Commercializing patents.

• Author: Sichelman, Ted

INTRODUCTION I. FROM INVENTION TO COMMERCIALIZATION IN PATENT LAW A. Identifying a Problem to Be Solved B. The "Proverbial Moment of Conception "' and "Developing a Working Prototype" C. Market Testing and Marketing D. Distribution E. Product Improvements F. "Commercialization" Writ Large II. INDIRECT INCENTIVES FOR COMMERCIALIZATION IN PATENT LAW A. Inventor-Focused Protection B. Rationalizing Rewards for Invention C. The Under-Commercialization of Invention 1. Inventors vs. innovators 2. The timing of invention and commercialization 3. The protection of non-technological innovation 4. Why under-commercialization thwarts the aims of the patent laws III. THE DIFFICULTY OF COMMERCIALIZING "INVENTION" PATENTS A. The Problems of Prospect Patents 1. Substantial inventor-commercializer transaction costs 2. Distributive values in commercializing intellectual property B. The Drawbacks to Revamping Prospect Theory C. The Hurdles to Modifying Reward Theory D. The Infinite Regress in Commercializing "Invention" Patents IV. TOWARDS A PURE "COMMERCIALIZATION" PATENT A. The Shortfalls of Previous Proposals to "Commercialize" Patent Law 1. The difficulties of expanding the scope of patentable subject matter 2. The limited effectiveness of petty patents 3. The complexities of a move to "innovation" warrants and patents B. Proposing a New Form of Commercialization Patent 1. The scope of patentable subject matter 2. Disclosure, claiming, and infringement 3. (Substantial) novelty and (the lack of) non-obviousness 4. The interaction with invention patents 5. The term of commercialization patents 6. Administering a commercialization patent system 7. Easing patent reform CONCLUSION INTRODUCTION

About half, probably more, of all patented inventions in the United States are never commercially exploited. (1) Many of these undeveloped inventions are commercially worthless ab initio, such as the anti-eating face mask, (2) beer bottle mini-umbrella, (3) and weed-cutting golf club. (4) Yet, for several reasons, the patent "underdevelopment" problem arguably applies to a large share of potentially valuable inventions. (5) First, patent law encourages inventors to file for patents early in the innovation process. (6) At this stage, especially for modem technologies, an invention is usually not in the form of a finished product ready for sale, and its commercial success is highly uncertain. (7) Instead, the inventor must undertake costly and risky development and testing to transform the invention into a commercially viable product. (8) This uncertainty encourages inventors to delay commercialization in the hopes of reducing risk--for example, by taking advantage of emerging complementary technologies that may lower production costs more than any forgone profits. (9) Indeed, many of the twentieth century's greatest inventions, including the television, radio, radar, and penicillin, were not commercialized until decades after they were invented. (l0) In some instances, the uncertainty is so great that the commercialization of a worthwhile invention never occurs. (11)

Second, patent law allows broad claims that encompass more than what an inventor actually discloses in a patent. (12) Although broad claims can reduce commercialization costs by allowing the original patentee to coordinate development among multiple firms, often this coordination fails to occur because of high bargaining costs or strategic behavior, which can stymie the independent commercialization efforts of more efficient firms. (13) Because early patent grants reward the best inventor, (14) but not necessarily the best commercializer, broad claims can impose unwarranted burdens on third-party commercializers. (15) Rampant defects in patent examination, licensing, and litigation often make these undue costs quite large and diminish commercialization. (16)

Third, patent law is primarily designed to induce invention; any protection it provides to commercialization is mostly an afterthought. The dominant "reward" theory of patenting, which undergirds much of today's law, perceives little to no need to protect risky and costly post-invention development and commercialization efforts. (17) Thus, reward theorists view the patent system as an unfortunate "second-best" compared with one in which all inventions are immediately placed in the public domain. (18) The upshot is that patent law confers direct encouragement to inventors who create and disclose intangible specifications, but not necessarily tangible products.

Fourth, although there has been limited empirical study of the issue, in a 1998 survey of 133 companies worldwide conducted by the British Technology Group, (19) approximately 40% of the patents held by the respondents were uncommercialized. (20) Nonetheless, these companies reported that 32% of these patents were either commercially "very important" or "quite important." (21) For engineering companies, the figure increased to 40%, and for biosciences/pharmaceutical companies, to 34%. (22) These results are consistent with a European Commission-funded survey that focused on "important" patents, which found that 3 8% of the patents were never commercialized. (23)

Several scholars have suggested various reforms to improve patent law's commercialization incentives. One approach, which follows Ed Kitch's influential "prospect" theory of patents, (24) proposes strengthening patent rights--by, for example, broadening patent scope or lengthening patent terms--so that patentees can internalize more of the positive benefits generated by their inventions. (25) Although reward theorists have heavily criticized these proposals for increasing deadweight losses and impeding follow-on technological development, (26) scholars have said very little about whether the proposals improve commercialization incentives per se, as intended. (27) This Article argues that such a property-rights approach can often retard commercialization. (28) Another proposed route to improving commercialization incentives is to modify the reward theory to encourage patenting later in the innovation process, such as by requiring patentees to build a prototype before filing. (29) Although such a modified reward theory would improve upon many wanting aspects of today's patent system--specifically, by forcing inventors to engage in at least some commercialization in exchange for a patent--it could significantly diminish ex ante incentives to invent and could lead to duplicated development costs. (30)

Neither prospect theory nor a modified reward theory can practically achieve an ideal balance because both attempt to "commercialize" traditional patents designed to spur the creation of new and non-obvious knowledge, rather than to encourage the manufacture and sale of new products. (31) Therefore, this Article recommends adopting a novel policy lever--a "commercialization" patent--granted in exchange for a commitment to commercialize a product not available in the marketplace. Clearly, the burden of proof for adopting a new type of intellectual property (IP) fight is high-patent scholars have generally been opposed to new rights, viewing them as unnecessarily increasing deadweight losses, being too costly and difficult to implement, creating needless complexity, and encouraging legislative rent-seeking. With these hurdles in mind, the remainder of this Introduction sketches the proposal and briefly explains why it overcomes these concerns.

Commercialization patents could be filed for the same types of product inventions as those within the scope of traditionally patentable subject matter. (32) Only a product that is "substantially novel"--that is, different from a product currently available in the marketplace and its "substantial equivalents"--would qualify for a patent. (33) The commercialization patent would need to be practiced no later than three years after filing. Unlike a traditional patent, which can broadly claim many embodiments, a commercialization patent's claims would be limited to the product specifically disclosed in the specification and its substantial equivalents.

In contrast to previous proposals for new forms of IP rights, a commercialization patent not only would provide a negative right to exclude others from making and selling the same or equivalent products, but also would include an affirmative equitable and legal right to its holder to make and sell the product. First, the affirmative equitable right would give the commercializer absolute immunity from any injunctive remedies otherwise available in infringement suits by traditional patent holders. Second, any traditional patent holder would be limited to a low, but fairly reasonable, fixed royalty rate it could win at suit, e.g., 1-2%, and would be subject to damages apportionment for multi-component products. In order to mitigate the potentially harsh consequences of affirmative rights, a commercialization patent could only be filed after a traditional patent goes uncommercialized for three years after issuance, extended for any regulatory or other unavoidable delays. This window would provide sufficient lead-time and a strong incentive to a traditional patent holder to commercialize its invention. Finally, because commercialization cycles tend to be quick, commercialization patents would be of short duration, e.g., five to eight years from filing, though longer terms may be appropriate for a handful of industries.

Such a patent would substantially increase the commercialization of inventions without imposing undue deadweight losses or dynamic inefficiencies. Because commercialization patents would provide partial immunity from suits by traditional patentees, they would significantly weaken the rights of non-commercializing patentees, reducing transaction costs and deadweight losses from generally welfare-decreasing patent licensing and litigation. (34) The administration of a commercialization patent system would not be...