Patently Uncertain

Abstract

Innovation is an inherently uncertain process. Success is typically coupled with risk and we can only hope that those with great ideas will persevere. To encourage innovation, society reduces some of the innovation risk through structures like funding systems, regulation, and of course intellectual property rights. But what happens when uncertainty strikes the legal protection devices themselves? Faced with unclear rules and increasingly speculative rewards, some innovators may simply stop playing the game.

Such uncertainty has recently been a topic of great concern in the U.S. patent system. Some believe that the suddenly unknowable nature of fundamental questions like what is patentable has had the effect of dramatically undermining legal incentives. But others question whether a crisis really exists. They point out that uncertainty can have positive effects and even be a source of strategic advantage. How can we tell good uncertainty from bad?

This article provides a novel framework for evaluating patent uncertainty that explains how complaints and complacency can exist contemporaneously. It draws on the behavioral economics literature to provide a deeper understanding of how innovators react to unknown legal environments. Based on this analysis, the article identifies three different types of legal uncertainty: (1) investment-killing; (2) if-then; and (3) remedial uncertainly. It asserts that only the first creates a problem that must be addressed by legal reform, while the others are actually essential to a healthy innovation system. The article concludes with specific prescriptions for addressing negative uncertainty that depend on both firm and policymaker action.

Keywords: patent, intellectual property, innovation, uncertainty, risk, patentability, knightian

JEL Classification: K11, K22, 031, 034