How the US government invented and exploited the “patent troll” hold-up myth

A patent like other property rights is a right to exclude others and not a right or an obligation to make the patented invention. Yet today there is a growing campaign by certain industry sectors and the government against patent holders that do not make any products but enforce their patent rights for licensing revenues, often pejoratively called patent “trolls.” In a recent White House report on the subject, President Barack Obama is quoted as saying that these patent holders “don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” The government alleges that “trolls” are responsible for a patent litigation crisis. Armed with this narrative, the White House had recently announced executive actions for “taking on patent trolls.”

This narrative of harmful patent assertion by non-practicing entities is not new. A century ago, the Wright aircraft company was accused by US government officials of causing such harm because it had attempted to enforce the Wright airplane patent, which it did not practice, by sending licensing demand letters to alleged infringers. Government officials stated that the assertion of the Wright airplane patent was “injurious to the development of aircraft and the aircraft industry in the United States.” They argued that “any adequate return to the Wright stockholders upon their investment [in the Wright patent] must be through the manufacture and sale of airplanes … and not through patent channels,” and that “any return from patents must necessarily fade into insignificance.”

This myth that the assertion of the Wright patent harmed the development of aviation continues to be propagated and erroneous lessons drawn for patent policy today: In 2014, Goldstone’s book Birdmen was published as the latest in the constant reworking through time of the Wright brothers’ story. The widespread reviews of this book emphasized that the Wright brothers were patent “trolls” – Orville Wright was a “vindictive SOB whose greed and begrudgery [sic] were surpassed only by those of his brother Wilbur” and the brothers were “cursed with an addiction to malice to anyone who challenged their primacy or stood in their path to riches.” The purported tool of their “malice” was, of course, their patent. The ostensible general lesson for today is explicitly and erroneously drawn by Goldstone; “Patent law remains [today] the damper on innovation that it was when airplane development was nearly grounded in its infancy.”

We show using primary evidence that the origins of this century-old myth are factually unsupported letters of government manufacture used to persuade the President and Congress to authorize the appropriation of patented inputs at depressed royalty rates. Today these letters are treated as “primary historical sources” to support the myth that the Wright brothers’ patent retarded US aviation development and that it was therefore necessary for the government to intervene in the market for patents and force patent holders into a patent pool. The story that US government officials manufactured in 1917 is believed by many to be fact and for some people, again there is a simple, general ‘policy lesson’ – sometimes government must intervene in markets because private owners of property rights cannot otherwise strike a bargain and reach the optimum social and economic outcome.

But this entrenched and oft-repeated myth is not true, in any part. The Wright brothers licensed their patent early and with vigour into all developed markets. When they won their suit against the principal infringer of their patent, Glenn Curtiss, they never enjoined Curtiss’ manufacturing activities, leaving him free to develop the leading US aviation business. All the commercial and patenting evidence we collect shows that no patent hold-up or development suppression occurred before the government forced patentees into its preferred patent pool.

The result in 1917 was the government-designed patent pool agreement, which depressed royalties to the Wright patent holder to the extraordinarily low rate of 1% – at a time when Congress recognized in the 1917 ‘Trading with the Enemy Act’ that 5% was a fair royalty to pay for a single patent owned by enemies of the US!

The acceptance of the myth has blinded policymakers to the possibility that the design of the 1917 aircraft patent pool was an abuse of the government’s monopsony power that effectively attenuated the development-incentive provided by aviation patents. Patenting rate declined and aircraft sales exhibited little market growth for a decade after the formation of the aircraft patent pool. We hypothesize that as a result of the government intervention, a period followed when aviation innovation may have been depressed and future research should investigate this hypothesis further.

The government’s past use of the “troll” narrative encourages one to wonder whether today’s “troll” narrative, advanced once again to alleviate another purported patent litigation “crisis,” will have the unintended consequence of suppressing innovation.

Headline image credit: Wilbur making a turn with the Wright Glider, 1902. Public domain via Wikimedia Commons.