The Economics of the International Patent System 0837166535

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' P38e Penrose 1738626 Economics of the internation¬ al patent system

PUBLIC LIBRARY FORT WAYNE AND ALLEN COUNTY, IND.

THE ECONOMICS OF THE INTERNATIONAL PATENT SYSTEM

THE ECONOMICS OF THE INTERNATIONAL PATENT SYSTEM

BY

EDITH TILTON PENROSE

GREENWOOD PRESS, PUBLISHERS WESTPORT, CONNECTICUT

The Library of Congress has catalogued this publication as follows:

Library of Congress Cataloging in Publication Data

Penrose, Edith Tilton. The economics of the international patent system. Reprint of the 1951 ed. issued in series: Johns Hopkins University studies in historical and political science. Extra volumes. New ser., no. 30. 1. Patents. 2. Patents (international law) I. Title. II. Series: Johns Hopkins University. Studies in historical and political science. Extra volumes, no. 30. [T211.P4 1973] 338.4'7'6087 72-11336 ISBN 0-8371-6653-5

Copyright 1951 The Johns Hopkins Press Originally published in 1951 by The Johns Hopkins Press, Baltimore Reprinted with the permission of Edith Penrose First Greenwood Reprinting 1973 Library of Congress Catalogue Card Number 72-11336 ISBN 0-8371-6653-5 Printed in the United States of America

1738626

IN MEMORIAM GEORGE ALBERT TILTON, JR.

Digitized by the Internet Archive in 2018

https://archive.org/details/economicsofinterOOpenr

FOREWORD In welcoming this book, I am also saying “ Welcome back! ” to economists re-entering the discussion of patent policy. During the great patent controversy of the Nineteenth Century, which almost led to the abolition of the Patent System in England and in Germany and did lead to its tem¬ porary abolition in Holland, economists were in the center of the debate. On the political scene neither the abolitionists nor the conservatives carried the day; instead, the reformists emerged victoriously, obtaining provisions in the patent laws of several countries to prevent “ abuses of the monopoly grant ” and to permit the use of compulsory licensing. Be it because reform was a less glamorous cause to fight for than abolition, be it because reform implied legal intricacies that are the jurist’s preserve, be it because patent lawyers and special interests contrived to bar economists from the legislative committee rooms and lobbies, whatever the rea¬ sons may have been, economists retired from the debate. Judging from the share which the subject of patents has had in the literary output of economists of the last fifty years, and from the share which economists have had in the litera¬ ture on the subject of patents, one may say that economists have virtually relinquished the field. Patent lawyers were probably glad to see them go; some said as much with dis¬ arming frankness. This is a deplorable situation. One cannot argue the rela¬ tive merits or demerits of various features of the patent system without analyzing the social costs and benefits in¬ volved. This is economic analysis and no amount of legal training or engineering experience or technological research • •

Vll

• • •

vm

Foreword

will equip the “ expert ” for it. Yet, most of the economic theories enunciated in discussions about patent reform have come from lawyers, engineers and technical experts with occasional contributions from business executives. One has only to go to the published record and check the professional qualifications of the witnesses heard by United States con¬ gressional committees on patents to verify this statement. The discussion of the economics of the international patent system, and in particular of the international patent Con¬ vention, has been almost devoid of contributions by bona fide economists. The international patent Convention is now 67 years old and the literature on it is by no means small. But scrutinize it and you will find only a handful of econo¬ mists writing on the subject, and even they address them¬ selves more to peripheral issues than to the fundamental economic issue—the balance of costs and gains. The book by Dr. Edith Penrose is the first of its kind. It constitutes a contribution to economic history as well as to economic analysis. While the history of the international patent Convention from a legal point of view has frequently been recounted, its history from an economic point of view has not been discussed. Mrs. Penrose now presents us with an economic interpretation of the Convention. This part of her book will be read with great interest by economists, his¬ torians, and lawyers. While the material will be novel to most, it is not controversial. On the other hand, the eco¬ nomic analysis of the international patent system is both novel and controversial. The parts of the study that deal with the economic evaluation of various provisions of the patent system will undoubtedly draw fire, because several dogmas which legal experts have held in great respect are exposed to the bright searchlight of a skilled economic analyst and are shown to be untenable. One may safely pre¬ dict that many members of the American patent bar, and especially international patent lawyers, will intensely dislike

ix

Foreword

some of the views expressed and perhaps all of the sug¬ gestions contained in this book. But the views and suggestions of Mrs. Penrose are not out of line with the current thinking of the more enlightened patent experts. Preparing the ground for the British Patents and Designs Act of 1949, the Second Interim Report of the Swan Committee (Cmd. 6789 of April 1946) declared “ that it is wrong in principle that a patent should be used to estab¬ lish a monopoly wider in scope and longer in duration than that conferred by a patent in itself, and it is obviously de¬ sirable that the patent law should keep in step with any measures which may be adopted in the future to limit or control monopoly in the public interest.” Mrs. Penrose’s recommendation that the International Patent Convention should keep in step with this development is very much to the point and deserves to be well heeded when the Con¬ vention comes up for revision in the near future. It is also appropriate that I should acknowledge the grants in aid of the research that underlies this book. For several years I have been engaged in research on the economics of the patent system and have received grants from the Social Science Research Council, the American Philosophical So¬ ciety, and the Lessing Rosenthal Fund for Economic Re¬ search at The Johns Hopkins University. Thanks to this financial assistance I was able to secure the collaboration of Mrs. Penrose, who spent her time on the international aspects of the patent system. This book is the result of her work, but without the financial support from the organizations mentioned the study would not have been possible. Fritz Machlup The Johns Hopkins University

PREFACE . . . nous avons toutefois a nous souvenir que les verites que nous invoquons, n’ont point la force d’axioms: les affirmer sans les discuter, serait de la presomption; les discuter sans chercher a convaincre, serait de la faiblesse. E. Picard et X. Olin, Traite des brevets d’invention et de la contrejagon industrielle (Brussels, 186-), p. viii.

Although the patent system has developed primarily to promote economic ends, economists have devoted very little attention to it and none at all to the international patent sys¬ tem. Jurists and legal students on the continent of Europe have produced a large number of monographs and treatises on the patent provisions of the International Convention for the Protection of Industrial Property but no one has yet attempted a systematic economic analysis of the principles of the Convention. There is only one published work in English on the Convention and that, too, is by a legal stu¬ dent. The following study is an attempt to remedy this deficiency. As far as possible I have avoided legal questions, wdiich existing publications have extensively discussed, and have confined myself to an analysis of the economic princi¬ ples on which the patent provisions of the Convention rest and to an evaluation of these provisions from an economic point of view. However, since economic studies of the international patent system have been so persistently neglected, our knowledge of many of the relevant facts is woefully inadequate. Most of the commonly accepted notions about the international patent system rest on extremely shaky foundations, and I hope that the analysis presented here provides a fruitful framework for further investigation. xi

Xll

Preface

It is a pleasure to acknowledge the help I have received in the preparation of this study. Professor Fritz Machlup of The Johns Hopkins University has followed very closely the evolution of every draft and it is to his stimulating, rigorous, yet nonetheless encouraging criticism at every point that I must give a great deal of the credit for whatever merit this study may possess. Some of the material in Chapter II has already appeared in an article in the May 1950 issue of the Journal of Economic History written jointly with Fritz Machlup. Many of the pages of the book are immensely improved because of the criticism of Dr. Robert Rennie of The Johns Hopkins University. Mr. Roger Dixon of the Department of State read the manuscript and made many valuable suggestions but it cannot, of course, be assumed that he is in accord with my conclusions. Mr. Marcel Silberstein of Basel, Switzerland, provided me with useful ma¬ terials on the development of the European patent systems. Angela and Lilly Lavarello did an excellent job of the typing. My husband, Professor E. F. Penrose, read the manuscript carefully and I am greatly indebted to his criticism of the style as well as the content. The shortcomings of the study are entirely my responsibility. Edith Tilton Penrose May, 1951 The Johns Hopkins University Baltimore, Maryland

CONTENTS PAGE Foreword... Preface

vii

.

xi

I. Historical Introduction.

1

CHAPTER

Early history of the patent of invention and innova¬ tion: Venice, Germany — Development of the English patent system — Early French history — Development of the United States patent law — The patent contro¬ versy of the 19th century — Summary.

II. The

Rationale of the Patent System.

19

Natural Rights arguments for the patent system: Natural property; reward for services rendered — Economic arguments for the Patent System: Dis¬ closure of secrets; encourages invention and innovation — Summary.

III.

The

Development

of

the

International

Convention for the Protection of In¬ dustrial Property.

42

Vienna Congress of 1873 — Paris Conference of 1878 — The first draft Convention — The Conference at Paris in 1880 — The International Union for the Protection of Industrial Property. Appendix: Mem¬ bers of the Union for the Protection of Industrial Property.

IV.

The Patent Provisions of the International Convention. National treatment — Right of priority — Indepen¬ dence of patents — Importation of patented objects — Abuse of the Monopoly: Compulsory working and compulsory licensing. • • •

Xlll

60

Contents

XIV

PAGE

chapter V. The Economics of the International Pro¬ tection of Patentees: Issues

A

Survey of the

88

.

Criteria for an economic appraisal — Sources of costs and gains in an international extension of the patent system: Price of patented products; rate of invention in export industries; availability of inventions and of technological information: royalties, royalties plus ex¬ clusive licensing, extended monopoly, “ suppression ” of patents by foreigners — The balance of costs and gains. VI. The Economics of the International Pro¬ tection of Patentees:

The Balance of

Costs and Gains.

110

The balance for single countries: Stimulation of inven¬ tion by granting patents to foreign firms; gain from obtaining patents in foreign markets; non-industrial countries; small industrial countries; the Swiss contro¬ versy; large industrial countries — The balance for the world as a whole: The necessity of some international agreement; the effects of an agreement to eliminate international patenting and the need for an inter¬ national system—Conclusion.

VII. Compulsory

Working of Foreign Patents

.

137

The origin of compulsory working — Patents for the protection of export markets — Effect of compulsory working on consumers — On domestic industry: In¬ dustrialized countries, underdeveloped countries — Effect on existing firms — On domestically owned in¬ dustry — Effectiveness of compulsory working require¬ ments — Sanctions for failure to work: Revocation of the patent and compulsory licensing.

VIII. Compulsory

Licensing of Foreign Patents.

History of the idea of compulsory licensing — The question of discrimination against foreign patents — Objections to the principle of compulsory licensing — Different systems of compulsory licensing: Britain, Germany, unconditional compulsory licensing.

162

xv

Contents

PAGE

CHAPTER IX. Compulsory Licensing and

International

Patent Cartels...

188

Nature of international patent cartels — Nature of the problem — Restrictive licensing and the dilemma it creates for public policy — Patents and international trade policy — Reform of the Convention. X. Criticisms

and

Economic

Principles

of

Reform.

20 5

An extreme attack on the Convention — Criticism of the Convention from the standpoint of patentees — An international patent: The relation of the inter¬ national patent to national patent systems; validity of international patents; licensing of international patents; independence of patents — Undeveloped countries and the international patent system. XI. Summary and Conclusions.

223

Bibliography.

234

Index

243

.

•

•

'

■

Chapter

I

HISTORICAL INTRODUCTION patent system as we know it today consists of a complex structure of national laws and cus¬ toms, international private agreements and practices, and intergovernmental conventions and arrangements regarding patents of invention. This network of patent laws and prac¬ tices can be called a “ system ” only in a very loose sense. There is uniformity in neither the subject matter nor the scope nor even the purposes of the various national patent laws, although international agreements have eliminated some of the grosser divergencies of earlier times. Within countries the problems of interpretation and of defining boundary lines are so great that extreme uncertainty attaches to the application of the statute law by the courts. The phrase “ patent system ” is used, therefore, as a con¬ venient omnibus term to cover a complicated set of legal arrangements and customs. In spite of this legal complexity, however, the economic principles of the patent system are relatively straightforward. All patent laws have this much in common: they purport to encourage invention and their method is to secure to the patentee a certain control over the use of the invention for which he has succeeded in ob¬ taining a patent. This control derives from his right to exclude others from using the invention except on his own terms.1 Thus a patent is a monopoly grant. It enables those The international

1 This statement applies in its full rigor only to the patent law of the United States. The patent laws of other countries impose some restrictions on the right of the patentee to do as he pleases with his patent without regard to the public interest, and even in the United States a patentee is to some extent restricted by other laws, notably the anti-trust laws.

1

2

Economics of the International Patent System

who hold rights under it to control the output, and, within the limits set by demand, the price of the patented products. Early History of the Patent System Evidences of grants to private individuals by kings and rulers of exclusive rights to exercise a trade, or sell a product or use a process occur in many curious places in the records of history.2 Such grants are an obvious method of reward or indication of favor and it would indeed be surprising if they had not been used in some form in most communities. By the 14th century we find numerous examples in Europe of privileges granted to innovators and in the 15th century the systematic use of monopoly privileges for inventors for the encouragement of invention emerges in Venice. In 1474, according to the historian Romanin, the Venetian Republic generally promised privileges of ten years to inventors of new arts and machines.3 This has been called “ the first patent law ” and nearly one hundred privileges for industrial inventions appear to have been granted or applied for be¬ tween the years 1475 and 1550.4 Thus 15th century Venice possessed a fairly well developed patent system for inventors. The utility and novelty of the invention were apparently important considerations in the granting of a privilege and the inventor was required to put his invention into practice within a specified time. In the 16th century patents were widely used by some of the German princes. August of Saxony in particular took a great interest in inventions; he received important revenues 2 For a discussion of some of the early patents see A. A. Gomme, Patents of Invention (London: 1936); M. Frumkin, “The Origin of Patents,” Journal of the Patent Office Society, v. 27 (1945); F. D. Prager, “ A History of In¬ tellectual Property from 1545 to 1787,” Journal of the Patent Office Society, v. 26 (1944); and Harold G. Fox, Monopolies and Patents (Toronto: 1947). 3 S. Romanin, Storia documentata di Venezia (Venice: 1855), v. 4, p. 485. After listing several privileges, Romanin writes, “ In general, privileges of ten years were promised to inventors of new engines and machines.” He cites the source of his statement (Provveditori de Comun, libro detto Maggiore, 1474, p. 89) but does not quote the text. 1

A. A. Gomme, p. 7.

Historical Introduction

3

from mines and was much concerned with methods of im¬ proving mine drainage for which he gave several patent privileges. August did not approve of granting privileges to others than the true inventor or for the mere improvement of a process or product. For example, in correspondence regarding a privilege for a newly invented type of stove that had been requested by the heirs and partners of an inventor he wrote: ... we are not, thanks to God, so grossly unwise and even ungracious not to consider it as just that inventors of novel, useful and wholesome things should receive and obtain due and grateful reward and respect. But we do entertain fair misgivings about giving a ten year consent for their selfish ends to those who did not invent the [process] but merely purchased it from the inventor for their own profit in order to put a levy and burden upon almost the entire country. ...5

The texts of several of these old privileges have been pub¬ lished and it is clear that the grounds on which the privileges were granted were essentially the same as those of the modern patent. Utility, novelty and working,6 for example, were im¬ portant considerations.7 It appears then, that certain German princes had arrived at a definite “ patent policy ” for inventions at the time when similar policies in France and England were just getting started: As one looks closer into the German protection of invention in the 16th century, the end of the Middle Ages and the beginning of modern times, one can establish the contents of a whole group of German inventors’ privileges, and the content of these privileges shows, that already at 6 The privilege requested was finally granted in 1558. Text of documents quoted by Fritz Hoffman, “ Beitrage zur Geschichte des Erfindungschutzes in Deutschland im sechzehnten Jahrhundert,” Zeitschrijt fur Industrierecht, 10. Jr. 8 (April 1915), p. 89. 6 The phrase “ working a patent ” is an unfortunate piece of technical jargon, but it is so widely used that it would be inconvenient to reject it now. It means, of course, producing with the use of the patented invention. 7 “ From it [examination of text of privileges] it can be shown that in general the granting of inventors’ privileges rested on the same considerations of legal philosophy as does the justification for the modern protection of invention.” Fritz Hoffman, p. 109.

4

Economics of the International Patent System

the beginning of the 16th century in Germany, very modern principles were applied with reference to inventors’ protection, principles which one had formerly assumed had first received expression in ‘England, especially in the English patent law of 1624. . . .

One finds particu¬

larly that Germany in the 16th century was very well developed eco¬ nomically, and was the land of invention, and that probably this lively activity of inventors led to the protection of invention.8

Development of the English Patent System In England, as elsewhere, the organization of municipal and business life was largely based on special charters, privi¬ leges, franchises and licenses, and the patent of innovation was not easily distinguished from other privileges granted by the Crown. Commercial privileges granted to companies of merchants and industrial privileges granted to fabricators were only separate species of the same genus within which intermixture was common.9 As early as 1623, however, the inventor’s patent was given statutory recognition as a justi¬ fiable monopoly to be distinguished from other monopoly privileges. The power of the gilds to regulate the “ mysteries ” and control the terms on which they could be practised was fre¬ quently exercised to retard innovation. Consequently, when the encouragement of industrial progress became a conscious state policy, the patent of invention was sometimes used to permit innovators to carry on their craft in contravention of gild regulations. Some writers therefore look upon the patent of invention as primarily a means in the beginning of breaking down gild restrictions. Undoubtedly this was important in many cases, but in itself was only one part of the conscious policy of the Crown of encouraging industry 8 Fritz Hoffman, p. 86. 9 Even early patents granted specifically for inventions did not always use the word in the modern sense, earlier meanings of the word “ invent ” include “ to found,” “ to establish,” “ to find.” Patents were granted, for example, to those who “ invented ” a “ new feate of merchandise ” with newly discovered parts of the world—i. e., to trading companies. See D. Seaborne Davies, “ Fur¬ ther Light on the Case of Monopolies,” Law Quarterly Review, v. 48 (1938), p. 398.

Historical Introduction

5

on a national scale, which in turn was part of the general objective of unifying the nation under the central authority, of breaking down the power of the local authorities and of making the country economically independent.10 In the 16th and 17th centuries it was only in England that the state was integrated enough, the market wide enough over which pro¬ tection could be assured, the Crown strong enough and public spirited enough, for the inventors’ patent of monopoly to become of very great national importance. Until around 1570, monopoly patents were primarily issued to encourage innovation and invention. Although the desire to encourage the introduction of new arts remained an im¬ portant reason for the grants of monopoly, other reasons rapidly became more prominent after this time. The mo¬ nopoly grant was an easy way of rewarding favorites, of securing the loyalty of important personages to the Crown, of attempting to raise money, of establishing a central con¬ trol over industry, and under Elizabeth and James I it became increasingly used for these purposes. The public outcry against the restrictive and privileged monopolies, covering, as they did, such daily necessities of life as salt, oils, vinegar, starch and saltpeter, was loud and persistent. Under these early grants the patentees had ex¬ tensive powers of control. They could search the premises of alleged infringers and seize their goods. These powers were frequently exercised with considerable violence, high¬ handedness and irresponsibility, and they intensified the 10 See, for example, E. Lipson, The Economic History of England (London: 1931), v. 3, p. 353: “Elizabeth developed the system [of patents] on the basis of exclusive privileges; and the numerous grants issued in the first decade of her reign indicate a deliberate policy on the part of her advisers to make England economically self-sufficing, so far as her natural resources permitted.” And E. Wyndham Hulme states: “ The. Elizabethan policy aimed beyond ques¬ tion, as a perusal of the grants will amply testify, at the introduction of those industries the products of which had hitherto figured most prominently in the list of imports, viz., alum, glass, soap, oils, salt, saltpeter, latten, etc. etc.” “ The History of the Patent System under the Prerogative and at Common Law,” Law Quarterly Review, v. 12 (1896), p. 152. Presumably local gild restrictions were not important for commodities largely imported.

6

Economics of the International Patent System

popular resentment against the entire system. In many cases there was no pretense that the grant was in consideration of the public welfare. For example, a grant in 1582 to Wil¬ liam Harebrowne for the making of salt, was given in part 44 for 4 the relief of the decayed ’ state of the fortunes of the Harebrownes attributable to losses at sea.” 11 The granting of patents for the encouragement of industry and the public welfare was a recognized part of the royal prerogative; the creation of monopolies in opposition to the public interest and without any 44 consideration passing to the public ” was in violation of the common law. Hence many of the patents of Elizabeth were illegal, but to chal¬ lenge them was a dangerous act liable to be interpreted as want of respect for the Queen’s prerogative and likely to incur severe penalties imposed in the Queen’s Court 44 for contempt of this our Royal Command.” In 1601, however, the revolt in the Commons had reached the point where the Queen, to forestall action adverse to herself, undertook to reform the system, abolish the most obnoxious of the mo¬ nopolies and submit the rest to the test of the common law. Almost at once (1602) the famous Case of Monopolies, Darcy v. Allin, was started in which the patent for the sole importing, selling and making of playing cards was chal¬ lenged. The outcome of this case finally established that under the common law exclusive grants to exercise a trade for private gain are against the 44 liberty and benefit of the subjects ” and against the common law. At the same time there was no doubt about the legality of grants for the furtherance of the 44 weal public.” 12 The failure of James I to regulate his monopoly grants according to the common law made necessary the Statute of Monopolies of 1623, which essentially reaffirmed the doc11 E. Wyndham Hulme, “ The Early History of the English Patent System,” Select Essays in Anglo-American Legal History (Boston: 1909), v. 3, p. 133. 12 For an interesting analysis of this case, see H. G. Fox, Monopolies and Patents, Appendix Four, especially p. 325.

Historical Introduction

7

trine laid down in Darcy v. Allin. By the Statute, monopo¬ lies were declared void under the common law and damages to persons injured by them were provided for. A significant exception was made in Section 6: Provided also and be it declared and enacted, that any declaration before mentioned shall not extend to any letters patent and grants of privilege for the term of fourteen years or under, hereafter to be made of the sole working or making of any manner of new manufactures within this Realm, to the true and first inventor and inventors of such manufactures, which others at the time of making such letters patents and grants shall not use, so as also they 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; the said fourteen years to be accounted from the date of the first letters patents or grants of such privilege hereafter to be made, but that the same shall be of such force as they should be if this act had never been made and of none other.13

This Statute has been called the Magna Charta of the rights of inventors, not because it originated the patent pro¬ tection of inventors, but because it was the first general law of a modern state to lay down the principle that only the “ first and true ” inventor of a new manufacture should be granted a monopoly patent.14 The Statute of Monopolies is the basis of the present British patent law and the direct ancestor of the United States law. It was the only statutory law in Britain (or in any other country 15) for over 150 years, until finally its principles were copied in France in 1791. Early French History In France the early history of the patent of invention was also a history of royal favor, capricious and arbitrary but eventually becoming a regularized system existing as an exception to the general abolition of state-sponsored mo13 21 Jac. I, cap. 3. A. D. 1623-24. 14 The “ first and true inventor ” included the first one to introduce a new art from abroad. See footnote 9, p. 4 above. 15 The British colonies in America, however, followed the mother country and very early adopted patent provisions.

8

Economics of the International Patent System

nopolies. As in the rest of medieval Europe, economic and political life was organized on a group basis. Individuals lived and worked as part of, and under the rules of, munici¬ pal corporations, craft gilds, merchant gilds and corporations which were in varying degrees regulated by the Crown. The importance of the corporations varied from trade to trade, but the control that they exercised over industrial and com¬ mercial activity was reinforced and extended by the actions of the Crown, who not only tried to regulate them but to use them as a means of extending the royal authority. In doing this the Crown, in many cases, removed serious abuses and tempered local and irresponsible despotism. It is in this respect that one can speak of “ Valliance entre la Royaute et le developpement des droits individuelsT 16 The difficulty with this last interpretation, however, is that these “ liberalising ” actions of the Crown were to a very large extent made necessary by its own previous acts. Under Louis XIV, Colbert, for example, in trying to recon¬ struct the finances and increase the power and economic strength of the French State in the latter half of the 17th century, vastly increased the bureaucratic regimentation of economic life. At the same time, exceptions to the strict regulations were made, and it was to these exceptions that inventors and innovators had to look in general for support. The fact that privileges were used to set aside existing regulations has led many writers to stress the importance in France of the early patents as a means of freeing industry from other legal restrictions. We saw that this explanation of the early English patents was not adequate and in France, especially, it is easy to overemphasize the extent to which the gilds controlled economic life.17 Heckscher points out that the preamble of an edict of 1581 read: \

10 Augustin-Charles Renouard, Traite des brevets d’invention (Paris: 1865, 3rd ed.), p. 43. 17 One writer, for example, states: “ In the old times all was in the hands

Historical Introduction

9

The majority of the craftsmen of Our Kingdom, particularly in towns, hamlets or other places where there is neither gild master nor warden to test their products, have become so independent that the majority of them [i. e., their products] are not half as good and reliable as they ought to be.18

As late as 1673 Paris had only sixty legalized gilds (metiers jures, corporations, communautes jurees or jurands) and these could have covered only a small number of the trades of the city.19 It was the monarchy, constantly striving to increase its control over industry through edicts and reglements, that created the rigid framework within which indus¬ try was carried on.20 Hence the state had to establish a dual system in order to permit innovation. This in itself created a conflict. The gilds frequently opposed the inventors’ patents,21 and the system under which the parlements could alter the terms of the King’s patents enabled the vested interests effectively to register their opposition. There was no general policy distinguishing inventors’ privileges from other privileges granted by the Crown until 1762. At this time an edict of the King for the first time laid down some regulations regarding the issuance of inven¬ tors’ privileges; the period for which they were issued was limited to 15 years, restrictions were placed on inheritance, proof of utility was required and working was obligatory. The purpose of this edict was not so much to encourage of privileged corporations. He who did not belong to one of these associations could not work; those who were members of a corporation had to sell or manu¬ facture according to recognized rules.” F. Malapert, “ Notice historique sur la legislation en matiere de brevets d’invention,” Journal des ficonomistes, 4e ser., v. 3 (1878), p. 100. 18 Eli F. Heckscher, Mercantilism (London: 1935), p. 143. 19 Ibid. 20 “ But our kings, who wished to have the prerogatives which had belonged to the Roman emperor, did not abstain from creating new corporations or from increasing the number of masters, that is, the number of members of the societies. . . . The kings, and Henry II stated it in his edicts, said that the right to work -was a royal privilege (droit royal): consequently the creation of corporations or of masters wras right in their eyes.” Malapert, p. 100. 21J. Isore, “ De l’existence des brevets d’invention en droit frangais avant 1791,” Revue Historique de Droit Frangais et Etranger, v. 16 (1937), p. 119.

10

Economics of the International Patent System

inventors as to remove some of the abuses surrounding the granting of inventors’ privileges.22 Agitation against the rigid monopolistic regulations and control of industry continued to increase throughout the 18th century. In 1776, the corporations were suppressed in the famous edict of Turgot, which was almost immediately superseded and its author dismissed. But the revolution of 1789 resulted in the abolition of the old gild regulations and freed commerce and industry from the old restrictions. In¬ ventors too, were freed from the regulations, but it was not until 1791 that the statutory basis for the patent of inven¬ tion was established. The principles of the English Act of 1623 became part of French law in that year. The French went much further than the English had done, by declaring that an absolute right of property existed in industrial discoveries. The Development of the United States Patent Law The only other patent law established in the 18th century was in the United States. The Constitution gave Congress the power “ To promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive rights to their respective writings and dis¬ coveries.” (Art. I, Sec. 8 (8)). The first Federal patent law was passed in 1793. 22 The preamble of this declaration read as follows: “ Louis, etc.—The com¬ mercial privileges which are designed to reward the industry of inventors or to stimulate industry which languishes in an environment wdiere there is no emula¬ tion, have not always been as successful as was expected, whether because these privileges, given for an indefinite time, seemed to be more of an hereditary patrimony than a personal reward to the inventor, whether because they often were given to people who didn’t have the necessary ability, or finally, whether because the children, successors or heirs of the holder of the privilege, when given the enjoyment of the privilege by the law, failed to acquire the necessary talents. The failure to exercise these privileges is the more inconvenient because it interferes with liberty without giving the public results it has a right to expect; finally the failure to give publicity to the scope (titres) of the privilege often gives the privilege holder the possibility of extending it and of seriously interfering with the industry and work of our subjects.” Text translated from Renouard, op. cit., p. 72.

Historical Introduction

11

Many of the Colonial governments had granted exclusive privileges to inventors, and several had made special legis¬ lative provisions for them. Monopoly privileges, similar to those we have described were granted not only for new in¬ vention but also, and sometimes especially, for innovations from abroad. On the other hand, such abuse of these privi¬ leges as had occurred in Elizabethan England was sometimes specifically guarded against. In 1641 the Massachusetts legislature decreed: “ No monopolies shall be granted or allowed among us, but of such new inventions that are profitable to the Countrie, and that for a short time.” Con¬ necticut adopted a similar law in 1672.23 In the 18th century numerous patent privileges were granted by several colonies, some for inventions and some for establishing new industries according to processes known elsewhere.24 One historian states that The most numerous monopolies were those designed to protect the local market for an intending manufacturer, without regard to inventions or imported methods; but as the projected industry was usually a new one or one fallen into abeyance, the grantee in most cases might claim credit for introducing his art from another country or province.25

This method of encouraging the importation of new indus¬ tries gradually disappeared and it was only the patent of invention proper that survived in the Federal Constitution. English law and English practice obviously had a great in23 Massachusetts Body of Liberties, section 9. Text reproduced in 'William MacDonald, Select Charters and Other Documents Illustrative of American History, 1606-1775 (New York: 1906), p. 75. 24 Patents were granted to encourage the manufacture of salt, canvas, sperm candles, and the establishment of mills, dry-docks, tobacco factories. V. S. Clark, History of Manufactures in the United States (New York: 1929). v. I, p. 50; “ Outline of the History of the United States Patent Office,” Journal of the Patent Office Society, v. 28 (1936), p. 37; W. B. Weeden, Economic and Social History of New England (Boston: 1890), p. 495 and p. 655. In 1715 Con¬ necticut specifically provided that “ If any person or persons shall set themselves on work to discover any commodities that may be of use for the country, for the bringing in a supply of goods from foreign parts, that is not as yet of use among us, he that discovers it shall have due encouragement granted to him.” Quoted from “ Outline of the History of the United States Patent Office,” p. 36. 25 V. S. Clark, p. 51.

12

Economics of the International Patent System

fluence on the colonies, but the relation between the law of England and the law of the colonies was not very clear.26 The desirability of rewarding inventors and innovators and the monopoly method of doing it was widely accepted in America before the formation of the Federal government. There was, so far as we know, no opposition to the adoption of the patent clauses of the constitution 27 and very little to the passage of the Arst patent law in 1790.28 The Patent Controversy of the 19th Century At the beginning of the 19th century three of the im¬ portant countries of the world had Armly established patent systems; although the laws of two of them were very recent, the practices on which they were founded were old. The ancient privilege system had given way to a system based on statutory law. The other countries of the world began to fall in line and adopt patent laws.29 20 For a discussion of the relation between English law and the colonies see St. George Leakin Sioussat, “ The Theory of the Extension of English Statutes to the Plantations,” Select Essays in Anglo-American Legal History. Also Walton Hamilton, Patents and Free Enterprise, Monograph No. 31, Temporary National Economic Committee (Washington: 1935), pp. 17-18. 27 One of the powders Madison proposed to give the “ General Legislature ” was the power “ To encourage by premiums and provisions, the advancement of useful knowledge and discoveries.” At the same time, Charles Pinckney pro¬ posed that it should have power “ To grant patents for useful inventions.” These proposals were referred to committee, in which there was apparently no debate over them, and the present clause of the Constitution was unanimously approved. The Debates in the Federal Convention of 1787 which Framed the Constitution of the United States of America (as reported by James Madison), Gaillard Hunt and James Brown Scott, ed. (International Edition, New York: 1920), p. 420 and p. 573. 28 See P. J. Federico, Record of the Proceedings in Congress Relating to the First Patent and Copyright Laws (Washington: 1940). In this pamphlet are reprinted all the passages from the Journals of the House and of the Senate referring to the Patent Act of 1790. Also by the same author “ The First Patent Act,” Journal of the Patent Office Society, v. 14 (1932), p. 237. 29 While the European countries were adopting formal patent laws in the early decades of the 19th century, the “ privilege system ” which preceded the adoption of regularized patent laws was becoming popular in some of the less industrialized non-European countries. The first formal edict in Brazil recog¬ nizing inventors’ protection was promulgated in 1809, although as early as 1752 Brazil had granted a privilege for ten years for the establishment of a rice decorticating factory in which machinery invented by the patentee would be used, and other producers were prohibited from using these machines. The text

Historical Introduction

13

Austria formally established a patent law in 1810, although as early as 1794 a Court Decree had provided for the estab¬ lishment of a patent system. Russia followed in 1812, Prussia in 1815, Belgium and the Netherlands in 1817, Spain in 1820, Bavaria in 1825, Sardinia in 1826, The Vatican State in 1833, Sweden in 1834, Wiirttemberg in 1836, Portugal in 1837, and Saxonia in 1843. In what Clapham calls the “ long peace of the 19th cen¬ tury ” 30 after 1815, the economic activity of the Western World quickened enormously. Trade, commerce and indus¬ try made great advances, the economic relationships between nations became closer and more complex and the need for international cooperation on matters as diverse as finance and patents became felt. So far as the patent system was concerned, two forces were at work which pulled in opposite directions. On the one hand, the lively industrial activity led to increasing demands from engineers, inventors, and manufacturers for more and better patent protection; the interests of some of the industrial groups in the larger countries led them to conduct an agitation in the smaller countries for the introduction of patent laws. On the other hand, the widening of markets, the extension of the scope and volume of international trade and the accompanying possibilities of economic advance through the international division of labor, which the political economy of the time did not fail to stress, gave rise to the free trade movement of this privilege read in part: “ The grantees will install in the districts where they wish to have the privilege as many machines as will assure them a monopoly in a radius of ten leagues (lieus).”/ Reproduced in G. A. Bailly, Protection des Inventions au Bresil (Paris: 1913), p. xxv. In 1813 two special laws were passed in Argentina, one “ protecting the in¬ vention of an American concerning the manufacture of adobe,” and another, also to an American citizen, protecting for twelve years his method “ de pro¬ pulsion de embarcacionesIn 1817 the Argentine Constitution enabled the Executive with the approval of the Congress to give privileges to inventors of public useful arts and “ establecimientos.” See Pedro C. Breuer Moreno, Derecho Intelectual Comparado (Buenos Aires: 1912), pp. 76-78. 30 J. H. Clapham, The Economic Development of France and Germany, 18151911* (Cambridge: 1945, 4th ed.), p. 4.

14

Economics of the International Patent System

and led to an increased awareness of the monopolistic and restrictive aspects of the patent system. There was an acute conflict over these questions in Ger¬ many where some of the basic problems with respect to the international protection of patentees were very early raised in an extreme form in the patent relations between the states of the German Zollverein. These states had formed a Cus¬ toms Union in 1833, but each state retained the right to prohibit the introduction of articles into its territory which were the subject of patents that it had issued.31 Clearly, if the domestic market of the patentees was to be protected by each state against competition from importers, the old customs boundaries would be re-established with respect to patented articles. This situation created great difficulties and finally an agreement was reached in 1842 under which patentees were to be given the exclusive right of production in their own countries but not the exclusive right to sell.32 Hence they were not protected from competition from the exporters in other states of the Zollverein. This, of course, seriously reduced the value of the patent grant, and great efforts were made and ingenious proposals presented to strengthen the patent system and establish a uniform system for the whole of Germany.33 Some trade associations, indus¬ trialists, and, in particular, engineers, fought for a patent system. Other groups, including especially economists34 fought for the complete abolition of the patent system and were strongly supported by Chancellor Bismarck. 31 See discussion in C. Th. von Kleinschrod, Die Internationale Patentgesetzgebung nach ihren Prinzipien nebst Vorschlagen jiir ein kiinjtiges gemeines deutsches Patentrecht (Erlangen: 1855), pp. 183-8. 32 A. Pilenko, Das Recht des Erfinders (Berlin: 1907), pp. 169-171. 33 Ibid., p. 96; Kleinschrod, op. cit. 34 The Kongress deutscher Volkswirthe at its annual meeting in Dresden in 1863 passed a resolution condemning the patent system “ by an overwhelming majority.” “ Bericht iiber die Verhandlungen des sechsten Kongresses deutscher Volkswirthe zu Dresden am 14., 15., 16. und 17. September,” Vierteljahrschrijt jiir Volkswirthschajt und Kulturgeschichte, Erster Jahrgang (1863), v. Ill, p. 221.

Historical Introduction

15

The controversy in Germany was part of a Europe-wide battle over the patent system. Reforms favorable to in¬ ventors were being requested in the English and French laws; the enactment of a general patent law was being pressed in Switzerland as well as in Germany. These pres¬ sures brought forth a lively opposition from the liberal or free trade camp, which received important political support from commercial interests who felt they would gain from the elimination of patent restrictions. A strong movement for the complete abolition of the patent system arose in many countries. It was so strong in England that some observers thought the law there would be repealed.35 Only in Holland, however, was the patent law actually repealed. In 1869, primarily as a result of free trade ideas, the Dutch repealed the law they had first adopted in 1817. It was not reenacted until 1910. The general movement against the patent system died out in the last quarter of the century almost as suddenly as it had started. Its weakening was probably associated with the depression of 1873 and with the increasing nationalism and protectionism which arose in most countries as the cen¬ tury drew to a close.36 Shortly after the unification of Ger¬ many in 1871 the patent protagonists won their cause and a unified patent law was adopted in the German Reich in 1877. In Switzerland, a small, highly industrialized country with a long, firmly rooted tradition of free trade, the controversy raged with especial vehemence. Since the Swiss Constitution prohibited the federal government from establishing a gen¬ eral patent system, a popular referendum endorsing an amendment to the Constitution was necessary. This meant that the proponents of a patent law had to reach a popular 85 «« J,.

is probable enough that the patent laws will be abolished ’ere long . . . The Economist (London), June 5, 1869, p. 656. 30 For a description of the controversy see Fritz Machlup and Edith Penrose, “ The Patent Controversy in the Nineteenth Century,” The Journal of Eco¬ nomic History, v. 10 (1950), pp. 1-29.

16

Economics of the International Patent System

audience. In 1866 and again in 1882 the people defeated a proposal to enable the Federal Legislature to pass laws to protect industrial property. In 1887 the proposal was accepted.37 Since the Swiss controversy was very largely concerned with issues arising from the international economic and political relations of Switzerland, the Swiss experience in this period is of particular interest for this study and will be used to illustrate some of the arguments in subsequent chapters. Two of the most important industries in Switzer¬ land—the chemical industry and the textile industry—were strongly opposed to the introduction of a patent law, in both cases because of the restrictions it would place on their use of processes developed abroad if foreigners could patent them in Switzerland. The Swiss patent law, when it was finally adopted, excluded inventions which could not be represented by a model. It thus effectively excluded all processes, in¬ cluding chemical processes, from the patent provisions. This compromise was apparently necessary in order to obtain sufficient agreement to pass any patent law,38 but it left unsatisfied the German chemical industry, which had exerted strong pressure on the Swiss to force the adoption of such a law.39 In the German-Swiss tariff negotiations in 1904, the German government under pressure from the Ger¬ man chemical industry frankly asked for a change in the Swiss patent legislation. The Swiss government at first resisted, but finally gave way and issued a declaration in which Germany was authorized to raise duties on the import of coal-t^r dyestuffs from Switzerland if the Swiss patent law was not changed by December 31, 1907.40 The law was 37 See E. Guyer, Einfiihrung in das Schweizerische Erfindungsrecht (Zurich:

1916), p. 14. 38 Bericht einer Fraktion der Kommission des Standerathes fur die Frage des Erfindungsschutzes, vertreten durch den Kommissionsprasidenten, Hm. Gavard. (April, 1887), p. 22. “ Wir leben in der Schweiz von Kompromissen.” 39 Ibid., p. 34. 40 W. Stuber, Die Patentierbarkeit der chemischen Erfindungen (Bern: 1907),

pp. 26 ff.

Historical Introduction

17

changed in June 1907 and the model clause dropped. On the request of the Basle chemical industry the so-called “ serienpatente ” on chemical process was excluded from the patent law, and on the request of the textile industry chemical processes for the, treatment of textile fibres were similarly excluded. Summary Today in most countries an inventor can obtain as a matter of right, in fact if not in law,41 a monopoly privilege or “ patent ” which protects him from the competition of others in the exploitation of his invention. The economic importance of an invention has little relation to its patent¬ ability.42 The patent laws rest upon the assumption that it is desirable to encourage invention for its own sake and that a monopoly privilege is the best way of doing it. Ex¬ ploitation of the invention is not always required. In its earliest beginnings, however, the inventors’ privilege was not given indiscriminately as a matter of right, but selectively to encourage or make possible the development of specific products or processes which were considered of economic importance to the state. Competition had little place in the mercantilistic philosophy and innovation had little scope under mercantilistic regulations except insofar as special arrangements were made within the mercantile framework. Among these arrangements the inventors’ privileges was one of the most important, although other methods of en¬ couraging inventors were also adopted, such as direct state subsidy, royal patronage or special concessions regarding taxes, or acquisition of materials. The privilege was often 41 In England today the patent privilege is still de jure an act of grace of the Crown—de facto it is obtained as a matter of right. 42 Most countries exclude from the scope of the patent law certain classes of things. Commonly excluded, for example, are scientific theories, inventions against public law, morals or safety, pharmaceutical compounds, foodstuffs, chemical products.

18

Economics of the International Patent System

abused in the sense that it was given ostensibly to reward invention or innovation, but in fact was motivated by a desire to reward court favorites, make money or achieve political objectives. Nonetheless, to the extent that it was a true inventor’s privilege, it was frequently a liberalizing device—a device that made more flexible existing monopo¬ listic or regulatory regimes. The intense popular opposition that eventually overthrew the latter was not directed at the former. Evidences of privileges which bear many of the charac¬ teristics of the modem patent were found toward the close of the middle ages and the beginning of modern times. In¬ ventors’ privileges were used in parts of Germany, in Venice, in Holland, in Britain and in France by the 15th and 16th centuries. In this chapter we have traced the development of the patent system in the following centuries and have indicated the speed with which it spread in the 19th century. The laws of the various countries have been frequently amended but the basic principles remain the same as they appeared in the 16th century privileges when the economy of the world was loosely connected and primitive in com¬ parison with that of the 20th century.

Chapter

II

THE RATIONALE OF THE PATENT SYSTEM The patent system

as it stands today has to a consider¬

able extent “ just growed,” without much reference to fundamental principles, escaping the social planning of men into unexpected byways, some of which have become major and well traveled thoroughfares. Conscious legislative modi¬ fications of social institutions tend to lag behind the modifi¬ cations effected by the adaptations to a changing environment which occur through the uncoordinated actions of individuals or groups of human beings. Adaptations of this sort in human institutions force those responsible for the laws through which the collective policy of society is consciously enunciated, periodically to reconsider those laws in the light of the actual operations of the institu¬ tions resting on them. Hence, insofar as the development of an international patent system in response to widening international economic relations has involved agreement between governments, it has forced international debate on the nature and purpose of the patent laws. As with most social institutions, the patent system has changed in form and function from beginning and a discussion of the arrangements will gain in perspective brief history of the changing rationale

what it was in the present international if it is preceded by a of the patent system.

This study is not, however, concerned with the question whether national patent laws are economically desirable. It is concerned only with an appraisal of the international 19

20

Economics of the International Patent System

patent system and then only so far as this system depends on official and not private arrangements. Only in the first of the international conferences that led to the International Convention for the Protection of Indus¬ trial Property did the delegates try to lay down the basic justification for patents. As we shall see, they were unable to agree which of the various theories were the “ true ” ones. They therefore in subsequent conferences refrained from stating explicitly just what should be considered the funda¬ mental nature of the patent law. They were all agreed that international arrangements on certain provisions were desir¬ able from the point of view of all countries, but wisely left each delegate free to adhere in good conscience to any theory of the patent system that pleased him. A brief analysis of these theories will assist in the understanding of the division of opinion that has occurred in the international patent discussions. The arguments put forward to justify the patent laws can be divided into four general groups, two of which are fundamentally concerned with individual justice and two with economic policy.1 If the former justifications of an 1 Both sets of arguments rest on an ethical judgment. The difference is that one stresses justice to the individual and the other justice to society as a whole. It is therefore possible to make various combinations of the two types of argument. Those arguments that insist upon the moral obligation of society to be “ just ” to the individual I have, for convenience, called “ natural rights ” arguments. Those that insist that patents are justified because they serve desirable economic ends, i. e., increase the material welfare of society, I have called “ economic.” It should be said, however, that the identification of “ jus¬ tice ” to each individual (in terms of individual deserts) with “ social justice ” in the abstract is the same mistake as the identification of the economic interests of an individual with the general interest. In a sense, economics is as much concerned with justice as is law when it comes to social policy, although most economic policies tend to emphasize the general interest above the individual interest. It is probably not within the power of men to be truly just to an indi¬ vidual since what an individual does is not entirely a function of his will. It may be “ unjust ” to a kleptomaniac to deprive him of his liberty if his thieving tendencies are due to some psychic disorder, but clearly it may be more “ un¬ just ” to others to leave him free. Hence in all cases the old problem of balancing the individual and the group interests is the central one whether one looks at a question from an economic or a legal point of view. One of the chief

The Rationale of the Patent System

21

international patent system were of such overwhelming force that they would completely carry the day even though the Convention should be shown to be undesirable economi¬ cally, the conclusions from an economic examination would be much less useful than if the economic arguments were the chief justification. It is necessary, therefore, to make a slight detour before reaching the main road to look briefly at the two arguments for patents which are based on the “ rights ” of individuals. Natural Rights Arguments for the Patent System

Although there are many variations, two central themes can be detected in the case made for patents on grounds of natural rights. The first has to do with the concept of a natural property right; the second with the right to receive reward for services rendered. Natural Property Rights The logic of the first argument can be generalized as follows: A man has a natural property right in his own ideas, the appropriation of which by another should there¬ fore be condemned as stealing. Society is morally obligated to recognize this property right. Property is in essence exclusive and therefore an exclusive privilege is the only appropriate way for society to recognize this particular right. In the 19th century this principle justifying patents was very popular, in France especially. It was adopted in the preamble of the patent law passed by the Constitutional Assembly in 1791 2 and by the international conference in defects of both of the natural rights arguments for patents is that only the individual is considered. The possible effects on society are not even weighed. 2 “ . . . every novel idea whose realization or development can become useful to society belongs primarily to him who conceived it, and 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.” Law of January 7, 1791. Text quoted in A. C. Renouard, op. cit., p. 93.

22

Economics of the International Patent System

Paris in 1878.3 Intellectual “ property ” was held to be the most sacred of property rights and to be logically indistin¬ guishable from material property. If the proposition is accepted that pre-existing natural rights impose upon society the moral obligation to grant an exclusive property right to the individual who brought am invention to patentable form, then there can be no argument about the international recognition of this right. As each separate country is part of world society, it is morally bound to recognize all such rights, regardless of the country in which they originated.4 Insofar as an international arrangement is merely a means of effecting this recognition, it has its justification in a higher law than that of man. But to accept this proposition, it is necessary first to believe that property is a natural right and not a social institution established for social purposes, and second, that ideas are a possible subject of such exclusive rights, and a proper subject irrespective of the social consequence of the denial to others of the right to imitate.5 6 3 “ The rights of inventors and of industrial creators over their work, or of manufacturers and business men over their marks is a right of property; the civil law does not create it, it only regulates it.” Congres international de la propriete industrielle tenu a Paris du 5 au 17 septembre 1878, Comptes Rendu Stenographiques, p. 250. A variant of the natural right position identified the natural right of inventors with the right of a man to his own personality. This was a popular theory of the rights of literary and artistic authors but was also applied to inventions— an invention being an extension of the personality. Thus Marcel Plaisant, a noted French jurist wrote: “ The right of the inventor, as the right of an author, is above all a right of the personality. ... In our eyes, the principal theoretical justification of the right of the inventor, or in general of the creator in the industrial sphere, lies in the principle that the mission of the law is to provide most generously for the extension of the human personality. . . .” Marcel Plaisant, De la protection Internationale de la propriete industrielle (Paris: 1933), p. 10. 4 “ If inventions are recognized as the indisputable property of their authors, then must this property be protected and respected according to the conditions of natural justice as between states just as any other more or less valuable things which are the subject of property, whether they belong to citizens or foreigners.” A. Krauss, Geist der osterreichischen Gesetzgebung zur Aufmunterung der Erfindungen (Wien: 1838), p. 36. 6 To some writers the free spread of ideas, i. e., the right to imitate, has seemed more of a “ natural right ” than the property right: “ That ideas should

The Rationale of the Patent System

23

Many could not accept the implications of the argument and in the 19th century the debate in patent circles was at the same time subtle and furious. It was pointed out that to be the subject of a property right, a thing must be capable of being possessed exclusively by its owner and that once a man parted with his ideas he could no longer control them, they became common property and restitution to the original “ owner ” became impossible;6 that the same idea was very commonly generated independently in different minds and could not be held to be the property of one and not of others;7 and that since an individual drew freely on the ideas of others, past and present, he could not claim exclusive rights to “ his ” idea, unless he first gave up all he owed to others, which was obviously impossible.8 freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his conditions, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property.” Thomas Jefferson, Letter to Isaac McPherson, August 13, 1813. The Complete Jefferson, Saul K. Padover, ed. (New York: 1943), p. 1016. Thomas Jefferson was the first United States Patent Commissioner. 6 “ Property in ideas once published, is an insoluble contradiction.” He who complains about the “ theft ” of his idea “ complains that something has been stolen which he still possesses, and he wants back something which, if given to him a thousand times, would add nothing to his possession.” Hermann Rentzsch, “ Geistiges Eigenthum,” Handworterbuch der Vblksvnrtschajt (Leip¬ zig: 1866), p. 333. 7 For example, as early as 1863 Max Wirth, a German economist, wrote: “ Inventions do not belong in the category of intellectual property, because in¬ ventions are emanations of the current state of civilization and, thus, are common property. . . . What the artist or poet creates is always something quite individual and cannot simultaneously be created by anyone else in exact likeness. In the case of inventions, however, this is easily possible, and ex¬ perience has taught us that one and the same invention can be made at the same time by two different persons; inventions are merely blossoms on the tree of civilization.” Max Wirth, in Vierteljahrschrift jiir Volkswirtschajt und Kidturgeschichte, op. cit., p. 222. . .8 The London Economist conducted a spirited campaign against the patent system in the middle of the 19th century and made much of this argument: “ Before . . . [the inventors] can . . . establish a right of property in their inventions, they ought to give up all the knowledge and assistance they have derived from the knowledge and inventions of others. That is impossible, and the impossibility shows that their minds and their inventions are, in fact, parts of the great mental whole of society, and that they have no right of property

24

Economics of the International Patent System

These arguments were strong, even to those who believed that a “ natural property ” existed in other things. But there was a further objection: if the patent grant is justified on grounds of natural property, there is no more logical or moral justification for limiting it in time than in space.9 This became an insuperable difficulty to the widespread adoption of the natural property theory. It was logically necessary to espouse the cause of perpetual patents: rights granted to an individual, his heirs and assigns in perpetuity —a position which led to such obviously unacceptable results from a social point of view that it forced the recognition of the social element in the patent grant. With a few excep¬ tions those who insisted on a reasoned justification for patents abandoned natural law and turned to other arguments. In spite of the more or less formal abandonment of the natural property conception of the patent right, it has not entirely disappeared. George E. Folk, Special Patent Adviser to the National Association of Manufacturers, in a book published in 1942 states that A patent is the means by which an inventor s right in something new which he has discovered ... is confirmed or made ‘ secure.’ Without a 'patent he has a right to his own creation, but is helpless to protect his invention against appropriation by others except by concealment.10

Mr. Folk is clearly using the word “ right ” in a moral and not in a legal sense and can only have some “ natural right ' idea in mind. Similarly the loose use of the word “ stealing ” remains in most patent discussions to remind in their inventions, except that they can keep them to themselves if they please and own all the material objects in which they may realize their mental con¬ ceptions.” The Economist, December 28, 1850, p. 1434. 11 “ But if the industrial discovery is truly the property of its author, property absolute beyond all doubt . . . how then, and by what right, can one limit the use of this property to ten, fifteen, or even twenty years in order finally to confiscate it for the public use? ” Charles Coquelin, Dictionnaire de l’Economic Politique (Paris: 1873), p. 213. 10 George E. Folk, Patents and Industrial Progress (New York: 1942), p. 10. (Italics are mine.)

The Rationale of the Patent System

25

us of the natural property right conception of patents. Stealing could, of course, be given a narrow meaning: the appropriation of something which by law is granted exclu¬ sively to another. But it is used in a wider and vaguer sense to include the use by another of a man’s ideas even though they are not in fact patented or patentable under the law applying to him who uses them. Upon this concept all charges of “ piracy ” are based when they are leveled against nations who permit their nationals to use freely inventions patented elsewhere but which are not patentable under their own laws. The notion of theft as applied to ideas, calls for further investigation because it would be manifestly absurd to require that a man should find the “ owner ” of each idea he uses, obtain his permission to use it and perhaps pay for it. Ideas are in general free goods. It may be dishonorable to take the ideas of another and consciously to represent them, for pay or credit, to the world as your own ideas— but this is plagiarism, misrepresentation and false pretenses. If there is no misrepresentation of this sort, under what conditions can a man use another’s ideas without being charged with a moral, if not a legal, theft? For example, suppose an inventor produces the proverbial better mousetrap and sinks time and money into perfecting it. His competitors quickly copy his product and retain for themselves part of the mousetrap market they would otherwise have lost. They thus force the inventor to sell at a lower price than he could have obtained if he could have averted their competition. Such competitors are called pirates and thieves and are classed among the low characters of the business world.11 Whether the original inventor makes 11 See, for example, the violent language used in Sylvan Gotshal, The Pirates Will Get You (New York: 1945), against low-priced mass production com¬ petitors in the ladies’ dress industry who copy the designs intended for the high price market and thus ruin their attractiveness to the lady of fashion.

26

Economics of the International Patent System

enough money to cover his expenses before his competitors force lower prices is irrelevant to the charge of stealing; one may argue that he who works hard to get a better mousetrap deserves a reward, but this is a different aspect of the matter. In what sense is it morally “ wrong ” for an inventor’s competitors to copy him? It is true that if one in an under¬ handed fashion deliberately appropriates the ideas of another for his own profit to the harm of the man who developed them, there may be something reprehensible, dishonorable or sly about it depending on the specific circumstances of the case and the conventions of society. It is this general idea of dishonorable behavior that seems frequently to be exploited by vested interests to force a recognition of the proposition that a man does not have a right openly to imitate the better ways of doing things he sees about him that he did not originally develop. In general, the notion is probably more closely connected with the idea that it is unfair to deprive a man of a just reward for his services; this is a distinct argument for the patent system and one to which we now turn. Reward for Services Rendered The second line of argument is also primarily based on a concept of natural right, although it rests on an economic hypothesis. The logic is as follows: A man has a right to receive, and therefore society is morally obligated to give, reward for his services in proportion as these services are useful to society. Inventors render useful services. An exclusive privilege in the form of a monopoly patent is the most appropriate reward to inventors. Applied to patents, the argument implies that 1) an invention is the work of an identifiable inventor; 2) the maximum total revenue that can be obtained in the market by a monopolist is a correct measure of the usefulness to

27

The Rationale of the Patent System

society of an invention; 3) the moral deserts of the inventor are in proportion to the usefulness of the invention as so measured. Each of these propositions has at some time been strongly challenged and a full discussion of them would take us far afield; hence I shall do little more than outline the nature of the problems raised. The mere statement of the implications of the argument, however, helps to reveal its limitations, and also to indicate how extensive an exhaustive analysis would have to be. The inventor of a patentable invention is he who first brings the invention to patentable form and files his claim at the patent office. Opponents of the patent system have long pointed to the fact that the same invention has frequently been made by different people at about the same time and have asked, why reward him who might be lucky enough to be the first? The difficulty of defining an invention, of sepa¬ rating it from others, of deciding which of the men who have participated in the series of experiments and discoveries preceding the perfecting of an invention should be given the exclusive credit, has led many to feel that the patent system was more unjust to the many than just to the one.12 Under modern laboratory conditions particularly, the cooperative nature of research makes such separation increasingly arti¬ ficial. This does not deny that there are times when the work of one man is of such outstanding importance that it should be rewarded. But the patent system as administered in most countries today is not sufficiently selective to ensure that the reward goes where it is most deserved.13 12 That the patent law may be unjust to other inventors has frequently been urged. The London Economist (Feb. 1 1851, p. 114), charged: “ . On all inventors it is especially a prohibition to exercise their faculties; and in pro¬ portion as they are more numerous than one, it is an impediment to the general advancement. . . .” 13 Alfred E. Kahn has ably expressed this objection: “ . . . novel elements [in technological progress] are what we call inventions. They are, of course, created by individuals; but these individuals merely make explicit what was already implicit in the technological organism which conditions their thought

,

. .

28

Economics of the International Patent System

If the reward of an inventor is obtained as a result of the monopolistic position in the market assured to him by a patent, it clearly follows that the size of that reward depends upon the total net revenue that he can exact from the exploitation of his monopoly. The price that society is willing in this way to pay is taken as a measure of the useful¬ ness of the invention to society. If usefulness is to be measured by the price that can be obtained from the sale of articles manufactured under a patent, then usefulness is a function of the conditions under which they are produced and sold. These include the state of technique, consumers tastes, the distribution of income and the availability of complementary factors of production, the organization of advertising and other forms of salesmanship, the types of tariffs, and—of especial importance from our point of view— the duration and scope of the patent grant. Furthermore, to use price as the measure of usefulness is to assume that there are no standards other than the existing effective demand of consumers in terms of which one can define use¬ fulness to society as a whole—an assumption that is open to considerable debate. Nevertheless, in spite of its limitations at any given time or place, market price is often employed in economic analysis as a rough measure of the usefulness of goods to society or of factors of production in different uses. It is so used because in our society pricing is the mechanism by which and effort and within which they must work. Strictly speaking, no individual makes an invention, in the usual connotation of the term. For the object which, for linguistic convenience, we call an automobile, a telephone, as if it were an entity, is, as a matter of fact, the aggregate of an almost infinite number of individual units of invention, each of them the contribution of a separate person. It is little short of absurdity to call any one of the interrelated units the invention, and its ‘ creator ’ the inventor. The man who brought to a certain stage of fruition the efforts of myriad predecessors and who laid the groundwork for the efforts of myriad successors, and whom therefore we call the inventor, may have made a great contribution. But seen in its proper setting and perspective, the contribution is something less than cataclysmic.” Alfred E. Kahn, “ Fundamental Deficiencies of the American Patent Law,” American Economic Review, v. 30 (1940), p. 478.

The Rationale of the Patent System

29

the relatively scarce resources available to men are dis¬ tributed among their different uses. With a given income, the price that people are willing to pay for the use of any commodity or factor of production largely determines the amount of it going into that use and at the same time the price measures its “ value ” in that use. Clearly the patent system is an attempt to include the production of inventions in the same framework of pricing as the production of other things, and to do this by creating scarcity—by limiting the use of the invention. For if value is defined in terms of price, value will only arise when goods are scarce. Scarcity is itself the raison d'etre of the pricing mechanism. When scarcity does not exist, usefulness to society and economic value have nothing in common. The more widely a good can be used, the greater, surely, is its total usefulness and to limit its use is to limit its usefulness although this may at the same time give it an economic value. This is, of course, a restatement of the famous paradox of value, but so far as inventions are concerned a price is put on them not because they are scarce but in order to make them scarce to those who want to use them. This restriction on the usefulness of an invention once it is patented was implicitly recognized by the framers of the patent laws of many countries when they made particularly important products—e. g., medical and pharmaceutical pro¬ ducts—unpatentable. The restriction on their use was con¬ sidered undesirable. A patent deliberately decreases the utilization of an invention by society in order to create an economic rent. The purpose of creating this rent is to enable the inventor to receive a return for his work. Hence to reward the inventor, a system is created which specifically reduces the use made of his invention. Clearly this can only be done in regard to inventions which directly result in marketable products. So-called scientific discoveries are not

30

Economics of the International Patent System

in this class although they are used in the process of inventing marketable things.14 Thus monopoly price as a measure of the usefulness of an invention is extremely artificial and limited. The price simply measures how much people are willing to pay for the product with the existing distribution of incomes, existing tastes, existing substitutes and existing institutional arrange¬ ments. The arbitrary limitation of the patent to the same period for all inventions irrespective of the time and expense it takes to perfect them and to develop a market for them may well result in the more difficult and elaborate inventions receiving a smaller “ index ” of usefulness than the easily developed, easily marketed inventions that catch the popular fancy quickly. In the former case only a small part of the total return may arise in the period for which the monopoly is granted while in the latter all of the return may accrue to the patentee. These considerations by no means constitute a conclusive argument against the patent method of rewarding inventors. As will be seen later, it can be maintained with considerable plausibility that inventions will not be forthcoming, or that business men will not take the risks associated with the introduction of something new, unless the possibility of monopoly rewards is held out to them. But these are totally different arguments from that which insists on the moral obligation of society to pay a reward, the appropriateness of which is measured by the monopoly profit obtained. The appraisal of moral deserts is exceedingly difficult if not impossible. Effort, good intentions, great ingenuity and intelligence help a man not at all if they are directed to the production of something nobody wants. Yet how shall one judge moral deserts? One man may spend his life developing 14 It has been argued, however, that modified patent rights should be granted in scientific discoveries. See C. J. Hamson, Patent Rights for Scientific Dis¬ coveries (Indianapolis: 1930).

The Rationale of the Patent System

31

a great idea for which society is not ready; another may perfect a bright idea in an evening for a clever gadget which society is willing to buy in large quantities and to pay millions of dollars for. It seems unnecessary to labor the point that there is even less relation between monopoly profits and moral deserts than there is between such profits and the social usefulness of inventions. It may be that special measures should be taken to reward some inventors since it is true that their services are useful and that in a reasonably competitive industry they may not always receive payment for their work, the whole benefit from their inven¬ tion flowing to others. This is simply an argument for rewarding inventors and not at all an argument for the patent method of doing it. Economic Arguments for the Patent System

Thus no matter what elements of partial truth there may be in the two natural rights arguments for the patent system that we have just examined, they are not of overwhelming force. The truth of this observation is demonstrated by the fact that even the most thoroughgoing proponents of unre¬ stricted patent privileges almost invariably try to support their position with assertions as to the economic desirability of patents. Like the natural rights arguments, the various economic arguments for patents can be broken down into two distinct groups. One insists that patents are necessary to get disclo¬ sure of secrets, and the other that patents are necessary to encourage inventors to invent and business men to exploit inventions.

Disclosure of Secrets Many writers have based their support of the patent system on the following proposition:

Industrial progress is

32

Economics of the International Patent System

desirable. Inventions and their exploitation are necessary to secure industrial progress. In the absence of protection against imitation by others, an inventor will keep his inven¬ tion secret. This secret will die with the inventor and society will lose the new art. Hence a means must be devised to induce the inventor to disclose his secret for the use of future generations. This can best be done by granting him an exclusive patent which protects him against imitation. This theory of the purpose of the patent grant has fre¬ quently been put in the form of a “ social contract ” theory: Society makes a contract with the inventor by which it agrees to grant him the exclusive use of his invention for a period and in return he agrees to disclose his secret in order that it will later be available to society.15 Once a patent has been granted in one country, disclosure of the invention has taken place. Except under special circumstances no further disclosure is made by virtue of the extension of the privilege to another country. Hence the only relevance the disclosure theory has for the international extension of the patent system arises from the possibility that an increase in the value of the patent by its extension 16 “ . . . the patent constitutes a genuine contract between society and in¬ ventor; if society grants him a temporary guarantee, he discloses the secret which he could have guarded; quid pro quo, this is the very principle of equity.” Louis Wolowski, Annales de la Societe d’ficonomie Politique, v. VIII (1869-70), p. 126. And for the contrary view: “ Patent Laws are erroneously said to be a con¬ tract between the public and the inventors of useful improvements; but as inventors have no part in the contract, but merely comply with certain con¬ ditions, it follows that the patent laws are public propositions for awarding exclusive privileges, or rather affording protection of natural rights to inventors.” Oliver Evans, Patent Right Oppression Exposed (Philadelphia: 1813), p. 132. The social contract theory also served another purpose according to an American writer: “ For several decades after the passage of the Statute of Monopolies . . . the public attitude toward a patentee was hostile . . . and the courts shared the hostility of the public, so that the rights of the patentee were confined strictly within the literal meaning of the words of the patent. . . . This general prejudicial attitude in the interpretations of patents could only be overcome after the memory of the old abuse of the monopoly had faded away. This development was aided by the doctrine of the ‘ social contract.’ ” A. J. Michel, Introduction to the Principal Patent Systems of the World (New York: 1936), p. 10.

The Rationale of the Patent System

33

over a wider geographical area increases the incentive for an inventor to take out a patent, and hence increases the incentive to disclose his secret. Furthermore, an inventor who expected the chief market for his product to be in countries other than his own might hesitate to disclose his invention in return for a domestic patent which would be of less use to him than the disclosure would be of use to his foreign competitors. The validity of the justification for patents as a means of inducing disclosure of secrets has been attacked on three grounds: 1) that it is nearly impossible to keep important inventions secret for very long;16 2) that even if the inventor could keep his secret, the fact is that inventions are called forth by the needs of society and made possible by the state of technique and consequently, with rare exceptions, others would soon hit upon the same ideas and make the same invention;17 and 3) that the patent systems are such a handicap to inventors because of the excessive litigation necessarily accompanying them that inventions are in fact patented only when secrecy is impossible.18 10 Consequently, if the contract theory of the patent grant is held, the con¬ tract, in the words of J. E. T. Rogers is “ thoroughly one-sided ” since society gets nothing it would not eventually have got in any case. J. E. T. Rogers, “ On the Rationale and Working of the Patent Laws,” Journal of the Statistical Society of London, v. XXVI (1863), p. 125. 17 “ Society would not be in the least injured though all such secrets died with their possessors . . . against all such suppositions that an individual may discover something of such pre-eminent importance that society will be injured if he be not encouraged by a patent law to make his discovery known ... it is more conclusive that nearly all useful inventions depend less on any individual than on the progress of society.” The Economist (London), July 26, 1851, p. 182. Waldemar Kafempffert brilliantly illustrates this thesis in “ Invention as a Social Manifestation,” A Century of Progress, Charles A. Beard, ed. (New York: 1932). 18 The problem of excessive litigation has plagued the patent system in most countries for over a hundred years and many authorities have concluded that it is an unavoidable by-product of the system. It was bitterly complained of in England in the 1850’s. In 1851 the Earl of Granville, Vice-President of the Board of Trade, said: “ Except, perhaps, cases of warranty of horses, there was no subject which offered so many opportunities for sharp practice as the law of patents.” House of Lords, Parliamentary Debates, July 1, 1851, col. 18. Bis-

34

Economics of the International Patent System

There is no way of determining whether or to what extent patents prevent the loss of new inventions and ideas to society because the inventors would otherwise carry their secrets to the grave. It is difficult to see why an inventor would go to the trouble of taking out a patent if the danger of imitation or of independent discovery of the same invention were slight. As it is, firms closely guard their techniqjes —frequently called “ know-how ”—and without the “ know¬ how ” many patents are of little value. Some discoveries may have been lost for years because the inventor did not make them available. It is argued, however, that he would not disclose his secret in return for governmental protection unless he considers that protection to be more effective than secrecy. On the other hand it is also possible that research workers in modern laboratories would not take the trouble to write up their discoveries if a patent could not be obtained on them. The secrecy theory of the patent grant is still a popular argument used to justify the patent system. It shares this popularity with the argument next to be discussed. Encouragement of Invention The essence of the fourth general argument for patents is as follows: Industrial progress is desirable. Inventions and their exploitation are necessary to secure industrial progress. Neither invention nor the exploitation of invention will be obtained to any adequate extent unless inventors and capi¬ talists have hopes that successful ventures will yield profits which make it worth their while to make their efforts and risk their money. These profits will not be hoped for unless special measures are taken.

The simplest, cheapest and

marck in Germany in 1868 had much the same objection; Godefroi in Hol¬ land in 1869, Chevalier in France in 1878 and Vaughan in the United States today: “ The obstacles which may greet the inventor at every turn encourage him to keep his invention secret. The likelihood of interference proceedings and of subsequent litigation especially deters the poor but intelligent inventor in taking out a patent.” F. L. Vaughan, Economics of Our Patent System (New York: 1925), p. 220.

j

The Rationale of the Patent System

35

most effective measure is an exclusive patent right in inven¬ tions. 17*2 8 626 Clearly there are two arguments here: one has to do with the attitude of inventors and the other with the attitude of businessmen. A thorough systematic analysis would treat each separately but it is not necessary for this brief review to distinguish them although most of the arguments sketched below apply to the latter. Because of the fact that so much invention is today carried out by salaried employees, many writers have largely abandoned the argument that the patent system is necessary to get inventors to invent. The argument that capitalists would not introduce innovations or encourage research without the prizes of the patent monopoly is the more popular one today.19 It is extremely difficult to evaluate this proposition. In the first place there are no units in which one can measure the amount of invention and no way of knowing what is the “ optimum rate of invention.” One can argue therefore, that there is too much invention, that extensive innovations are unsettling to the economic system and that patents create an undesirable form of competition in the production of invention.20 On the other hand, one can insist that innova¬ tion is the mainspring of progress and that it is necessary on an extensive scale to prevent prolonged unemployment in a capitalist system.21 19 Incidentally, the fact that employees make the inventions while their em¬ ployers get the patent reward has been suggested as one of the reasons why the French, after creating the doctrine of intellectual property in the 18th century, abandoned it in the 19th. Clearly this doctrine wrould not have been in the interest of employers. See F. D. Prager, “ A History of Intellectual Property,” p. 736. 20 “ . . . the multiplicity of inventions is not at all enviable. ... By holding off competition through the monopoly, you establish competition of inventions which is the worst of all. Industry needs a certain stability, and while avoiding the spirit of routine, it needs to guard itself against continued modifications which upset calculations and prevent the final fruition of the discovery of the day because of the fear of seeing the efforts and expenses become pure loss before the discovery of tomorrow.” Edmond Picard and X. Olin, Traite des brevets d’invention et de la contrefagon industrielle (Brussels, 186-), p. 23. 21 Some theories of the business cycle stress the role of innovation in pulling

36

Economics of the International Patent System

Secondly, one can argue that there would be adequate innovation in any case 22—that the imperfections of competi¬ tion are such that before imitating competitors had appreci¬ ably reduced the profits flowing to him who first introduced a new and better way of doing things, sufficient returns would have been earned to reward him for his risk and originality.23 On the other hand, one can argue that competi¬ tion will so quickly reduce the profits of innovators that nothing would remain to cover the “ sunk ” costs of time, effort and money put into the invention and its development —costs that competitors who merely imitate the final result do not have.24 If one tries to discover what inventors and business men have said about the question—which, after all, ought to have considerable weight because these are the people who an economy out of a depression, and some versions of the “ stagnation thesis ” of the modern capitalist economy give a prominent role to technological innova¬ tions providing investment opportunities. 22 F. W. Taussig, for example, argued that men were possessed of an “ instinct of contrivance ” in varying degrees which needed little stimulation. “ If we now admit that there is an instinct of contrivance, and that there is a keen satisfaction in following it, we are led to question the proposition that progress in the arts depends on an experience or prospect of gain. ... To say that the forward march of the industrial arts is dependent on a patent system is like saying that poetry, music, the plastic arts are merely forms of money-making.” F. W. Taussig, Inventors and Money-Makers (New York: 1915), p. 17. 23 E. A. G. Robinson has suggested that the normal frictions are in fact con¬ sidered adequate by many manufacturers: “ In practice the enforcement of patent monopolies is often so difficult, and so expensive in legal fees, that competing manufacturers have in some industries preferred to pool patents; and to look for sufficient reward for technical invention in the year or so more’s advantage of priority that earlier experimentation usually gives and in the subsequent good-will that may arise from it.” E. A. G. Robinson, Monopoly (Cambridge: 1941), p. 120. 24 Schumpeter has built a general theory of capitalist progress on the necessity of holding back competition in the short run in order that in the long run innovation will be undertaken. He asserted that “. . . perfectly free entry into a new field may make it impossible to enter it at all. The introduction of new methods of production and new commodities is hardly conceivable with perfect— and perfectly prompt—competition from the start. And this means that the bulk of what we call economic progress is incompatible with it. As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced—automatically or by measures devised for the purpose—even in otherwise perfectly competitive conditions.” Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York: 1947), p. 105.

The Rationale of the Patent System

37

actually make the innovations—one can compile two lists of nearly equal length: assertions about the favorable influ¬ ence of patents can be matched by assertions that they are neutral or actually harmful. The following examples of divergent opinion have been selected from widely separated investigations:

United States, 1939. Hearings before the Temporary National Economic Committee, Part 2. Q. “ Suppose the patent system should be abolished tomorrow ?” A. Mr. Knudsen (President of General Motors Corporation): . .1 think it would be bad for industry generally.” P. 330.

Q. “ Do you have any opinion as to whether, if it were not possi¬ ble for a company to acquire a patent on an invention, the same work would nevertheless be carried on? ” A. Edsel Ford (President, Ford Motor Co.): “ I feel quite defi¬ nitely it would be carried on.” P. 262.

Switzerland, 1886 Investigation of the Zurich Chamber of Commerce on the protection Df inventions. Bureau der Kaufmannischen Gesellschaft, Zurich, Ueber die Einfuhrung des Schutzes der Erfindungen, Muster und Modelle. Manufacturer in the Machine In¬ dustry: “ The protection of in¬ ventions would stir up the worker, while today he has not the least interest in inventions or improvements.” P. 43. Manufacturer in the Beer Industry: “ It is obvious that the invent¬ ing spirit will be strengthened if he has before him a pecu¬ niary reward.” P. 46.

Manufacturer in the Silk Indus¬ try: “ In our opinion it is pure fantasy to believe that the protection of inventions would result in greater activity or encouragement of workers.” P. 44. Manufacturer in the Pottery In¬ dustry: “ The inventing spirit . . . follows his ideas, not for gain but driven by an inner compulsion which will not let him rest.” P. 45.

38

Economics of the International Patent System

United Kingdom, 1871. Proceedings of the Select Committee on Letters Patent, House of Commons Sessional Papers, v. 10. Henry Bessemer (Inventor of the Bessemer steel process): I certainly believe that the manu¬ factures of this country are in¬ finitely benefited by the patent laws; and I believe that with¬ out the patent laws the manu¬ facturing skill of this country would decline immensely from the day we abandoned them.” P. 147.

J. Nasmyth (inventor of the steam hammer) : “. . . so far as I know inventors, the result of taking away the patent law protection, would be to intro¬ duce a system of secrecy, and of a consequent shutting up of ingenious ideas . . . valuable ideas would be kept secret. . . ” P. 179.

Eugene Schneider (M a n a g i n g Partner of Creuzot, armament manufacturers): “. . . a patent ought not to be granted except ... in cases absolutely excep¬ tional ... I do not believe that in industrial matters there is occasion for many patents ... I am very desirous of having the most rapid progress possible, and I am quite of the opinion that there would be very little difference in that respect if patents were abolished, with an unrestricted system the progress might com¬ mence a little later . . . but the progress would proceed all the faster.” P. 128 and p. 133. Sir William Armstrong (inventor and manufacturer): “ Q. If there were no patent laws, would many inventions be lost to the world, do you think? A. I doubt whether any would be lost to the world. Q. Or very much delayed? A. The patent laws will act as a stimulus in certain cases; but, I think, the fertility of inven¬ tion is such that if you leave it to itself it will always pro¬ duce the thing that is wanted.” P. 177.

The only group in all of these investigations in which opinion was virtually unanimous as to the desirability of the patent law was the group which comprised the patent bar— the patent lawyers! Many writers have tried to prove the usefulness of the patent system by historical evidence regarding the compara-

The Rationale of the Patent System

39

tive development of different countries with different systems. It would be helpful in evaluating the patent system if argu¬ ments based on the comparative industrial development of different countries had any logical rationale. Unfortunately it is necessary to reject them since there is no way of showing what would have happened if the history of the patent system had been different.25 Furthermore, the theory of patents, when translated into practice, is embodied in a number of provisions of a statute regarding patentability, examination, duration of the grant, procedural matters, fees, etc., all or any of which may have an adverse or favorable effect. Hence the conclusion that this or that patent law is effective or ineffective has no necessary relevance to the operation of a law with different provision. Consequently it seems that the argument that patents are necessary to induce invention and to encourage the exploita¬ tion of invention is difficult to evaluate and impossible to test adequately. It is not, however, necessary for the purposes of this study to come to a firm conclusion on this point. It is enough if the nature and limitations of the argument have been exposed; the desirability of national patent laws is not the subject we are investigating. T countries have today officially accepted this argument and justify their patent laws largely by it. 25 The following are typical examples of this type of argument: “ China grants no patents to foreigners, which probably is a factor in that nation’s limited industrial development.” W. B. Bennett, The American Patent System (Louisiana: 1943), p. 227. G. A. Bailly attempts to show what a weak patent law has meant for Brazil by the following process: “ It is only necessary to compare our country with the United States. . . . How many inventors in Brazil have been successful with their inventions? If there are any, it is a very small number. And how many are there in the United States? A very great number.” G. A. Bailly, op. cit., p. 5. And Robert L. Lund, Chairman, Committee on Patents and Research, National Association of Manufacturers (U. S. A.) states, “. . . the strongest evidence of the value of the American Patent System is our industrial economy which has been built largely upon a groundwork of patented inventions.” Fore¬ word to George E. Folk, Patents and Industrial Progress, p. xii.

40

Economics of the International Patent System

The only serious attack on the patent system occurred in the middle of the 19th century and was defeated. If national patent laws did not exist, it would be difficult to make a conclusive case for introducing them; but the fact that they do exist shifts the burden of proof and it is equally difficult to make a really conclusive case for abolishing them.26 Few deny, however, that there are very serious defects in the system today and minor reforms of the patent law are fairly frequent in most countries. Attempts at reform, particularly if they tend to reduce the scope of the monopoly, are violently attacked and usually misrepresented by vested interests,27 but it should be clear now that even if a reduction in the patent monopoly is recommended such a recommendation can hardly be regarded as an attack on “ the rights of man in their very essence.” 28 20 Particularly a case conclusive to those who are emotionally attached to the laws. It was once wisely said with respect to the patent system: “ It is life and not logic that gives birth to law, and a system of legislation that has developed through and by accidents and incidents of the history of a nation has such a claim to the sympathy of that nation that no demonstration no matter how complete, of the absurdity or even bad effects of the system will serve to weaken this attachment.” A. Wood Renton, “ L’unification inter¬ national du droit en matiere de brevets d’invention,” Revue de Droit Inter¬ national, v. 23 (1891), p. 491. 27 In particular those who wish closely to restrict or regulate the patent monopoly are in danger of being classed as “ enemies of private ownership of property, especially of patents, who seek an economic revolution and would subject the patent system to bureaucratic control.” George E. Folk, op. cit., p. 77, referring to the “ ammunition ” used by Walton Hamilton against the patent system in Patents and Free Enterprise (TNEC Monograph No. 31). The charge of “ communism ” has been hurled at the other side too, since it is a convenient charge for any purpose. The London Economist (Feb. 1, 1851, p. 114) said that for the legislature to take unto itself the power to distribute the fruits of discovery by providing for patents is to substitute “ communism for property ” and if it does this in this case “ why not in every case? ” 28 “ We may leave undiscussed the question whether if there were no patent rights of any kind there would be an inadequate flow of invention; . . . But it is really quite ridiculous to suggest that any modification in the present law would necessarily have this consequence, that the thing is naturally sacrosanct. The patent system in its present form is a highly artificial creation emerging from a process of legislation in which the role of pressure groups and muddled thinking has been unfortunately only too prominent; and no convincing argu¬ ment has yet been put forward to show that the abolition of the present system and the substitution of a * licence of right ’ system whereby, after a very short period, anyone might use a patent on paying a licence fee to the

The Rationale of the Patent System

41

The most solid arguments for rewarding inventors rest on the usefulness of invention and on the interest of society not only in promoting some invention but also in granting rewards to those who serve it. Not all invention, however, is useful enough to justify the burden of a fourteen to twenty year monopoly and not all inventors require special con¬ sideration. A sweeping, non-discriminating, generously ad¬ ministered, and unconditional patent grant is an expensive and blunt instrument and most countries have struggled with efforts to adapt the principle of the patent system and to limit the scope of the patent monopoly in order to increase the flexibility and reduce the costs of this means of encourag¬ ing invention. There are alternatives to the patent method of promoting invention but it would be too far off our main course to discuss these here. Our immediate task is to investigate the development of the national patent systems into an international system in the light of the general considerations of these first two chapters; to appraise, from an economic point of view, the advantages and disadvan¬ tages of the major international arrangements as they exist today.

inventor, would be unjust to inventors or diminish the flow of invention. But certainly it would sweep away the whole network of monopolistic practice which rests on the present system.” Lionel Robbins, The Economic Basis of Class Conflict (London: 1939), p. 73.

Chapter

III

THE DEVELOPMENT OF THE INTERNATIONAL CONVENTION FOR THE PROTECTION OF INDUSTRIAL PROPERTY As the patent system spread into one country after another in the 19th century, demands from various quarters for the adoption of international regulations increased. Com¬ mercial interests are no respecters of national boundaries and while the laws of each country prevail only within the juris¬ diction of that country, the interest of the patentees in the use of their inventions frequently extends beyond the juris¬ diction of any one country. As might be expected, the patent laws adopted by the various countries, though designed broadly for the same purposes, varied considerably in their detailed provisions. Although few discriminated against foreigners specifically, the difficulty of complying with many different regulations made it almost impossible for a patentee to get protection in many countries. The definition of what was considered a patentable in¬ vention differed between the laws of different countries and consequently a patent might be obtained on an invention in some countries while in others the invention was excluded from patent protection. This was—and is—particularly true with regard to medicines, foods, drugs and chemical products. Novelty of the invention was required in most countries and an invention was frequently not considered new if it had been published or publicly used abroad. When an inventor applied for a patent in his own country he had to disclose the nature of his invention, and the publication of the specifi-

42

Development of the International Convention

43

cation attached to this patent application was held by a few other countries to destroy the newness of the invention for patent purposes. In applying for a patent in several countries an inventor had to draw up applications conforming to widely different and extremely detailed rules; he had strictly to observe complicated procedures, and he had to do all of these things within short periods of time. In the meantime, others might learn of his invention through the patent application in his own country and patent the invention themselves, if permitted. Or they might simply use it, thus either destroy¬ ing its novelty for patent purposes or acquiring a legal right to its use which could not be touched even if the original inventor succeeded eventually in obtaining a patent. Taxes had to be paid on time or the patent would be forfeited. In many countries the invention had to be put into commercial use within a limited period of time. Thus, to obtain and maintain patents in foreign countries, a patentee was usually forced to incur the expense of obtaining and maintaining patent agents in each country to defend his interests.1 Hence a patentee who wished to exploit his invention abroad, or to obtain a revenue from its exploitation abroad by others, or to prevent others from using his invention to compete with him in foreign markets, had a strong incentive to press for international agreements which would eliminate the difficulties of obtaining protection in countries other than his own. Patent lawyers, jurists and manufacturers joined in the demand for international legislation.2 The “ rights of man ” 1 Many of these difficulties still exist. Some have been eliminated by the International Convention as we shall see. For a discussion of them see Stephen P. Ladas, The International Protection of Industrial Property (Harvard: 1930), pp. 31-32. , This book is the only comprehensive discussion of the international industrial property Convention in English. It is written primarily from a legal point of view and consequently hardly touches the economic issues involved in the principles of the Convention. 2 A French jurist, after describing the great varieties of laws and practices regarding patents, stated: “ It is evident that a situation like this opens the

44

Economics of the International Patent System

were freely invoked in the cause and at times the movement took on the tone of a religious crusade. One of the crusaders, for example, wrote: The striving of the individual human being and the interest of the social organism join in a common cause to justify the juridical insti¬ tution of the right of the inventor or of the creator. . . . But a right which has its source in a human aspiration as profound as that we have just revealed extends to the entire community of men who live and think. . . . How contain the explosion of a new principle in the narrow confines of a single country without permitting it to expand across the universe? 3

Nor was invention the only type of industrial property for which international arrangements were being asked. Trade marks, industrial designs and models were included. The only international protection existing when the Inter¬ national Convention for the Protection of Industrial Property was created in 1880 was such as had been written into bipartite treaties most of which were concerned primarily with other matters. Of these there were some 69 that included provisions affecting industrial property, but only two of them contained provisions for the protection of patents.4 This type of protection was generally considered to be unsatisfactory since it had no separate existence apart from the general commercial arrangements with which it was usually associated. Hence the protection was apt to be “ breve et precaire.” 5 door to a mass of abuses, favors, the carrying on of shameless and unfair industry, a real piracy, which a system of international guarantees would effectively terminate.” Charles Letort, “ Une legislation internationale sur les brevets d’invention,” L’Economiste Frangaise, v. 5, pt. 2 (Sept. 29, 1877), p. 389. 3 Marcel Plaisant, De la protection internationale de la propriete industrielle, p. 11. Similarly Michel Pelletier in a preface to Plaisant’s Repertoire des Brevets d’invention en droit international prive (Paris: 1914), wrote: “A veteran of industrial property, I give you the most sincere wishes for the success of your first attempt: you are not yet more than a conscript and it is with a real pleasure that I see you march, head high and with an alert step, under the folds of the flag that we defend together.” p. ii. 4 Ladas, op cit., p. 54. There had been earlier treaties concerning patents, particularly among the states of the German Zollverein, but these were no longer in existence. 6 Michel Pelletier et Vidal-Naquet, La Convention d’Union pour la protection de la propriete industrielle (Paris: 1902), p. 5.

Development of the International Convention

45

The Vienna Congress of 1873 The first conference to consider the protection of inventors on an international scale met in Vienna in 1873. An inter¬ national Exposition under the auspices of the AustriaHungarian Government was to be held in that year and the inventors in some countries, particularly the United States, feared that their inventions would be inadequately protected under Austrian law. The United States took the lead in pressing Austria to protect more adequately inventions exhibited at the Exposition and, in addition, to revise her patent laws to give more complete protection to foreign patentees in general. Among those provisions of the Austrian law which met the disapproval of the United States was the compulsory working requirement, under which a patented article had to be manufactured in Austria within a year from the issue of the patent.6 The American Minister in Vienna even referred the Austrian Foreign Ministry to an article in the Scientific American which complained of Austrian treat¬ ment of American inventors and ended with a veiled threat of refusal to join in the Exposition if the Austrian law were not changed.7 0 Foreign Relations of the United States 1872-73 (42nd Cong., 3rd sess.), pp. 48 ff. 7 This article read in part: “ Constructors and patentees who have introduced their inventions in European countries have suffered grievous ill-treatment at the hands of the Austrian authorities, whose regulations on the subject of patents are, to say the least, not formed for the protection and reward of foreign talent and ingenuity. One most vexatious rule is that which invalidates a patent unless the article be manufactured in the realm, within twelve months from the date of issue. Now, as patents are, in a measure, characterized by the locality in which they take rise, and are generally most economically worked in the country in which they originate, it is almost equivalent to prohibition to enact that the locomotive engines of Great Britain, the telegraph instruments of the United States, and the printed muslins of France be manufactured on Austrian soil within a year from securing the patent, and ife a preposterous requirement, which ill comports with our liberal systems of granting patents to their subjects. “ But worse remains to be told. An American gentlemen, having a manu¬ factory at Vienna, was enabled to comply with this obnoxious rule: . . . He had obtained a patent and commenced the manufacture of the article almost simultaneously, and two trustworthy and credible witnesses were produced to prove this fact, but the officials deemed their affidavits insufficient, and the

46

Economics of the International Patent System

The Austrians passed a special law protecting exhibited inventions. In addition, on the suggestion of the United States, it was decided to hold an international conference on patent reform immediately after the Exposition.8 Thus, the first international conference on patents was held while the controversy between the patent and anti-patent forces throughout Europe was still lively and bitter. It was not an official conference although representatives from 13 countries were included among the 158 participants.9 The majority of those attending the conference were from Germany and the acute difference of opinion in Germany as to whether a patent law was desirable and whether Germany should adopt one was reflected in the debates of the conference. The resolutions were very general but clearly endorsed the principle of patent protection. The first resolution, consisting manufacturer has been summoned before a court of justice to prove the intro¬ duction. Such hinderance of the rights of foreigners gives rise to an uncom¬ fortable suspicion that the value of Austrian patents issued to Americans and other foreigners can be easily escheated to the benefit of the Austrian public. . . . “ Under such laws, it would be well for the Austrians to consider whether their invitation to the nations is not likely to be met with a contumelious refusal.” Quoted from Papers Relating to the Foreign Relations of the United States, 1872, Part I, p. 48. 8 For a discussion of the events leading up to the Vienna conference see Heinrich Kronstein and Irene Till, “ A Reevaluation of the International Patent Convention,” Law and Contemporary Problems, v. 12 (1947), pp. 766-770. This article includes some very interesting extracts from the relevant documents but is extremely one-sided, presenting the conference as a gigantic American manipulated plot to defeat the anti-patent forces in Europe. The discussion of the conference concludes: “ Thus the Vienna conference was an outstanding American victory, won by a purposeful policy.” This judgment can only be maintained by overlooking the defeat the American delegates suffered on one of the most important issues of the conference (compulsory licensing) and by overemphasizing the American influence as compared to the German. Further¬ more, the Commissioner of Patents reported in 1873 that when Mr. J. M. Thacher, the Assistant Commissioner of Patents and the American delegate to the conference, reached Vienna “ . . . the congress proved to be a mere un¬ official convention of prominent citizens of the various European governments and a few from the United States. For this reason, I am informed, Mr. Thacher did not present his credentials, but by invitation, participated to some extent in the convention as a citizen of the United States.” U. S. Patent Office, Report of the Commissioner, 1873, p. xiii. 0 Amtlicher Bericht iiber den Internationalen Patent-Congress zur Erorterung der Frage des Patentschutzes, “ Der Erfinderschutz und die Reform der Patentgesetze ” (Dresden: 1873).

Development of the International Convention

47

of seven reasons why “ the protection of inventions should be guaranteed by the laws of all civilized nations under the condition of a complete publication of the same,” was violently debated but was adopted by a vote of 80 to 4.10 The second resolution, setting out the principles on which an “ effective and useful patent law should be based ” was even more controversial. The most notable decision of the conference was paragraph (f) of this resolution which recom¬ mended compulsory licensing of patents “ in cases in which the public interest should require it.” 11 This principle was not again to be accepted by an international conference for 50 years but the anti-patent movement in the 19th century had created such an awareness of the possible monopolistic and restrictive effects of the patent system that some limi¬ tation of the patent monopoly had to be conceded by the patent advocates. The official United States position was strongly opposed to any concessions 12 but the resolution was carried by a vote of 42 to 17.13 Finally the conference resolved that it was “ of pressing moment that governments should endeavor to bring about an international understanding upon patent protection as soon as possible ” and empowered a preparatory committee 10 The resolutions are printed in German in the Amtlicher Bericht. I have taken the English text from Papers Relating to the Foreign Relations of the United States, Part I, v. 2, 1873, p. 75. 11 The text was as follows: “ (f) It is advisable to establish legal rules, according to which the patentee may be induced, in cases in which the public interest should require it, to allow the use of his invention to all suitable applicants, for an adequate compensation.” 12 Nevertheless, one American at the conference at least, a Mr. Hamilton Hill of Massachusetts, supported the resolution. And Arthur P. Greely, one of the members of a commission on patent law reform in the United States, later admitted, “ It is by no means certain that it is not wise principle.” U. S. Patent Office, Proposals for Changes in the United States Law, Report of Commissioners 1877, p. 226. 13 Amtlicher Bericht, p. 211. Although endorsing the principle of compulsory licensing, the conference rejected the principle that a patent must be worked in the state granting it (compulsory working): “ The non-application of an invention in one country shall not involve the forfeiture of the patent if the patented invention has been carried into practice at all, and if it has been rendered possible for the inhabitants of such country to purchase and make use of the invention.” Resolution II (g).

48

Economics of the International Patent System

“ to continue the work commenced by this first international congress, and to use all their influence that the principles adopted be made known as widely as possible, and carried into practice.” Five years later the conference that was to establish the basis of an international agreement was called. The Paris Conference of 1878 Under the auspices of the French Government, and again in connection with an international Exposition, a conference of nearly 500 participants, including eleven government delegates and delegates from 48 Chambers of Commerce and industrial and technical societies was called in Paris. Like the Vienna conference, this conference was an unofficial affair, although called by the French government and at¬ tended by some official delegates. More than three-fifths of the delegates were French industrialists and thus the French point of view completely dominated the conference.14 This is one of the reasons why the views of this conference in many respects contrasted strongly with those of the Vienna con¬ ference in which the German element was predominant. Malapert, a French jurist and patent authority, complained that, although invitations were widely sent out, the scope of the conference was so restricted by its promoters that people with a critical point of view did not attend: . The acts of the organising committee had restricted too much a field which ought to be open. There was no place where one could take account of the social position of different populations of the globe, although all were invited to engage in a common task. The radius of the circle was too short, the circumference inscribed a cell in which it was not possible to breathe. It was for this reason that many jurists and economists, expert in the study of patent laws, refrained from attend¬ ing the conference where they would have nothing to learn and nothing to do or teach, since limits had been set outside of which it was forbidden to go.15 14 For a discussion of the composition of the conference see Louis Devaux, Les brevets d’invention au point du vue international (Paris: 1892), p. 73. 15 F. Malapert, “ Des lois ctrangeres sur les brevets d’invention,” Journal des

Development of the International Convention

49

The stenographic report of the conference shows clearly that critics of the operation of the patent system were not well received. “ Vive applaudissements ” occur after speeches in which the strongest and most far-reaching claims were made for inventors’ rights, while “ rumeurs ” are reported when remarks such as the following were made: Messieurs, after the eloquent words which you have just heard, it takes great temerity on my part to mount this platform; but I consider it my duty to arise here to tell you of the dangers and inconveniences which result from the monopoly of exploitation granted by the French law to patentees for fifteen years.16 (Murmurs)

It is not surprising, therefore, that the resolutions of the conference reflect almost exclusively the patentees’ point of view. In addition to the exaltation of the rights of inventors was the exaltation of the spirit of international union. The dream of many who attended the conference was complete uniformity of the laws protecting industrial property in all nations.17 At this time the formation of unions of many kinds was being discussed in conferences all over Europe. The most important of these referred to postal matters, the telegraph, weights and measures, and literary and artistic property. A patent union analogous to these other unions, with a uniform international law, was the goal.18 1Zconomistes, 4e Ser. v. 4 (1878), p. 400. Malapert was not an opponent of the patent system but was critical of many phases of its operation. 18 Speech of M. Poirrier, Comptes Rendu Stenographique, p. 250. 17 M. T. de Bort, French Minister of Agriculture and Commerce made the opening speech. He spoke of the hardships of inventors caused by the great diversity of national laws and went on: “ A study which has for its object the comparison of the merits of these laws and the preparation of an agreement designed to make them uniform is, therefore, not only opportune but an urgent necessity. . . . Lay down the basis of an international legislation. Industrial property will only be truly protected when there are rules, simple, uniform, precise, forming a kind of conventional regime among the nations, a kind of mutual insurance against plagiarism and piracy (contrefayon).” Comptes Rendu, p. 32. 18.“. . . Werner Siemans was the first to show that one ought to found a union for patent rights analogous to a telegraph union.” Albert Osterrieth and August Axster, Die Internationale Ubereinkunft zum Schutze des Gewerblichen Eigentums vom 80 M 'drz 1833 (Berlin: 1903), p. ix. An Italian writer comments as follows: “ The international conventions of

50

Economics of the International Patent System

There were a few participants, however, who were aware of the social implications of the patent law and who felt that some recognition of the interest of society should be explicitly stated other than the general assertion that society benefited because of the encouragement of invention. The very first debate of the conference was on the nature of the inventor’s right and the proposition before the conference was as follows: The right of inventors and of industrial creators in their work, or of manufacturers and business men in their marks is a right of property; the civil law does not create it, it only regulates it.19

M. Clunet, a French jurist, presented a “ counter-propo¬ sition The right of inventors and of industrial creators is an equitable and useful creation of the civil law, which reconciles the rights of inventors and of society by the concession of a temporary monopoly.20

The debate on this issue was heated and involved,21 but the conference came out decisively in favor of the first propo¬ sition. It adopted in effect the “ natural property ” theory which we treat are not positive law and it is not appropriate, as some authors have done, to study them from a theoretical and poetical point of view, singing a hymn to an international solidarity which was in large part non-existent; it is true, however, that these conventions are at least in part the result of a juridical thought which saw as the final goal the creation of an international legislation equal in all countries. It seemed to that era that a current of inter¬ national solidarity was moving towards that goal and that it would be possible to reach it easily in this field where difficulties were much less than in others.” Enrico Luzzatto, La Propriety Industriale nelle convenzioni intemazionali (Milano: 1930), p. 11. 19 Comptes Rendu, p. 130. This resolution and the others discussed below can also be found in Journal des Lconomistes (Oct.-Dec. 1878), pp. 97 ff. and in the Journal du Droit International Prive et de la Jurisprudence Comparee (1878), pp. 412-413. 20 Comptes Rendu, p. 112. 21 M. Turquetel, a French industrialist, living up to the traditional picture of a “ man of action,” characteristic of his kind, complained about the detailed, sophistical nature of the debate: “ We industrialists are in the habit of treating things rapidly, we do not make long sentences. . . . Yes or no! Does industrial property exist? If so, piracy must be suppressed. . . . But why go into so much detail. This is my opinion, gentlemen, I am not accustomed to speaking! ” Comptes Rendu, p. 127.

Development of the International Convention

51

of inventors’ rights. Nonetheless, in spite of this extreme position, it was not possible for the participants in the dis¬ cussions to escape the fact that at times there might be a serious interference with the welfare of society if this “ most sacred of all property ” was subject to no limitations. Hence it was proposed that “ the principle of expropriation in the public interest is applicable to patents.” The adoption of this proposal was opposed on the ground that it was not necessary; if a matter of public health or military necessity existed, the state obviously had the power to override private interests. The majority of the conference, however, felt it was worthwhile to make this principle explicit and adopted the proposal. On the principle of expropriation in the public interest, the conference admitted the right of the state to revoke a patent if manufacture was not undertaken in the country in a specified time, at least if the patentee could not justify his inaction. In other words, the conference approved what is now known as compulsory working—revocation of the patent if it was not worked. Even compulsory licensing as the sanction for failure to work was rejected. In later conferences, revocation of the patent was considered to be too harsh on the inventor, and its replacement by compulsory licensing was fought for and obtained. The Vienna conference had rejected the principle that a patent must be worked in the country granting it and had therefore not even proposed compulsory licensing as a sanction for non-working although it had approved compulsory licensing whenever the public interest required it. In both respects, the Vienna conference was far ahead of the times. It seems curious, however, that in the 1878 conference, where the rights of inventors were upheld in the most extreme forms, the principle of compulsory licensing for failure to work was rejected in favor of outright revocation of the

52

, Economics of the International Patent System

patent.22 This position was the direct result of the natural property theory of patents adopted by the conference. M. Charles Lyon-Caen, a prominent French lawyer, argued heatedly that compulsory licensing was a derogation of the right of property and compared the inventor subject to such licensing to a man who owned his house but was required to allow all who requested it, to live with him on the payment of a rent.23 Compulsory licensing only aided other private groups24 and could not be tolerated, although he would accept expropriation “ pour cause d’utilite publique ” if necessary: If one thinks that industry would have to suffer because of the monopoly, the remedy should not be to impose the obligation on the patentee to concede licenses, but to eliminate patents. ... It is to completely misunderstand the absolute character of the right of property of the inventor to impose on him the obligation to concede licenses.25

The conference accepted M. Lyon-Caen’s point of view and approved the resolution that: Patents ought to assure, during their entire duration, to inventors or their assigns, the exclusive right to the exploitation of the invention and not a mere right to a royalty paid to them by third parties.26

The conference adopted a number of other resolutions 22 A few delegates proposed that the inventor could be adequately rewarded even if the monopoly were not absolute for the entire duration of the patent but were modified either by compulsory licensing, as in Germany, or by a short monopoly period plus a further period in which others had the right to use the invention but the patentee had a right to receive royalties. Various methods of ‘paying from the public domain ” were discussed. Needless to say, the conference rejected all of them. 23 H. A. Toulmin, 60 years later, used much the same analogy against com¬ pulsory licensing in his Patents and the Public Interest (New York: 1939), p. 77. 24 The Chairman of the Conference, Senator Bozerian of France, shared this view: “ What is it then, this public domain, for the profit of which this despoliation is claimed? It is the collection of those who, being unable to invent anything find it natural to despoil those who do invent.” Quoted by M. Eug. Pouillet et M. G. Pie, La convention d’union intemationale (Paris: 1869), p. 80. 25 Comptes Rendu, pp. 155, 156. 20 For the debate which resulted in this resolution see Comptes Rendu, pp. 248 ff.

Development of the International Convention

53

which were much more practical than those so far discussed. Some of them were subsequently taken over as the basis of the international Convention when it was finally agreed. These included the principle that foreigners should be treated equally with nationals in each country; that the laws of each country should apply to its colonies; that the importa¬ tion of patented products by a patentee should not cause revocation of his patent; and that the rights acquired for the same invention in different countries should be independent of each other.27 It was also agreed that it should be possible for a patent claim to be made simultaneously at the appro¬ priate national office and at the consulates of the various foreign nations in which a patent was desired. When it came, however, to the problem of devising the framework of uniform legislation, the conference was obliged to recognize the realism of those who had insisted that uniformity was impossible in a world of national states with different interests, different legal structures and different economic histories, aspirations and ideologies. The partici¬ pants contested vigorously over their different positions, but it soon became clear that the ideal of uniformity of legislation would have to give way to lesser goals. To the orators the ideal was good but the practical problems of achieving it were too great, since no state would admit that its own legal frame¬ work was not the best from which to take the international model. The biggest obstacle to agreement on uniform patent laws was the question of the “ previous examination ” of the invention. Under the law of France and some other countries a patent was issued on the claim of the inventor, without examination of the merits or validity of his claim or of the novelty of the invention. Many other countries, on the other 27 The meaning of some of these resolutions is discussed in the next chapter where the patent provisions of the Convention on industrial property as it now exists are described.

54

Economics of the International Patent System

hand, required that the novelty, utility, patentability, etc. of the invention be scrutinized before the patent could be issued. Although most of the non-French delegates supported the latter system, the French were in the majority and the conference passed a resolution that a patent should be de¬ livered to all claimants at their own risk and thus without governmental examination. Nor was there unanimous agreement on what products should be patentable. “ Batailles tres chaudes ” took place on whether chemical products, pharmaceutical preparations and foodstuffs should be patentable,28 and, although the conference decided in the affirmative, an important minority \fras left dissatisfied. These various differences prevented the conference from coming to any final agreement on the nature of an inter¬ national patent law, and it was decided to charge a per¬ manent international commission with the task of carrying out the resolutions of the conference and of arranging an official international conference called by a government to lay the basis for uniform international legislation. In spit© of the violent differences of opinion, the promoters of the conference had not yet lost hope of seeing such uniform legislation adopted. The First Drajt Convention The commission set up by the conference of 1878 set to work immediately after the conference was over and the French section, which formed the executive committee of the commission, produced a long draft which constituted in effect an extensive universal law. The French Minister of Commerce, to whom the draft was presented, recognized that such a far-reaching proposal could never command universal acceptance, and requested the section to draft a convention 3i Comptes Rendu, pp. 174 ff.

Development of the International Convention

55

of more modest proportions. A “ Projet d/une Union Inter¬ nationale pour la protection de la propriety industrielle ” was then drafted by the French delegate Jagerschmidt. In the drafting of this projet an eye wTas kept on existing national laws; uniform international legislation was no longer the goal and the convention was admittedly designed to encroach as little as possible on existing laws.29 Since the next step was a governmental one, it became necessary to produce specific proposals that would be politically viable. Thus the delegates had come down from the stars, and con¬ centrated on provisions that they hoped would overcome the worst difficulties facing patentees with international in¬ terests, and would at the same time be politically practical. Gone was the talk of “ natural property rights,” or any attempt to define the nature of an inventor’s right; gone were attempts to eliminate compulsory working, which was pro¬ vided for in the laws of nearly all countries; and gone were attempts to impose a uniform standard of patentability devised in the interest of patentees. M. Jagerschmidt showed remarkable political acumen in the draft, most of the essentials of which were eventually accepted in the Convention. The Conference at Paris in 1880 The draft, together with an invitation to an international diplomatic conference, was sent by the French government to other governments. The response was favorable, and in 1880 the official conference met in Paris with representatives from 19 governments.30 The draft convention was adopted with some amendments and the amended draft was submitted 29 Conference internationale 'pour la protection de la prapriete industrielle (Paris: 1880). Hereafter cited as Conf. Int. 18S0. 30 The governments represented were: Argentina, Austria-Hungary, Belgium, Brazil, France, Great Britain, Guatemala, Italy, Luxemburg, Netherlands, Portugal, Russia, San Salvador, Sweden and Norway, Switzerland, Turkey, United States, Uruguay, Venezuela. Conf. lnt. 1880.

56

Economics of the International Patent System

to governments for their comment and approval. Provision was made for the protection of other forms of industrial property as well as for patents, for the organization of an International Bureau for the Protection of Industrial Prop¬ erty, for amendments to the Convention and for the adhesion of new member states. The provisions on patents were confined to specific issues on which it was hoped sufficient agreement could be obtained to form a union. The important ones were as follows: Art. 2. The subjects or citizens of each of the contracting states shall enjoy, in all of the other States of the Union, so far as patents, industrial designs or models, trade marks, and commercial names are concerned, the advantages that their respective laws now grant, or may hereafter grant, to their own nationals. Consequently they shall have the same protection as the latter, and the same legal remedy against any infringement of their rights, provided they comply with the formalities and conditions imposed on nationals by the domestic legislation of each State. Art. 3. The subjects of States not forming part of the Union who are domiciled or who have industrial or commercial establishments in the territory of one of the States of the Union are assimilated to the subjects or citizens of the contracting States. Art. 4. Any person who has duly applied for a patent, the registration of an industrial design or model, or a trade mark in one of the contract¬ ing States, shall enjoy for the purposes of registration in other countries, and subject to the rights of third parties, a right of priority during the periods hereinafter stated. Consequently, subsequent filing in one of the other States of the Union, before the expiration of these periods shall not be invalidated through any acts accomplished in the interval, as, for instance, by another filing, by publication of the invention or the working thereof, by the sale of copies of the design or model, or by the use of the trade mark. The above-mentioned periods of priority shall be six months for patents and three months for industrial designs or models and for trade marks. They shall be increased by one month for countries overseas. Art. 5. The introduction by the patentee into the country where the patent has been granted of objects manufactured in any of the countries of the Union shall not entail forfeiture. Nevertheless the patentee is subject to the obligation to work his

Development of the International Convention

57

patent in accordance with the laws of the country into which he intro¬ duces the patented articles.31

The International Union for the Protection of Industrial Property In 1883 a brief conference was held at which the Conven¬ tion was finally approved and signed. Ratifications were exchanged and in 1884 the International Union for the Protection of Industrial Property came into being.32 The Union was first composed of eleven countries, to which another twenty-nine were successively added.33 Amendments to the Convention are made by Conferences of Revision, of which there have been six so far.34 These conferences meet periodically and are called when it seems desirable to the countries concerned. All amendments must have the unanimous approval of the members of the Union. If unanimity is not forthcoming Special Arrangements between the countries agreeing to the provisions under dis¬ cussion may be adopted. The principle of special arrange¬ ments or “ restricted unions ” is not looked upon with favor, since it destroys the uniformity of the international regu¬ lations affecting members of the Union, and only three special arrangements have been established,35 none for patents. 31 Conf. Int. 1880.

(My translation)

82 The Convention of the Union for the Protection of Industrial Property is the document signed by the various governments. The only official text is in French and its full citation is: “ Convention d’Union de Paris du 20 Mars 1883 pour la Protection de la Propriete Industrielle, Revisee a Bruxelles le 14 decembre 1900, a Washington le 12 juin 1911, a la Haye le 6 Novembre 1925, et a Londres le 2 juin 1934.” The International Bureau for the Protection of Industrial Property at Berne is the secretariat of the Union and, although theoretically confined to the collection and publishing of information, it, like most international secretariats, plays an active role in the affairs of the Union. Its organ is La Propriete Industrielle, published monthly since 1884 at Berne. 83 The original signatories of the Convention were: Belgium, Portugal, France, Guatemala, Italy, Netherlands, San Salvador, Serbia, Spain and Switzerland. See appendix to this chapter. 84 At Rome 1886, at Madrid 1890-91, at Brussels 1897-1900, at Washington 1911, at The Hague 1925, and at London 1934. 35 Arrangement of Madrid of 14 April 1891 for the repression of false indica¬ tions of origin; Arrangement of Madrid of 14 April 1891 for the international registration of trade marks; and the Arrangements of The Hague of 6

58

Economics of the International Patent System

The text of the Convention, as revised in the conferences of revision, comes into effect for each country when it deposits its ratification. The old text remains in force for countries that have not ratified the new text. Hence at any given time there may be several regimes in effect depending upon the progress of ratification of the latest revised texts. The text at present in force and adhered to by twenty countries is the text as revised in London in 1934. Its provisions affecting patents are discussed in the next chapter.

APPENDIX:

MEMBERS OF THE UNION FOR THE PROTECTION OF INDUSTRIAL PROPERTY

Country Australia Territory of Papua & New Guinea Norfolk Is. Nauru Austria Belgium Brazil Bulgaria Canada Cuba Czechoslovakia Denmark and Faeroe Is. Dominican Republic Egypt Finland France, Algeria and colonies Germany Great Britain and Northern Ireland Ceylon Tanganyika Trinidad and Tobago Singapore Greece Hungary Indonesia Ireland Israel Italy

Date of Accession 1907 1933 1936 1936 1909 1884 1884 1921 1923 1904 1919 1894 1890 1950 1921 1884 1903 1884 1905 1938 1908 1949 1924 1909 1949 1925 1948 1884

Text in Force The Hague The Hague The Hague The Hague London London The Hague Washington The Hague Washington The Hague London Washington London Washington London London London Washington London The Hague London Washington The Hague London Washington London The Hague

November 1925 for the international deposit of industrial designs and models. There is also a temporary arrangement created at Neuchatel, 8 February 1947 for the protection or restoration of industrial property rights affected by the Second World War.

Development of the International Convention Country Eritrea and Libya Japan Korea, Formosa, So. Sakhaline Lebanon Lichtenstein Luxemburg Mexico Morocco Netherlands Antilles Surinam and Curacao New Zealand Western Samoa Norway Poland Portugal with Azores and Madera Rumania South Africa Spain Morocco Spanish colonies Sweden Switzerland Syria Tangiers Tunis Turkey United States Yugoslavia

Date of Accession 1932 1899 1935 1924 1933 1922 1903 1917 1884 1890 1890 1891 1931 1885 1919 1884 1920 1947 1884 1928 1947 1885 1884 1924 1936 1884 1925 1887 1921

59

Text in Force The Hague London London London London London The Hague London London London London London London London The Hague London Washington London The Hague The Hague The Hague The Hague London London London London The Hague London The Hague

Chapter IV

THE PATENT PROVISIONS OF THE INTER¬ NATIONAL CONVENTION for the Protection of Industrial Property is an agreement creating an organization called the International Union for the Protection of Industrial Property. It is an “ open ” agreement to which any country may unilaterally accede simply by notifying the Swiss Government of its accession.1 The terms of the Convention are applicable within any country in accordance with the public law of that country. It is not necessary here to discuss in detail the position of the Convention in the legal systems of the various countries or the precise legal significance of its provisions,2 but a brief summary of its general legal nature may be useful in understanding the economic implications of the specific provisions. In discussing the relation of the Convention to the muni¬ cipal law of the member countries, Ladas distinguishes three classes of provisions: Provisions making the municipal law of each country applicable to foreigners; provisions requiring the adoption or maintenance of certain provisions of muni¬ cipal law; and provisions establishing common legislation for all members of the Union. Only the second type necessarily depends on special domestic legislation, while the applica¬ bility of provisions in the first and third categories depends on the relation of the Convention to the domestic law. In The International

Convention

1 This was considered to be a great advance in international law, because the fact that any state could adhere to the Convention unilaterally meant that “ Union protection ” was automatically accorded even when the foreign protection was small or unsuitable. * For a good discussion in English see Ladas, op. tit., p. 150.

60

The Patent Provisions

61

some countries the provisions of the Convention are merely international obligations and do not become part of the “ law of the land ” unless local legislative action is taken. Thus in Great Britain a special act of Parliament was required. Inlpther countries the Convention was given im¬ mediate legal force when it was ratified.3 In the United States, the Constitution makes treaties the supreme law of the land and whether further national legislation is required to give effect to them is a question of whether they are “ self-executing ” or not and this in turn depends on the intention of the parties to the treaty. The weight of authority is in favor of the self-executing nature of the provisions of the Convention which make municipal law applicable to foreign¬ ers and which establish common legislation for the members of the Union.4 All of the important provisions of the Con¬ vention respecting patents, with the exception of Article 11, under which the contracting countries agree to give tem¬ porary protection to inventions exhibited at international expositions, fall in these two classes. The Patent Provisions The International Convention covers the protection of many kinds of industrial property 5 but this study is only 3 For example, Belgium, France, Germany, Austria, Greece, Netherlands, Portugal, Switzerland, Italy. See Ladas, p. 150. 4 . . in the United States the relation of the Convention of 1883 to the municipal law is not like that in Great Britain, but similar to that in many other countries, such as France, Germany, and Switzerland. The great weight of authority is in favor of the self-execution of those provisions of the Conven¬ tion of 1883 which are not merely contractual engagements of the United States. Analytically, and historically also, this relation should be admitted, in view of the constitutional provision and its interpretation by the courts.” Ladas, p. 165. 6 Article 1, sections (2) and (3) read as follows: “ (2) The scope of the protection of industrial property shall include patents, utility models, industrial designs and models, trade marks, commercial names and indications of origin, or appelations of origin, as well as the repression of unfair competition. “(3) Industrial property shall be understood in the broadest meaning and shall apply not only to industry and commerce as such, but likewise to agricultural and extractive industries and to all manufactured or natural products, for example, wines, grains, tobacco leaves, fruits, cattle, minerals, mineral waters,

62

Economics of the International Patent System

concerned with those clauses which relate to patents, and of these, only with those which are of appreciable economic importance. Furthermore, I shall not deal with legal issues except insofar as they are relevant for an economic evalu¬ ation. The purpose of this chapter is simply to describe the nature and meaning of the patent provisions of the Conven¬ tion and the reasons for their adoption in their present form. From this point of view the important articles of the Convention as it stands at present can be summarized as follows: 1. Nationals and residents of Union countries are guaran¬ teed equality of treatment with nationals (“ national treat¬ ment ”) in other Union countries, and conditions as to domicile or location of establishment may not be imposed upon them. 2. Any person applying for a patent in a Union country and entitled to the benefits of the Convention is granted a right of priority for twelve months in all other countries of the Union, during which period his claim to a patent in these countries cannot be invalidated by acts of other persons. 3. Patents in each country are independent of patents for the same invention in other countries, particularly as regards grounds for refusal and revocation and as regards normal duration; hence loss of the patent in the country of original filing does not entail loss in other countries in which it has been filed. 4. Importation by the patentee of objects manufactured under the patent in other countries of the Union does not entail forfeiture of the patent. 5. Each country has the right to take measures to prevent abuses of the exclusive privileges granted through its patents. beers, flowers, flours.” The English text of the present Convention is taken from Protection of Industrial Property, Treaty Series, No. 941, (Washington, 1949).

The Patent Provisions

63

Revocation of the patent is permitted only if compulsory licensing is inadequate to prevent the abuses, in particular failure to work. Compulsory licenses cannot be demanded until after three years after the patent has been granted and then only if acceptable excuses are not provided by the patentee. Revocation proceedings cannot be started until two years after the first compulsory license. 6. The inventor has a right to be mentioned as such in the patent.6 7. The use of patented articles on ships, or on airplane or locomotive engines entering a country temporarily shall not be considered as infringing the rights of the patentee.7 6 This article was inserted in the Convention at the London Conference of 1934. It has no economic importance but is mentioned here because of its bearing on the problem of the justification of the patent right under modern conditions. The patent right has been frequently defended on the grounds that it is a means of rewarding inventors. Yet, today a great deal of invention takes place in the laboratories of great corporations and is done by salaried employees whose remuneration has no relation to the profit eventually derived from the use of the patented invention. Hence the link between the patent reward and the work of the inventor is broken. This was considered by many to be a form of exploitation of the worker and the Commission on Intellectual Work of the International Labor Office passed a resolution in 1929 at Geneva as follows: “ 1. All patents ought to mention the name of the author or authors of the invention if they can be determined. 2. WTiere an invention is made by an employee of either a private or a state enterprise and where the law recognizes the employer’s right to the patent, if it appears that the employee has not had, either from his salary or from any other source, an equitable remuneration, the employer shall be obliged to grant him a supplementary remuneration in accordance with the value of the invention and the circumstances in which it had been made.” (Quoted in Actes de la Conference de Londres, p. 91.) The delegates to the London Conference could not see their way to adopting all of the resolution of the Commission but they did insert a recognition of the right of the inventor to be mentioned. The right of an author to the personal credit for his creation is usually referred to as the droit moral, and is more commonly recognized with respect to literary than to industrial creations. 7 This article is of considerable economic importance but it will not be discussed further in this study since it has never been the subject of controversy and the reasons for it are so obvious that an explanation is not necessary. In its absence, constant difficulties would arise because of the temporary infringements of the rights of patentees occasioned by the presence of ships, locomotives and airplanes equipped with patented devices which could not legally be brought into the country. The resulting inconveniences for transport have been generally recognized and the article was inserted into the Convention without much discussion. The text of the article (5 ter) is as follows:

64

Economics of the International Patent System

National Treatment One of the two essential buttresses of the International Convention is the principle of national treatment. This is provided for in Article 2 of the Convention which reads as follows: (1) Nationals of each of the countries of the Union shall, in all other countries of the Union, as regards the protection of industrial property, enjoy the advantages that their respective laws now grant, or may here¬ after grant, to their own nationals, without any prejudice to the rights specially provided for by the present convention. Consequently they shall have the same protection as the latter, and the same legal remedy against any infringement of their rights, provided they observe the con¬ ditions and formalities imposed upon nationals. (2) Nevertheless, no condition as to the possession of a domicile or establishment in the country where protection is claimed can be required of those who enjoy the benefits of the Union for the enjoyment of any industrial property rights. (3) The provisions of the legislation of each of the countries of the Union relative to judicial and administrative proceedings and to com¬ petent authority, as well as to the choice of domicile or the appointment of an authorized agent, which may be required by the laws on industrial property are expressly reserved.

The principle of national treatment of foreigners was inserted in the original text of 1880 and the principle of reciprocity was expressly rejected. Under this provision foreigners are assimilated to nationals with the exceptions provided in section (3). Hence reciprocity in the treatment of foreigners cannot be required by any Union country. As a consequence, a Union country which places few restrictions “ In each one of the countries of the Union, the following shall not be con¬ sidered as infringing the rights of the patentee: “ 1. The use on board ships of other countries of the Union of any article forming the subject matter of his patent in the body of the ship, in the machinery, tackle, rigging, and other accessories, when such ships shall enter temporarily or accidentally the waters of the country, provided that such article is used there exclusively for the needs of the vessel. “ 2. The use of any article forming the subject matter of the patent in the construction or operation of air or land locomotive engines of the other countries of the Union, or of accessories to these engines, when the latter shall enter the country temporarily or accidentally.”

The Patent Provisions

65

or taxes on patentees may nonetheless be unable to obtain equally favorable treatment in other countries for its own nationals. Thus even Switzerland and the Netherlands, neither of which had a patent law, could adhere to the Con¬ vention in 1883 and their nationals could-obtain equal treat¬ ment in Union countries with the nationals of those countries, although the nationals of other countries had no patent rights at all in either Switzerland or the Netherlands.8 Inequality of treatment must exist so long as the patent laws of the different countries are not uniform, but the requirement that member countries must grant rights to foreigners that are not possessed by their own citizens in foreign countries has not always been cheerfully accepted. Following the conference of 1883 a sharp agitation against the Convention arose in France. It was led by a prominent jurist, Louis Donzel, in his Journal des proces on contrefagon. Donzel charged that far too many concessions had been made to foreigners, particularly by the importation clause,9 the priority arrangements 10 and the rights granted to non-union states in the national treatment provisions.11 His attacks had 8 The moral pressure that these provisions would exert on countries to bring their laws into line with those of others was recognized, and was among the advantages claimed for the principle of national treatment. Thus, Pelletier and Vidal-Naquet observed, “ A group of countries, forming a mass, exercises an influence on a country that remains isolated outside the circle of the other states: the adhesions [to the Convention] that came after the conclusion of the Union, the movement of opinion that exists in the countries not participating, are facts which prove how well founded is this remark.” Pelletier and VidalNaquet, op cit., p. 8. Similarly, the Bureau of the Union stated: “ The care for its reputation before the opinion of international conferences has been for more than one country a vigorous stimulus.” And “. . . in Switzerland, in fact, nothing has been so conducive to the acceptance of a law on patents as the fact of belonging to the Union.” 1883-1933 L’Union intemationale pour la protection de la propriete industrielle, p. 28. 0 Art. 5 A (1), see p. 75 below. 10 Art. 4, p. 67 below. 11 The controversy started by M. Donzel was joined in by the Chambers of Commerce, particularly of Paris, the representatives of which, as was pointed out by M. Lyon-Caen were “ necessarily made up of representatives of the public domain and the natural adversaries of the monopoly of inventors.” It became peculiarly violent. In an article published in the Petit Journal, one M. Thomas Grimm demanded an inquiry into the actions of the French representa¬ tives in the Conference of 1880; “ If they have been credulous simpletons they

66

Economics of the International Patent System

a significant influence on French public opinion and some feared that France, the chief instigator of the Convention, might withdraw.12 The only serious attacks on the principle of national treat¬ ment that have occurred in the conferences of revision have come from the United States, where patentees are subject to only nominal fees and very few restrictions. At the Brussels conference of revision, in 1897-1900, the United States proposed that the amount of taxes and the criteria of patentability be determined by those of the country of origin of the patentee. Again, at the conference of revision in Wash¬ ington, in 1911, the United States pressed for reciprocity. At The Hague, in 1925, it proposed to amend article 2 by inserting a clause reserving to each country the right to impose on the nationals of all other contracting countries the obligation to observe certain or all of the conditions regarding in¬ dustrial property which the other countries imposed on its nationals.13

On all occasions the United States’ position was decisively rejected by the conferences. If reciprocity were required, the very foundation of the Union—the principle of as nearly equal universal treatment of patentees as possible—would be undermined. Under a regime of reciprocity each country would apply different standards to different patentees within the country depending on their nationality. The “ Union ” would in fact become nothing but a series of bilateral arrange¬ ments.14 The provisions of the laws of other countries against which the United States felt so strongly that it was willing to destroy the principle of national treatment, were those should be deprived of their offices, if they have sacrificed the interests of France for discreditable reasons as has been insinuated in a report presented to the Chamber of Commerce of Paris, in the meeting of July 8, 1885, they should be brought before a high court of justice and punished as they deserve.” Devaux, op. cit., pp. 137-138. 13 Bureau de l’Union, 1883-1933 L’Union Internationale, pp. 42-43. 13 Actes de la Conference de la Haye, p. 573. 14 See Ladas, op. cit., p. 207, for further discussion of this point.

The Patent Provisions

67

regarding taxes, patentability, duration of patents, and especially, compulsory working and compulsory licensing. In all these respects the United States’ patentees receive less generous treatment in most other countries than the nationals of these countries receive in the United States.15 Right of Priority In addition to “ national treatment,” patentees in Union countries can claim certain special rights under the Conven¬ tion, of which the 44 right of priority ” is the most important. This is provided for in Article 4, the significant sections of which are as follows: A. (I) Any person who has duly applied for a patent, the registration of a utility model, industrial design or model, or trade mark in one of the countries of the Union, or his legal representative or assignee, shall enjoy for the purposes of registration in other countries a right of priority during the periods hereinafter stated. (2) Any filing having the value of a formal national filing by virtue of the internal law of each country of the Union or of international treaties concluded among several countries of the Union shall be recog¬ nized as giving rise to a right of priority. B. Consequently, subsequent filing in one of the other countries of the Union before the expiration of these periods shall not be invalidated through any acts accomplished in the interval, as for instance, by another filing, by publication of the invention or the working thereof, by the sale of copies of the design or model, or by use of the trade mark, and these facts cannot give rise to any right of third parties or any personal possession. The rights acquired by third parties before the day of the first application on which priority is based shall be reserved by the internal legislation of each country of the Union. C. (1) The above-mentioned periods of priority shall be 12 months for patents and utility models and 6 months for industrial designs and

models and for trade marks. D. (1) Any person desiring to take advantage of the priority of a previous application must make a declaration giving particulars as to the date of such application and the country in which it was made. 16 For bargaining purposes the United States found its “ liberal ” patent law to be a disadvantage: “. . . it seems unfortunate that we have not reserved something which would enable us by timely concessions to secure for our citizens reciprocal advantages in other countries.” U. S. Patent Office: Proposals

68

Economics of the International Patent System

Each country will determine the latest date at which such declaration must be made. (2) The particulars referred to shall be stated in the publications issued by the competent authority, and in particular in the patents issued and the specifications relating thereto. (4) No other formalities may be required for the declaration of priority at the time application is filed. Each of the countries of the Union shall decide upon the consequences of the omission of the formali¬ ties prescribed by this article, but such consequences shall in no case exceed the loss of the right of priority.

It has been said, with reason, that the right of priority is the “ raison d’exister ” of the International Convention;16 that “ all the Convention is in Article 4.” 17 It is certainly the most important article in the Convention. Because of it, the filing of an application for a patent in one country gives an inventor the right to obtain recognition of his claim in all other countries in which his invention is patentable. Acts occurring within the priority period cannot invalidate his claim for a patent, the novelty of his invention for patent purposes cannot be destroyed within the period nor can third parties acquire any claims.18 for Changes in the United States Laws, Report of Commissioners, 1877, p. 252. 10 Fernand-Jacq, “ La Conference de Londres. Mai 1934,” Journal des Lconomistes, v. 104, 6e ser. (1934), p. 650. 17 Charles Lyon-Caen, “ La Conference internationale pour la protection de la propriete industrielle, tenue a Paris en 1880,” Revue de Droit International et de la Legislation Comparee, v. 14 (1882), p. 195. 18 In the Convention as adopted at Paris in 1880, Article 4 (A) included the phrase “ subject to the rights of third parties ” (sous reserve des droits des tiers), thus making the right of the inventor to obtain a patent in other countries under the priority provision subject to rights of third parties. The purpose of this provision was to protect against infringement proceedings by the patentee anyone who had been using the invention before the first patent had been demanded, and had thereby acquired a right of personal possession. The clause was loosely and ambiguously drawn and was subsequently interpreted by some countries in such a manner that rights cf personal possession were allowed to arise within the priority period and after the first filing of a patent claim. This, to a considerable extent, weakened the priority provisions because foreigners could acquire knowledge of the invention from the first patent claim and, by using it in their own countries without a patent, could obtain the right to continue using it even after the original inventor filed a claim under the priority arrangement. It was never the intention of the drafters of the original conven¬ tion to allow this kind of right to arise. Many attempts were made to clarify the provision but unanimous agreement was not obtained until the London

The Patent Provisions

69

The right of priority is an attempt to get as close as possible to the ideal of the “ universal patent ”—a patent valid the world over when obtained in one country.19 One distinguished patent lawyer began his discussion of international patent law with the remark: Half or more than half of our material has to do with priority rights; hence, it is convenient to put the international aspects of patent law into two groups, miscellaneous and priority rights.20

Underlying the entire Convention is the assumption that an inventor ought to receive the benefits of a patent on a world-wide scale if he so desires. Because the patent grant by any one country is limited by the “ principle of territori¬ ality,” i. e., it cannot extend beyond the jurisdiction of that country, the possibility of an inventor obtaining a monoply in other countries depends on the laws of the other countries. In all countries an invention, to be patentable, must be “ new,” and in many countries the newness or novelty of the invention is destroyed by publication abroad as well as at home. Before the Convention, even official publication resultconference of 1934. At that conference only the Czechs and the Japanese refused to agree to a change. The Japanese finally consented after having received additional instructions from home. Czechoslovakia agreed to withdraw its opposition “ ... if the propositions that it had presented with the purpose of assuring the protection of the indications of origin for beer under the Arrange¬ ment of Madrid were accepted by the conference.” Thus, because certain con¬ cessions were made in an entirely different international agreement, the rights of third parties were clarified in the international patent Convention. At London, 4 (B) was inserted which made it clear that only rights arising “ before the day of the first application on which priority is based shall be reserved. . . .” For a discussion of the problem of the droits des tiers and the reasons for the provisions of the new London text, see the section on “ Expose des motifs et propositions,” Actes de la Conference de Londres, pp. 167-68. The story of the droits des tiers exchanged for the “ droits de biere ” is an example of the type of negotiation which always goes on at international conferences and which rarely appears in the published records. Such records, therefore, should always be used with caution; they never tell the whole story and frequently do not tell a true one. But in the absence of memoirs or direct personal knowledge, these pieces of the past are frequently lost to the historian. 19 “ The Union constitutes a minimum of unification in the protection of industrial property; it is a first step toward complete uniformity which is the final end and the ideal.” Pouillet et Pie. ov cit., p. 13. i0 Emerson Stringham (ed.), Patents and Gebrauchsmuster in International Law (Wisconsin: 1935), pp. 45-46.

70

Economics of the International Patent System

ing from the application or grant of a patent in one country destroyed the novelty of the invention in some other countries.21 Since an inventor cannot simultanously comply with all the formalities for filing a patent application in all countries in which he wishes protection, acts could easily take place in the meantime which destroyed the patentability of the invention in some of the countries. It is this possibility that the right of priority is designed to eliminate. In the original Convention the period of priority was fixed at six months. Two opposing interests had to be reconciled— that of the patentee, who wanted a period long enough to give him time to complete the formalities and make the appli¬ cation, and that of the industry and the inventors of the other countries, whose right to use the invention or develop and patent it independently was held in abeyance during the priority period. Some delegates felt that even six months was too long; the delegate from Uruguay pointed out, “ The establishment of too long a period would be against those interests [i. e., consumers and “ Vhumanite ”] which are at least as respectable as those of the inventor.” 22 And the Swedish delegate argued that the difficulties of raising capital for the exploitation of an invention were increased if a long period of uncertainty arose because of the right of priority.23 But the Swiss delegate insisted that “ . . . the purpose of the article is to protect the inventor.” 24 Since the patent procedure of some countries includes an 21 In France, the original patent law of 1791, Article 3, provided: “ Whoever is the first to bring into France a foreign discovery, shall enjoy the same advantages as if he were the inventor.” But the law of 1844 changed this provision because of “ the necessities of international relations ” and stated: (Art. 31) “All discoveries, inventions or appliances which in France or abroad have received sufficient publicity to enable them to be used before the deposit of the request [for a patent] will not be considered new.” See J. Isore, “ De l’existence des brevets d’invention,” pp. 96 ff. for a discussion of this question. This provision of the law of 1844 was, of course, overruled by the priority provisions of the Convention so far as Union members were concerned. 22 Conf. 1880, p. 54. 23 Ibid., p. 52. ** Ibid., p. 53.

The Patent Provisions

71

extensive examination of the patent claim before a patent is issued, six months from the time of filing was felt by these countries to be too short to enable the inventor to receive his patent and comply with the necessary formalities incident to a patent claim in other countries. This latter viewpoint prevailed at the Brussels conference of revision where the period of priority was extended to twelve months. The application of the principle of the right of priority has raised many complex legal issues and various amendments have been made to the original text of the Convention. These amendments, however, need not delay us here since they raise no important economic problems. The principle is a simple one, but it involves one of the fundamental economic assumptions of the Convention—that an inventor should be protected from competition in all countries. The economics of the principle are hardly mentioned in the debates and we shall explore its implications in the next two chapters. Independence of Patents The extension of the geographic scope of the patentee’s protection made possible by the priority provision of the Convention is not an extension of the monopoly obtained under the original patent grant. On the contrary, Article 4 bis specifically provides that a patent taken out for an invention in one country is independent of all other patents for that invention in other countries. The article reads as follows: Article 4 bis. (1) Patents applied for in the various countries of the Union by persons entitled to the benefits of the Union shall be independ¬ ent of the patents obtained for the same invention in other countries, whether or not such countries be parties to the Union. (2) This stipulation must receive a strict interpretation; in particular, it shall be understood to mean that patents applied for during the period of priority are independent, both as regards the grounds for refusal and revocation and as regards their normal duration. (3) This stipulation shall apply to all patents already existing at the time when it shall come into effect.

72

Economics of the International Patent System

(4) The same stipulation shall apply, in the case of the accession of new countries, to patents in existence, either on one side or the other, at the time of accession. (5) Patents obtained with the benefit of priority shall enjoy, in the different countries of the Union, a duration equal to that which they would have enjoyed if they had been applied for or granted without the benefit of priority.

This provision ensures that the invalidation or forfeiture of a patent in one country will not automatically entail the invalidation or forfeiture of the patent on the same invention in other countries. Similarly, the fact that the original patent expires will not affect the duration of other patents on the same invention in other countries. No clear statement as to the independence of patents appeared in the original Convention, although it was usually considered that any form of interdependence was out of harmony with the intention and spirit of the Convention.25 In the absence of an explicit provision, the laws of several countries continued to make the duration and validitv of patents granted to foreigners dependent on the duration and validity of patents in the country of origin. In the first two conferences of revision attempts were made to introduce the principle of independence of patents, and at the third (in Brussels), the first paragraph of the present text was adopted. There were still some doubts 26 as to whether independence with respect to the normal duration of patents was intended to be covered by this article as well as independence with respect to invalidation or forfeiture of the patent. In Wash¬ ington in 1911, the second paragraph of Article 4 bis was adopted which expressly covered the question. The effect of the Convention, therefore, is not to extend the spatial scope of one patent monopoly, but rather to 26 See Albert Osterrielh und August Axster, Die Internationale Ubereinkunjt, pp. 104-105. Also Ladas, p. 313. 26 Osterrieth und Axster, pp. 107, 109. Also E. Thaller, “ Dependence ou Independence de brevets pris pour une meme invention des divers Etats,” Revue de Droit International Drive (1908), pp. 16 ff.

The Patent Provisions

73

enable one inventor to request as many different patents as there are countries of the Union, each patent being governed by the laws of the country issuing it and being independent of all the other patents granted for the same invention. The principle of the independence of patents was of particu¬ lar significance for “ patents of importation ” which many countries granted on inventions already patented abroad to individuals who wished to introduce the new art or industry into the countries.2r Such patents were frequently subject to special restrictions;28 in particular their duration was de¬ pendent on the original foreign grant. The fear of handicapping domestic industry if the new invention were restricted by a patent at home while abroad it could be freely used, was the chief reason for this dependence. For example, in regard to the dependence of French patents on a previous foreign patent for the same invention, it was stated: “ The protection given by France must not become a cause of inequality; a protection which shackles by monopoly that which is everywhere else free from all restraints.” 29 27 “ The new patent [of importation] was the reward, not for a discovery made by the claimant, but for the service that he rendered to a second national com¬ munity in giving them an invention, perhaps his, perhaps another’s, which that community would not have known, or would only have known much later, if that diligent individual had not brought it to them.” Thaller, p. 9. 28 For example, the Brazilian law of 1830 provided in Article 3: “To him who introduces a foreign industry will be granted a reward proportional to its utility and to the difficulty of introduction.” The law also provided that “ if the patentee has obtained a patent in a foreign country for the same invention . . . he would have, as the introducteur, the right to the reward established by article 3 ” but he would lose his ordinary patent. Bailly, op. cit., p. xxviii. 20 Philippe Dupin, rapporteur for the law of 1844 in France, speaking in the Chamber of Deputies. Quoted by Thaller, p. 11. Michel also remarks, “The reason for this provision is to be found in the antiquated economic concept that the foreign country in which the patented invention has become public property at an earlier date, would have a certain advantage over the home country if the invention did not become public property in the latter at the same time.” Michel, op. cit., pp. 13-14. Whether this concept is as “ antiquated ” as Michel makes out is open to much doubt. Nonetheless, this argument, combined with the argument for the patent of importation, reveals a confusion of thought fairly common in discussions of the patent system. If a patent of importation is necessary in order to obtain the working of the new invention in the country, this surely is the case only if domestic industry would not otherwise use it; to argue, then, that domestic industry is restricted by it is a clear contradiction.

74

Economics of the International Patent System

The dependence of patents was considered inconsistent with the principle of national treatment of foreigners; if the patent granted to a foreigner were dependent for its validity, and as to its duration, on the laws of another country most foreign patentees would in fact be treated differently from national patentees.30 This was one objection. Another was that it . . . reaches unjust results. If the new patent be an extension of the foreign patent, and consequently, dependent on the latter, the annulment, cancellation, or forfeiture of the same will cause that of the national patent. It is not seen why the failure to comply with a condition in the first state should have any effect in the second. ... It is usually argued in support of this view, that the industry of a country should not be restrained by a legal monopoly which has ceased in the foreign country. But it is difficult to see why there should be any difference in the results in state B from the accidental reason that a person applied first in state A and then in state B, instead of applying in the opposite way. The inventor, therefore, who has obtained many patents for the same invention has ... as many independent rights as the number of his patents.31

The

arguments

that independence

of

patents

would

prejudice domestic industry did not impress the delegates to the various conferences 32 and the position was accepted that an independent right was applied for and obtained in each country in which an invention was patented. Importation of the Patented Object In the original text adopted at Paris in 1880, a provision was inserted under which the importation of the patented 30 A French student, writing before this provision of the Convention was clarified (1892) gives the following argument for interpreting the Convention as providing for complete independence: “ . . . Article 2 of the Convention establishes as a general rule that nationals of each of the contracting States shall enjoy national treatment in all the other states of the Union, and that one cannot consider as national treatment the issuance of patents of importation for a shorter period than national patents, and subject to accidents that do not menace the latter.” Devaux, op. cit., pp. 124-125. See also Osterrieth and Axster, op. cit., p. 104. 31 Ladas, op. cit., p. 18. 32 See for example Actes de la Conference de Bruxelles, p. 181.

The Patent Provisions

75

object by the patentee could not be considered grounds for revocation of a patent. This provision now reads as follows: Article 5. A. (1). The introduction by the patentee into the country where the patent has been granted of objects manufactured in any of the countries of the Union shall not entail forfeiture.

This article was directed primarily against the French law 33 which contained such penalty for importation of the patented object by the patentee. The reason for this provision in France was to force the manufacture of the patented objects in France. Its effect, therefore, was to strengthen the compulsory working pro¬ visions.34 As a consequence the discussion of the prohibition of importation was confused with the discussion of compulsory working both in the conference of 1880 and in the public controversies that followed.35 It was argued by some that if the patent were effectively worked, there could be no im¬ portation; hence to permit importation was tantamount to a serious weakening of the compulsory working provisions, the retention of which was considered of greatest economic importance by most countries at this time. The confusion was heightened by the inexcusable interpretation given by Senator Bozerian, the Chairman of the conference of 1880, when he stated that the word “ exploiter ” (to work) appear¬ ing in the text of the Convention should be construed to include “ vendre ” (to sell) ,36 This interpretation was com¬ pletely wrong in both the legal and popular usage. 33 The laws of Mexico and Tunisia also contained similar provisions. 34 See the discussion of compulsory working, Chapter VII below. 35 Under the compulsory working provisions as modified in 1911, a patentee was given three years within which to exploit his patent. Osterrieth and Axster comment: “ It has been especially argued that the prohibition of importation is only postponed during the period in which, according to Section 3b of the Convention, compulsory working is delayed, that is, for three years. Within the first three years after the issue of the patent, the patentee need not work it, he may import. After the first three years, however, he must work his patent but he cannot import. This interpretation has no support either in the wording or in the sense of the Convention.” Osterrieth ,and Axster, op. cit., p. 131. See also, La Propriete Industrielle, v. 40 (1924), pp. 68-69. 30 “ II faut s'entendre sur le sens du mot exploiter; en jrangais, il ne veut pas dire fabriquer mais vendre.” Conf. Int. 1880. Seance 8 novembre.

76

Economics of the International Patent System

The fact that there was so little basis for the confusion makes one suspect that it was created by those who wished to retain the importation restrictions. The report of the French section, which was the basis of discussion for the conference of 1878, had stated clearly: The exclusive right that is granted to a patentee can only be legiti¬ mately recognized on condition that he effectively works his invention and that it is thus made to profit the country in which he has obtained his patent. The provisions of the law which impose forfeiture of the patent for failure to work are sufficient guarantee that it will be worked. There are two possibilities: one that the patentee introduces articles manufactured abroad in such small quantities that it doe$ not interfere with serious exploitation of the invention in the country where the patent was taken out; the other that the importation takes place on a large scale and consequently there is no working, or at any rate only a mock working. In the latter case, forfeiture for failure to work can be enforced and that will be sufficient to protect national industry.37

Nonetheless, the confusion played a leading role in the violent attack on the Convention led by M. Louis Donzel in 1885. Most French jurists who were concerned with the Convention strongly condemned the provisions of the French law.38 Probably because of the attacks by M. Donzel and his supporters, the French government tried at the conference of revision at Rome, in 1886, to obtain a modification of Article 5 to permit each country to prohibit importation.39 This was opposed by other countries, none of which had such a provision in its law and France abandoned her proposals. Ladas raises the question whether imports of patented 37 Comptes Rendu, p. 725. See also La Propriete Industrielle, v. 40 (1924), p. 66. 33 The chairman of the conference of 1880, Senator Bozerian, publicly declared the provision against importation in the French law to be “ barbarous, useless and harmful to trade and most French commentators on the convention (e. g. Pelletier, Vidal-Naquet, Lavoix, Pouillet) condemned the French law in this respect. It was charged by the Italian delegate at the conference in Rome in 1886 that the controversy led by Donzel was the work of a few industrialists whose interests had been injured by the effects of the provision allowing the importation of articles manufactured abroad. See the discussion by Casimir Akerman, U obligation d*exploiter et la licence obligatoire, pp. 66-67. 39 Conference de Rome, 1886, pp. 11, 91, 110.

The Patent Provisions

77

articles may be hindered by heavy fines or customs duties even though their importation is not formally prohibited and concludes: Although the literal sense of the provision does not exclude such measures, it’s reasonable construction is opposed thereto. . . . Moreover, it is against the whole spirit of the Convention to allow a country by such circuitous methods to violate its provisions. Of course, the pro¬ vision of Article 5 cannot be interpreted- as meaning that importation of patented articles by the patentee shall be free of duties. These articles may be subject to the ordinary and general customs duties of the country concerned.40

If the “ ordinary and general customs duties ” on manu¬ factured products are very high, an incidental effect, of course, is to hinder the importation of patented products as well as of other products. So long, however, as these tariffs are not directed specifically at patented products they do not violate the Convention, although they may have much the same effect on the location of industrial activity between countries as would the specific prohibition or hindrance of the importation of such products. General tariff policies are not appropriate subjects for a patent Convention, although they may be relevant for other policies affecting patents, notably compulsory working and compulsory licensing. 40 Ladas, p. 325. See below p. 80 where the Swiss pointed out the importance of tariffs in determining the location of industry if working were not required in all countries. Some protectionist writers felt that tariffs would have to be raised to offset the effects of permitting importation: “ . . . the Union Convention of 1883 and the conferences that followed to complete it have almost completely lost sight of the interest of the public and are only concerned to give satisfaction to the particular interest of inventors. The right to import is directly contrary to the interests of the States that grant the patent . . .[The obligation to work] is clearly not very serious and it is obvious to us that the great scope granted for the exercise of the inventors’ monopoly from the international point of view must result in grave inconveniences for national production if it is not possible to remedy its defects through the establishment of tariff laws. It is by raising tariffs and making the tariff legislation protectionist that the state can give to industry and to national employment the security that it needs in order to develop. As to the laws on industrial property and in particular as to the Convention of 1883, they will be truly disastrous if they do not have a counter¬ weight in tariff legislation.” A. Pillet, Le regime international de la propriety industrielle (Paris: 1915), p. 294.

78

Economics of the International Patent System

Abuse of the Monopoly—Compulsory Working and Compulsory Licensing The sections of article 5 which are concerned with the right of countries to adopt measures, in particular compulsory working and compulsory licensing, to prevent the “ abuse of the monopoly ” have been, and still are, the most contro¬ versial provisions of the Convention.41 The text of these sections is as follows: Article 5. (2) Nevertheless, each of the countries of the Union shall have the right to take the necessary legislative measures to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent; for example, failure to use. (3) These measures will only provide for the revocation of the patent if the granting of compulsory licenses does not suffice to prevent these abuses. (4) In any case the issuance of a compulsory license cannot be demanded before the expiration of 3 years beginning with the date of the granting of the patent and this license can be issued only if the patentee does not produce acceptable excuses. No action for the cancela¬ tion or revocation of a patent can be introduced before the expiration of 2 years beginning with the issuance of the first compulsory license.

These provisions have had a turbulent history because they touch directly on the conflict between the interest of the national economy as a whole and the interest of the individual patentee in obtaining the maximum return from his patent. The nature of the conflict and the economic problem involved are fully discussed later. Here only the history of the pro¬ visions of the Convention will be described and the inter¬ national arguments that have taken place over their amend¬ ment. 41 “ The question as to whether the patentee ought to work his invention in all countries in which he has obtained a patent and whether, in case of non¬ working, the patent ought to be revoked or not, has occupied first place in all the discussions that have taken place since the international protection of inventions was first spoken of.” Actes de la Conference de Londres, “ Expose des motifs et propositions,” p. 173. “ The history of this provision is in a sense the history of the Union,” Ladas, p. 327. The Vienna conference of 1873 has been the only conference not insisting on the obligation to work, although it had approved compulsory licensing in the public interest.

The Patent Provisions

79

The laws of most countries require that a patentee must put his invention into practice (“ work ” or “ exploit ” his patent) within a specified period of time or his patent will be revoked or subject to compulsory licensing. In the latter case, any one who wishes to use the patented invention may apply for a license to use it and the government can compel the patentee to issue the license on terms agreed upon between the parties or determined by the government. The purpose of both of these provisions is to ensure that the invention is exploited in the country where it is protected by a patent. As we saw in Chapter III, the conference of 1873 approved compulsory licensing and the conference of 1878 decisively rejected it on the grounds that it was a derogation of the natural property right of the inventor. The Convention adopted in 1880 left the matter up to each country in the second paragraph of Article 5. This paragraph was adopted in face of the opposition of Belgium, Great Britain, Russia and Turkey, whose governments held that compulsory work¬ ing provisions were inconsistent with the purpose of the Convention. The Belgian delegates led the attack on com¬ pulsory working. One of them, M. Dujeux, argued that the purpose of the conference being to achieve an international legislation, here was the place to consider the frontiers of the agreeing States as nonexistent; all the States forming a single juridical unit within which the location of the actual working of an invention was a matter of indifference, pro¬ vided that it was worked in the territory of one of the States.42 M. Dumeur, the other Belgian delegate, noted that the Belgian law required that a patentee manufacture within the country, but “ . . . even if one can understand this provision from the particular point of view of each State, one can but find it bad when one thinks of the formation of a Union.” 42 Conf. 1880, p. 45. See also, discussion by Akerman, p. 62.

80

Economics of the International Patent System

He argued that a patentee should be required to work his patent, but only in one country of the Union.43 For each country to require compulsory working was a mistake, and, in the last analysis only injures the interest of all. In spite of the creation of a Union, it is still necessary that a patentee work his invention in the fifteen or twenty States which make it up in order to retain his rights. This is ridiculous; because, after all, if the patentee were only required to choose one place of manufacture, it is clear that he would be able to deliver his products much cheaper.44

The majority of delegates felt, nonetheless, that the abolition of compulsory working would harm the interests of their countries.45 The Swiss delegate pointed out the bear¬ ing of tariffs on this question and stated: It is necessary to take account of the interests of each country. If, in their particular situation, Belgium and Great Britain can accept the principle defended by M. Dumeur, this is not the case for Switzerland. If the amendment of M. Dumeur were adopted, the patentee would exploit his invention in the country which appeared the most advanta¬ geous to him, and because of the present tariff arrangements, he would certainly go to France because he could then easily export his products to Switzerland where the tariff was extremely low; he would thus over¬ whelm the industry of the country.46

The countries defending compulsory working were then and later charged with “ nationalism ” and accused of acting to the detriment of “ internationalism.” In a comment on the 1880 controversy. La Propriete Industrielle in 1924 stated: It is interesting to note that, from the first Conference from which emerged the Union, very liberal spirits had adumbrated the larger point of view; a delegate of Belgium—relying solely on the truth, the interest of the consumer—had denounced as inadmissible the requirement that the patentee work his invention in fifteen or twenty different States. It is 43 This had been the position taken by the Vienna Conference. 44 Conf. 1880, p. 66. 45 M. Herich (Hungary) spoke of the “incontestable axiom that a State does not have the right to grant a privilege in the interest of another country. . . . ” Ibid., p. 68. 40 Ibid., p. 67.

The Patent Provisions

81

true that this point of view did not triumph, the delegates of other countries believing that they could not sacrifice what they believed to be their immediate national interest to the international cause. Thanks to them, nationalism carried the day; but the contrary thesis had been squarely put and had been affirmed with considerable force.47

The battle against the compulsory working clause was resumed in Rome in 1886. The Belgians re-introduced their resolution: The owner of a patent who works his invention in one of the countries of the Union cannot be deprived of his rights in other countries for failure to work.48

Italy, too, argued that working in the country of origin should be considered adequate. The opposition was as strong as before and the only agreement was on the principle that each country could interpret the phrase “ exploiter ” in its own way. In Madrid in 1890, the United States re-introduced the Belgian proposal, again unsuccessfully. Sweden and Norway joined the opposition to compulsory working on the ground that, among other things, it was unfair to a poor inventor and did a country no good. From them came the first sug¬ gestion that compulsory licensing be substituted for com¬ pulsory working as the best method of conciliating the different interests involved.49 In Brussels, at the two conference sessions of 1897 and 1900,50 two new tacks were tried: The United States intro4T La Propriety Industrielle, v. 40 (1924), p. 68. In what sense the issue involves “ nationalism ” or “ internationalism ” is discussed in Chapter VII. 48 Conference de Rome, p. 11. 40 Proces-verbaux de la conference de Madrid de 1890, pp. 20-21. “Strictly nationalistic conceptions prevailed against the extremely liberal propositions of the United States, which one could only recognize as approaching the ideal of the future.” Akerman, p. 91. 60 The first part of the Brussels Conference was held in 1897, but the conference was unable to agree on several basic principles, including the period of priority, compulsory working, and certain questions regarding trade marks and unfair competition. The conference, therefore, adjourned to enable the countries con¬ cerned to attempt to achieve agreement through diplomatic means and resumed its meeting in 1900.

82

Economics of the International Patent System

duced its reciprocity proposals and the Bureau of the Union proposed an arrangement for a “ restricted union ” 51 to which countries could adhere who agreed to adopt the following addition to Article 5: However, a patent can only be revoked in any country for non-working after a minimum period of three years, and only if the patentee cannot justify his failure to act. The fact that the patentee has offered, through sufficiently well known publications, to grant licenses on equitable conditions, and that these offers have been ineffective, will be considered an adequate reason by which he can justify his failure to act.52

As we saw, the United States proposals were rejected. Neither did the Bureau’s proposals meet with favor. The sub-commission charged to examine them did not like the specification that an offer to grant licenses was a sufficient justification for inaction; it feared the possibilities of collusion between patentee and acquiescent licensees; and the sub¬ commission considered that the phrase, “ on equitable con¬ ditions ” raised difficult problems of interpretation; finally the sub-commission disliked the extension of the principle of “ restricted unions.” The text the sub-commission eventually agreed upon was incorporated in the Convention at the Washington conference of revision in 1911. At this conference Germany and the United States pressed for the abolition of compulsory working and were strongly opposed by the British,53 Dutch, Spanish, Australians and French. The Bureau proposed a text which 61 “ Restricted unions,” or arrangements which were not adopted by all the members of the full Union, had been created for the first time at Madrid. (See p. 57). The Bureau’s proposal for an arrangement regarding compulsory working was of the same sort. 63 Actes de la Conference de Bruxelles. 63 Although Great Britain had originally opposed compulsory working, and had not imposed the obligation to work in her own law, she reversed her position in 1907 and introduced it in the Patent Law Amendment Act of that year, primarily because of complaints from her manufacturers regarding patents taken out by German nationals allegedly for the purpose of stifling the British chemical industry. In 1910 compulsory working was replaced by compulsory licensing. See Chapters VII and VIII.

The Patent Provisions

83

substantially substituted compulsory licensing for compulsory working and which a member country could refuse to accept by notifying the Swiss government. This would have intro¬ duced what is known as the “ reservation system ” which had been adopted in the conventions concerning the protection of literary and artistic property. It allows countries to “ con¬ tract out,” in effect, of various provisions of the Convention, and is considered by most commentators to be a confusing and less effective type of convention. The proposal was as unacceptable as the restricted union proposal of the Bureau made at the previous conference. After much argument, the proposition adopted at Brussels was incorporated into the Convention. It provided that sanctions for non-working could not be enforced before three years had elapsed from the filing of the patent application, and then only if the patentee was unable to justify his failure to work. Compulsory working was thus retained, though in a modified form. The French delegation was especially insistent on its retention: The French delegation wished particularly to note that the obligation to work corresponds to an economic necessity, that of feeding the national industry of each country with the discoveries and inventions which have been made the object of patents in that country; that France is not in principle hostile to the idea of tempering the regulation of compulsory working but that far reaching studies had not yet unearthed any means of reaching this end.54

The Bureau of the Union continued to work for modifi¬ cation of the provision, and opposition to the severity of compulsory working was becoming increasingly widespread.55 54 Actes de la Conference de Washington, p. 282. 65 The International Association for the Protection of Industrial Property had long been agitating for a modification of the compulsory working provisions. Several of the Bureau’s proposals had been based on the voeax of the annual conferences of this association, which had considerable influence. The Association was formed in 1896 for the purpose of developing the theory and practice of the protection of industrial property. It is a private organization composed of business men, industrialists, lawyers and authorities in the field. See Akerman, pp. 91-100 for a review of the voenx of this association with regard to com-

84

Economics of the International Patent System

By 1925, when the conference of revision was held at The Hague, it was possible to gain acceptance of the principle that compulsory licensing should be the chief means of securing exploitation of the patent and that revocation should be permitted only if compulsory licensing proved to be in¬ adequate. The arguments of the Bureau were persuasive: Does the maintenance of the present system mean that each country, in the name of the law, is protecting the interests of the national con¬ sumption or production? We do not think so. If the holder of a patent does not work it in the country, it is generally because he can work it to better account in another country and in such a case, the consumer will pay less for the imported product than he would pay for the product manufactured inside the country itself. Can one reasonably demand of the owner of one of the patented inventions for which the possible market extends over nearly all the countries of the Union that he install a factory in each of the countries if he wishes to be protected? Strictly applied in all the countries of the Union who have required it, such an obligation would be extremely hard on the patentee, and almost impossible to fulfill within a period of three years.56

Compulsory working would have been completely abolished at this conference if it had not been for the opposition of only three countries: Japan, Poland and Yugoslavia. The Polish delegation declared that the situation of their country in which industry is far from being as developed as that of the great Western Powers, does not permit them to agree to the suppression of the obligation to exploit. Poland has the duty of protecting its national production and of assuring the develop¬ ment of its industry. She cannot therefore consent to that which would stifle her industry by the importation of merchandise produced under the protection of patents.57

In the absence of the agreement of these countries, some proposal less far-reaching than abolition was required since pulsory working and compulsory licensing. In addition to the activities of this and other organized groups, the movement for the abolition or modification of compulsory working had been strengthened in this period by the changes in the laws of several countries, notably Britain and France. 56 Actes de la Conference de la Haye, p. 234. 57 Ibid., p. 431.

The Patent Provisions

85

unanimity was necessary. The United States reverted to its old reciprocity ideas and proposed that: No obligation other than that imposed by the laws of the countries of origin can be imposed on patents taken out in one of the countries of the Union so far as working or concession of compulsory licenses are concerned.58

This proposal was obviously open to the same objection as the other similar proposals: that it would destroy the prin¬ ciple of national treatment and replace the Union by a series of bilateral arrangements. Hence it, too, was rejected on the same grounds as they had been rejected. Inspired by the British law, the American and British delegations finally introduced a text which would allow each country to take the measures it considered necessary to prevent an “ abuse of the monopoly,” but these measures could not include revocation except where compulsory licenses were insufficient to prevent the abuse. The phrase “ abuse of the monopoly ” was understood to include the refusal of the patentee to grant licenses on equitable terms, too restricted working of the patent so that the domestic market was insufficiently supplied, the charging of excessive prices, failure to work, etc.59 As originally introduced, it was difficult to translate into French and was expanded to “ abuses which might result from the exercise of the exclusive rights conferred by the patent; for example, failure to use.” Agreement was at last reached on the text cited on p. 78 (with the exception of the last sentence of Section 4, which was inserted at London). The whole was characterized by a United States delegate as a clause which constitutes a step in the required direction and tends to give to the citizens of the United States treatment a little less unequal. . . . The American delegates have consented to it in a spirit of con¬ ciliation in order to permit the United States to adhere to the Con¬ vention.60

58 Ibid.,

p. 574.

59 Ibid.,

p. 434.

00 Ibid., P.

574.

86

Economics of the International Patent System

In accepting the text, the American delegation urged all countries to examine their legislation with a view to elimi¬ nating compulsory working, compulsory licensing and patent taxes. They argued that patent laws should encourage inventors to take out patents and disclose the secrets of their invention. Taxes, compulsory licenses and forced premature working discouraged such disclosure on the part of inventors or caused them to take their inventions abroad. Compulsory working forced an undesirable use of resources and com¬ pulsory licensing hurt inventors in advance of their time.61 Again at London, in 1934, the Bureau of the Union and several countries tried to get revocation as the sanction for failure to work completely eliminated from the Convention and compulsory licensing substituted. Other countries sug¬ gested other sanctions for “ abuse of the monopoly Spain suggested compulsory licensing without royalties; Mexico, a reduction of the period of the patent.62 After a long discus¬ sion, it became clear again that no agreement could be reached on the suppression of compulsory working. Several other proposals for limiting the use of it were also rejected and the text as finally agreed was the same as the text adopted at The Hague with the addition of the last paragraph which further restricted the use of revocation by prohibiting it during the first two years after the concession of the first compulsory license. There the matter stands. In subsequent conferences the fight to obtain the suppression of revocation of the patent as a sanction for non-working will undoubtedly be resumed. If the principle of the international recognition of the in¬ ventors’ right to protection is accepted, then the question of what restrictions each country may impose on the exercise of this right is of fundamental importance. In this chapter we have reviewed in considerable detail 61 Ibid., p. 575. 62 Aden de la Conference de Londres, pp. 2G1-262.

The Patent Provisions

87

the history of, and the arguments about, the five important patent provisions of the International Convention. Two of these have far-reaching economic implications: the right of priority, which accepts the principle that an inventor should be able to obtain a monopoly in all countries in which his invention is patentable if he so wishes; and the “ abuse of the monopoly ” concept, which defines the conditions under which a country may impose restrictions on the patents it grants, particularly conditions as to working or licensing. The other provisions are of lesser significance. National treatment is largely a political question; the independence of patents is also primarily a question of political expediency although I shall give some attention to its economic impli¬ cations; the prohibition of importation was never widely adopted and its disadvantages are so obvious that further discussion would be superfluous.

Chapter

V

THE ECONOMICS OF THE INTERNATIONAL PRO¬ TECTION OF PATENTEES:

A SURVEY OF

THE ISSUES in one country ofily to pro¬ tection in several countries is a big one and was taken without much consideration of the effects of such an extension of the patent system. But unless the natural rights theory of the patent law is accepted, the question whether and to what extent patentees should receive international protection is one of social policy which should be decided in the light of an analysis of the economic costs of the practice of granting patents on the same invention in several countries and of the gains to be obtained thereby.1 Originally the patent grant was closely conditioned upon the actual use of the invention within the country. Patents were frequently granted to foreigners to encourage them to introduce a new art. The patent system grew up in an The step from protection

1 This was clearly recognized in the early days of patent legislation. In 1838 an Austrian writer stated: “ Insofar as one considers it in no way a moral obligation of the state to protect the inventions of men’s minds as the exclusive private property of the inventor, once they have been put into practice for all to see, are clearly published to other men and are no longer merely ideas within the mind of the inventor; and insofar as one subscribes rather to a real natural law which governs a community of independent states according to which each may appropriate to itself fully disclosed and clearly revealed inventions and imitate them and use them as it wishes; then two questions arise with regard to the inventions of foreigners: (a) whether and to what extent it is wise state policy to grant temporary exclusive rights for the exploitation of an invention introduced from abroad and (b) whether it is wise to grant the benefits of exclusive temporary rights under certain circum¬ stances to third persons, just as to inventors themselves, when third persons intend to introduce and put into practice foreign inventions developed by others but with respect to which they have no real claim to the profits or exclusive enjoyment.” A. Krauss, Geist der osterreichischen Gesetzgebung zur Aufmunterung der Erfindungen, p. 37.

88

A Survey of the Issues

89

environment of protectionism, and its administration, so far as international considerations were concerned, was governed by current ideas regarding the most effective methods of stimulating the growth of national industry. To a very considerable extent these ideas approved the encouragement of national manufacturing for its own sake and at almost any cost. Economic provincialism is perhaps a more appro¬ priate term than economic nationalism for these policies since the international repercussions of domestic policies were less significant than they are today and less importance was attached to them. As international relations became more widespread and more complex, patents were increasingly used to protect international markets, and the granting of patents to for¬ eigners took on a new economic significance. The custom of granting such patents, however, was firmly established by the time the Convention was drafted and the acceptance of it came naturally to most people, even to those who did not hold an extreme view of the sanctity of inventors’ rights. The opponents of granting patents to foreigners were almost entirely either opponents of the whole patent system, or extreme economic protectionists. The increasing interdepend¬ ence of nations was for many the chief argument in favor of the international protection of patentees;2 for others, who saw in this interdependence a threat to the economic inde¬ pendence of their own country, it was one of the arguments against international protection.3 2 “ The interest of commerce and of industry demands that protection does not stop at the frontier. Today commerce and industry cannot be confined within the limits of each state. Inventions cannot be localized. They are essentially cosmopolitan, international, and if one wishes to protect them in an effective manner, it is necessary to protect them outside the boundaries of the country of origin no matter who was the original inventor.” Leon Milhaud, Des brevets d’invention dans les rapports intemationaux (Paris: 1892), pp. 12-13. 3 “ Commerce is, in effect, cosmopolitan and most of the social utility of legal institutions established to aid it, would be destroyed if they tried to confine it within the limits of a single country. From this point of view, a distinction is necessary between the various rights included in the generic expres-

90

Economics of the International Patent System

As we have seen, it is through the right of priority that the Convention sanctions and facilitates an international extension of the patent system. The rights of the patentee in a Union country are enlarged, for, once he has applied for a patent in his own country, he automatically obtains a right to receive a patent on the same invention in other countries where it is patentable, provided that he complies with the requisite formalities. The right of priority does not contravene the principle of territoriality but rather follows from it. Insofar as the right of priority is concerned merely with the question of who should get the patents in other countries on an invention patented in one country, it raises no economic issues and can be viewed as a matter of justice. If special privileges are to be granted in all countries for an invention, it would seem just in general that the inventor should have the first chance of obtaining them.4 The right of priority goes sion of industrial property. With respect to rights having an arbitrary monopoly character, the international effect of these rights should be limited, and, in principle, should only be recognized if they do not tend to transplant the monopoly to foreign countries. This is the case with patents . . . the interest of commerce is that each person should profit freely from the progress thus realized. If the monopoly of the exploitation of this or that design or model exists abroad, this monopoly may well have certain effects at home—but one cannot admit that this monopoly established abroad should impair the free exploitation of the invention in France. That would be contrary to the public interest. “ . . . when one sees that the securing of a patent assures, according to the convention, a right of priority in obtaining it again in another country in spite of all publicity, one is driven to think that the texts refer above all to the thesis of the “ unite du monopole.l ” A. Pillet, op. cit., pp. 11 and 15. 4 Since many inventions are made almost simultaneously in different countries, the granting of all patents to the first patentee may well be unjust to those who had already arrived at the same result or were on the point of doing so. This is one of the inequities of the patent system and is as important within countries as between countries. Some countries make special provisions for simultaneous or “ joint ” invention. Curiously enough, Ladas, though defending vigorously the international pro¬ tection of patentees and urging a reduction of difficulties in the way of obtaining international protection, finds this inequity to inventors who lose out because someone has beat them in the race to the patent office, a serious objection to the creation of an international patent: “ The fortuitous character of certain inventions at a certain stage of scientific and technical knowledge, and the contemporaneous search for, or ‘ finding ’ of the same invention by several

A Survey of the Issues

91

further than this, however, and gives the first patentee a right to obtain a patent in other countries, provided he com¬ plies with the laws of those countries. Thus the right of priority is based on the assumption that a geographical protection as extensive as the patentee wishes is generally advantageous under all circumstances or that any net dis¬ advantages can be dealt with by supplementary regulations. I shall leave for later discussion the question of supplement¬ ary regulations, the most important of which are compulsory working and compulsory licensing, and examine the economic problem first under the assumption that the patentee’s mono¬ poly is unrestricted by these special obligations.5 Criteria For an Economic Appraisal The international patent Convention is here examined with respect to its effects on the economic activity of all countries. We should like to know whether on balance the provisions of the Convention are likely to increase or decrease the real income of all countries taken together, or whether they benefit only some countries at the expense of others. Losses to one country must be offset against gains to others, and benefits to individuals must be weighed against losses to their own countries and to other countries. Economic nationalism is generally decried because it implies an insistence on national economic interests regardless of the effect on other countries and is usually blind even to the long-run interest of the national economy. Internationalism, on the other hand im¬ plies a concern for the international welfare. Thus, when an extension of the protection of the interests of private in¬ persons, often render unjust the grant of a patent to the first applicant. Such injustice would be enormously increased if an international, instead of a national, patent should be granted to the first applicant.” Ladas, op. cit., p. 837. 6 To non-American readers it may seem as if I were setting up a straw man by assuming the granting of unrestricted patents. In the United States, however, even the most limited compulsory licensing has been accepted only for violations of the anti-trust laws and it has been the policy of the United States to press for the elimination of both compulsory working and compulsory licensing from the Convention. Hence, the discussion is realistic from this point of view.

92

Economics of the International Patent System

dividuals is defended in the name of internationalism, the connection between these interests and the international welfare must be shown. The essence of the whole problem turns on the question, under what conditions, if at all, is it an advantage to all of the countries concerned that patents be granted on in¬ ventions already patented somewhere else. As we have seen, the matter has usually been viewed as a question of granting foreign patents 6 because it is in this form that any parti¬ cular country is most immediately faced with the problem. More broadly it is a question of extending the patentees’ monopoly power and may be considered as one of extending the patent system. In patent discussions the problem has rarely been posed in this form, and indeed the assumption that to grant foreign patents is the natural thing to do has been largely treated as if it had the force of an axiom.7 My chief purpose in analyzing such a firmly established tradition is to indicate the nature of the difficulties created by it in order that any offsetting measures and supplementary regu¬ lations can be more adequately appraised. Thus the criteria used in this study for the appraisal of the Convention are not those that the framers of the Con¬ vention had in mind when they created it, nor have they been systematically applied in subsequent analyses of it. The delegates to the different conferences and the commentators on the Convention have as a rule been lawyers and jurists. Problems of international private law, of individual justice, 61 shall use the term “ foreign patent ” in this study as a shorthand expression applying to patents granted by a country on inventions developed and patented abroad; such patents may, of course, be granted to either nationals or foreigners. It is the nationality of the invention, so to speak, and not the nationality of the patentee that is the relevant consideration. 7 There have been a few non-conformists in this respect. A. Krauss questioned this assumption as part of the central theme of his Geist der osterreichischen Gesetzgebung. Among the French, A. Pillet attacked the assumption from the extreme protectionist point of view. He was one of the severest French critics of the international Convention and insisted that the framers should have con¬ centrated on working out the conditions under which recognition of foreign rights would be desirable. A. Pillet, Le regime international, p. 17.

A Survey of the Issues

93

of convenience to patentees, have been the subject of their analyses rather than economic problems. This is to be ex¬ pected and is legitimate. What is not so legitimate is the extent to which the legal experts make extensive economic generalizations without even the pretense of an analysis. Some have gone so far as to consider the patent question a private preserve of the law, outside the scope of economics.8 That it cannot be so viewed is clear from the “ abuse of the monopoly ” discussions reviewed in Chapter IV. On this issue economics has persistently reared its ugly head and will continue to do so. Lawyers who argued about it were frankly concerning themselves with an economic question.

Sources of Costs and

Gains in an International

Extension of the Patent System

The advisability of extending the patent system beyond a given set of limits must be considered in the light of the incremental or marginal costs and gains. In all patent laws the patent right is limited in four important directions: as to what can be patented, as to how long the patent lasts, as to the geographical area with respect to which rights are 8 Arguing against the position that general economic grounds must provide the basis for determining the extent of patent protection, a Swiss student stated: “ How far legal protection should reach in the different fields of industry is a question primarily for the Jurists. They should give to the inventor what belongs to him and to Society what is its due.” Walther Stuber, Die Patentierbarkeit chemischer Erfindungen, p. 5. One of the world’s leading patent experts also stated, “ After jurisprudence has taken hold of any area treated by the law, it is up to this science to develop it and all other disciplines must resign; from now on it is the method of juridical thinking which must rule.” Josef Kohler, Handbuch des Deutschen Patentsrechts (Mannheim: 1900), p. 30. Nor is this attitude confined to Europe. Mr. Folk in Patents and Industrial Progress questions the qualifications of Professor Walton Hamilton to write on the subject of patents and free enterprise on the same grounds: “ What are those qualifications? Is he a lawyer? Has he ever practiced law? Has he any law degree? . . . Professor Hamilton . . . prior to his Professorship in the Yale Law School was a Professor of Economics. ... It does not appear that an affirmative answer could be given ... to any of the foregoing pertinent questions as to his qualifications to speak as an expert on the subject of patents or the effects of the patent system.” (p. 73).

94

Economics of the International Patent System

obtained, and as to the duties imposed and the use made of the rights granted. Many inventions are not patentable partly because they are not suitable for commercial use and partly for reasons of public policy. All countries limit the duration of the patent grant because it is generally considered that the burden on society of perpetual patents would be too high. Many countries make the monopoly conditional upon the use made of it. A few countries have limited the geographical scope of the patent within the country under some conditions.*' There are a variety of costs to society incident to the patent method of encouraging 'invention and these costs become greater with every extension of the patent monopoly. It is usually assumed that the gain to be expected consists of an increase in inventive activity or an increase in the rate at which new inventions are put into commercial use. An extension of the limits of patent protection presumably increases the total reward the owner of a patent could expect. One could postulate that the greater the reward the greater would be the amount of invention; but inventions are only wanted if they are a net advantage—if the total cost does not exceed the total value of the invention obtained. It may be that a considerable amount of invention would be forthcom¬ ing if no special measures were taken; that, with a modest reward, a great deal more would come forth and be applied, 9 For example, in Bolivia, Brazil, British Honduras and Ecuador the patent privilege has been limited to a part of the country. See C. Buschmann, Lets da propriedada industrial artistica e litteraria da republica dos Estados TJnidos do Brazil (Rio: 1916); also Ladas, p. 244. The provisions of the Bolivian law of 1858 are an interesting example of an attempt to adapt the patent grant to the extent of protection considered neces¬ sary in different cases. Articles 8 and 9 read as follows: “ Art. 8. If the establishment of the machine or imported industry requires or anticipates a cost of twenty five thousand pesos, the privilege shall be for three years; if it reaches fifty thousand, six: if a hundred or more, ten years. Art. 9 The privilege which is granted to those who import machines or new methods of fabrication or industry already used or known abroad, shall be confined to the district in which the machine operates or to the territory neces¬ sary to assure their reward.” Nestor Jeronimo Otazo, Privilegios industriales y marcas de fabrica (La Paz: 1910), p. 3.

A Survey of the Issues

95

that with larger prizes still more would come forth, but not enough to justify the increased costs to society. In attempting to evaluate the balance of costs and gains consequent upon an international extension of the patent system, we have not only to consider those costs and gains which are inherent in any national patent system and which are merely increased by the wider rights granted to the patentee, but a variety of others as well. All of them can be grouped under three heads. The effect of the extension of the scope of the patentee’s monopoly on (1) the price of the exports for which the exporter has patent protection in the importing country; (2) the rate of invention in export industries; and (3) the availability of patentable invention and unpatentable technological information. Price of Exports of Patented Products The monopoly position of exporters of patented products enables them to charge a higher price for their products than they would have charged in the absence of patent protection in the country of importation.10 If the patented exports are at all important the increased proceeds permit the exporting countries to import more goods in exchange for their exports than they could otherwise have imported, and the improve¬ ment in their terms of trade thus results in an increase in the real income of the country. This type of gain is especially important for the large exporting countries who export more patented products than they import; in general the gain is obtained at the expense of the importing countries. If the price of patented imports into a country is increased because patents have been granted to foreign firms, the cost 10 The “ lavish margins ” given to importers and distributors of Dutch half-watt lamps was complained of by the Standing Committee on the Investigation of Prices and Trusts under the Profiteering Acts in Great Britain in 1920. In spite of the fact that Dutch lamps were in fact manufactured much more cheaply than the British, higher prices in Britain were made possible because only three firms were licensed to import lamps. See p. 11 of the Report of this committee in the House of Commons Sessional Papers v. 23 (1920).

96

Economics of the International Patent System

to the importing country of the foreign patents is the excess of the price the foreign firms obtain from their exports over the price they would have obtained if they had had no patent protection in the importing country. The terms of trade of the importing countries are worsened, that is, the amount of foreign goods they can obtain for a given amount of their own goods is reduced. As with tariffs and other indirect means of taxing con¬ sumers, those adversely affected are not so conscious of their loss as those who benefit are conscious of their gains. Clearly a gain to a net exporting country that is at the expense of importing countries will not be stressed by the former in international discussions in which both types of countries are represented. It is no wonder, then, that this type of gain to some countries has not been directly mentioned in the international conferences. To enlarge upon it would not have been consistent with the theme of “ internationalism/’ What is a most important gain for the more powerful industrial countries is, on the other hand, one of the most important costs to the less industrialized importing countries. That this cost has not influenced more countries against an inter¬ national patent system than it has, is probably partly because of the belief that the increased price paid to exporters will stimulate them to make better and, in the long run, cheaper products available to importing countries—in other words, that patents granted to foreign firms are necessary to encourage invention in export industries. The Rate of Invention in Export Industries The familiar argument that patents are necessary to encourage invention applies to exporting firms as well as to firms producing for the domestic market. In both cases, inventions that reduce costs and increase the quality or variety of goods are important to consumers. There is no special reason for refusing the patent incentive to exporting

A Survey of the Issues

97

firms; indeed patents may be more important to them than to firms catering only to the domestic market because the uncertainty in the export trade is frequently greater than in the domestic trade and the prospect of monopoly gains may be more important to offset this added uncertainty. This argument has the greatest weight for those producers who sell almost exclusively in foreign markets, because if producers have a domestic sales outlet as well as a foreign one, domestic patents can protect the domestic market and may bring in sufficient returns to reward and stimulate innovation. On the other hand it has been suggested that firms in a monopolistic position can afford to take a more conservative attitude toward introducing inventions than can competitive firms and are more likely to do so. If this is true, a combina¬ tion of limited protection with competitive pressures may well be more effective in stimulating innovation than the grant of an absolute world-wide monopoly in the use of an invention. A greater amount of protection, however, may be necessary where heavy capital investment is required to develop an invention, where the risks of failure are great, where the invention can be imitated at relatively small cost, and where the domestic market is not of great importance. For such inventions the international extension of the patent system might just provide that additional incentive neces¬ sary to call them forth. If the rate of invention is in fact increased by foreign patents, resources are diverted from other uses and devoted to the development of patentable inventions. The production foregone by the diversion of resources must be considered part of the cost of the production of inventions. Insofar as people who otherwise would be employed at something else respond to this specific inducement they are being diverted from activities which may very likely include purely research work, i. e., the production of unpatentable ideas. Conse-

98

Economics of the International Patent System

quently the supply of patentable inventions may increase but it is impossible to tell at what cost in terms of the products that would have been produced by the resources devoted to unpatentable inventions and other non-commercial research activity.11 It is important to recognize that inventions them¬ selves involve a cost to society and for that reason I have mentioned it here. In the rest of the discussion of the costs and gains of international patenting, however, I shall ignore this type of cost. Availability of Inventions and of Technological Information Both within countries and between countries the greatest social costs of patents arise from the restrictions they put on the right to imitate new ideas. One of the most persistent allegations of the more ardent and uncritical defenders of the patent system is that nothing is taken away from the public which they had before and hence that a patent monopoly involves no cost to the public.12 This argument rests on the assumption that in the absence of patents there would be no invention and therefore the'public would not 11 “ The only conceivable line for such an argument [that patentable invention possesses a superior usefulness] to take would seem to be that ultimately the inventions of a patentable type which will be made in response to the grant of a temporary monopoly will possess a sufficiently greater general usefulness than would result from the other inventions or other output immediately foregone, to outweight the immediate loss. There surely exists no scientific reason for making any such claim for patentable inventions in general, as compared with alter¬ native output. . . . Economics, in short, has not yet evolved any apparatus of analysis which would enable us to pronounce upon the relative productivity of this particular infant industry—the production of inventions; nor does it provide any criteria for the approval of this method of encouragement.” Arnold Plant, “Economic Theory Concerning Patents,” Economica (New Series), v. I (1934), pp. 42-43. 12 For this reason patents of invention were for long distinguished from monopolies. Coke defined a monopoly as “ ... an institution, or allowance by the King by his grant, Commission, or otherwise to any person or persons, bodies politick or corporate, of or for the sole buying, selling, making, working, or using of any thing, whereby any person or persons, bodies politick or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade.” If this last condition were not fulfilled, no monopoly existed. Edward Coke, Institutes of the Laws of England, III, c. 85, 181. Hence Jeremy Bentham could say that inventors’ privileges have “nothing in common with monopolies which are so justly decried.” The Works of Jeremy Bentham, John G. Bowring, ed. (Edinburgh, 1842), v. II, p. 533.

A Survey of the Issues

99

have the opportunity of copying that which the patent forbids them to copy. The validity of this assumption is by no means conclusively established. Even the most cursory glance at history reveals as manifestly absurd the assertion that men will not devise new ways of doing things if their efforts are not protected by monopoly patents. The modern patent system is only some 300 years old and in most countries less than 150 years old. Although many of the manifold gadgets and processes of modern industry may have been introduced only because a patent was obtainable, no one would seriously assert that invention and innovation, industry and the arts made no progress before this new system was developed and would have made none without it.13 The fact that it has made remarkable progress since then can easily be explained on grounds other than the existence of a patent system. The presumption surely is that no marked change in the nature of men has occurred in this respect in the last 300 years. The law of patents takes away the right of a man to put to his own use ideas developed and patented by others, even though he may also have developed them independently. It takes away from the public the right to imitate. It may be desirable that restrictions be placed on this right but to assert that such restrictions take nothing away from the public is clearly incorrect.1* 13 W. H. Price, in what has become almost the standard work on the early English patents of monopoly, states: “ The ordinary sources of information as to the results of the 16th and 17th century monopolies are almost silent as to the many privileges that were granted for mechanical inventions. The fact is that no single one of the inventions of this character proved of first rate import¬ ance. In the aggregate, they represent a fair state of mechanical activity, some ingenuity, and considerable teachableness. . . . The whole period was one of great industrial expansion, and it was this condition rather than a system of govern¬ mental encouragement that caused the unusual exercise of mechanical ingenuity. In the mechanical progress that took place the patents were not leading factors. Some of the most successful mechanical innovations of the period did not enjoy any patent.” W. H. Price, English Patents of Monopoly (Boston: 1906), p. 62. 14 Two lawyers who are today among the most ardent patent advocates in the United States, Mr. George Folk and Mr. Harry Toulmin, still insist warmly that

100

Economics of the International Patent System

This is particularly true with respect to the use of inven¬ tions already developed to a commercial stage in one country. There is no doubt that such inventions would be adopted in other countries on a large scale if producers were not deterred by the fact that their country had granted patent protection to the foreign inventor. Innumerable instances of inter¬ national “ piracy ” of this sort can be cited and in fact such “ piracy ” was one of the chief complaints directed at nations with inadequate or no patent laws in the 19th century. Institutions restricting the access of a country to markets or to raw materials or other factors of production reduce the opportunities open to it to use its own resources 16 to the best advantage or to benefit as fully as it might from an inter¬ national division of labor. Because of the immobility of many of the world’s resources and because of the costs of the public loses nothing. Mr. Toulmin expresses great concern that the courts are beginning to realize what the public loses: “ An invention is a contribution to the general store of public knowledge of something the public did not have before. Therefore, the granting to the inventor of a temporary monopoly does not deprive the public of anything. It would not have had the invention except for the stimulation afforded by the prospective reward of a temporary monopoly. The tendency of some Courts, in recent years, to resist the rights of inventors and to take a reactionary view toward all inventions indicates that those Courts have failed to understand that fact.” Harry A. Toulmin, Invention and the Law (New York: 1936), p. 25. Mr. Folk makes the fact that the author of Patents and Free Enterprise (TNEC Monograph 31) takes exception to this principle the basis for an attack on him that is distinguished more by its emotional overtones than by its judicial reasoning: “ One of the author’s more fundamental errors is in treating a patent as an instrument for taking something away from the public and giving it to an individual. ... A patent is not a private privilege carved out of the public domain. . . . What, then, shall be said of one who undertakes to instruct the nation on ‘ patents and free enterprise ’ and proceeds on the theory that a patent is a transfer of something from the public domain to an individual? Correct statements of the matter, which the author might easily have consulted, are abundant in the writings of authorities on the subject. . . .” George E. Folk, op. cit., pp. 79-80. 15 Including the resources of inventors. As far back as 1886 a Swiss manu¬ facturer in the machine industry stated: “ The advantages [of our not having a patent law] in my line, and in the machine industry generally, lie less in the free use of all developments themselves, than in the free scope for engineers in general. With great complicated machinery, individual, perhaps not very essential, parts can be patented, thus preventing a complete and perhaps much more valuable construction and forcing better engineers to an exacting study of all such little patents.” Bureau der Kaufmannischen Gesellschaft Zurich, op. cit., p. 18.

A Survey of the Issues

101

transport and other obstacles reducing the mobility of others, not all factors of production are equally available to all countries, and not all markets are equally accessible, even in the absence of restrictive regulations. Under these circum¬ stances, not all goods can be produced in all countries, and total real income will be greatest if in each country those goods are produced for which the resources available are most suitable and which will give the largest net returns to the economy. The economic significance of many natural resources is, however, a function of the “ state of the arts.” And whether a given “ natural resource ” can in fact be considered a natural resource from an economic point of view may depend on the state of effective technological knowledge: rubber became of great economic significance only after the invention of vulcanization; the Bessemer process changed the relative importance of different grades of iron ore; new mining tech¬ niques have made resources available that had previously been considered inaccessible; the list could be enormously enlarged. The “ state of the arts ”—the stage of development of human knowledge of scientific, industrial and agricultural techniques—is a pervasive, immeasurable influence, of fund¬ amental importance in a changing economy.16 Knowledge is the most important subject matter of patents, and the effect of granting exclusive rights in the use of new techniques to private individuals may extend over a whole range of inter¬ mediate and final products. The cost to a country of granting patents to foreigners increases directly with the extent to which prices are higher, output more restricted and, hence, available resources used less efficiently than they would have been if the new inven¬ tions had been freely available. Four general types of restriction on the use of inventions can be distinguished: 10 “ Knowledge is our most powerful engine of production.” Alfred Marshall, Principles of Economics (London: 1930, 8th ed.), p. 138.

102

(1)

Economics of the International Patent System

Royalties—where the patentee makes his invention

available to all who wish to use it but at a price. (2) Royal¬ ties plus exclusive licensing—where the patentee licenses a limited number of licensees to use the invention.17 (3) Ex¬ tended monopoly—where control over large sections of industry or of unpatented products is obtained through the accumulation of patents in a few hands or by licensing agree¬ ments among several patentees. (4) “ Suppression of patents ”—where the patentee does not use the patented invention in production even when it would be economical to do so from the point of view of the country granting the patent, but uses his patent merely to prevent competitors from using the invention. When a country grants patents to foreigners for inventions which the foreigner is not going to “ work ” in the country himself, but which he is willing to make available to domestic producers at a price, the price paid to the foreigner is clearly one of the costs of granting the patents and just as clearly must restrict the use of the invention to those who can pay the price. From the point of view of producers this cost is simply the royalty payment made to foreign firms; the effect on output and price is exactly equivalent to that of a tax imposed in the same manner. From the point of view of the economy as a whole it is a tax paid to a foreign firm and requires a transfer of real income from one country to another.18 If the foreign patentee makes the patent available at a “reasonable” royalty charge to all who want to use it, the price to the consumer may be raised to some extent because of the royalty payments and the output of the industry may 17 I am not including the case in which the patentee is the sole producer under the patent and does not import, because from our point of view he is then in the same position as a native patentee, although he may want to take more of his profits out of the country. 18 The loss to consumers will be somewdiat greater than the income transfer just as excise taxes impose an extra burden on the economy in comparison with income taxes.

A Survey of the Issues

103

be somewhat smaller than it would have been if the invention could have been used without charge. These effects on price and output are the result of the royalty and nothing more. If the patentee limits the number of licensees the restriction will be even greater. Patents are frequently licensed on an “ exclusive ” basis— only one firm is licensed to use the invention in each market area. Competition is thus limited and the licensed firm can charge a higher price than it would have been able to charge if it had had to face more competition. This must mean higher prices to consumers unless the firm would have had the same monopoly position without the patent or unless costs were lowered entirely as a result of the monopoly position of the producer made possible by the patent.19 The consumer thus pays a price that is higher as a result of the patent for two reasons: because the domestic producers can charge monopoly prices and because the domestic pro¬ ducers must pay royalties to the foreign patentee. The utilization of the invention and the output of the product are more restricted and prices are higher than they would have been if royalties had been charged but the invention had been made available to all firms. The simple monopoly which the patent grant confers over the use of an invention can be extended by the accumulation of many different patents relating to the same industry in the hands of one patentee and by restrictive licensing agree¬ ments. The former is not of so much importance from the international point of view as the latter and I shall not discuss it. Restrictive licensing agreements are agreements 10 This is possible if the mere fact of production being concentrated in one or a few firms leads either to the adoption of an innovation that would otherwise have been neglected or to economies of scale sufficient to reduce costs the requisite amount—reconomies that would not have been available if the industry had been organized more competitively. I have never seen the argument made that one of the benefits of granting patents to foreign firms is the increase in monopoly in the domestic economy that might result from a restrictive licensing policy on the part of foreigners and I do not consider it worth further discussion.

104

Economics of the International Patent System

by which the patentee licenses others to use his patent, but imposes conditions upon the licensees which restrict the use they may make of the patent or even require them to accept limitations on their actions which are completely outside the scope of the patent.20 A notorious type of license agreement of this latter kind, now illegal in some countries, is the socalled