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Prizes have long been used to induce solutions to national challenges. Between the 16th and 19th centuries, prizes yielded the vaccine inoculation, the lifeboat, a method of calculating longitude at sea, new food-preservation techniques, and more. But by the late 19th century, prizes had largely been replaced by two other mechanisms: patents and grants. However, those tools have limitations. Patents lead to innovation only in areas where inventions have commercial potential; and given the structure of government funding, grants are awarded to a narrow range of eligible recipients.

As a result, prizes have been making a comeback. “Prizes are an incentive mechanism that is particularly interesting when you want to specify the kinds of innovations you’re looking for and when you want to diversify the base of potential innovators,” says Fiona Murray, the David Sarnoff Professor of Technological Innovation, Entrepreneurship, and Strategic Management in the MIT Sloan School of Management. Accordingly, in early 2011, the Obama administration established regulations explicitly designed to accelerate the adoption of “ambitious prizes in areas of national priority.”

At Christmas, we traditionally retell Dickens's story of Scrooge, who cared more for money than for his fellow human beings. What would we think of a Scrooge who could cure diseases that blighted thousands of people's lives but did not do so? Clearly, we would be horrified. But this has increasingly been happening in the name of economics, under the innocent sounding guise of “intellectual property rights.”

Intellectual property differs from other property—restricting its use is inefficient as it costs nothing for another person to use it. Thomas Jefferson, America's third president, put it more poetically than modern economists (who refer to “zero marginal costs” and “non-rivalrous consumption”) when he said that knowledge is like a candle, when one candle lights another it does not diminish from the light of the first. Using knowledge to help someone does not prevent that knowledge from helping others. Intellectual property rights, however, enable one person or company to have exclusive control of the use of a particular piece of knowledge, thereby creating monopoly power. Monopolies distort the economy. Restricting the use of medical knowledge not only affects economic efficiency, but also life itself.

Part of modern medicine’s success is built on new drugs, in which pharmaceutical companies invest billions of dollars on research. The companies can recover their expenses thanks to patents, which give them a temporary monopoly and thus allow them to charge prices well above the cost of producing the drugs. We cannot expect innovation without paying for it. But are the incentives provided by the patent system appropriate, so that all this money is well spent and contributes to treatments for diseases of the greatest concern? Sadly, the answer is a resounding “no.”

The fundamental problem with the patent system is simple: it is based on restricting the use of knowledge. Because there is no extra cost associated with an additional individual enjoying the benefits of any piece of knowledge, restricting knowledge is inefficient. But the patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance. In the Third World, this can be a matter of life and death for people who cannot afford new brand-name drugs but might be able to afford generics. For example, generic drugs for first-line AIDS defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 to $130.

A prize system of the sort sketched briefly above has three potential benefits. First, it would enable us to avoid the most serious of the drawbacks of the current patent system – namely, the social-welfare losses caused by the monopoly pricing of patented products. The patent system, as we have seen, enables the firms holding the patents to charge consumers much more for the drugs to which they pertain than the cost of producing those drugs. Indeed, that’s the point of the system. Unfortunately, pursuit of this strategy has the effect of placing the drugs out of the financial reach of some people. Economists commonly refer to the deaths or suffering of the people who are thus “priced out of the market” as forms of “deadweight loss.” In the developing world, this effect is especially grave, because so many people are both poor and uninsured and thus unable to afford the prices of patented products.

This drawback of a patent system can be mitigated in various ways. For example, as we saw in the preceding chapter, an appropriately disciplined system of price discrimination can reduce the number of persons who are “priced out of the market.” However, such devices at best can reduce the problem, not solve it.

TWO basic means of stimulating innovative activity are compared in this paper. One is a system of rewards paid by the government to innovators. According to this system, innovations would pass immediately into the public domain, becoming freely available to all. The other approach is the familiar system of intellectual property rights that we employ, notably, patent and copyright protection, under which the government confers to innovators exclusive rights to market the goods and services that embody their intellectual works.

Our main conclusion is that the intellectual property rights system does not enjoy any fundamental advantage over the reward system. Indeed, an optional reward system--under which an innovator can choose between a [*526] reward and intellectual property rights--is superior to the intellectual property rights system in the model we examine. These findings derive from the primary virtues of reward systems: that incentives to innovate are provided without granting innovators monopoly power over price and that the magnitude of research incentives may be selected by the government. A principal difficulty with reward systems, however, concerns the government's need for information to calculate rewards (although the government might be able to base rewards on sales and other ex post data).

Importance of the Advantages of Reward Systems. To appreciate the [*545] possible advantages of reward systems, it is helpful to consider areas of innovation where the social losses due to intellectual property rights are likely to be high, namely, where the difference between price and production cost (after innovation) is large. Such areas of innovation may be exemplified by development of pharmaceuticals, computer software, and recorded music and visual products. Here, prices are often substantial in relation to production cost; drugs may sell for many times their marginal production cost, the price of computer software is generally nontrivial even though its marginal production cost is essentially zero (it can be downloaded from the Internet), and similar statements can be made about compact disc recordings, cable television broadcasts, and first-run movies. In a regime with rewards, drugs would be far cheaper and more widely used, all computer software would be free, and electronically recorded materials would be inexpensive, arguably engendering significant increases in consumer welfare. Moreover, there would also be potential gains from enhanced incentives to innovate, as profits from patent and copyright may fall considerably short of consumer surplus. For example, Kremer suggests that studies of the social versus the private returns from research indicate that private profits from research might well be only one-third of the social returns. Because optimal rewards would reflect the social returns, rewards would increase overall incentives to invest.

IV. CONCLUSION

The third and final potential benefit of a prize system is that it could reduce socially wasteful expenditures by pharmaceutical firms. The largest potential source of savings consists of marketing costs. Estimates of the magnitude of those costs under the current regime vary. Some scholars contend that pharmaceutical firms devote roughly one third of their revenues to marketing their products.10 Meredith Rosenthal and her colleagues suggest that the number is closer to 15%.11 Dean Baker and Norkio Chatani point out that “[a]ccording to the industry’s own data, in 2000 it employed almost twice as many people in sales promotion as in research, 87,810 in sales compared to 48,527 in research.” 12 These differences aside, there is little question that the amount that the firms are currently spending on marketing is substantial. For reasons we explored in chapter 4, only a portion of those expenditures redound to the benefit of society at large. In brief: To the extent that advertising better informs either patients or doctors concerning the merits of drugs and thus enables them to improve their own or their patients’ health, it is plainly beneficial. However, to the extent that advertising functions to expand or stabilize the market share of one of several substitute products – or leads to increases in drug consumption unjustified by health benefits – it is wasteful or pernicious. A prize system, if it were structured properly, might reduce these outlays. Most intriguing is the possibility that the mechanism for determining the magnitude of the awards might be designed so as to reduce firms’ incentives to engage in pernicious forms of promotion, while preserving their incentives to engage in beneficial forms of promotion. Another potential source of savings involves litigation costs. The resources currently consumed by lawyers and the court system resolving disputes involving pharmaceutical patents are enormous.13 A prize system would not be free of disputes, of course. But it might be designed to reduce the incidence of those controversies and the costs of resolving them.

In addition, as the reward system does not provide for licensing copycat drugs, it prevents welfare losses from free riding and excessive market entry. This is in line with the reasoning of [36], who argued that if an entrant causes incumbent firms to reduce output, entry is more desirable to the entrant than to society. Further, there is no need to subsidise start-up and production costs of generic manufacturers. Litigation costs because of patent infringement lawsuits against generic manufacturers also vanish. Finally, firms currently allocate substantial resources to marketing8 in order to protect their profits. Restricting excessive entry and competition for market share could change the proportion between R&D and marketing expenditures.

These private sector efforts served as models for a new generation of government-sponsored innovation prizes. The Obama administration made prizes a key part of its National Strategy for American Innovation in 2009, and Congress responded in 2010 when it passed the COMPETES Act. The statute grants all federal agencies the authority “to award prizes competitively to stimulate innovation that has the potential to advance the mission of the respective agency.” Federal agencies as diverse as the Department of Energy, the Department of Housing and Urban Development, the Federal Trade Commission, the National Endowment for the Arts, and the Department of Transportation have offered at least one hundred prize competitions under the authority of the COMPETES Act. Nine of the COMPETES Act challenges in fiscal year 2014 had prize purses worth more than $100,000. Government-sponsored innovation prizes appear to be gaining popularity among lawmakers: As of this writing, the House of Representatives has passed a bill which would expand the use of prizes even further by creating a dedicated biomedical prize innovation fund for the National Institutes of Health.

The United States has a "dual" system of trademark law. A firm can secure trademark protection under state law, usually under state common law but possibly under a state statute as well. It can also seek federal rights, under the federal trademark statute known as the Lanham Act. The two are theoretically independent of each other, though as we shall see there is much interdependence between the two systems as a matter of practice. A mark can be valid and protectable under state common law even though the owner has not taken any steps to secure federal rights. Conversely, a mark might be protected under federal law even though state common law rights have not accrued, though this would be a relatively rare situation. Most marks are protected simultaneously under both schemes. Moreover, to make matters a bit messier, trademarks protected only under state law may nonetheless be enforced in an action in federal court under the Lanham Act. We will untangle all of this is due course.

Some reflection reveals that the real dispute in the Tiffany case was over who should bear the cost of policing Internet platforms. Such platforms will inevitably attract counterfeiters of all types. While the platform owner has an interest in keeping such goods off its site to avoid alienating customers, determining which of millions of items offered for sale are counterfeit is very costly. On the other hand, the trademark owners feel, with some justification, that having created a marketplace that draws counterfeiters, the site owners should be the ones tasked with absorbing the cost. They would also incur very significant expense if they have to hire staff to monitor sites for listings every day, scrutinize each one, and then send notifications to the site operator.

There is no "right" answer to the question, but we would note that if the site owner absorbs the costs, they will be spread over all users of the site, including those who have no interest in the category of goods at issue. On the other hand, if the trademark owner has to pay the policing costs, only the price of the genuine goods will go up. A Tiffany locket will cost a bit more because there is a "catch-the- counterfeiters" surcharge built into the price, but the price of toasters or laptops or steak knives sold on eBay wouldn't be affected. As between the two populations, we think the purchaser of the specific trademarked goods is the more appropriate group to absorb the cost, but we fully recognize that reasonable minds could differ.

Federal protection for trademarks is based on a "registration" system. This system is established by the federal trademark statute known as the Lanham Act.47 Federal trademark registration is entirely optional. Once a firm has commenced use of a mark via bona fide sales to the public (or through other qualifying activities) it will be protected under the common law of its state regardless of whether it has obtained a federal registration. Federal registration, however confers numerous advantages.

For instance, it guarantees the registrant trademark rights in all parts of the United States, even those regions where it might not have made any sales or done any advertising. As we shall see, the common law is not so generous. Second, only a federal registrant may use the R-in-a circle federal registration symbol (®), which not only serves to put potential infringers on notice that the mark is protected, but may subliminally suggest some degree of quality to the consuming public. Third, federal registrants may invoke the assistance of the U.S. Customs and Border Protection service to prevent infringing imports from entering the country. In addition, registration provides constructive notice to other parties of the registrant's claim of ownership and the registration can be used in litigation as prima facie evidence of the registrant's ownership of the trademark. After five years, the registration can be declared incontestable, and can then be used in litigation as conclusive evidence of the registrant's right to use the mark, subject only to itemized defenses. There are additional advantages of somewhat lesser importance as well, all of which serve as a strong incentive for many merchants to pursue federal registration.48

As an initial matter, this paper focuses on software cybertechnologies. This distinction is crucial to keep in mind as the case law focuses on software implementation.12 Cybertechnology patent applications have faced increased scrutiny since the U.S. Supreme Court's decision in Alice Corp. Pty. Ltd. v. CLS Bank Int'l.13 In Alice, the Court stated that an "abstract idea" is not patent eligible merely by being implemented on a computer. Unfortunately, the Court did not define "abstract idea." 14 Before and since the Alice decision, there have been several other cases that illuminate the Court's directionality regarding software patents.

In Alice, the technology was a management system for financial obligations implemented on a computer. To deduce whether this technology was patentable, the Court implemented a two-step inquiry process: (1) Does the subject matter of the patent fall into patent ineligible criteria (law of nature, abstract idea, and natural phenomenon); and (2) if so, is there an inventive concept sufficient to ensure that the patent, in practice, amounts to significantly more than a patent upon a patent-ineligible concept?16

It is in one sense reasonable to wish for acceleration in innovation. Because it is the source of wealth and well-being, and the likely solution to many (if not most) social and environmental challenges, people put great faith in innovation. It is therefore only expectable and understandable if society would want to see its processes accelerated in order to bring more improvements to more people, faster. Meanwhile, the speed imperative also risks breeding unsustainable practices, shortsightedness, and greed. Chasing higher speeds and swifter returns runs counter to careful improvement of ideas and inventions in a way that creates durable and sustainable benefits for the many. There is a major risk that the speed imperative makes innovators, producers and marketers favor the easily sellable and the easily disposable—more products sold, more revenue, resulting also in more waste and less satisfied consumers, in the long run and broader perspective. Speed also causes problems such as stress and mental health issues, and waste of natural and human resources (Hasu et al. 2012: 89).

But also beyond the culturally promoted myths about entrepreneurship as the road to salvation for individuals, communities, and society as a whole, entrepreneurship is misunderstood. As Aldrich and Ruef (2018) have shown, major selection biases in the attention paid to innovation and entrepreneurship in popular culture, policymaking and public administration, and also academic research, have contributed to what they call a “Silicon Valley mania”. Although only a tiny fraction of all entrepreneurship and innovation in the world happens in Silicon Valley, it is the “unicorns”, “gazelles” and other rare events from that sunny region in California that get the media attention and set the standards for the policies adopted across the globe, for promoting entrepreneurial success (Hwang and Powell 2005; Boyle and Kelly 2010). Innovation and entrepreneurship research plays along, neglecting the mundane reality and the empirically accurate in favor of the exciting but unrealistic, thus reproducing heroical myths about startups overcoming major obstacles, battling monopolies, perhaps even “moving fast and breaking things” in the process (see Chap. 5), and almost single-handedly turn grim prospects for a region into bright futures with growth, jobs, and sustainability (Brattström and Wennberg 2022).

It matters little that entrepreneurship in the real world is something rather mundane and dull, as entrepreneurship researcher Scott Shane (2008) has demonstrated. People are more likely to become entrepreneurs, that is, to start their own businesses, in countries that are poor and agricultural, than in countries that are richer and reliant on manufacturing. Most new businesses are started in “run-of-the-mill industries” such as retail, accommodation and food services, and construction. Most entrepreneurs are not in search of opportunities to exploit but form businesses based on what they are good at, and what they want to do. Most entrepreneurs get no funding from venture capitalists and business angels, but invest their own savings (Shane 2008: 28, 31, 38, 68–69, 89–91). Not much of this seems to matter for the popular image of entrepreneurs. It likewise matters little that most evidence suggests that policies that encourage startups are unnecessary, since there is no evidence that too few new businesses are started when such policies are absent, and a lot of evidence that such policies mostly lead to businesses that fail, that have very limited economic impact, and generate few new jobs (Shane 2008: 157). These and other irrefutable facts aside, current society still views the typical entrepreneur as “a hero with special powers that lead him to build a great company, which innovates, creates jobs, makes markets more competitive, and enhances economic growth” (Shane 2008: 160).

Productivity should be the focus, and small firms are often less productive than large firms. Indeed, recent evidence has suggested that some economies that have favoured small firms, such as India, have in fact performed worse. Hsieh and Klenow (2009), for example, suggest that 40-60 per cent of the total factor productivity (TFP) difference between India and the United States is due to misallocation of output to too many small and low-productivity SMEs in India. As most small start-up firms fail, or are incapable of growing beyond the stage of having a sole owner-operator, targeting assistance to them through grants, soft loans or tax breaks will necessarily involve a high degree of waste. While this waste is a necessary gamble in the innovation process (Janeway 2012), it is important to at least guide the funding process with what we know about 'high growth' innovative firms rather than some folkloristic notion of the value of SMEs as an aggregate category— which actually means very little.

Bloom and Van Reenen (2006) argue that small firms are less productive than large ones because they are less well managed and subject to provincial family favouritism. Furthermore, small firms have lower average wages, fewer skilled workers, less training, fewer fringe benefits and higher instances of bankruptcy. They argue that the UK has many family firms and a poor record of management in comparison with other countries such as the US and Germany (2006). Among other reasons, this is related to the fact that the tax system is distorted by giving inheritance tax breaks to family firms.

//DH

Despite the challenges that software patent applications currently face, the USPTO continues to grant, and courts continue to uphold, patents for innovations in cybersecurity technologies. To help improve a patent application’s chances of success, both before a court and if challenged, patent applicants should consider some or all of the following:

Although patent law has historically been uniform, with a single set of legal standards designed to cover “anything under the sun that is made by man,” 2 Congress has shown increased interest in tailoring patent law to the needs of particular industries. In the last twenty years, it has lengthened the patent term for most pharmaceutical patents (see 35 U.S.C. §§ 155, 156 [2000]), protected certain experimental uses of pharmaceuticals by generic suppliers from liability (see 35 U.S.C. § 271(e) [2000]), prohibited enforcing patents on medical procedures against doctors (see 35 U.S.C. § 287 [2000]), prohibited issuing patents for genetically modified humans (P.L. 108–199 § 634), relaxed the obviousness standard for biotechnological processes (see 35 U.S.C. § 103(b) [2000]), and created a new defense against business method patents (see 35 U.S.C. § 273(a)[3]). It has supplemented patent protection for semiconductors with a sui generis statute (see Semiconductor Chip Protection Act, 17 U.S.C. §§ 901–14 [2000]). It has enacted non-patent statutes granting patentlike exclusive rights in particular industries (see Plant Variety Protection Act, 7 U.S.C. §§ 2321–2583). It has even passed a “private” patent bill, lengthening the term of one narrow group of patents.3 In each case, Congress reacted to particular complaints about the perceived unfairness of applying a general legal standard to a particular industry. Still other bills recently introduced in Congress, but not passed, would have changed the obviousness standards for business method patents, had the government “take” a particular financial services patent, or extended the patent for Claritin.4

These rather modest technology-specific changes to the patent statute are but the tip of the iceberg. There are any number of scholars, lawyers, and clients out there who want to revise the law further, in diverse and sometimes contradictory directions. Here are a few examples. A number of scholars suggest that patent law needs to be modified to take account of the particular needs of the software industry. Some suggest that software patents are inappropriate altogether,5 some that only Internet business method patents are.6 Others suggest that a form of sui generis patentlike protection is appropriate for software.7 Still others who endorse the general framework of patent law argue that the courts should apply patent law to software in somewhat different ways than they do in other industries. Most commonly, scholars suggest that the rapid market cycles in software justify shorter terms of protection for software patents.8 Similarly, some scholars have explored whether biotechnology deserves its own sui generis form of protection,9 while others have suggested that biotechnology patent standards should deviate from the general patent law rules.10 Some argue that certain types of biotechnological innovations should be entirely unpatentable.11 Others suggest that the disclosure requirements should be loosened for biotechnology patents,12 that the obviousness standard should be lowered,13 or that the scope of DNA sequence patents should be restricted.14 They have variously argued that the Federal Circuit should defer to the PTO,15 or conversely that the PTO should defer to the Federal Circuit.16

While there is a research component in innovation, there is not a linear relationship between research and development, innovation and economic growth. While it is important that the frontiers of science advance and that economies develop the nodes and networks that enable knowledge to be transferred between different organizations and individuals, it does not follow that subsidizing the activity of R&D per se within individual firms is the best use of taxpayers' money. Although it is common sense that there is a relationship between a decision to engage in R&D and its cost (see Myth 1), qualitative surveys of the effectiveness of the R&D tax credit for both large and small firms provide little evidence that it has positively impacted the decision to engage in R&D, rather than simply providing a welcome cash transfer to some firms that have already done so.7 There is also a potential problem under the current R&D tax credit system, in many countries, that it does not hold firms accountable as to whether they have conducted new innovation that would not otherwise have taken place, or simply pursued routine forms of product development. In time, therefore, as the entrepreneurial State is built, it would be more effective to use some of the expenditure on R&D tax credits to directly commission the technological advance in question. Recently, the Netherlands has introduced an R&D tax credit that targets not the income from R&D (easily fudged) but R&D workers—and this has been found to be more effective, creating the kind of 'additionally' that income-based R&D tax credits don't (Lockshin and Mohnen 2012).

While layoffs in big-tech companies claimed hundreds of thousands of jobs in recent years, many of those departing walked away with generous severance packages and a lot of good ideas. We could be on the cusp of a new innovative and entrepreneurial boom.

That means a new generation of companies seeking venture capital and a new wave of investors betting on their future.