Patents prevent freeriding.

The mechanical and electrical industries could live with a patent system which was unsuited to the protection of inventions which resulted from investment in R&D, because they have other ways of obtaining the protection they need, especially through the power to exclude competitors that goes with massive investment in productive assets and in resources for marketing. There is one industry, however, which simply cannot do without patents, and that is chemicals, especially pharmaceuticals. The formula discovered in the laboratory is identical with the formula that is patented and with the formula of what the physician prescribes and his patient takes. Once that formula is known, investment in resources to make the product delivers only a trivial barrier to copying, and if the drug is effective, little persuasion is needed for its sale. Because chemical inventions can be communicated so easily to others, therefore, if patents did not protect them, free-riding would ensure that investment in research would not be justified. This is why it was from a revolution in the pharmaceutical industry that the stimulus for revolution in patents eventually came, and the cause of both was antibiotics.

The first of these was penicillin, but this was never patented, partly because the authorities in Britain, where it was discovered, considered that it was wrong that something which was so much to the benefit of mankind should be a monopoly. The next one of great importance was streptomycin, and this was patented in 1947. Penicillin had undoubtedly been discovered through a “flash of creative genius,” but the origin of streptomycin could not have been more different. It emerged from Merck's funding of the painstaking examination and testing of more than 10,000 kinds of soil microbes for antibiotic activity by a team led by Selman Waksman of Rutgers University, New Jersey; and it started a deluge of inventions from pharmaceutical firms which were (and are) typically the output of large-scale, routine activity which is anything but inspired (see Kingston, 2000 for a full account).

Nothing could have been clearer at the time than that investment in antibiotics R&D could not be made on the large scale which was desirable unless patent protection would be available for its results. It was equally clear that the Courts would insist on looking for the “flash of genius,” which research for antibiotic inventions on the Waksman model would be unable to supply (Waksman, 1975). Consequently, there was no option but to change the patent law fundamentally. This would require careful drafting, because a law which frankly recognized that investment had replaced individuals as the source of what is to be protected, would not have been within the power given to Congress by the Constitution. Change could therefore only come about in a way that forced the reality of invention by investment into the pretence of invention by individuals.

The year after the streptomycin patent issued, the New York Patent Bar Association drafted a Bill and was able to get it introduced in Congress, and this, supplemented by other Bills and pressures, led to the first major revision of the U.S. patent law since 1870. This was the Patent Act of 1952, and it was explicitly intended to make the patent system suitable for protecting inventions which were the result of investment in research and development, by killing off the “flash of genius” requirement.