Tuesday, March 4, 2014

Do We Need More IP To Promote Commercialization?

The patent system already protects inventors' exclusive rights in their "novel" and "nonobvious" inventions. But do we also need intellectual property rights to promote commercialization? In their influential article Intellectual Property for Market ExperimentationMichael Abramowicz and John Duffy concluded that we might. Just as technical information is subject to free riding by competitors, so is information generated from marketing a new product to the public or a game-changing business model. And "[j]ust as patents encourage risky but ultimately beneficial technological experimentation," they conclude, "some form of intellectual property protection" for "economically nonobvious" products "could result in a socially beneficial increase in market experimentation and entrepreneurial activity."

The article came out in 2008, before Abramowicz and Duffy's potentially even more influential follow-up The Inducement Standard of Patentability. But I think IP for Market Experimentation deserves the title of "recent classic."  It added to a long line of work on the importance of patents for promoting commercialization by Edmund Kitch and Scott Kief, and laid the groundwork for Ted Sichelman's controversial proposal for "commercialization patents." This in turn prompted scholars like Michael Burstein, whose recent article was blogged on here, to question whether IP is really necessary to facilitate post-invention commercialization efforts.

At first glance, the basic reasoning behind patents for market experimentation makes sense. The process of innovation, Abramowicz and Duffy write, "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." As they point out, economists have long recognized parallels between technology spillovers and market spillovers. Given the similarities, "it would be 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 and never to deploy some form of exclusive rights, since society generally relies on exclusive rights to encourage technological experimentation."

But proposals for separate forms of patents to promote commercialization do not seem to have a strong basis in United States patent law. Based on my work on historic state and colonial patents and Edward Walterscheid's work on British "patents of importation," I agree that governments once commonly used exclusive rights to protect far more than new technological information. However, as Mario Biagioli has emphasized in his historical work on the Venetian Republic, early "privilege-granting regimes" were quite different from the patent system as it eventually developed under the U.S. Constitution and the Patent Act of 1790, which valued generation and disclosure of new technical know-how far more than the practice and local working of inventions. As Walterscheid has documented, Congress specifically amended the text of the Patent Act to make clear that patents would be available only for "any useful art, manufacture, engine, machine, or device, or any improvement therein" that was newly invented and "not before known or used." Unlike in state and colonial patents, Congress instituted no requirement that inventions be commercialized or practiced at all.

There was some debate among early American policymakers over whether patents should be so limited. Alexander Hamilton, in particular, wrote about the need for government incentives to induce commercial risk-taking along with invention. In his Report on Manufacturers (1791), he recommended a variety of incentives 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," including both "pecuniary awards, and, for a time, exclusive privileges" for “introducers” of foreign technology. In other words: the first Secretary of the Treasury and creator of the First Bank of the United States might have supported proposals for new patents to promote commercial risk-taking.

And yet, Hamilton lost the debate over patents for introducers. One reason he backed off was apparently that he thought the federal government might lack power under the IP Clause to grant patents for inventions that are not novel "discoveries." This constitutional limitation, if it exists, is obviously not without exceptions. As Abramowicz and Duffy observe, U.S. patents are already available for "smallish variations" of known inventions. And, as Duffy recently described in Reviving the Paper Patent Doctrine, U.S. courts in the nineteenth century continued to reward commercial risk by distinguishing between patents that are actually worked and those that remain "mere pieces of paper."

But the question of historic precedent seems less important than the question of need. In my new paper, Local Commercialization Incentives, I argue that, today, we probably don't need more IP to promote commercial risk. The reason isn't necessarily, as Mark Lemley has suggested, that "the market works fine on its own." Rather, the reason is that the government already has a system for promoting commercialization of patented and unpatented innovations that do not require creating unprecedented forms of exclusive rights: government financing. As I show in the paper, federal agencies and, even more so, state governments are highly active in financing companies' early stage technology development and commercialization efforts by granting what are sometimes called "commercialization awards." Although state awards are hardly perfect, research suggests they can help entrepreneurs raise and leverage private funding and that, at least in some regions, they are pursued to a greater degree than federal programs.

Whether we see commercialization awards as the modern-day equivalent of Hamilton's "pecuniary awards" or simply the legacy of Hamilton's efforts to create more efficient capital markets, it seems like a better strategy to recognize and try to improve existing non-patent alternatives before seriously considering adding "IP for market experimentation" or "commercialization patents" to Congress' to-do list.

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