Patents are effectively property rights for ideas. They give you protection of the law from someone else taking that property.
Now I do think there might need to be two categories, one for items you can physically interact with and the other code/algorithm. The code/algorithm would have much shorter protection with many more limits on it.
Now suppose there was a mechanism by which the Federal Government could exercise a public domain taking, still requires compensation. This would be something that should pretty much require extra ordinary public interest and perhaps maybe even a vote by Congress or similar committee that is "answerable" to the people
That is how it works in theory. In reality, large entrenched interests with a large budget for attorneys, and a war chest of their own patents that can be used offensively, can easily stomp over small entrepreneurs. At best, the small entrepreneur gets an invitation to settle.
In other words, same outcome, different pathway.
The real solution to the situation you described is to have a better, more fair patent system.
Not 100% sure the chocolate maker was Nestle, though the time frame fits. It could have been some other one, most likely Swiss or Dutch.
Of course that's assuming that patents or copyright are actually necessary to allow the creation of new works and inventions. As far as I'm aware, we sort of just assumed that it would be the case when we stuck it into the US Constitution. We never actually produced any sort of proof that this would be true. There were previous civilizations that managed cultural and technological innovation without it, and there were also other legal innovations concurrent with the introduction of copyright and patent law (e.g. freedom of speech, republican democracy, etc) that also have accelerated the pace of such innovations.
We do know that under copyright and patent law, parties that infringe upon others' rights generally gain supra-competitive advantage that has to be remedied by a court. Clearly, if there's a law, then firms that break that law have competitive advantage. However, this is then extrapolated to assume that innovation is a natural competitive disadvantage and that we need copyright and patent law to ensure that it exists at all. This is extremely pessimistic; and probably not the case for at least some markets. Free Software projects generally do not collect licensing fees at all, and sometimes prohibit others from doing so, yet they still have regular innovation and growth.