74 Pages Posted: 28 Nov 2014 Last revised: 15 Oct 2015
Date Written: October 26, 2014
The United States has a system of intellectual property (IP) that includes patents for new and nonobvious inventions. Patents are believed to indirectly promote innovation by creating incentives to invent and thereafter commercialize inventions at a faster pace than would otherwise occur. However, theory suggests market failures, such as externalities, transaction costs, and information asymmetries in capital markets, could potentially impede commercialization of inventions that involve significant commercial risk, even when they are patented. In consequence, some scholars propose creating entirely new forms of patents, such as “commercialization patents,” in order to help commercializers market their ideas and more fully appropriate returns from their investments. They argue this would spur socially beneficial entrepreneurial activity and increase the amount of information in the public domain.
This Article argues that — to the extent the alleged commercialization market failures exist — the United States already has a system of commercialization incentives that does not require creating new forms of exclusive rights: direct financing for inventors and entrepreneurs in the early stages of technology development seeking capital to fund research and operations. These are sometimes called “commercialization awards.” They are currently available at the federal level in a limited form, and they are available in over half the states and some cities. Although others have interpreted these awards as inferior public alternatives to private venture capital, this Article reinterprets commercialization awards as an alternative way for government to encourage commercial risk taking in technology development.
After comparing commercialization awards to commercialization patents, the Article concludes that commercialization patents may indeed be the better choice if the goal is to incentivize business ventures that involve significant amounts of “market experimentation” and therefore produce new information that is subject to competitive free riding in the absence of IP. However, commercialization awards are the better choice if the goal is to resolve market failures specifically associated with entrepreneurial risk taking in pursuing public goals, such as innovations in public health, energy, and defense.
There are several reasons for preferring commercialization awards for achieving this goal. First, commercialization awards do not generate the deadweight loss and innovation-hindering effects associated with exclusive rights. Second, awards do something commercialization patents do not: they provide ex ante financing for start-ups and small businesses that cannot raise money on their own due to the capital constraints mentioned above. They also provide non-monetary assistance, such as business planning advice and help accessing professional investors. Third, unlike “market-set” incentives like patents, commercialization awards can be used to affect long-term innovation outcomes by diverting private investment away from commercial blockbusters toward innovations with long-term social benefits. In order to mitigate the risks associated with government “picking winners,” awards require obtaining private sector matching before money changes hands. The matching requirement is thus a mechanism for mixing public and private goals.
The burden to prove commercialization market failure is on those alleging new forms of incentives. This Article concludes that, given the difficulty of producing that proof, and in light of preexisting mechanisms for overcoming similar market failures, such as commercialization awards, Congress should not introduce new forms of IP for commercialization at this time.
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