Cameron Waterman of Detroit/Grosse Isle successfully tested the first fully functional gasoline-powered outboard motor on the ice-filled Detroit River in February, 1905. He formed the Waterman Marine Motor Company and filed a patent application on December 6, 1905 for a Boat-Propelling Device. U.S. Patent No. 851,389 was issued April 23, 1907. The Waterman Marine Motor Company eventually manufactured and sold up to 1,000 outboard motors a year, but sold out in 1917 because of too much competition.
When asked why his 1907 patent hadn't protected him against competition, Mr. Waterman explained:
I never had a basic patent because I couldn't get one, and neither could anyone else. That was because way back in 1883, a fellow whose name I forgot stuck a small steam boiler on the back of a boat, used a propeller, and was given a U.S. patent on what he called an outboard motor. It never worked and never was produced but the issuance of that patent prevented anyone else from getting full protection.
Source : The Great Idea Finder
For a longer recap, see "Invention of the Outboard Motor" by Sue Ashley, Grosse Isle Historical Society entry captured by the Wayback Machine on October 9, 1999.