Commercializing Patents

Ted Sichelman - University of San Diego Law School

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About half, probably more, of all patented inventions in the United States are never commercially exploited. Many of these undeveloped inventions are commercially worthless ab initio, such as the anti-eating face mask, beer bottle mini-umbrella, and weed-cutting golf club.

Yet, for several reasons, the patent “underdevelopment” problem arguably applies to a large share of potentially valuable inventions. First, patent law encourages inventors to file for patents early in the innovation process. At this stage, especially for modern technologies, an invention is usually not in the form of a finished product ready for sale, and its commercial success is highly uncertain. Instead, the inventor must undertake costly and risky development and testing to transform the invention into a commercially viable product. 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. 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. In some instances, the uncertainty is so great that the commercialization of a worthwhile invention never occurs.

Second, the Patent Office and courts tend to countenance expansive “claims”—namely, the inventor’s legal rights—which encompass far more than what the inventor actually discloses in a patent. Although broad claims can reduce commercialization costs by allowing the original patentee to coordinate development efforts 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. Because early patent grants reward the best inventor, but not necessarily the best commercializer, broad claims can impose unwarranted burdens on third-party commercializers. Rampant defects in patent examination, licensing, and litigation often make these undue costs quite large and diminish commercialization.

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 minimal need to protect risky and costly post-invention development and commercialization efforts. 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. 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, approximately 40% of the patents held by the respondents were uncommercialized. Nonetheless, these companies reported that 32% of these patents were either commercially “very important” or “quite important.” For engineering companies, the figure increased to 40%, and for biosciences and pharmaceutical companies, to 34%. These results are consistent with a European Commission-funded survey that focused on “important” patents, which found that 38% of the patents were never commercialized.

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, proposes strengthening patent rights—by, for example, broadening patent scope or lengthening patent terms—so that patentees can “internalize” more of the positive “external” benefits generated by their inventions. Although this view is tempting, reward theorists have rightly criticized it and related proposals as dampening competition and impeding follow-on technological development. Moreover, contrary to one of prospect theory’s core claims, in many cases such a property-rights approach can retard commercialization—particularly when third parties are better commercializers than the inventor. Not only can broad and strong patents enable inventors to exploit defects in the litigation process to inefficiently “hold up” commercializers, but they can also prevent commercializers from “designing around” the original invention and engender “wasted” costs by inducing too many firms to enter the proverbial “patent race.”

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. Although a modified reward theory would improve upon many wanting aspects of today’s patent system 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 unnecessary duplicated development costs.

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 prompt the manufacture and sale of new products. Therefore, instead of trying fine-tune patents not originally designed to promote commercial activity, society should adopt 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 right is high. Patent scholars have generally been opposed to new rights, viewing them as unnecessarily diminishing competition, being too costly and difficult to implement, creating needless complexity, and encouraging legislative rent-seeking. With these hurdles in mind, I sketch a solution and briefly explain why it overcomes these concerns. (Of course, a detailed proposal is ensconced in the Stanford Law Review.)

Commercialization patents could be filed for the same types of product inventions as those within the scope of traditionally patentable subject matter. Only a product that is “substantially novel”—that is, substantially different from a product currently available in the marketplace would qualify for a patent. 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 intellectual property rights, a commercialization patent would not only provide a negative right to exclude others from making and selling the same or equivalent products, but would also 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 covering the product 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 unduly decreasing competition or imposing dynamic inefficiencies in the system. 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 pernicious “deadweight losses” from patent licensing and litigation. The administration of a commercialization patent system would not be costly and complex, could reduce the number of traditional patent filings, and could provide significant additional revenue to the Patent Office to improve traditional patent examination. In particular, a commercialization patent would be drafted in the same way as a traditional product patent and include the same kinds of claims. Review for subject matter, utility, enablement, written description, substantial novelty, best mode, and the like would be the same or similar to that for a traditional patent. For similar reasons, judicial oversight of commercialization patents would not be terribly costly. Although the assessment of whether a commercialization patentee sufficiently “worked” the patent may initially be difficult, a “sham sale” doctrine would quickly develop and root out this problem. Finally, because commercialization patents would apply in the same manner to all patentable subject matter, the incentives for industry-specific lobbying of Congress to specially tailor the commercialization patent statute would be minimal.

In sum, commercialization patents of the sort proposed here would fundamentally alter the patent system’s single-minded approach to a multi-faceted problem. Surely, elucidation of the details of commercialization patents requires testing, empirical study, and refinement. Yet, by decoupling the traditional patent into an invention patent, granted in exchange for the disclosure of new and non-obvious knowledge, and a commercialization patent, granted in exchange for the manufacture and sale of a substantially new product, the patent system could offer more optimal incentives for invention and commercialization alike.

Acknowledgments:

Copyright © 2010 Stanford Law Review.

A lengthy list of colleagues and students who provided invaluable comments and suggestions, as well as copious footnotes for the assertions made herein, can be found in the aforementioned article. This work was funded by a grant from the Ewing Marion Kauffman Foundation.

Ted Sichelman is an Assistant Professor of law at the University of San Diego.

This Legal Workshop Editorial is based on the following Law Review Article: Ted Sichelman, Commercializing Patents, 62 STAN. L. REV. 341 (2010).


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