Self-realizing inventions and the utilitarian foundation of patent law.

• Jurisdiction: United States
• Author: Devlin, Alan
• Date: 01 December 2009

ABSTRACT

Unlike other forms of intellectual property, patents are universally justified on utilitarian grounds alone. Valuable inventions and discoveries, bearing the characteristics of public goods, are easily appropriated by third parties. Because much technological innovation occurs pursuant to significant expenditures--both in terms of up front research and subsequent commercialization costs--inventors must be permitted to extract at least part of the social gain associated with their technological contributions. Absent some form of proprietary control or alternative reward system, economics predicts that suboptimal capital will be devoted to the innovative process.

This widely accepted principle comes with an important corollary: namely, that canons of patent law should accurately reflect the subject's utilitarian foundation. The most important principle under this rubric is denying proprietary rights in "self-realizing" inventions--those for which sufficient incentives to invent and commercialize exist independent of the patent system.

The law's principal means of excluding such inevitable discoveries is through the nonobviousness doctrine. Yet that doctrine fails to achieve this task. Two classes of invention may be deemed "self-realizing"--inventions that are axiomatic (and useful) to those skilled in the art and innovations that provide utility to the relevant inventors because they consume the inventions themselves. While the nonobviousness doctrine excludes the former class of innovative activity, it utterly fails to eliminate the latter. This regrettable phenomenon results in social welfare losses and belies the policy foundation of the patent system.

This particularly startling disconnect between theory and practice begs the question of whether we can do better. We conclude that the courts should turn to an often neglected but fundamental tenet of patent law: the patentable subject matter inquiry. In doing so, we identify a variety of "self-realizing" innovative activity but find that a well-crafted patent system must tolerate the inclusion of certain "inevitable" inventions. We conclude, however, that one sphere of innovation that can reliably be regarded as inevitable by a priori assumption involves nonpublic, or "internal," business methods. Given free market competition, companies have ample incentives to develop internal business processes that reduce costs and/or increase consumer demand, even if these processes cannot be patented. And because these inventions are suitable for trade secret protection, inventors who seek patents on internal business methods presumably do so to raise rivals' costs.

Unfortunately, the patentable subject matter inquiry thus far has been wholly unsatisfactory in denying patent protection to undeserving processes. In late 2008, the Federal Circuit's deficient "useful, concrete and tangible result" test in State Street Bank v. Signature Financial Group, Inc. was jettisoned in favor of a "machine-or-transformation" test in In re Bilski. Although this new standard may limit the patentability of certain undeserving processes, it rests on a strained interpretation of Supreme Court precedent. More fundamentally, the logic employed bears scant relation to the utilitarian underpinning of the patent system, as enshrined in the Patent Act and the U.S. Constitution.

This Article urges the Supreme Court to reconcile the patentable subject matter inquiry with its utilitarian roots, particularly in the context of business method patents.

TABLE OF CONTENTS INTRODUCTION I. PATENT LAW AS A SYSTEM OF INCENTIVES A. The Utilitarian Foundation of Patent Law B. Innovation, the Cost of Monopoly, and the Failure of Nonobviousness C. Self-Realizing Inventions 1. Spontaneous Innovation: "Eureka" Inventions and Inadvertent Discoveries 2. Innovations Made Pursuant to Social Incentives 3. Inventions Giving Rise to "Self-Consumption"-Herein of Business Methods II. TYING THE PATENTABLE SUBJECT MATTER INQUIRY TO UTILITARIANISM A. Process Patents and the Evolution of Patentable Subject Matter 1. The Core Exclusion: Abstract Ideas, Laws of Nature, and Scientific Principles 2. Toward the "Useful, Concrete and Tangible Result" Test 3. In re Bilski 4. Bilski's Legacy B. Toward an "Incentive To Invent" Theory of Patentable Subject Matter CONCLUSION: CRACKS IN THE FOUNDATION OF PATENT LAW INTRODUCTION

A remarkable asymmetry exists between the economic foundation of patent law and the doctrine that animates this theoretical underpinning. Almost all commentators and judges agree that utilitarian considerations enjoy hegemonic status in patent jurisprudence, such that the purpose of the patent system is to induce the creation and commercialization of technology that otherwise could be easily appropriated. (1) So defined, only those inventions that would otherwise not materialize, or would be discovered only after a longer passage of time, should receive the benefits of patent protection. (2) As a patent monopoly carries with it potentially large social welfare costs, it can be condoned only when necessary to incentivize the creation and dissemination of disproportionately valuable information. (3)

Nevertheless, it is not at all clear that the actual laws developed by Congress and the courts accurately reflect the patent system's utilitarian underpinning. From an economic perspective, inventions and other valuable discoveries possess the characteristics of public goods; their consumption is nonexcludable (an inventor cannot stop someone else who knows of the invention from using it) and nonrival (another person's use of the invention does not prevent the inventor from using the invention). (4) Absent proprietary ownership of such information, inventors will devote suboptimal resources to the innovative process. (5) But what form should such ownership take? Optimally, property rights should be awarded in a parsimonious manner, awarding deserving inventors just enough proprietary control over their discoveries to compensate them for the risk, capital, and opportunity cost expended ex ante. (6)

Yet patent rules have not been so applied. Most obviously, the law largely adopts a "one-size-fits-all" approach, purporting to apply identical rules to vastly disparate industries and contexts, for which different incentive structures apply. (7) The result has been that sometimes an inventor is overcompensated for her discovery, and other times she is undercompensated, depending on the relevant context. (8) This phenomenon is to some extent unavoidable, for a perfect alignment of incentives via the patent system likely cannot be attained. (9) Society has limited empirical ability to compare specific rules, applied in practice, to the optimal ones that would be mandated by theory. (10) In general, then, some uncertainty inevitably exists about the rules properly brought to bear on innovations in the useful arts and sciences. (11)

This Article concerns a major issue that is at the cusp of this broader tension and that relates to the differing incentive structures for various inventions. It considers how intellectual property (IP) law does and ought to treat processes that, though immensely valuable, entirely novel, and far from obvious, are undeserving of patent protection from a utilitarian perspective. More specifically, the Article considers what might be termed "self-realizing" inventions--ones for which adequate incentives to invent and commercialize exist entirely independent of the patent system. The normative case for patenting such innovations is weak, because society unnecessarily pays for the deadweight loss of inventions that were, in a sense, "inevitable."

The question therefore arises: is there a reliable way to disqualify novel, highly valuable, and nonobvious inventions that would be invented even if they were not to receive patent protection? In answering this question, a crucial predicate issue is whether the kinds of innovations that fit this profile can be categorically identified ex ante. If so, courts should define those categories of inventions as nonpatentable subject matter and deny protection accordingly. If the purpose of the patent system is to provide otherwise absent incentives to invent and commercialize, then swathes of inventive activity that do not need these incentives should fall outside the purview of patent protection. In short, nonobvious, useful, but "self-realizing" processes belong in the public domain if they are not protected as trade secrets.

This Article identifies various categories of "self-realizing" innovative activity that fit these criteria and hence might be excluded from patent protection. One such category involves "eureka" inventions--those that are discovered in a flash of brilliance rather than preceded by capital-intensive endeavors. There is some reason to believe that such ad hoc discoveries, immensely valuable to society as they might be, would be invented anyway even if they did not receive patent protection. Another category of self-realizing discovery involves discoveries that are spurred primarily by social, rather than pecuniary, incentives. Such inventions are often discovered in academic circles, where the lure of reputational gain might obviate the need for patent protection.

Although eureka inventions and innovations pursuant to social incentives are two prominent categories of self-realizing discoveries, this Article concludes, for a variety of reasons, that it would be very difficult as a practical matter to categorically deny patent protection to such inventions. Instead, this Article targets a more promising category of self-realizing discovery: inventions that are consumed by the inventors themselves. Most "self-consumed" inventions would be crafted regardless of whether the patent system existed. That is because the innate utility of these inventions drives inventors to create them in the first place.

To illustrate, the...