From my Mises blog post from 2009, with some updates:
Update: Dennis Crouch, “The Carrot and Stick Approach to Innovation,” Patently-O (Jan. 16, 2024): “The ruling in Gilead Tenofovir Cases opens the door to lawsuits punishing companies for not innovating fast enough – a sharp contrast to the patent system’s traditional approach to encouraging innovation through potential monopoly-like profits. This flips the normal “carrot”/”stick” innovation incentive model on its head. Patents traditionally encourage innovation by rewarding it through time-limited exclusive rights enabling high prices that “fuel … genius,” as President Lincoln put it.”
Update: “… the patent system confers a legally protected monopoly on inventors to stimulate invention.” Areeda, Kaplow, Edlin, and Hemphill, Antitrust Analysis: Problems, Text, and Cases, 7th ed. (2013), ¶118.
Update: In the recent Oil States case (April 24, 2018), the Supreme Court recognized that patents are “public franchises,” and states that, “like the PTO’s initial review, the Board’s inter partes review protects ‘the public’s paramount interest in seeing that patent monopolies are kept within their legitimate scope.'” And:
Patents began as little more than feudal favors. … The crown both issued and revoked them. … And they often permitted the lucky recipient the exclusive right to do very ordinary things, like operate a toll bridge or run a tavern. Ibid. But by the 18th century, inventors were busy in Britain and invention patents came to be seen in a different light. They came to be viewed not as endowing accidental and anticompetitive monopolies on the fortunate few but as a procompetitive means to secure to individuals the fruits of their labor and ingenuity; encourage others to emulate them; and promote public access to new technologies that would not otherwise exist. … The Constitution itself reflects this new thinking, authorizing the issuance of patents precisely because of their contribution to the “Progress of Science and useful Arts.” Art. I, §8, cl. 8. “In essence, there was a change in perception—from viewing a patent as a contract between the crown and the patentee to viewing it as a ‘social contract’ between the patentee and society.” Waltersheid, The Early Evolution of the United States Patent Law: Antecedents…. And as invention patents came to be seen so differently, it is no surprise courts came to treat them more solicitously.
Of course, patent proponents are very upset by this. Objectivist law professor Adam Mossoff bemoans this decision, writing
the Court rules that the U.S. follows the original practice by English Kings and Queens who bestowed royal privileges on their subjects as “patent” grants, applying to U.S. patent owners the historical dictum that “what the government giveth, the government can taketh away.”
I, for one, agree: there is nothing wrong with the government taking away a patent it has granted (I pointed this out in Objectivist worried ObamaCare may weaken patent rights; see also Price Controls, Antitrust, and Patents). As Justice Thomas says, writing for the majority, all inter partes review involves is “reconsideration of the Government’s decision to grant a public franchise.”
So of course we have patent shill Gene Quinn lamenting the decision and then dragging out a group of industry and IP commentators, most of whom are upset by this decision. Some even cling to the hope that inter partes review may yet be found unconstitutional on Takings and Due Process grounds, based on Thomas’s statement that
our decision should not be misconstrued as suggesting that patents are not property for purposes of the Due Process Clause or the Takings Clause.
However, it is hard to see how abolition of patent law, narrowing of patent protection judicially or by legislation, etc., would really be a “taking” given the thrust of the Court’s reasoning—which is why Mossoff worries—hopefully rightly—that the decision ultimately means “what the government giveth, the government can taketh away.” Abolishing or limiting existing patent rights is no more of a taking than eliminating welfare or social security would be.
See also: Adam B. Jaffe & Josh Lerner, Innovation and Its Discontents: “A patent thereby creates a kind of monopoly for its owner, although the breadth and hence significance of this monopoly depends on the breadth or extent of the patent grant.”
See also Michael Davis, Patent Politics, at n.141:
This argument surfaces in the “debate” over whether a patent is a monopoly. Although the Supreme Court, among others, has never faltered in so characterizing the patent monopoly, a small but vocal minority seems determined to argue the point.
As early as the 1920s, U.S. Supreme Court cases can be found saying that a patent is a monopoly, and in a lot of what I think was fairly poor reasoning, even as late as the 1970s, the Court continued to reiterate the theme that a patent is a monopoly …. It is only in the more recent Supreme Court cases that it has been made clearer that a patent is not a monopoly. It may be an opportunity for “rent seeking,” to use the economist’s term, but it is not a monopoly.
Proceedings of the Sixth Annual Seminar on Legal Aspects of Doing Businessin Latin America: Free Markets in Latin America: New Games-New Rules, 8 FLA. J. INT’LL. 191, 256 (1993) (statement of Robert M. Sherwood). “As a side issue, it is worth noting that the holder of a patent does not really have a ‘monopoly’ over the invention in question in a strict sense.” Jacqueline Lipton, Protecting Valuable Commercial Information in the Digital Age: Law, Policy and Practice, 6 J. TECH. L. & POL’Y 1, 3 n.9 (2001). However, the Supreme Court has always described the patent monopoly in exactly that manner. See Pfaff v. Wells Elecs., Inc., 525 U.S. 55, 63 (1998); Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 672 (1990); Dawson Chem. Co. v. Rohrn & Haas Co., 448 U.S. 176, 180 (1980); Blonder- Tongue Labs., Inc. v. Univ. of IM., 402 U.S. 313, 343 (1971); Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336, 339 (1961); Great Atd. & Pac. Tea Co. v. Supermarket Equip. Corp., 340 U.S. 147, 149 (1950). This “debate” seemingly has only one point: to sanitize the patent monopoly so that it more closely resembles simple property. A monopoly, of course, virtually compels the public interest. Thus, the trump of property depends on asserting not only that a patent is simple property, but also that it does not constitute an economic phenomenon, like a monopoly, in which the public has a particular interest. The introduction of the trump of property theory will routinely rely on cases of a different era. See, for instance, Rose, supra note 37, at 566 n.6 (citing Cont’l Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405, 424 (1908)); Philip Konecny, Windfall Property Rightsfor the Left Out Co- Inventor Who Gets Let into the Patent, 16 COMPUTER & HIGH TECH. L.J. 141 (quoting the same language); Joan E. Schaffner, Patent Preemption Unlocked, 1995 Wis. L. REv. 1081, 1100 n.89 (1995) (citing United States v. Am. Bell Tel. Co., 167 U.S. 224, 250 (1897) and Consol. Fruit Jar Co. v. Wright, 94 U.S. 92, 96 (1876)).
See also Fritz Machlup, U.S. Senate Subcommittee On Patents, Trademarks & Copyrights, An Economic Review of the Patent System (85th Cong., 2nd Session, 1958, Study No. 15; https://mises.org/library/economic-review-patent-system), p. 26:
While some economists before 1873 were anxious to deny that patents conferred “monopolies”—and, indeed, had talked of “property in inventions” chiefly in order to avoid using the unpopular word “monopoly”—most of this squeamishness has disappeared. But most writers want to make it understood that these are not “odious” monopolies but rather “social monopolies”, “general welfare monopolies”, or “socially earned” monopolies. Most writers also point out with great emphasis that the monopoly grant is limited and conditional.
Also see Adam Mossoff, Patents as Constitutional Private Property: The Historical Protection of Patents Under the Takings Clause, at pp. 698-99 and n. 47:
Broader intellectual property scholarship – critical of the expansive protections afforded to patents, copyrights, and other intellectual property rights today – takes a similar tack in suggesting that the historical record is inconclusive or contrary to the notion that patents are constitutional private property. Relying on a historical claim that patents and copyrights were special, limited monopoly grants in the early American Republic,47 scholars today condemn recent expansions in intellectual property rights,48 which they refer to as “propertizing” intellectual property.49
47 See, e.g., LAWRENCE LESSIG, THE FUTURE OF IDEAS 58-59, 94-96 (2001) (claiming that early Americans viewed patents and copyrights as special, limited monopolies); SIVA VAIDHYANATHAN, COPYRIGHTS AND COPYWRONGS 23-24 (2001) (maintaining that early Americans viewed patents and copyrights as “a necessary evil” in that these monopolies provided limited incentives); Tyler T. Ochoa & Mark Rose, The Anti-Monopoly Origins of the Patent & Copyright Clause, 84 J. PAT. & TRADEMARK OFF. SOC’Y 909, 919 (2002) (arguing generally that patents and copyrights were viewed by early Americans as limited monopolies); see also Eldred v. Ashcroft, 537 U.S. 186, 246 (2003) (Breyer, J., dissenting) (castigating the Eldred majority for ignoring the views of Madison, Jefferson “and others in the founding generation, [who] warned against the dangers of monopolies” in granting copyrights and patents).
Of course many argue patents are not monopolies but are more similar to normal property rights. See, e.g.,
Roger E. Meiners & Robert J. Staaf, “Patents, Copyrights, and Trademarks: Property Or Monopoly,” Harv. J. L. & Pub. Pol’y 13, no. 3 (Summer 1990): 911–48.
(Archived comments below)
JULY 13, 2009 by STEPHAN KINSELLA
On occasion you get some defender of patents who is upset when we use the m-word to describe these artificial state-granted monopoly rights. For example here one Dale Halling, a patent attorney (surprise!) posts about “The Myth that Patents are a Monopoly” and writes, ” People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.”
Well, let’s see. First, see my post Epstein and Patents, noting that the pro-patent Epstein writes:
Patented goods are subject to a lawful monopoly created by the state in order to induce their creation. No one thinks that new pharmaceutical drugs will be invented by private firms that cannot receive a rate of return sufficient to recover [various costs]. … The legal monopoly granted by the patent is the only mechanism that allows the producer to recover those fixed costs….
Is the pro-patent Epstein being dishonest?
And see my comments (1, 2) on The Three Stages of Invention post, excerpted below:First, as to whether patents are monopoly grants–hell, even the feds admit this: “Section 154 and related provisions [e.g. Sec. 271] obviously are intended to grant a patentee a monopoly only over the United States market….” U.S. Supreme Court, Deepsouth Packing Co. v. Laitram Corp., 406 U.S. 518 (1972). See also: King Instr. v. Perego, by the Court of Appeals for the Federal Circuit (“Congress made the policy choice that the “carrot” of an exclusive market for the patented goods would encourage patentees to commercialize the protected inventions so that the public would enjoy the benefits of the new technology during the patent term in exchange for granting a limited patent monopoly. In other words, the public expected benefits during “‘the embarrassment of an exclusive patent as Jefferson put it.’” Graham v. John Deere Co., 383 U.S. 1, 10-11 (1966). See in particular, “Thomas Jefferson to Isaac McPherson 13 Aug. 1813“: “accordingly it is a fact, as far as I am informed, that England was, until we copied her, the only country on earth which ever by a general law, gave a legal right to the exclusive use of an idea. in some other countries, it is sometimes done, in a great case, and by a special & personal4 act. but generally speaking, other nations have thought that these monopolies produce more embarrasment than advantage to society. and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.”)
[Jefferson also referred to patent and copyright as monopolies in his proposal for an amendment in the Bill of Rights:
Art. 9. Monopolies may be allowed to persons for their own productions in literature and their own inventions in the arts for a term not exceeding — years but for no longer term and no other purpose.
See Kinsella, “Thomas Jefferson’s Proposal to Limit the Length of Patent and Copyright in the Bill of Rights,” C4SIF Blog (Dec. 1, 2011)]
See also Engel Ind. v. Lockformer Co. (“We hold that the disputed royalties provisions do not inappropriately extend the patent monopoly to unpatented parts of the patented system”); Carborundum Co. v. Molten Metal Eq. Co. (“A patentee, in demanding and receiving full compensation for the wrongful use of his invention in devices made and sold by a manufacturer adopts the sales as though made by himself, and therefore, necessarily licenses the use of the devices, and frees them from the monopoly of the patent.”)
And: Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947):
The Florida statute is aimed directly at the promotion of intellectual creation by substantially restricting the public’s ability to exploit ideas that the patent system mandates shall be free for all to use. Like the interpretation of Illinois unfair competition law in Sears and Compco, the Florida statute represents a break with the tradition of peaceful coexistence between state market regulation and federal patent policy. The Florida law substantially restricts the public’s ability to exploit an unpatented design in general circulation, raising the specter of state-created monopolies in a host of useful shapes and processes for which patent protection has been denied or is otherwise unobtainable. It thus enters a field of regulation which the patent laws have reserved to Congress. The patent statute’s careful balance between public right and private monopoly to promote certain creative activity is a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.”
Brenner v. Manson, 383 U.S. 519 (1966):
Whatever weight is attached to the value of encouraging disclosure and of inhibiting secrecy, we believe a more compelling consideration is that a process patent in the chemical field, which has not been developed and pointed to the degree of specific utility, creates a monopoly of knowledge which should be granted only if clearly commanded by the statute. Until the process claim has been reduced to production of a product shown to be useful, the metes and bounds of that monopoly are not capable of precise delineation. It may engross a vast, unknown, and perhaps unknowable area. Such a patent may confer power to block off whole areas of scientific development, without compensating benefit to the public. The basic quid pro quo contemplated by the Constitution and the Congress for granting a patent monopoly is the benefit derived by the public from an invention with substantial utility. Unless and until a process is refined and developed to this point — where specific benefit exists in currently available form – there is insufficient justification for permitting an applicant to engross what may prove to be a broad field.
Diamond v. Chakrabarty, S.Ct. (1980), Brennan’s dissent:
I agree with the Court that the question before us is a narrow one. Neither the future of scientific research, nor even the ability of respondent Chakrabarty to reap some monopoly profits from his pioneering work, is at stake. Patents on the processes by which he has produced and employed the new living organism are not contested. The only question we need decide is whether Congress, exercising its authority under Art. I, 8, of the Constitution, intended that he be able to secure a monopoly on the living organism itself, no matter how produced or how used.
Now you can argue that patent holders do not necessarily have “monopoly power” (see The Importance of Patents for Economic Development – 1999, by Prof. William Hennessey), but as Rothbard et al. have pointed out, the government’s concept of monopoly is flawed; the only issue that matters is whether there is a legal monopoly granted. See, e.g., Hoppe, A Theory of Socialism and Capitalism, ch. 9, pp. 185-86:
The monopoly problem as a special problem of markets requiring state action to be resolved does not exist. In fact, only when the state enters the scene does a real, nonillusory problem of monopoly and monopoly prices emerge. The state is the only enterprise whose prices and business practices can be conceptually distinguished from all other prices and practices, and whose prices and practices can be called “too high” or “exploitative” in a completely objective, nonarbitrary way. These are prices and practices which consumers are not voluntarily willing to pay and accept, but which instead are forced upon them through threats of violence.
See also Rothbard, Man, Economy, and State (with Power and Market): “The only viable definition of monopoly is a grant of privilege from the government.”
Now it is, indeed, clear that a patent is a monopoly grant to someone that permits them to charge above-market prices; this is exactly the goal of the patent law: to provide this monopoly profit to inventors so as to incentivize them to innovate and file for patents. And it is why, for example, Blackberry paid over $600 million to NTP in a recent patent suit; and it is why consumers will have to pay more for Blackberry services than they otherwise would, etc. Did NTP have “monopoly power” as defined by the government’s antitrust scheme? I don’t know. Probably not. But did they extort RIM/Blackberry by use of the government-granted patent monopoly? Of course.
See also Arnold Plant, The Economic Theory Concerning Patents for Inventions, sections 16, 19, 20, 24:
The patent system may, on the one hand, be expected to affect the making of inventions in two ways. The first is to divert inventive activity into those fields in which the monopoly grant will be expected to prove most remunerative. It may, secondly, affect the total amount of inventive activity.
… the utilitarians assumed that the patent system was responsible for the greater part of inventing activity. The question which they one and all failed to ask themselves, however, is what these people would otherwise be doing if the patent system were not diverting their attention by the offer of monopolistic profits to the task of inventing. By what system of economic calculus were they enabled to conclude so definitely that the gain of any inventions that they might make would not be offset by the loss of other output? By no stretch of the imagination can the inventing class be assumed to be otherwise unemployable. Other product which is foregone when scarce factors are diverted in this way completely escaped their attention.
… at the beginning of this century Professor J. B. Clark was still writing: “If the patented article is something which society without a patent system would not have secured at all – the inventor’s monopoly hurts nobody… His gains consist in something which no one loses, even while he enjoys them.”? No inkling here that the patent inducement to invent diverts scarce human effort from other production, and that the subsequent exploitation of patents again interferes with the disposition of scarce factors which would obtain under competitive conditions.
… It seems unquestionable not only that a very considerable volume of inventive activity must definitely be induced by price conditions, but also that that activity is diverted by price movements from other types of endeavour as well as from other fields of invention. Entrepreneurs faced with new difficulties or with new opportunities will divert not only their own attention, but that of every technician who can be spared, from the business of routine production to that of urgent innovation. They will not rely exclusively upon those types of professional inventors whose autonomous output pours out in a stream of unvarying size, and some of whom may be prepared, in return for the inducements which the entrepreneurs can offer, to transfer their spontaneous activity to their service. It cannot be assumed that all who are capable of innovation spend their whole lives in inventing. Many of them are also able administrators and production controllers; some in the past have been clergymen and barbers, and in our own time there is a steady flow of technicians from the research laboratories of pure science into those of industrial invention and out again. … The patent system … enables those who “have the monopoly of the right to use a patented invention to raise the price of using it … and in that way to derive a larger profit from the invention than they could otherwise obtain. The effect must surely be to induce a considerable volume of activity to be diverted from other spheres to the attempt to make inventions of a patentable type. [emphasis added]
See also Rothbard, Man, Economy, and State, ch. 10, sec. 7:
It is by no means self-evident that patents encourage an increased absolute quantity of research expenditures. But certainly patents distort the type of research expenditure being conducted. . . . Research expenditures are therefore overstimulated in the early stages before anyone has a patent, and they are unduly restricted in the period after the patent is received. In addition, some inventions are considered patentable, while others are not. The patent system then has the further effect of artificially stimulating research expenditures in the patentableareas, while artificially restricting research in the nonpatentable areas.
Update: See “Ideas Need Protection: Abolishing Intellectual-property Patents Would Hurt Innovation: A Middle Ground Is Needed,” by William F. Shughart II, a senior fellow with the Independent Institute, The Baltimore Sun (Dec. 21, 2009):
Granting a temporary monopoly to the rare breakthrough is necessary, therefore, to provide its inventor with an opportunity to earn a return on the investment that led to the new idea – and to encourage additional such investments. Such protection is especially important in the pharmaceutical industry, where, in its absence, new drugs could be duplicated by competitors, and the incentive to invest would disappear, stifling the discovery process.
To paraphrase the late economist Joan Robinson, patents and copyrights slow down the diffusion of new ideas for a reason: to ensure there will be more new ideas to diffuse.
Update: It is interesting to note that one of the first patent statutes was England’s Statute of Monopolies of 1623.
Update: New York Law School professor Beth Noveck, quoted in an article on improving the U.S. patent system, admits: “A patent is a pretty significant monopoly, so we want to make sure we are giving it to the right people.”
Update: See my post IP Rights as Monopolistic Grants to Overcome the Public Goods Problem.
Update: As I note in Canada’s Founders Debated Justification for Patents, Canadian Sen. Jean-Charles Chapais, the agriculture minister, in introducing legislation for a Canadian patent law in 1869, readily admitted the monopoly nature of patents:
It must be remembered that a patent is a kind of monopoly, though he did not mean to say that the word monopoly should be taken in its fullest sense, but nevertheless it is a monopoly, because it gives to a man the right of manufacturing or vending alone, an article useful to the public; certainly there was great reason for granting this monopoly.
Update: In Thomas Jefferson’s Letter to James Madison, August 28, 1789 (On the liberty to write, speak, and publish and its limits), he proposes to James Madison, then in the process of drafting the Bill of Rights, that the following be incorporated into the Bill of Rights:
Art. 9. Monopolies may be allowed to persons for their own productions in literature and their own inventions in the arts for a term not exceeding — years but for no longer term and no other purpose.
This was written just shortly before the Constitution itself was to be ratified. It appears to be aimed at adding a limit on how many years Congress could grant patent and copyright monopolies for. The copyright and patent clause in the then-pending Constitution had no outside limit on how long the patent and copyright monopoly grants could be, providing: “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Jefferson apparently wanted the “limited time” to be capped at some maximum number of years (probably 14 or 21 years or so). If he had got his way, (a) it would be clearer to everyone that patent and copyright are monopolies, and (b) Big Media and Mickey Mouse would not have been able to extend the copyright term to its current 100+ years.
See also Alex Tabarrok, Launching the Innovation Renaissance (which I discuss here):
Innovators need time to recoup their sunk costs, but why should every useful, non-obvious and novel idea be granted a 20-year patent? Maximizing innovation requires treating different industries differently. The idea for one-click shopping does not have the same sunk costs of research and development as a new pharmaceutical, and the former does not need and should not be given the same monopoly rights as the latter. [Tabarrok, Alex (2011-11-21). Launching The Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast (Kindle Locations 241-243). TED Books. Kindle Edition.]
Update: “A patent is an obvious monopoly; the patentee has exclusive rights and, where patented processes are involved, conditions are necessarily monopolistic. This influence has many ramifications. Not merely does it directly protect the manufacturer of patented articles; it also permits the creation of a whole network of tying contracts, forced joint supply, resale price maintenance and other trade practices, not particularly conspicuous in themselves but cumulatively highly conducive to the consolidation of monopolistic conditions. Indeed it is so important an influence that it is no exaggeration to say that special lines of expertise exist, not to forward the progress of invention but merely to devise variations in productive processes permitting the continuation of this form of monopoly power.” ~ Lionel Robbins (1939)
Also see Edmund W. Kitch, “Patents: Monopolies or Property Rights?,” Rsch. in L. & Econ. 8 (1986): 31–50; Frank H. Easterbrook, “Intellectual Property Is Still Property,” Harv. J.L. & Pub. Pol’y 13, no. 1 (Winter 1990): 108–118, p. 112 (“[A] right to exclude in intellectual property is no different in principle from the right to exclude in physical property.”)
- Are Patents “Monopolies”?
- Mises Quote on Patents and Monopolies
- Lionel Robbins on the Patent Monopoly