Churn

Abstract

From biopharmaceuticals to information technology, patents play a powerful role in the birth, death, and renewal of innovative industries. While patent scholarship has fruitfully explored the impact of exclusive rights on individual acts of invention, this Article explores patent law’s underappreciated contributions to evolutionary economic change. It argues that patents promote churn—a continual process in which new innovations and firms challenge incumbents, which must constantly innovate or face displacement. The concept of churn both builds upon and diverges from the influential economic theory of “creative destruction” and provides a more nuanced account of patent law’s contributions to industrial evolution. This Article contends that the availability of an exclusive, time-limited right to technology promotes a baseline level of churn by both spurring the entry of new firms and disciplining patentees that stop innovating. At the “front end,” patents aid the formation and entry of new technological firms that compete against incumbents. At the “back end,” impending patent expirations compel patentees to continuously innovate or risk extinction.

This Article further argues that beyond these baseline functions, patent law accelerates churn in more powerful ways. At the front end, patent law subsidizes patent acquisition by small entities, which empirical studies show are disproportionately innovative. These patent subsidies help facilitate a steady stream of highly innovative entrants to challenge incumbents. At the back end, dynamic doctrines such as patent misuse and the equitable standard for granting injunctions prevent patentees from asserting exclusive rights in overreaching or strategic ways. These pressures come together to encourage innovation in both insurgent and incumbent firms, thus driving churn. Having explored how the patent system promotes churn, this Article suggests ways of improving patent law’s contributions to industrial evolution. It advocates orienting the patent system toward stimulating new entry by small entities, and it proposes a framework for subsidizing patent acquisition by such entities based on the innovation dynamics of particular industries. It also argues for shoring up the patent misuse doctrine and denials of injunctive relief to discipline overreaching by existing patentees.

Keywords: Patents, creative destruction, biotech, pharmaceuticals, software, industry entry, patent expiration, patent misuse, injunctions, small entities