the AEC’s private sector contractors as well as in its own government operated laboratories. Four years later, the first uniform federal government-wide patent policy, issued by President Truman, extended the AEC’s patent policy to any invention made by a federal employee, “on government time,” or with federal dollars.
Neither then, nor now, has anyone seriously argued that the federal government is equipped to compete with the business sector, nor that it should, by itself, attempt to commercialize the innovative products that could result from federally funded research. But as the tensions of the Cold War began to subside, fewer and fewer members of Congress questioned whether taxpayers should have to pay twice for marketable innovations based on public intellectual property.
The pro-business Republican ideology that carried Ronald Reagan into the White House in 1980 embraced the notion that taxpayers could pay for the research that produced innovations, and then pay again for those innovations when they appeared in the marketplace. Meanwhile, corporate interests that did indeed finance the risk of product development and marketing, complained that government contributed nothing but impediments to American technological progress. And so a moral barrier between private lucre and public good began to weaken against political pressure to “commercialize” the public’s intellectual capital.
Most economists agreed with Attorney General Nicholas Katzenbach when he told the Senate Small Business Committee in 1965 that he knew of no “data, studies, or facts of any kind at all which could possibly support” the notion that giving patent rights to federal contractors would “foster the prompt working of inventions.”[i]
Notwithstanding the conclusions of numerous economists and his own Attorney General, when President Kennedy issued patent policy guidelines to executive branch agencies, buried in the policy language was a subtle transfer of the public’s presumptive intellectual property rights to the private sector. Kennedy’s policy directed that if two or more potential government contractors offered otherwise competitive proposals, “the willingness to grant the government principal or exclusive rights in resulting inventions will be an additional factor in the evaluation of proposals.”[ii] Thus might the public obtain what it had previously owned. The die was cast.
A bi-partisan consensus emerged (and persists) supporting the enclosure by the private sector of publicly generated intellectual capital in the unsubstantiated belief that commercializing all scientific discoveries is in the public interest, and that patents singularly motivate the development and marketing of innovative products. This consensus enabled the Nixon administration to allow government agencies to grant exclusive licenses to commercial developers of inventions covered by federal patents, patent applications, or government contracts (subject to a loose array of criteria likely to be met by anyone seeking such a license). Also enjoying bi-partisan support were the 1980 “Bayh-Dole” amendments to the patent and trademark laws, which invited non-profit organizations and small businesses to “elect to retain title” to inventions made under a federal contract or grant.
The credulity of the Congress and the White House in allowing the steady enclosure—or proprietary capture—of the public’s intellectual property created through research and development funded by the federal government was rationalized in two ways. First was the argument that the private sector was better suited to commercializing marketable innovations, an argument that could have been met through licensing rather than transfers of patent ownership. Second was the expectation that patent ownership would ensure public disclosure and dissemination of the knowledge embedded in a newly patented invention.
However, suppose the recipient of a right to patent fails to patent the invention, instead concealing the invention as a trade secret? Then the intellectual capital is irretrievably lost from the public ‘commons’ as well as public ownership. Its absence is unknowable, and its loss invisible. By the end of the 20th century, concluded the Government Accounting Office, the principal federal research agencies (DOD, NSF, NIH, NASA and the DOE) were unable to account for over two thirds of the more than 1,700 patents issued by the US Patent and Trademark Office as government-originated inventions. Nor had NASA and DOE effectively tracked the outcomes of patent rights waived to their contractors and grantees.[iii]
Economists have been unable to isolate a singularly significant causal relationship between patent ownership and the successful commercialization of innovations. Effective capitalization, systems integration, exploitation of tacit knowledge, and mastery of production and marketing strategies, along with the ability to pursue incremental product improvements, matter as much if not more than patent ownership. The most promising business model may require universal adoption, rather than monopoly control, of system components—consider the open system VHS videocassette recorder, or the USB (universal serial bus) that standardized the market for all kinds of computer peripherals.
Far from promoting technological innovation, intellectual property itself can be the basis of an income stream of license fees or royalties, secure corporate debt, or deployed to “corner the market” with patent pools that capture for investors monopoly control over the critical technologies in an industry as well as known alternatives. “Patents have recently become hot property,” noted Forbes in 2005, enabling small companies “armed with patents but little or no product” to fill their coffers with the fruits of their victories in patent infringement suits against “large business.”[iv]
Indeed, an ‘explosion’ of patenting since the early 1980‘s could be doing more harm than good.[v] Michael Heller’s The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (Basic Books, 2008) contributes to the growing disenchantment with the lucre-driven private sector lionized by Ayn Rand and Ronald Reagan. The financial crisis of 2008 showed that the private sector cannot even manage its own greed.
The Congress’s decades long conversion of publicly generated intellectual capital into the private sector’s intangible assets has accomplished something only a few might have intended: the engorgement of investment portfolios with a ‘wealth’ of mysterious, if not vaporous, intellectual property. Securities, analogous to bundled mortgages, promise revenue streams from intangible assets, e.g., royalties for the use of copyrighted materials and licenses for the use of patented technologies.[vi] Notwithstanding the enormous challenge of valuing securities that bundle patents or patent rights (a challenge that has spawned yet another new field of financial acrobatics, ‘intangible property valuation.’[vii]), intellectual property has grown as a significant component of the asset base of the S&P 500.
Successful democracies combine the most critical intangible asset any society can offer—the free flow of ideas—with the assurance that their citizens will share equitably in the material fruits of their enterprise. The incremental proprietary capture of the public sphere that we have seen since the 1960’s threatens the free flow of ideas and citizen prosperity in perilous ways for all of us. The failure of our policy makers—inadequately prodded by our citizens—to ensure an Open Internet may be one of the final nails in the coffin of an authentic American democracy. (See also post for February 16, 2013, National Public Wi-Fi: Why it Matters to You.)
[i] Katzenbach quoted in The Washington Post, July 30, 1965.
[ii] Federal Register, 28 (200), “John F. Kennedy, Memorandum and Statement on Government Patent Policy,” (October 12, 1963), pp. 10943-46. Federal inventions with national security significance continue to be presumptively ‘titled’ to the government, typically in the cases of the Department of Energy and NASA, which can, however, waive its patent rights.
[iii] General Accounting Office, “Technology Transfer: Reporting Requirements for Federally Sponsored Inventions Need Revisions,” GAO/RCED-99-242 (August 1999). Sylvia Kraemer, “Federal Intellectual Property Policy and the History of Technology: The Case of NASA Patents,” History and Technology, Vol. 17 (2001).
[iv] Chad Huston, “Survey of IP Monetization Techniques,” IP Today, Vol. 11, No. 10 (October 2004); Margaret M. Blair, Steven M.H. Wallman, Unseen Wealth: Report of the Brookings Task Force on Intangibles, Brookings Institution Press, 2001; Juergen H. Daum, Intangible Assets and Value Creation (John Wiley and Sons, 2002). Licensing income from intellectual property grew from $18 million in 1990 to an estimated $500 billion in 2005.
[v] Giovanni Dosi, Luigi Marengo, Corrado Pasquali, “How Much Should Society Fuel the Greed of Innovators: On the Relations Between Appropriability, Opportunities and Rates of Innovation,” LEM [Laboratory of Economics and Management, Sant’Anna School of Advanced Studies] Working Papers, 17 (July 2006); Michael A. Heller and Rebecca S. Eisenbery, “Can Patents Deter Innovation? The Anti-commons in Biomedical Research,” Science, Vol.280 (May 1, 1998); Adam Jaffe and Josh Lerner, Innovation and Its Discontents (Princeton, 2004); Don E. Kash and William Kingston, “Patents in a World of Complex Technologies,” Science and Public Policy (February 2001); David Mowery, Richard Nelson, Bhaven N. Sampat, and Arvids A. Ziedonis, “The Growth of Patenting and Licensing by U.S. Universities: An Assessment of the Effects of the Bayh-Dole Act of 1980,” Research Policy, Vol. 30 (2001); James Surowiecki, “The Open Secret of Success,” The New Yorker (Mayb12, 2008).
[vi] Karen Richardson, “Bankers Hope for a Reprise of ‘Bowie Bonds,’” The Wall Street Journal (August 23, 2005).
[vii] Stephen Bennett, “The IP Asset Class: Protecting and Unlocking Inherent Value,” Vol. 5, The John Marshall Review of Intellectual Property Law (2006).