The Case for Tailoring Patent Awards Based on the Time-to-Market of Inventions

Abstract

One of the hallmarks of our patent system is that it provides a one-size-fits-all reward for innovation. The uniform patent laws offer insufficient incentives to develop some socially valuable inventions, and offer excessive rewards for other inventions that impose an unnecessary tax on consumers and subsequent innovators. If the government could adequately tailor patent awards to account for differences in inventions’ need for protection and the likelihood that patents will stifle subsequent innovation, it could spur additional innovation while avoiding the social costs of excessive patent protection. However, although we may know which economic determinants are relevant to a socially optimal patent strength, we lack a reliable way to directly measure and synthesize this information into a usable framework. Absent a principled and administrable system to determine which inventions need more protection than others, the uniform patent system is our best option.

This Article identifies a readily observable, cross-industry indication of optimal patent strength for different technologies — inventions’ time-to-market. Some inventions take much longer to develop than others, and there is tremendous variation in the average time-to-market across industries. This Article first shows that there is a strong, positive correlation between the amount of time needed to complete an R&D project and the amount of patent protection (if any) necessary to motivate investment in that R&D project. A longer time-to-market for inventions is associated with higher out-of-pocket R&D costs, greater risk of failure, increased opportunity costs of R&D investments, and diminished value of future revenue streams from the developed invention because of discounting. Moreover, because imitators frequently avoid much of the increased R&D costs and uncertainty associated with a longer time-to-market, lengthier R&D times also usually correspond to a greater vulnerability to free riding. Second, this Article shows that a longer time-to-market is associated with a reduced likelihood of patents stifling subsequent innovation. Inventions with a longer time-to-market usually have longer commercial lifespans (product life cycles) because the inventions that ultimately replace them in the market also generally take longer to develop. The slower rate of product turnover in these markets reduces the need for patent licensing between early and later innovators, and offers more time to negotiate licenses, which diminishes the likelihood that patents granted on earlier inventions will stifle later improvements to those technologies. Similarly, because inventions with a lengthy time-to-market have higher total R&D costs, fields in which inventions typically have a lengthy time-to-market have higher entry costs. Those higher costs diminish the number of entrants in these markets, and encourage later innovators to develop inventions that are more differentiated from earlier inventions. The reduced entry and greater product differentiation once again decreases the need for patent licensing, thereby lessening the potential harm from patents stifling subsequent innovation.

Since a longer time-to-market is indicative of a greater need for patent protection and a lower risk of patents stifling subsequent innovation, time-to-market is likely a uniquely powerful indicator of the optimal patent strength for different types of inventions. Moreover, because time-to-market is relatively observable, it can be used to create a framework for a principled and administrable system of tailored patent awards. Such a system would enable the government to strike a better balance between the benefits of promoting innovation with temporary monopoly rights and the social costs of restricting access to inventions.

Keywords: patents, intellectual property

JEL Classification: K39, O34