For the conference on Innovation Law Beyond IP at Yale Law School
The Innovation Law Beyond IP Conference will explore how
forms of law and governance beyond intellectual property rights (IPR) promote
innovation. In my new paper, Local
Commercialization Incentives,[1]
I make two contributions to this discussion. First, I question the wisdom of
proposals to introduce new forms of patents to facilitate commercialization of
un-worked inventions based on the observation that the U.S. government already
provides financing for commercialization at both the federal and local levels. These
incentives, sometimes called commercialization awards, may be as efficient or
more efficient than so-called commercialization patents. Second, I question the
common presumption that national incentives are preferable to state and local
incentives for promoting innovation due to the existence of
inter-jurisdictional spillovers. As with the argument for IPR maximization, this
argument is based on the questionable premise that containment of spillovers is
always socially beneficial.[2]
In this post I’ll briefly summarize the main points I make
regarding each of these two contributions.
[1] Rethinking the
Case for Commercialization Patents As we know, the patent system protects
inventors' exclusive rights in their "novel" and
"nonobvious" inventions. But some scholars have argued that we also
need new forms of IPR to promote commercialization of those inventions. Just as
technical information is subject to free-riding, Michael Abramowicz and John Duffy
write, so is information generated in the process of commercializing known but
“economically nonobvious” inventions; and just as patents encourage “risky but
ultimately beneficial technological experimentation,” some form of IPR for
commercialization “could result in a socially beneficial increase in market
experimentation and entrepreneurial activity."[3]
Controversial proposals of this ilk include Ted Sichelman’s recent suggestion
that Congress start offering short-term “commercialization patents” for inventions
that go uncommercialized for three years after patenting,[4]
or a similar form of IPR called “innovation warrants,” which was suggested by
William Kingston a while back but never adopted.[5]
At first glance, the basic reasoning behind IPR for commercialization
makes sense. Innovation is a long process and "can be seen broadly as
encompassing all forms of risk-taking and entrepreneurship, from new technology
to new business organizations to minutiae-laden everyday business
decisions."[6] Economists,
business management specialists, and investors have long recognized the
parallels between spillovers generated from technological experimentation and
market experimentation, both of which may diminish or eliminate incentives to
invest. And, as scholars like Edmund Kitch observe, patents already arguably do
more than simply “reward” technological experimentation.[7] So given these similarities, wouldn’t
it “highly surprising if the optimal policy choice for encouraging market
experimentation were always to rely upon whatever natural first-mover
advantages exist in a particular market …”?[8]
I agree with Abramowicz and Duffy that the answer to this
question is “yes, it would be surprising.” However, I disagree with their
subsequent conclusion that the solution to this problem is to “deploy some form
of exclusive rights, since society generally relies on exclusive rights to
encourage technological experimentation."
I have two main reasons for this disagreement and explain
each below.
1. Commercialization
Patents Lack Historical Basis in Modern U.S. Patent Law. First, it is not
clear that IPR to promote commercial experimentation has a strong historic
basis in patent and intellectual property law at all – at least not as it
developed in the United States circa 1787. Based on my work on historic state
and colonial patents, I agree that governments once commonly employed
“exclusive privileges” as a cheap and efficient way to promote both new
invention and commercial risk-taking.[9]
But as Mario Biagioli has observed, early "privileges” in England and the
Venetian Republic were quite different from the patent system that developed
under the U.S. Constitution.[10]
In the first Patent Act of 1790, Congress expressly limited patents to
universally novel inventions that fell within a specific category of subject
matter (specifically, “any useful art, manufacture, engine, machine, or device,
or any improvement therein not before
known or used"), and instituted no requirement that inventions be
practiced.[11]
Over the course of the next century, U.S. patent law would come to value
generation and disclosure of new technical know-how far more than the actual
working – let alone the commercialization – of inventions.[12]
This is not to say the idea of patents to promote
commercialization was never considered. Alexander Hamilton, in particular, wrote in his Report on Manufacturers (1791)[13]
about the need for more commercial risk-taking and entrepreneurship in the
infant nation, and recommended a variety of incentives, including “for a time,
exclusive privileges,” in order to encourage “new intentions and discoveries at
home, and the introduction into the United States of such as may have been made
in other countries." Yet Hamilton backed off on his proposal for patents
for “introducers” for two reasons. First, he apparently thought Congress might
lack power under the IP Clause to grant patents for inventions that were not
new. Second, he recognized that patents were not the only way to encourage “new
intentions and discoveries.” In fact, Hamilton wrote that, along with
“exclusive privileges,” “[t]he usual means of … encouragement are pecuniary rewards.”
2. We Probably Don’t
Need Commercialization Patents. This leads nicely to my second basis for
objection: we probably don't need more IPR to promote commercialization because
non-patent incentives already perform a very similar function. Obviously, the
private sector supplies venture capital for a select group of lucky
entrepreneurs who are developing risky but potentially profitable new technology.[14]
Although I disagree with Mark Lemley that market incentives are enough,[15]
in the paper I demonstrate that the government already provides the modern-day
equivalent of Hamilton’s “pecuniary awards”: risk capital for businesses
engaged in commercialization or early-stage technology development that cannot
raise sufficient funding to survive into profitability due to the high cost and
risk involved in developing and marketing unproven inventions and the chance
that competitors will free-ride off first movers’ efforts.[16]
As I discuss at length in the paper, an array of federal
research agencies, such as the Department of Defense and the Department of
Health and Human Services, provides around $2 billion a year for small
businesses that are developing innovations with commercial potential through
the Small Business Innovation Research Program (SBIR), with awards ranging from
around $150,000 to $1 million in size.[17]
Perhaps more surprisingly, many U.S. states – including Connecticut, Illinois,
Iowa, Indiana, Kansas, Kentucky, Maryland, Michigan, Minnesota, New York,
Oklahoma, Texas, and Wisconsin – offer cash, loans, and/or equity awards ranging
anywhere from $10,000 to $2 million for high technology companies that are in or
near the commercialization stage. Although state awards – which are called
things like “commercialization awards”[18]
or “innovation acceleration” awards[19]
– may seem like chump change compared to the Sequoia Capitals and Googles of
the world, research suggests that start-ups and entrepreneurs pursue them,[20]
and that they can significantly enhance award winners’ chances of securing
financing from private investors with deeper pockets.[21]
My skepticism of proposals for IPR for commercialization
grows deeper still in light of the fact that an initial comparative analysis of
commercialization patents and commercialization awards suggests the latter may
be as efficient or more efficient than the former. Critics of rewards for inventions such as Scott Kief[22]
stress the administrative difficulty involved in efficiently administering such
systems. But drawing on prior scholarship on prizes[23]
and venture capital strategies[24],
I suggest that, when commercialization awards are made contingent on private
sector matching or other certifications of technical and commercial viability –
which most state awards are – they can reduce the risk of government wasting
public money on bad investments and avoid some of the concerns about
politico-economic goals like instant but unsustainable job creation disrupting
awards’ utility at promoting true innovation.
That said, I am not sure it is even necessary to go this
far. The upshot of Abramowicz’ and Kieff’s work in this area is that granting
prizes for inventions is a feat that should not be undertaken lightly since we already have a patent system in
place. But when it comes to government awards for commercialization, the
opposite is true: no government in this country offers commercialization
patents, but many U.S. governments offer commercialization awards. In light of scholarly
debates over the patent system’s efficacy and the relatively anti-patent
political climate, it seems wiser to try to improve existing non-patent
incentives rather than trying to design and implement entirely new forms of IPR
for commercialization.
[2] Do We Have A
Bifurcated Patent System? The second main insight I make in the paper is
that, once the field of innovation incentives is expanded to include non-patent
options like commercialization awards, we can and should begin to think about
patent and innovation policy from the perspective of federalism and
decentralized governance. As I’ve discussed elsewhere, the reason the national
government is generally held responsible for sponsoring generation and
disclosure of inventions is that smaller jurisdictions like states and cities
cannot easily internalize the benefits of new information produced as a result
of inventions made on their dollar.[25]
In contrast, I argue, state and local governments can reliably internalize many of the benefits of commercialization.
These benefits potentially include short-term politico-economic wins, such as
company location, in-state property purchases, increased tax revenues, and
hiring of local workers. But they can also include long-term productivity gains
that result from information generated during the actual practice, production,
and marketing of inventions.[26] Although this information may “spill
over” to other jurisdictions, a line of research by Eric Von Hippel,[27]
Gary Pisano,[28] and Suzanne
Berger[29]
suggests that information related to the actual practice and marketing of
inventions – in particular, to manufacturing – is likely to remain
geographically “stuck” to the location in which it originated and cannot easily
be transmitted to other locales.[30]
Therefore, drawing on Robert Cooter and Neil Siegel’s
“collective action federalism,”[31]
I suggest that the patent system may be to some extent bifurcated, with the national government solving collective action
problems through patents and grants for basic research, and state and local
governments supplying non-patent financial incentives for applied research that
is likely to be commercialized in their jurisdictions in the near future.[32]
I
argue that this bifurcation is not only accurate at a descriptive level, but
that it may also be efficient. According to the theory, when it comes to
supplying “local” goods whose effects are “internal” to a state, local actors
possess superior incentives to supply those goods and superior information to
do so effectively. Moreover, when states experiment in designing
commercialization strategies and copy one another’s successes, this can lead to
innovations in law and policy that would not happen with full nationalization.[33]
Thus, local commercialization incentives could lead to more commercialization
of inventions and greater overall productivity than would occur if innovation
policy were left exclusively to federal actors and institutions.[34]
Camilla A. Hrdy is a resident fellow at the Information Society Project. She can be reached at cahrdy at gmail.com
[1]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2404741
[2] The notion that spillovers
should be contained is presently being challenged both by scholars of
intellectual property law like Brett Frischmann and Mark Lemley, and by
scholars of federalism like Heather Gerken.
[3]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1090887
[4] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1395558
[5]
http://dimetic.dime-eu.org/dimetic_files/KingstonRP2001.pdf
[6]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1090887
[7]
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCwQFjAA&url=http%3A%2F%2Fbayhdolecentral.com%2FbremmerPDF%2FThe_Nature_and_Function_of_the_Patent_System_by_Edmund_W._Kitch.pdf&ei=uCQdU4ehNqyi0gH2poH4CQ&usg=AFQjCNGC573ovPfzMTjvvPoVTu7OzeODJw&sig2=FmoO9dE1fM-RGluZHsTz3w
[8]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1090887
[9]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2134284
[10]
http://muse.jhu.edu/journals/social_research/summary/v073/73.4.biagioli.html
[11]http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CGUQFjAG&url=http%3A%2F%2Fipmall.info%2Fhosted_resources%2Flipa%2Fpatents%2FPatent_Act_of_1790.pdf&ei=ofQZU8vBIYr90gGt1oHAAw&usg=AFQjCNGUjzjv2TCz7aHL1dREV7Dhd3h5pg&sig2=D71LdgkPWsp2_jGZIcbvfg
[12] This generalization is not
without exceptions. For instance,
as Duffy has shown, early U.S. courts distinguished between patents that were
actually worked and those that remained "mere pieces of paper." Today
U.S. patents are generally available for business methods and for “nonobvious”
variations of known inventions.
[13]
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CDUQFjAB&url=http%3A%2F%2Fwww.constitution.org%2Fah%2Frpt_manufactures.pdf&ei=HFoeU-6dH-L40AHLxoGQAw&usg=AFQjCNE4FFQdSqJsEhgxyxusPJt1ZGOlcg&sig2=MZE95k0huxMhcxdHEjS1yg
[14]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=353380
[15]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=494424
[16]
http://belfercenter.hks.harvard.edu/publication/2067/between_invention_and_innovation.html
[17] http://www.sbir.gov/
[18]
http://governor.state.tx.us/ecodev/etf/apply_commercialization
[19] http://www.ottumwadevelopment.org/ottumwa/business-resources/incentives-directory/?item=461
[20]
http://www.americanprogress.org/issues/economy/report/2010/09/23/8436/silos-of-small-beer/
[21]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2060739
[22] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=229981
[23] As Duffy has shown, early
American courts also used the “paper patent doctrine” to reward commercial risk
worked patents more favorably than those that remained “mere pieces of
paper.”http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292079
[24]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=353380
[25] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2229274
[26] John Duffy emphasizes the
importance of new information generated through actual practice of inventions
in his new paper on the “paper patent doctrine.”
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEkQFjAD&url=http%3A%2F%2Fcornelllawreview.org%2Ffiles%2F2013%2F10%2F98CLR1359.pdf&ei=R7EcU4WRCInf0gH0pIDQDw&usg=AFQjCNFs3IjfdyYUwS-BZdACSITjmKToGg&sig2=QkDCcKMfKspL0zDi5XrQtQ
[27]
http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=41272
[28]
http://www.hbs.edu/faculty/Pages/profile.aspx?facId=6530
[29]
http://web.mit.edu/polisci/people/faculty/suzanne-berger.html
[30] http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CEkQFjAD&url=http%3A%2F%2Fcornelllawreview.org%2Ffiles%2F2013%2F10%2F98CLR1359.pdf&ei=rWkeU-PJIMuh0gHttYDYDA&usg=AFQjCNFs3IjfdyYUwS-BZdACSITjmKToGg&sig2=Qdpkbt7tPzw3LbXwC_zBoA
[31]
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1692835
[32] By “basic” versus “applied”
research I loosely mean “research with no commercial value which lays a
foundation for commercial products.” But I recognize that this distinction is
“shaky,” especially when so-called basic research is patentable. See Suzanne
Scotchmer, Ideas and Innovations: Which Should be Subsidized 18 (NBER working
paper, January 11, 2011),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1755091
[33] Lisa Larrimore Ouellette
makes a similar argument about the benefits of local knowledge and policy
experimentation in patent law.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2294774
[34] Clayton Gillette has made a
similar argument in favor of state business incentives, generally,
http://heinonline.org/HOL/LandingPage?handle=hein.journals/mnlr82&div=18&id=&page=