1. Patent Economics II Approaches to the Patent System Class Notes: April 10, 2003 Law 677 | Patent Law | Spring 2003 Professor Wagner

2. 04/10/032Law 677 | Spring 2003 Today’s Agenda 1.(Economic) Approaches to the Patent System a)Patents-as-rewards b)Patents-as-prospects c)Patents to avoid rent dissipation

3. 04/10/033Law 677 | Spring 2003 Introduction to Patent Theory Why is it important to have a (some?) theory of the patent law? Illustrates policy questions Explains features of the law Suggests doctrinal interpretations, etc.

4. 04/10/034Law 677 | Spring 2003 The Reward Theory of Patents 1.What is the most basic statement of the ‘reward theory’? 2.Why do you think the reward approach is the most widely held view? 3.Why does Kitch suggest that the reward theory is premised on: a)The inevitable reduction of output of patented goods b)The balancing of output-reduction and output- increase

5. 04/10/035Law 677 | Spring 2003 The Reward Theory Kitch suggests a number of features of the patent system that cannot be explained by the reward theory: 1.The breadth of the claims 2.The requirement for early patenting 3.The divergence between when goods are patented and when they become commercially viable (see table on p. 272)

6. 04/10/036Law 677 | Spring 2003 The Prospect Theory Kitch offers a alternative theory supporting the patent system -- the prospect theory 1.What is the basic idea? 2.How does he analogize to the mineral claims system? 3.How does the prospect theory explain the puzzling aspects of the patent law? What does Kitch’s theory suggest about the public benefits of patents? Is there a need to balance protection versus costs? Are you convinced?

7. 04/10/037Law 677 | Spring 2003 The Prospect Theory Kitch suggests several advantages of the patent system when viewed as a prospect system: 1.Increases efficiency of resource allocation to innovation 2.Generates incentives to maximize the ‘prospect’ (the invention) 3.Enhances the ability to contract for complementary information 4.Enables signaling 5.Reduces costs of controlling technology

8. 04/10/038Law 677 | Spring 2003 The Prospect Theory 1.What are the problems with the prospect theory? 2.How do Merges and Nelson suggest that broad (‘prospect’) patents can reduce welfare? Consider the case-studies they note: Electrical lighting Automobiles and airplanes; Radio; Semiconductors; Bulk chemicals; Synthetics; Pharmaceuticals;

9. 04/10/039Law 677 | Spring 2003 Prospect Theory Consider the following: 1.Kitch is most concerned with controlling the over- allocation of resources to innovation 2.M&N view the problem as avoiding under-allocation of resources 3.But … can aspects of the patent system resolve both concerns? (That is, perhaps the system is designed to prevent both over-allocation and under-allocation of resources.)

10. 04/10/0310Law 677 | Spring 2003 Patent Law and Rent Dissipation What is ‘rent dissipation’? Grady and Alexander suggest that the patent law is best viewed in terms of avoiding rent dissipation. What do they mean? How does rent dissipation occur during the innovation phase? How does rent dissipation occur during the commercialization phase? What is rent dissipation due to secrecy?

11. 04/10/0311Law 677 | Spring 2003 Patent Law and Rent Dissipation G&A suggest that rent dissipation theory can explain the following: (How?) Denying patent protection to ‘basic’ inventions, like principles of nature; Offering broader protection where an initial innovation signals a number of possible improvements; How does the G&A theory suggest that more valuable patents are less good candidates for protection? What are the problems with the rent dissipation theory?

12. 04/10/0312Law 677 | Spring 2003 Next Class Patent Economics III Cumulative Innovations & Patent Portfolios