TABLE 16. Working capital, sales, and profits of large manufacturing corporations (200 largest corporations compared with 800 other large corporations)

TABLE 17.-Earning rates of companies, classified by size of permanent investment-average for the period 1910-29

Source: Quarterly Journal of Economics, May 1932, pp. 476 and 477. See text for explanation of terms.

TABLE 18.-Profit as a percentage of stockholders' equity, all United States

TABLE 19.-Profit as a percentage of stockholders' equity, all United States corporations

Source: Computed by NAM from data published by U. S. Bureau of Internal Revenue.

BASIC PRINCIPLES OF THE UNITED STATES PATENT SYSTEM*

I. INTRODUCTION

The basic principle of the United States patent system, which distinguishes it from the patent systems of other countries, is that the grant of a patent to an inventor vests in him the full and complete ownership and control of his invention for the limited life of the patent, the "exclusive right" provided for in the Constitution. In short it vests in the inventor an incorporeal property right in his invention. From this basic principle other fundamental principles follow which are common to the ownership of property in general.

Chief Justice Marshall more than 100 years ago (in 1832) referring to the contract between the Government and the patent owner stated:

"It is the reward stipulated for the advantages derived by the public for the exertions of the individual, and is intended as a stimulus of those exertions * * * The public yields nothing which it has not agreed to yield; it receives all that it has contracted to receive. The full benefit of the discovery, as it is enjoyed by the discoverer for 14 (now 17) years, is preserved; and for his exclusive enjoyment of it during that time the public faith is pledged." 1

The reward which the patentee receives is especially adapted to what he discloses and adds to the public domain after the patent has expired. If the invention is of little value, what the patentee receives is likewise of little value. If the invention is of great value, his reward is commensurate therewith. In any event, what he receives is of a highly speculative nature. Whether it is of any value at all depends upon the extent to which he can commercialize the invention. If his invention is of value, he is invariably faced with the necessity of protecting his invention against the encroachment of others upon his rights. While the public in general respects the property rights of others, it is unfortunately true that in the case of patent property the public is inclined to dispute the rights of the patentee to his property and he is frequently put to the expense of protecting his rights by an infringement suit, usually costly and time consuming.

In recent years, especially during the last 12, unremitting direct attacks have been made upon the basic principles of the United States patent system. These attacks have been along three principal lines:

1. In hearings before the Temporary National Economic Committee, the attacks were under the guise of bringing our patent laws in conformity with our antimonopoly laws. Hearings on the patent system were under the direction of the Antitrust Division of the Department of Justice. Almost unbelievable misstatements of what the law is were made before that Committee, as a result of which the Committee was influenced to make recommendations which would destroy the basic principles of our patent system.

2. Before congressional committees in bills to carry out the recommendations of the Temporary National Economic Committee. Extensive hearings were held

on such bills which were not reported out of committee.

Prepared by George E. Folk, patent adviser to the National Association of Manufacturers.

1 Grant v. Raymond (6 Pet. 317).

A summary, analysis, and evaluation of the record on patents of the Temporary National Economic Committee is found in "Patents and Industrial Progress" by George E. Folk, Harper & Bros. 1942.

3. Before the courts, particularly the Supreme Court, in attempts to have the Court overrule previous well-established leading decisions with respect to the rights inherent in the patent grant. Though the Supreme Court has in recent years made certain rulings highly inimical to the patent system, the attempt to induce that Court to overrule the previous decisions on fundamental principles have been unsuccessful. On the contrary, the Supreme Court has reaffirmed and restated its time-honored rulings dealing with basic principles.

Judicial notice of these attacks was taken in a recent opinion by Mr. Justice Burton (concurred in by the Chief Justice and Mr. Justice Frankfurter) in the Line Material case. In that opinion is the statement:

"The long and unfaltering development of our patent law often has been touched upon in our decisions. However, in the face of the direct attack now made upon some of its underlying principles, the infinite importance of our inventions justifies a brief review here of the development and nature of the patent rights attacked."

Though thus far unsuccessful, the attacks on the fundamentals of the patent system have not subsided. It is probable that they will continue with determined

vigor.

II. THE BASIC PRINCIPLES WHICH HAVE BEEN UNDER ATTACK

The basic principles which have been under attack are those characteristic of our patent system as provided for in the Constitution and established by laws enacted by Congress in accordance therewith. These principles are as follows:

1. The exclusive right granted by a patent for a limited time is merely the right to exclude others from making, using and selling the article or process covered by the patent. Any right that the patentee may have to make, use and sell is a natural or common law right. The patent law merely adds by statute, in accordance with the Constitution, the right to exclude others.

2. Patents are property protected by the fifth amendment to the Constitution. 3. A patent or interest therein may be assigned or licenses granted thereunder, as in the case with respect to other property.

4. A patent owner has the right to use or not use the patented invention, to license or not license and to license some and not license others as he sees fit. He is not in the position of a quasi trustee for the public.

5. A license is, to the extent specified, merely the waiver of the right to exclude. Hence, the grant of limited licenses (sometimes mistakenly called restrictive licenses) is the partial waiver of the patentee's right to exclude. Such right of waiver is common to property in general and, therefore, within the rights to which the patentee is entitled by the grant of his patent.

III. NATURE OF THE ATTACKS ON THE BASIC PRINCIPLES

Those attacking the fundamental principles of the patent system have advocated the following:

1. A system of compulsory licensing of patents.

2. The outlawing of limited or "restrictive" licenses.

3. That patented inventions are not property in the sense that they are entitled to the protection of the fifth amendment to the Constitution. (This is an attempt to pave the way for compulsory licensing of patents already issued.)

4. That a patent owner is in position of a quasi trustee for the public and is under obligations to see to it that the public acquires the rights to use the invention during the life of the patent.

Various other changes of less consequence, but still inimical to the present system, have been advanced.

These holdings of the Supreme Court relate to:

1. A new doctrine of contributory infringement which leaves it uncertain what such doctrine now is;

2. The holding that a patentee may not under certain circumstances be estopped from denying the validity of a patent under which he is licensed even though he expressly contracts not to do so;

3. The doctrine of "misuse" or "use against the public interest" by which the patentee is denied relief in the courts against infringement, at least until the effects of such misuse are dissipated; and

4. That the Government is entitled to attack in an antitrust proceeding the validity of a patent granted by the Government.

4 United States v. Line Material Co. (333 U. S. 287 (1948)).

IV. THE NEED FOR EMPHASIZING THE FUNDAMENTALS OF THE PATENT SYSTEM

Before discussing more fully the proposals for introducing revolutionary changes into our patent system, it may be helpful to present a background of the above-mentioned fundamental principles forming the foundation on which the system is built. The need for doing so is apparent from the fact that in some quarters there seems to be a woeful misunderstanding of the subject. Even those

who have spoken on behalf of the Antitrust Division of the Department of Justice have apparently manifested a lack of understanding of these fundamental principles. As a result they have, either directly or by implication, given incorrect information as to what the law is and as to what changes can be made without departing from constitutional principles and without impairing substantially the practical effectiveness of the system.

THE CONSTITUTIONAL PROVISION

The Constitution (art. 1, sec. 8) delegates to Congress the power "to promote the progress of science and useful arts." Furthermore, it specifies the precise manner by which this particular power may be exercised, namely "by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Congress is authorized, as in the case of all powers delegated to it, "to make all laws which shall be necessary and proper for carrying into execution the foregoing powers * * *." It is to the adequacy of the patent laws to meet modern conditions that our present enquiry is directed.

THE NATURE OF THE PATENT GRANT

It can readily be appreciated that even without the grant of a patent an author has at least some inherent right to his own writing and that an inventor has at least some inherent right to his discovery. But he has no exclusive right. In the absence of a patent grant, the inventor is helpless to protect himself again the utilization of his invention by others except by resorting to concealment. As an incentive to explore and create new things and to make a disclosure thereof, the Constitution provides, as bove quoted, that an inventor may be given the right. to own and control, though only for a limited time, the fruits of his own efforts. Among the powers exercised by the First Congress, on the recommendation of President Washington, was the enactment in 1790 of a law providing for the grant to inventors for a period of 14 years (later changed to 17 years) of exclusive rights to their inventions. Thus Congress, following the constitutional directive, established the American type of patent system, a system in which the inventor is given an unconditional monopoly of his own creation for a limited number of years. Few, if any, would now have Congress fail to continue the patent system, though some apparently would have it curbed in a manner not contemplated by the Constitution and in ways that would stifle the incentive to invent and to introduce the inventions into commercial use.

The Constitution provision for securing to inventors the exclusive right to their discoveries is a provision for giving them merely the right to exclude others for a limited time from making, using, and vending the new patented things which they have invented or discovered-things which were not in the public domain but which have been added by the invention to the sum total of our national resources. It gives him no right to make, use, or sell. Such right (if any) as he may have in that respect is a common law right.

THE SENSE IN WHICH A PATENT IS A MONOPOLY

Since odium is attached to "monopoly" in the mind of the public, those who would discredit our patent system in the public eye seem to be provided a vantage point from which to attack this particular kind of property. This is especially true of those who would attack the private ownership of property in general. patent is a monopoly only in the sense that all property rights are monopolies. As aptly stated by Mr. Justice Roberts: 6

A

• A more detailed discussion of this subject is found in a monograph by George E. Folk entitled "Fundamentals of Our Patent System" published in the NAM News of April 3, 1943, and reprinted as Appendix 5 pp. 437-462 of Barnett's "Patent Property and the Antimonopoly Laws.'

U. S. v. Dubilier Condenser Corporation, 289 U. S. 178, 186 (1933).

96347-50-pt. 2B-48

"Though often so characterized a patent is not, accurately speaking, a monopoly, for it is not created by the executive authority at the expense and to the prejudice of all the community except the grantee of the patent (Seymour v. Osborne, 11 Wall., 615, 535). The term 'monopoly' connotes the giving of an exclusive privilege for buying, selling, working, or using a thing which the public freely enjoyed prior to the grant. Thus a monopoly takes something from the people. An inventor deprives the public of nothing which it enjoyed before his discovery, but gives something of value to the community by adding to the sum of human knowledge."

Patents are granted not as a matter of privilege or special favor as was done in England with respect to things already in the public domain before the passage of the Statute of Monopolies but as a matter of justice to those who have discovered and disclosed to the public something new and useful of their own creation. This distinction enables us to appreciate why Jefferson, the first administrator of our patent system, was an ardent supporter of the patent system while at the same time he condemned the type of monopoly by which the public is deprived of rights which it previously had.

This distinction was forcibly stated by Dean John W. Wigmore, an eminent jurist, in his foreword to Wood's Patents and Anti-Trust Law, in the following language:

"I take the opportunity to intrude my personal opinion, that neither courts nor treatise writers have been radical enough in defending the legitimacy of the 'monopoly' in a patent, as distinguished from the ordinary trade monopoly. Is it not a fact that every property right that we have is a 'monopoly'? The right to our house or our automobile is simply a right to keep anyone else from entering or using it without our consent and is that not a monopoly? Take the case of the miner; he discovers a deposit of gold; he stakes it out and registers it; and he gets a monopoly-and not merely for 14 years, but forever. Yet no one ever publicly attacked his monopoly or proposed to cut down its duration, or to take it away from him unless he worked it; and so on. When Sir Isaac, by thinking and thinking, discovered the law of gravity, and when Alexander Bell, by thinking and thinking, discovered electric telephony and the California gold miner, by digging and sinking, discovered gold, they all three were doing an identical thing, i. e., discovering a condition of nature which had been existing all along but nobody else had ever found it out. Yet the third man gets a perpetual property right-monopoly; the first one gets no legal recognition at all; and the second one is awarded grudgingly a temporary right, and every once in a while he is reproached for even that temporary 'monopoly'."

The foundation upon which our patent system was built was set forth by Daniel Webster nearly 100 years ago (1852) in his argument in the vulcanized rubber He stated:

case.

66* * * The Constitution does not attempt to give an inventor a right to his invention, or to an author a right to his literary productions. No such thing. But the Constitution recognizes an original, preexisting, inherent right of property in the invention, and authorizes Congress to secure to inventors the enjoyment of that right. But the right existed before the Constitution and above the Constitution, and is, as a natural right, more clear than that which a man can assert in almost any other kind of property. What a man earns by thought, study and care, is as much his own, as what he obtains by his hands. It is said that by the natural law, the son has no right to inherit the estate of his father-or to take it by devise. But the natural law gives a man a right to his own acquisitions, as in the case of securing a quadruped, a bird, or a fish by his skill, industry, or perserverance. Invention, as a right of property, stands higher than inheritance or devise, because it is personal earning. It is more like acquisitions by the original right of nature. In all these there is an effort of mind as well as muscular strength.

"Upon acknowledged principles, rights acquired by invention stand on plainer principles of natural law than most other rights of property. Blackstone and every other able writer on public law, thus regards this natural right and asserts man's title to his own invention or earnings.

"The right of an inventor to his invention is no monopoly. It is no monopoly in any other sense than as a man's own house is a monopoly. A monopoly, as it was understood in the ancient law, was a grant of the right to buy, sell, or carry on some particular trade, conferred on one of the king's subjects to the exclusion of all the rest. Such a monopoly is unjust. But a man's right to his own invention is a very different matter. It is no more a monopoly for him to possess that, than to possess his own homestead.