How and Why the Founding Fathers Created Non-Practicing Entities

Legitimate NPEs are not anything new in our economy. In fact, NPEs and patent licensing were actually authorized by the U.S. Founding Fathers 233 years ago as a way to kick-start the development of the new American economy.

Remember, at the time of its founding, America had a backward agrarian economy, almost wholly-dependent on imports, and lacking in any significant domestic industry. The U.S. at the time had a standard of living lower than that of many South American countries.

In addition to creating lasting democratic institutions of governance, the Founders also faced the critical task of finding some way to unleash the latent creative and productive potential of the American citizenry. As Thomas Jefferson wrote to his daughter Martha in 1787, precisely because America was deprived of British imports and left to its own devices, “we are obliged to invent and execute; to find means within ourselves, and not to lean on others.”

But how, exactly, could they do that?

The Founders had studied the elitist British patent system, and they knew that patent fees there were 11 times the per capita income of the average citizen and that patent holders were required to practice or “work” their patents—i.e., manufacture products from their inventions. According to Bowdoin College historian Zorina Khan—her book “The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920” earned the Alice Hanson Jones prize in 2005 for outstanding work in economic history—the Founders also knew that these high fees and “working requirements” restricted innovation activity to a tiny handful of wealthy individuals with the factories (or the capital to build factories) needed to manufacture products. (In fact, says professor Khan, the exclusion of the “working classes” was regarded by British parliamentarians as one of the chief virtues of their patent system.) These high fees and working requirements also skewed invention towards incumbent capital-intensive industries, rather than the disruptive new industries that usually spark great economic advances.

Clearly, the British patent model would not work for the United States, whose only asset (other than natural resources) was a population widely-considered to be especially enterprising. Unlike the tenant farmers and laborers that made up the bulk of England’s rigid class society, most Americans were free-holding small farmers, merchants, shopkeepers, artisans, and mechanics—the forerunners of what we today call the middle class—who were possessed of what 18th century publisher Hezekiah Niles called “a universal ambition to go forward.”

A Patent System for the Common Man

In order to rapidly develop the U.S. economy, then, the Founders “quite self-consciously” (to quote economic historians Naomi Lamoreaux at Yale and the late Kenneth Sokoloff of UCLA) designed a patent system that could do what no other had ever done before—stimulate the inventive genius and entrepreneurial energy of the common man. Simply put, they needed to expand the pool of productive inventors in our new nation to include as many people as possible, even those without the wealth or resources to commercialize their own inventions.

They did this by first of all setting patent fees to a level any ordinary citizen could afford—less than five percent of the rate in Britain. Second, they decided not to impose “working requirements” on patentees. During the debate over HR-41 (the bill that became the first patent law in 1790), says professor Khan, “the Senate suggested requiring patentees to make products based on the patent or license others to do so, but the House rejected this as an infringement of patentee rights.” And third, they wrote the patent law expressly to facilitate the licensing and sale of patent rights, thereby creating the world’s first patent licensing industry.

The results, as Jefferson would write 13 years later, have “given a spring to invention beyond my conception.” Indeed, the low patent fees, lack of working requirements, and ability to license patent rights turned inventing into a new income-earning career path for thousands of poor but technically-creative citizens. Whereas most of Britain’s few hundred inventors came from wealth and privilege, the vast majority of America’s many thousands of inventors came from humble beginnings. They were farmers, workers, merchants, mechanics, and artisans.

The end result of the patent system was to fuel innovation in the U.S. as citizens saw that they could make a living by applying a little “Yankee ingenuity” to the problems of agriculture and industry, the U.S. per capita patenting rate, defined as the percentage of citizens who became inventors, soared.

By 1885, the U.S. per capita patenting rate was more than quadruple the rate in Britain, and 85 percent of U.S. patents were licensed. A nation of inventors was born, and patent licensing quickly became the primary means by which inventions were turned into new products in the decades before in-house corporate R&D departments arose in the early 20th century.

Read more about patent licensing by downloading the Patent Licensing: The Founding Fathers’ Secret for Economic Success paper.