The uneasy case for patent races over auctions.

• Author: Abramowicz, Michael

INTRODUCTION I. A BRIEF INTELLECTUAL HISTORY OF PATENT AUCTIONS A. Barzel on the Optimal Timing of Innovations B. Kitch on Prospect Theory C. Duffy on Demsetzian Auctions D. Bar-Gill and Parchomovsky on Auctioning Ideas II. THE UNEASY CASE FOR PATENT RACES OVER PATENT AUCTIONS A. The Effects of an Auction System 1. Enablement of expansive patent scope a. The time dimension b. The technology dimension 2. Effects of expansive patent scope a. Effects on invention and development incentives b. Effects on deadweight loss 3. The best case scenario B. Administration of an Auction System 1. Property right delineation 2. Timing 3. Cost C. Additional Objections and Caveats 1. International cooperation 2. Technology suppression 3. Irrational and mistaken bids 4. Small and independent inventors III. THE DESIGN OF PATENT AUCTIONS A. Auctions to Stimulate Development B. Price Auctions 1. Least-patent-term auctions 2. Price auctions IV. MORE MODEST PROPOSALS A. Auctions with Multiple Winners B. Patent Scope Auctions CONCLUSION INTRODUCTION

The government awards intellectual property rights based on a principle analogous to that of first possession. The author who creates a literary work enjoys copyright protection, (l) the entrepreneur who first uses an indication of origin receives a trademark, (2) and the first inventor of a useful machine or process is entitled to apply for a patent. (3) This approach is not inevitable. Other property rights initially conferred by the government are assigned by administrative flat or through auction. For example, the Federal Communications Commission decides who may use some parts of the broadcast spectrum and auctions fights to other frequencies. (4) Economists, meanwhile, have suggested that auctions be used to limit participation in research tournaments, such as competitions to design the best fighter jet for the government. (5) Despite the similarities between research tournaments and patent races, (6) commentators have paid virtually no attention to the possibility that intellectual property rights might be auctioned. (7) In theory, the government could auction a particular class of intellectual property fights encompassing copyrighted works, trademarks, or inventions yet to be created. (8) The winner of such an auction would then have incentives to create intellectual property within the scope of the right, without needing to worry that competition from third parties might make the investments worthless.

This Article considers whether auctioning patents, instead of (or in addition to) granting them to the first inventors, could accelerate innovation and improve efficiency. The debate will turn on a variety of empirical considerations, many of which will be familiar from the debate on Edmund Kitch's prospect theory of patent law. (9) The prospect theory suggests that patents should generally be granted relatively early, even well before the patents are ready to be commercialized, and should nonetheless cover a broad range of subject matter. (10) This approach reduces the possibility of redundant efforts at technological and commercial improvement and provides a single patentee with the assurance of being able to profit from further research and development. Critics of prospect theory argue that prospects might harm innovation by muting competitive pressures (11) and centralizing decisionmaking on which projects to pursue, (12) but proponents identify countervailing considerations. (13) If patents are granted sufficiently early, they might lessen the inefficiency associated with patent races, (14) as the certainty of being able to capitalize on any successful research might lead an auction winner to invest more and earlier in research and development. (15) Similarly, broader patents reduce inefficiencies associated with "inventing around." (16)

Precisely the same arguments may be made about auctions, which will tend, for better or worse, to centralize in the winner of the patent the power to coordinate invention. The possibility of auctioning intellectual property rights may thus be seen as an extreme version of prospect theory. This Article will not attempt a resolution of the difficult empirical questions about the relative virtues of competition and centralized control in the inventive process, let alone announce a verdict on prospect theory. For two reasons, however, the prospect approach is strengthened when it is realized through a well-run auction rather than through some version of the existing patent system. First, an auction system can allow for prospects that are granted earlier and more broadly than is feasible in the existing patent system. (17) An auction system can thus increase the benefits of a prospect approach in encouraging early invention and avoiding duplicative invention. For example, one criticism of the prospect approach is that it encourages excessive competition in the race to a patent, (18) but an early auction can eliminate this inefficiency. Second, an auction system can be designed to avoid some of the potentially negative consequences of the prospect approach. We will see that auctions can be designed to reduce a patentee's power over price and thus deadweight loss, or to counteract a patentee's incentive to develop only some of the technologies within the scope of a patent.

Even so, the existing patent system probably is superior to an auction system alternative. An auction might work well only if it is well-run, but there are formidable obstacles to efficient governmental execution of patent auctions. Ultimately, this Article seeks only to make uneasy the conclusion that the existing system granting rights to successful inventors necessarily dominates an auction approach. A substantial literature considers whether the patent system is superior to the alternative of a reward system, (19) but the literature ignores that there is a third possible strategy for encouraging inventive activity, the granting of exclusive rights through auctions. This Article will seek to describe the range of ways in which patent auctions might work. Plainly, this analysis is of greater theoretical than practical interest. The auction idea has heuristic value as an idealization of the prospect approach and serves to emphasize more broadly how bidding and racing can be substitute methods for awarding property rights. With this background, the Article seeks its practical payoff by describing much more modest auction proposals.

The more theoretical portion of this Article extends a recent analysis by John Duffy, (20) though this Article differs on some key points. (21) The Duffy article, while not considering the possibility of actual auctions of patent rights, argues that the patent system functions in some respects like an auction, in which a patent is awarded to one of the inventors who agree to start racing earliest and thus implicitly consent to place the invention in the public domain first. The analogy highlights that a patent auction need not award a patent to the bidder who offers to make the highest cash payment to the government. Considering the possibility of explicit auctions enables analysis of several different approaches for selecting the winning bidder. A patent auction, for example, might award the patent to the inventor who commits the most resources to research and development, (22) who accepts the shortest patent term, (23) or who agrees to sell or license the patented invention for the lowest amount of money. (24) A significant potential benefit of patent auctions is that prospective inventors compete to offer as much as possible to the public, rather than solely to earn as much as possible through monopoly pricing from the public. (25) One reason that patent auctions may have received so little attention from scholars is that pure cash auctions appear to be little more than an inefficient tool for generating government revenue. Patent auctions may become more attractive, however, once alternative forms for auction bids are considered, and the prospect theory in general becomes more attractive as system design can better overcome some of its limitations.

A significant obstacle, however, remains: no single form of auction bid can capture the social welfare that a prospective patentee expects to provide. The more the winning bidder offers in the form of a shorter patent term or a reduced price, for example, the less incentive the patentee will have to develop inventions within the patent scope. At the limit, anyone could offer a zero patent term or zero price and then do nothing to develop the patent. With a shortest patent term or lowest price auction, then, the winning bidder would need to be required also to make some commitment to developing the patented product. This might come in the form of a payment to the government, or payment into a fund to be used only for future development costs. More complex auction designs might require the government to choose the bidder who offers the public the best overall package, considering variables such as patent term, price, payment to the government, and commitment of money to a development fund. (26) There is no obvious formula for the government to use in comparing bid packages, however. (27) Whether the government selects how it will weigh different components of a bid in advance or evaluates bid packages case-by-case, it risks placing excessive weight on some goals of patent law (such as encouraging development of patented inventions) at the expense of others (such as limiting deadweight loss). This trade-off between static and dynamic efficiency is familiar to patent scholarship, (28) though in the case of auctions, the question is whether there will be enough incentives to invent after a patent is issued.

The analysis proceeds as follows: Part I reviews past proposals that, in passing, have noted the possibility of auctioning patent rights, as well as Duffy's proposal and another proposal...