Tuesday, March 11, 2014

Innovation Law Beyond IP: Introducing the Blog Symposium

Guest Blogger

Lisa Larrimore Ouellette

For the conference on Innovation Law Beyond IP at Yale Law School

On Sunday, March 30, the Yale Law School Information Society Project is hosting a conference on Innovation Law Beyond IP. To expand the discussion beyond our one day in New Haven, participants will be blogging here over the coming weeks with some initial thoughts on the conference papers, and more broadly on how we should define our field as scholars as innovation. To kick off this symposium, I’ll say a bit about the article I’m presenting, Beyond the PatentsPrizes Debate (coauthored with Daniel Hemel and recently published in the Texas Law Review), and how it fits with the broader conference agenda.

So far, intellectual property law has been the primary legal field in which we think about both technical and creative innovation. For example, Dan Burk and Mark Lemley (both of whom will be at our conference!) have said that “[p]atent law is our primary tool to promote innovation,” and they and other patent scholars have spent a lot of time thinking about ways to better promote innovation through patent law.

Not everyone thinks that patent law is the best way to provide financial rewards for innovation, and there is an old debate about whether we would be better off rewarding innovation through prizes. This debate continues to have terrific new contributions, such as by Michael Abramowicz (also attending our conference) and by Michael Burstein and Fiona Murray (who will be blogging about their new prizes paper soon), and prizes are also gaining ground in the popular press. There is also some literature on financially supporting innovation through direct government spending with grants or procurement contracts, and our conference will include three new papers in this area by Bhaven Sampat, Camilla Hrdy, and Jim Bessen.

But with a few exceptions (such as work by Brett Frischmann, who will also be at our conference), Daniel and I argue that this debate has ignored the role of tax incentives for innovation, even though these are already important innovation policies. I think Rob Merges summed up the view of IP scholars when he recently wrote: “Taxation is, of course, external to IP law.” I have also previously blogged about how the Federal Circuit ignores tax when discussing innovation policy. And yet R&D tax incentives are already major innovation policies: IRC § 174 (which allows companies to deduct expenses immediately rather than over a period of future years) and § 41 (which provides a tax credit for companies that increase their R&D spending) alone cost taxpayers over $10 billion per year.

In Beyond the Patents–Prizes Debate, Daniel and I have tried to situate tax into our innovation policy discussion and to create a coherent framework for thinking about the innovation policy choice. We begin by explaining that in a theoretical world where we could perfectly tailor each incentive, each of the four main tools for rewarding innovators—patents, prizes, grants, and R&D tax incentives—has the same cost to society (bracketing deadweight loss and administrative costs). If the gap between the expected cost of an R&D project and the return for the researcher absent government intervention is $1, and the probability of success is 1-in-10, we can give innovators a $1 grant or tax credit, or we can give a $10 prize or patent if the project is successful, and for economically motivated rational actors with no risk aversion, these are equivalent.

Of course, the real world is different from this theoretical world in many important ways, and we think our framework is useful for figuring out how different real-world considerations point toward different innovation policy tools. In particular, we argue that every government transfer to spur innovation embodies answers to three distinct questions (see pages 333 and 348 of our article for 2x2 and 2x2x2 illustrations of these dimensions):

(1) Who decides the size of the transfer? Does the government tailor the reward on a project-by-project basis, or does it simply establish general ground rules? Grants and fixed prizes are effective when the government can foresee a potential invention and evaluate its costs and benefits. Patents, in contrast, can leverage private information about potential R&D projects, and we explain that technology-neutral tax incentives can replicate these benefit.

(2) When is the reward transferred: before the results of the research are known, or only ex post to successful projects? Ex post rewards such as patents and prizes provide a strong incentive for success, but in some cases that incentive might be dulled because ex post rewards are both delayed and speculative, and innovators might be more responsive to a $1 tax credit or grant today than to a 1-in-10 chance of a $10 patent or prize in the future.

(3) Who pays for the transfer: all taxpayers, or only users of the resulting technology? Here, patents look different in that they are generally paid for by users of the resulting technology (through supracompetitive prices on patented products), rather than by all taxpayers. We argue that whether the “user pays” aspect of patents is normatively attractive will vary with the technology, and that in theory, “user pays” could be incorporated into other reward mechanisms.

We walk through each of these considerations in much more detail in our article, and we suggest that these questions can help guide policymakers who are searching for the optimal solution to a particular innovation-related problem. But whatever you think of our specific conclusions, our broader claim is that tax law ought to be part of our innovation law conversation.

I think many of the most interesting IP law questions today similarly lie at the intersection of IP and related fields. As we explain in our conference description, IP law is only one of many legal institutions that can help promote, stifle, or govern knowledge production. In addition to transferring rewards to innovators through tax incentives, grants, and prizes, governments regulate innovation through the administrative state, creates legal rules and infrastructures that can help sustain or undermine commons-based production, and influence innovation through law and institutions related to immigration, tort law, education, and more. I very much look forward to hearing more thoughts on these topics over the coming weeks, both from conference participants and from the broader innovation law community!

Lisa Larrimore Ouellette is a fellow at the Information Society Project. You can reach her by email at larrimore at

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