Patents don’t give inventors enough certainty

Even outside the realm of pure basic research, the more upstream a research project is, the less likely it is that the patent system would provide adequate incentives to pursue it.99 While the results of upstream research endeavors might be the subject of market transactions, the potential consumers of such results are not “end users” (businesses or individuals), but rather “research users” who may engage in follow-on R&D that could ultimately lead to the development of commercial applications.100 The more removed an R&D project is from commercial applications in terms of time, concept, number of development stages, and amount of follow-on R&D needed to produce such applications, the higher the uncertainty regarding the market value of such project is likely to be. The market value of an upstream R&D project is dependent upon future demand for its results by potential downstream inventors—which is based, in turn, on the likely expectations of such inventors for profits in the markets for commercial applications. At the early point in time when a decision whether to invest in an upstream project must be taken, there are simply too many unknown parameters. Such parameters include, inter alia, the volume and type of follow-on research projects that may evolve; the likelihood that such followon projects would lead to the development of commercial applications; the time it may take until such applications are developed, produced, and commercialized;101 the level of financial gains that such applications may ultimately yield; and the division of profits between the parties. Facing such high levels of uncertainty, an upstream researcher is not likely to be able to form any solid expectations regarding the profitability of his or her project. In such circumstances, when market signals are far from clear, the incentives provided by a market-based platform may not be adequate.102

One other factor that contributes to the uncertainty in these situations is transaction costs. In order to receive a share of the profits resulting from downstream applications, an upstream researcher must enter licensing deals with follow-on researchers. Unfortunately, the ability to enter such transactions is far from guaranteed. In fact, licensing deals between cumulative inventors often entail high transaction costs.103 As a result, it is quite possible that certain potential downstream uses may never take place.104 This makes it even more difficult for upstream researchers to rely on the ability to generate profits from follow-on R&D projects in deciding whether to pursue an upstream research endeavor. For this reason, as well, while a prospect of profits may exist in regard to an upstream research project, it is often too uncertain and remote to adequately incentivize investment in such an endeavor.105

In addition, the market value of an upstream innovation may underrepresent its social value due to the existence of substantial spillovers—“uncompensated benefits that one person’s activity provides to another.”106 As a general matter, in cumulative innovation settings, “the most important social benefit of an innovation may be the boost given to later innovators, and this may make the benefits harder to appropriate.”107 Upstream innovation may lead over time to a wide range of downstream uses, some of which in remote technological fields and industries.108 To the extent the social value of such downstream endeavors is internalized by upstream innovators, the concern regarding spillovers is reduced.109 Yet, even when the results of an upstream R&D project are patented110—full appropriability is not guaranteed.111 Patents have limited scope and duration, and some downstream uses may fall outside the patent’s scope or be performed long after it expires.112 Even with respect to uses that are clearly infringing under current patent law, the ability to enforce upstream patents may be rather limited. For instance, in some cases, an upstream innovation may serve merely as a “research tool” in the development process of secondgeneration products without being embedded in the final version of such products.113 At other times, the use of an upstream innovation may simply fail to yield any follow-on products or processes. In these cases, unless the use is very conspicuous, it “may never come to the attention of the patent holder.”114 As a general matter, the broad array of potential downstream uses for an upstream innovation may lead to significant hurdles in detecting and proving infringement and increase enforcement costs. Thus, substantial spillovers may indeed be present in these settings. This may further dilute the ex ante incentive provided to an upstream researcher by a market-based platform.

All of this is highly relevant in the environmental context, where the need for upstream innovation as a basis for applied R&D is apparent. Consider, for instance, the important domain of alternative energy sources noted above.115 While some of the important questions that need to be addressed in this context are more of a basic science nature—e.g., the potential mitigating effect of switching to alternative sources, their disadvantages and the risks associated with their use—there are also multiple questions with a more practical orientation that must be investigated in order to advance the field. For instance, there is a need for R&D targeted at improving efficiency of these energy sources and exploring methods to employ them in a manner that would maximize their energy yield in various settings.116 R&D projects focusing on these matters are classic examples for upstream innovation—while the results of such projects cannot be marketed to end users, they may serve as the foundation for a wide array of downstream innovative efforts that may ultimately lead to the development of green production methods and consumer endproducts. Yet, for all the reasons explored above, market incentives are not likely to adequately incentivize this type of upstream innovation. In fact, in this particular context, the uncertainty faced by an upstream researcher regarding the prospect of profits may be particularly high. An investigation of the questions described above may sometimes lead to “negative” answers—for example, it may lead to the conclusion that a certain alternative energy source cannot be used effectively in a specific context.117 Even when the research culminates in “positive” findings, in order for the use of an alternative energy source to become prevalent, there is often a need for investment by the government in infrastructure. For example, electric vehicles depend heavily on an effective charging infrastructure.118 In addition, the switch to a new energy source may have health and safety ramifications that need to be addressed prior to implementation.119 Most importantly, for various reasons discussed below, one cannot anticipate in advance future demand by businesses and individual consumers for products and processes that may use the relevant alternative energy resources.120 Under these circumstances, market incentives—even if bolstered by patent protection—may fall short in incentivizing this type of research, and thus, should be supplemented in other ways.