Inventing a nonexclusive patent system.

• Author: Leibovitz, John S.

Consider a slightly fictional scenario. (1) The year is 1879. Two inventors, Edison and Swan, are both developing a pioneering technology--the incandescent lamp. Working independently on different continents (Swan in England, Edison in the United States), the two men labor tirelessly to find a combination of materials and manufacturing processes that will provide a reliable and cost-effective source of illumination for the modern age. After years of false starts and minor improvements, it appears that each is on the verge of a breakthrough. Swan recognizes the importance of using a slender, high-resistance lighting element, abandoning platinum in favor of carbon as his material of choice. He also sees the value of a vacuum-sealed bulb and has even found a way to treat the element so that it does not give off destabilizing gases and water vapor. Meanwhile, Edison progresses in a similar manner. He comes to appreciate the advantages of carbon and vacuum sealing. Toward the end of the year, Edison makes one more significant advance, which puts him a step ahead of Swan. After experimenting with many different kinds of materials, he realizes that carbonized vegetable fibers make for excellent, long-lasting filaments. Confident that he has discovered a workable solution to the problem, Edison obtains a patent. (2)

The race is over and to the winner go the spoils. Later, Swan catches up to Edison, but his efforts mean little now, since Edison has exclusive fights to the first commercially viable light-bulb design. Over the next several years, Swan remains on the sidelines, prevented from capitalizing on his know-how lest he infringe Edison's patent. (3) And Swan is not the only frustrated inventor--Edison does not hesitate to sue anyone who uses his technology. Moreover, Edison shrewdly leverages his initial monopoly into an even stronger position by patenting a continuous stream of smaller refinements and process improvements that competitors, lacking fights to the underlying technology, are slow to devise. Edison thus translates his development lead into a lasting competitive advantage, which he uses as he pleases to maintain high prices and block others from entering the market.

This simplified adaptation of a paradigmatic patent parable illustrates some widely acknowledged tensions in the patent system. On the plus side, the patent system provides a great incentive for Edison (and, for that matter, Swan) to invent a better electric lamp. In the absence of a patent system, Edison might try to protect his design by keeping it secret. Secrecy probably would not do him much good, however, since it would not be difficult for a competitor to reverse-engineer his light bulb once it hit the market. The patent allows Edison to avoid the risk that a competitor might use the fruits of his labor against him by copying his invention and introducing a competitive product while having borne little cost and even less risk. In technical terms, the patent allows Edison to appropriate the returns from his inventive efforts by granting him exclusive rights to make use of the invention for a limited period of time.

But Edison's patent comes at a price. Swan commits enough time, resources, and talent in his effort to invent the light bulb that he can run neck and neck with Edison, at least for a while. Yet ultimately, in the winner-take-all patent race, Swan is left with very little to show for his investment. This outcome is obviously undesirable from Swan's perspective. Swan may have been just months away from reaching Edison's milestone, but he is relegated to a second-tier competitive position once Edison's patent issues. Society also suffers. Edison's patent gives him the power to set prices and exclude competitors--not only Swan, but also new entrants--from the market. As a result, society is deprived of the benefits of healthy competition in the market for incandescent lighting and suffers for the duration of the patent (or longer, given Edison's ability to leverage his original patent to secure additional downstream patents). Edison is able to make more money by charging higher prices for fewer light bulbs, thereby maximizing his own private welfare at society's expense.

Controversy over granting exclusive rights to new technologies is as old as the patent system itself. As long as there have been patents, policymakers and academics have argued about the best way to balance the interests of inventors such as Edison, competitors such as Swan, and the general public. The debate has taken different forms over the years. In the nineteenth century, a vigorous anti-patent movement used a variety of economic and natural law arguments to question the value of patents. (4) By the end of the century, the patent advocates had won. (5) While a number of economists continued to debate the pros and cons of patents, the basic existence of the patent system was never really in question. (6) In the second half of the twentieth century, academic commentary increasingly looked for ways to fine-tune the patent monopoly by optimizing along two main dimensions of patent length and breadth. (7) More recently, as high-tech industries have tested the flexibility and responsiveness of the patent system, the debate has begun to turn in a new direction. Several writers have proposed new systems for specialized industrial circumstances, many of which merge aspects of various intellectual property regimes. (8)

In this Note, I pose a simple question: What would happen if society gave both Edison and Swan the right to commercialize the light bulb? My hypothesis is that the exclusivity assumption of patents represents another dimension, alongside the familiar dimensions of breadth and length, that policymakers can manipulate to improve the efficient production and dissemination of new technologies in society. The question may sound paradoxical to some--after all, isn't exclusivity the defining attribute of a patent? It may even seem anti-American. (9) Nevertheless, I show that the idea falls well within the bounds of theoretical viability. In framing the hypothesis, I align myself with a small number of economists who have begun to evaluate the benefits to be gained by lifting the patent exclusivity constraint, (10) an idea that thus far has scarcely infiltrated the legal academy. (11) By following an analytical approach that is less formalistic than those of the economic writers (but using similar basic assumptions), I hope to extend the conversation about nonexclusive patents to include lawyers and other policymakers engaged in the continuing debate about how to optimize the system to maximize social welfare.

My argument proceeds in five Parts. Part I provides a quick overview of the conventional wisdom behind the existing patent system. Part II identifies structural problems inherent in an exclusive regime. Part III makes a theoretical case for nonexclusive patents in comparison to other approaches to correcting the structural deficiencies of patents. Part IV offers an account of how nonexclusive patents could be implemented through minimal modification of the current patent laws. Part V applies the theory of nonexclusive patents to some contemporary policy disputes as a means of demonstrating its applicability throughout the innovation lifecycle. Finally, I conclude with some thoughts about how the idea might be tested in practice.

1. THE STANDARD ECONOMIC CASE

   My argument is best understood against the backdrop of what I call the "standard economic case" for patents. I frame the argument in economic terms since economics is the dominant discourse for patent policy debates. Of course, patent theory is a highly diversified field. Although I touch on some differences between leading schools of thought, my discussion emphasizes common themes rather than differences among various theories. My aim in this Part is not to provide a comprehensive survey of the patent literature, but rather to establish a relatively noncontroversial account of the current system that serves as a theoretical backdrop for the nonexclusivity argument that follows.

   Invention can be broadly understood as a production process whose output is applied knowledge (technical specifications, production processes, and the like) rather than physical goods. Unlike wheat, gasoline, or other material commodities, knowledge is an information good that can generally be copied at nearly zero marginal cost. Absent any special legal protection or government intervention, knowledge can be freely disseminated across a population of interested consumers. (This is increasingly true given the progression of information technology in recent decades.) Unconstrained technical knowledge thus fits the textbook definition of a public good: a commodity "for which the cost of extending the service to an additional person is zero and which it is impossible to exclude individuals from enjoying." (12) For that reason, society faces not only special challenges but also special opportunities in maximizing its efficient production. The patent system, at its core, involves a bargain whereby inventors gain temporary exclusivity over their inventions in exchange for public disclosure of technical details. The standard economic case explains this bargain as a way of maximizing social welfare by providing incentives for inventors to increase the stock of applied technical knowledge in society (through protection) and discouraging inefficient redundancy of inventive effort (through disclosure).

   1. Protection: Providing Incentives To Invent

      The protection function generally receives the most attention in the patent literature. In a classic article, Kenneth Arrow outlines several problems that can inhibit optimal allocation of resources toward invention. (13) First is the problem of inappropriability. The full value of some piece of unprotected technical information cannot be realized by its original possessor...