Ideas into Practice: How Well Does US Patent Law Implement Modern Innovation Theory?

Abstract

The US Supreme Court’s decision in Graham v. John Deere (1966) placed neoclassical economic insights at the heart of modern patent law. But economic theory has moved on. Since the 1990s, legal scholars have repeatedly mined the discipline to propose ad hoc rules for individual industries like biotech and software. So far, however, they have almost always ignored the literature’s broader lessons for doctrine. This article asks how well today’s patent doctrine follows and occasionally departs from modern economic principles. The article starts by reviewing what innovation economists have learned since the 1970s. While it is conventional for legal scholars to divide the neoclassical literature into multiple competing “theories,” shared mathematical methods and modeling assumptions (e.g. profit-maximization) guarantee that the neoclassical literature’s various strands cannot disagree in any fundamental way. For this reason, whatever differences exist in the neoclassical literature are more accurately seen as special cases of a single underlying theory. We argue that this underlying theory must include at least three principles. The first limits reward to non-obvious inventions and explicitly entered the law through Graham’s PHOSITA standard. The second principle holds that patent breadth should be chosen to balance the benefits of innovation against the costs of monopoly. Though widely recognized by judges and scholars, the principle’s influence on doctrine remains remarkably incoherent. The final principle prescribes rules for allocating patent rewards where multiple inventors contribute to a shared technology. Unlike the first two principles, this insight was unknown in the 1960s and has yet to enter the law. Remarkably, patent doctrine uses a single concept – Graham’s “Person Having Ordinary Skill in the Art” or “PHOSITA” – to address all three principles. This means that doctrinal solutions for one principle can have unintended impacts on the others. In some cases, this link is optional. For example, the article shows how the PHOSITA concept could be generalized to provide separate and distinct tests for, say, non-obviousness and patent breadth. However, other links are mandatory. In particular, the article shows that any doctrinal architecture built on Graham’s PHOSITA test automatically allocates reward among successive inventors. Though reasonable, these default outcomes fall short of the economic ideal. The article analyzes how changes in the Utility, Blocking Patents, Reverse Doctrine of Equivalents, and the Written Description doctrines can mitigate this problem. However, other gaps are inherent and cannot be eliminated without abandoning Graham itself. This radically revised architecture would probably cause more problems than it solves.