PublishedJanuary 18, 2013

A History of Abuse

The U.S. patent system is almost as old as our country. The power to create patents was included in the constitution, and the first Patent Act was enacted in 1790. A lot of opponents of patent reform today argue that the length of the patent system in this country is indicative of its health as a body of law. The argument follows that there is nothing wrong with patent law because it has been roughly the same (or strengthened) through periods of U.S. technological dominance. However, what this argument fails to recognize is that patent law does not exist in a vacuum.

Historically, patent law has relied on competition law to serve as a check on those that would abuse it. The ways in which these bodies of law overlap have been constantly evolving. Appeals to maintain the status quo based on the length of patent law and its historical successes greatly discount the role of this evolution. A more complete examination of history shows that maintaining the status quo is not only harmful to competition and consumers, but also counter to this important established process.

One of the most famous antitrust cases of patent abuse involved the sewing machine industry. In 1956, a Swiss sewing machine manufacturer attended a sewing machine convention in Kansas City. While there he became quite concerned over the competition posed by Japanese sewing machines. The Swiss manufacturer then met with Singer, an American company, and discussed the problem. Eventually it was decided that they could beat the Japanese company, Brother International, not through competition but through patent litigation. Singer and the Swiss manufacturer partnered with an Italian manufacturer to transfer patents to Singer who used these patents against the Japanese company Brother International. The United States took action against Singer and in a landmark case the Supreme Court decided that conspiring to force a competitor out of the market using patents is illegal under the Sherman Act.

Ironically, Singer was at the center of a large scale patent war, originally as a defendant, a century previous during the 1850s. This sewing machine war is considered to be the first known case of an American patent thicket. The patent thicket was eventually solved with a patent pool, but unfortunately this was before the antitrust laws were enacted. Price collusion was alleged to occur among the patent pool members and was widely panned in the press as a “most odious monopoly” that charged “ruinous” prices. The result was deadweight societal loss – first in the money and effort spent litigating and then continuing in what was probably monopoly prices charged to consumers.

An even older case, Hartford-Empire v. U.S., is about a glass company that used patents to create a mafia-style protection scheme to lower production and hurt consumers. Hartford started its scheme by gaining control of a large amount of patents covering glass blowing machinery. Then, Hartford partnered with another large glass company, Owens, to gain control over all patents covering a particular method of glass manufacturing. Subsequently, these two companies turned their attention on a company called Hazel. Hazel was Owens second biggest competitor and had its own glass manufacturing system. Hartford and Owens tried to persuade Hazel to join their pool of patents. When Hazel refused they sued until Hazel became more willing. With their patent pool strengthened these companies worked out deals with two other companies, Ball and Thatcher, where they agreed to manufacturing quotas to keep prices up. These companies, except Hartford, eventually formed the Glass Container Association of America which controlled 92% of glass container production of the United States. The Glass Container Association worked closely with Hartford to discourage outsiders from increasing production and keep newcomers out of the industry. Fortunately, the Supreme Court found this type of patent pooling to be illegal under antitrust laws in 1945 and the glass blowing patent mafia was brought to an end.

Walker Process v. Food Machinery & Chemical is a 1965 Supreme Court case that is often cited to this day. Food Machinery obtained a patent by fraud, swearing its invention hadn’t been in the public use for more than a year when it had, and then used that patent to sue its competitor Walker Process. The Noerr-Pennington doctrine, created by Supreme Court case law, states that it is a right protected by the First Amendment to litigate. But here the Supreme Court qualified this doctrine by ruling that suing a competitor with fraudulently obtained patents can amount to a violation of the Antitrust Act. The Supreme Court later expanded this doctrine in Handgards v. Ethicon to include patents the plaintiff knows to be invalid. These cases are often used today as counterclaims against competitors that aggressively litigate using weak patents. Although these counterclaims have received very limited success, Walker Process and Handgards are still good law and could play a significant role in judicial reforms to the patent system.

Patent abuse may be as timeless as patent law itself. In each of these cases the Supreme Court made new law to correct problems in the patent system. These problems still exist, and it would be wrong for the legal system to stop finding new solutions to these problems. Too often we see competitors partnering to buy patents to enforce them against other competitors. However, we are also facing new challenges. Companies are becoming smarter in how they use patents to hurt competitors. Patents are being transferred to shell companies, non-practicing entities that can target rivals without fear of recourse. More patents are being issued now than ever before. More cases are being pursued in the ITC, a trade court not subject to Supreme Court rulings that can ban products from entering the U.S. We also have broad patents that cover problems, not solutions. Furthermore, the ever-increasing complexities of these problems create a strain on juries’ ability to understand the facts of a patent infringement case and properly decide the case on its merits. In a debate on the patent system, Judge Posner commented on these problems and suggested that juries are often lost.

Patent law needs competition law now more than ever to prevent abuse. If not, patent law will cease to promote the progress of the useful arts and science and instead promote monopoly over consumer welfare and competition. As Senator Ron Wyden recently stated, “The acquisition of these patents appears less about deploying innovation and more about employing a legal arsenal.” I agree with Senator Wyden that Congress needs to begin a review on software patents’ contributions to the economy. Any such review would do well to look to competition law’s history of protecting consumer welfare and efforts to minimize societal deadweight loss.

David Balto thanks Matthew Lane for his research and assistance on this post.

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David Balto

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